Law of Obligations
NOTES
Chapter 2: The place of Contract within Private
Law
What is the Law of Obligations?
The law of obligations is concerned with the obligations owed by individuals (including legal
entities, such as corporations) to one another.
The law of obligations comprises the fields of contract, tort and restitution (unjust enrichment),
along with other categories.
Competition and Consume Act 2010 (Cth) is an important statute source of obligations owed by
individuals to one another.
Contract – Obligations that are owed to contracting parties are self-imposed.
Obligations – Private law obligations imposed by law.
In the law of obligations, the relevant legal rights are ‘private’ in that they are enforceable by the
individuals who are recognised as holders of the relevant rights.
Buttersworths Concise Australian Legal Dictionary:
‘An umbrella term for contract, tort and restitution. The phrase is sometimes used to reflect the theory that
there is not a general law of contract, tort or restitution; rather, there is a general law of obligations, which
is manifested in particular forms of contracts, torts and responses to unjust enrichment.’
Tort
Concurrent liability – When the plaintiff is provided with actions both in contract and in tort against a
particular defendant. The plaintiff cannot do both and so commonly chooses to pursue the option which is
more advantageous.
Measure of Damages - An award of compensatory damages in the primary remedy for both tort and
breach of contract. The aim of such damages in both instances is to compensate for loss: to put the
plaintiff in the position he or she would have been in had the contractual or tortious duty not been
breached.
Unjust Enrichment
Principle source of obligations owed by individual to one another.
Concerned with obligations to restore unjust gains.
Where a defendant has been unjustly enriched at the expense of the plaintiff, the plaintiff seeks
restitution, which means the return of the benefit, which has been transferred from the plaintiff to
the defendant.
Equity
Rich Source of personal obligations.
“Among other things – the quality of fairness or justice”
Rectifies the defects in Common Law
Equitable Obligations
The Obligation not to harm others by behaving inconsistently (equitable estoppel).
The Obligation to act solely in the interest of those people who repose special trust and confidence
in us (fiduciary obligations).
The Obligation not to misuse confidential information.
Statutory Obligations And Regulation
A number of statutes impose obligations that affect the formation, performance and enforcement
of contracts. Some statutes also regulate the content of the contract terms.
The Australian Consumer Law is a statutory regime with the closest connection to contract, which is
set out in schedule 2 of the Competition and Consumer Act 2010. (CCA)
Recurring theme
Stronger parties vs Weaker parties
Corporations vs Consumers
However, this is not always the case as some corporations may be small businesses facing powerful
individuals.
Rise of Consumerism
Resulted in a decline of caveat emptor (Let the buyer beware). The regulation was developed to
protect the weaker parties (the consumers), hence there was a decline.
Consumer Rights
1. Right to safety – to be protected against the marketing of goods which are hazardous to
health or life.
2. Right to be informed – to be protected against fraudulent, deceitful or grossly misleading
information, advertising, labelling, or other practices, and to be given the facts needed to
make an informed choice.
3. Right to choose – to be assured, wherever possible, access to a variety of products and
services at competitive prices; and in those industries in which competition is not workable
and government regulation is substituted, an assurance of satisfactory quality and service at
fair prices.
4. Right to be heard – to be assured that consumer interests will receive full and sympathetic
consideration in the formulation of government policy, and fair and expeditious treatment
in its administrative tribunals.
UN Endorsement of Consumer Rights
1. Right to safety – to be protected against products, production processes and services which
are hazardous to health or life.
2. Right to be informed – to be given the facts needed to make an informed choice, and to be
protected against dishonest or misleading advertising and labelling.
3. Right to choose – to be able to select from a range of products and services offered at
competitive prices with an assurance of satisfactory quality.
4. Right to be heard – to have consumer interests represented in the making and execution of
government policy, and in the development of products and services.
5. Right to satisfaction of basic needs – to have access to essential goods and services,
including adequate food, clothing, shelter, health care, education and sanitation.
6. Right to redress – to receive a fair settlement of just claims, including compensation for
misrepresentation, shoddy goods or unsatisfactory services.
7. Right to consumer education – to acquire knowledge and skills needed to make informed,
confident choices about goods and services while being aware of basic consumer rights and
responsibilities and how to act on them.
8. Right to a healthy environment – to live and work in an environment which is nonthreatening to the well-being of present and future generations.
The Australian Consumer Law (ACL)
The ACL is comprehensive consumer protection legislation, which applies uniformly across
Australia.
Introduces national law for fair trading and consumer protection, thereby reducing complexity and
duplication for consumers and business.
Draws on consumer protection provisions previously contained in the Trade Practices Act 1974 as
well as other consumer protection regimes, which were previously operating in different Australian
jurisdictions.
ACL regulates misleading and deceptive conduct, unconscionable conduct, unfair contract terms,
consumer guarantees, product liability and unsolicited consumer agreements.
The Australian Competition and Consumer Commission (ACCC) is given the power to enforce
certain provisions of the ACL, by seeking remedies and fines for affected parties. These affected
parties may also pursue legal proceedings of their own.
The CCA provides for the application of the ACL as the law of the Commonwealth.
The CCA provides that the ACL applies to activities with respect to which the Commonwealth has
constitutional power.
Chapter 14 – Implied Terms
WHEN WILL TERMS BE IMPLIED?
Three main classes of implied terms
1. Terms implied in law
2. Terms implied by custom
3. Terms implied by fact
Some statutes imply terms in particular types of contract.
Australian Consumer law provides a range of similar minimum quality standards or consumer guarantees that
apply as to consumer transactions as statutory rights and are independent of the parties contract.
Express terms – terms written in the contract (written or stated between the parties) can come from other
sources as well.
Implied terms:
Unspoken and unwritten between the parties
Law considers to part of the agreement
A lot of implied terms in contracts
Types of implied terms
1. Terms implied in fact
To give the contract ‘business efficacy’
Based on a previous course of dealing
2. Terms implied by law
a certain type of contract – Helicopter & Liverpool cases
by statute
3. Terms implied by custom or trade useage
Excluding Implied terms
Terms will not be implied in law.
Terms will not be implied where the parties have expressly excluded them.
Terms will not be implied where they are inconsistent with the express terms of the contract.
TERMS IMPLIED IN FACT
Nature of terms implied in fact
Terms implied in fact are terms that are tailored and therefore unique, to the particular contract in question.
Terms implied by fact is traditionally been said to be based on the presumed intentions of the parties.
Implying a term can also be seen as a matter of construction.
Must give effect to the presumed intentions of the parties
Attorney General of Belize v Belize Telecom Ltd
“Implication of the term is not an addition to the instrument, It only spells out what the contract means”
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English decision
Court took a different approach in this case as to interpretation to identify whether a term was implied to
give Business efficacy
Constitution of a company (governing document of the company)
Also has contractual effect
In this case, it was vague
Right of the golden share holders in the constitution to appoint a certain number of directors to the board
(beneficial – appoint people who align with your way of thinking)
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Golden share holders lost shares
Constitution didn’t say what would happen to their directors when they lost a certain number of shares
which no longer classified them a G. shareholders.
Company arguing that this goes to a new elections and that the directors are removed at the time you
loose the golden number of shares.
There was an implied term that the directors would stop holding their position
Court looked as implication as a matter of construction / interpretation
Said the 5 tests that come from the cases (work out Business efficacy)
Court said the tests are still relevant / applicable to interpret or construe a contraction
Extension of contractual construction.
Big movement in the law of implied terms
Formal Contracts
The BP Refinery Tests
Way of ascertaining the presumed intentions of the parties and identifying and appropriate term to be implied
in fact in a formal contract.
For a term to be implies, the following conditions (which may overlap) must be satisfied:
1. Be reasonable and equitable
2. Be necessary to give ‘business efficacy’ to the contract, so that no term will be implied if the contract
is effective without it
3. Be so obvious that ‘it goes without saying’
4. Be capable of clear expression
5. Not contradict any express term of the contract
Tests have been approved by the high court on numerous of occasions
Debated also that the process must depend largely on the circumstances of the case in question.
Reasonable and Equitable
Reasonableness also is not sufficient reason for implying a term.
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
The case concerned an agreement between H and BP, whereby H granted concessional rates to BP.
Westernport was supposed to have preferential status with respect to rates charged for use of the
land
Later, Westernport yielded occupation of the site to a co-subsidiary that also sought the benefit of the
agreement.
Held the rating agreement contained an implied term allowing the right to preferential rates to be
assigned to other members of the BP group.
The majority considered that the Shire’s proposed term precluding assignment was neither
reasonable or equitable.
Business Efficacy
A term implied in fact must be necessary to give business efficacy to a contract.
Whether or not a reasonable person would consider that the proposed term was necessary to enable the
contract to operate in a business like manner.
The Moorcock (1889) 14 PD 64
P was a ship owner. D was a wharf owner.
P contracted to use D’s wharf for loading/unloading the ship.
At low tide, the ship came to rest on a hard ridge and was damaged.
Implied in fact
Being an efficient, systematic, effectual, accomplished, business (BE)
Was this term implied under business efficacy?
‘… what the law desires to effect by the implication is to give such business efficacy to the transaction as
must have been intended at all events by both parties …’
In 1889, the Moorcock was a steamship whose owner entered into a contract with the owner of a wharf in order to
unload cargo. While the ship was docked, the tide went out causing the hull of the ship to hit a ridge damaging the
ship. The owners of the wharf claimed that there were no terms in the contract to ensure the ship’s safety nor could
the owners have foreseen the damage caused to the ship. The court, however, found that there was an implied
warranty: Bowen L.J. said that
“[i]n business transactions such as this, what the law desires to effect by the implication is to give such
business efficacy to the transaction as must have been intended at all events by both parties who are
business men; not to impose on one side all perils of the transaction, or to emancipate one side from all the
chances of failure, but to make each party promise in law as much, at all events as it must have been in the
contemplation of both parties that he should be responsible for in respect to those perils or chances.”
The Lord Justice argued that it was the owners of the wharf who were best positioned
Obviousness
A case were the proposed implied term was “obvious” in the sense of it could be said to “go without saying”.
Gwam Investments v Outback Health Screenings
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
Tunnels through city
Presumed that when entered the contract – was assumed they could work 24/7
Residents bought an action for an injunction
Ability for company to work was reduced – only during reasonable business hours
This meant all deadlines/ milestones became impossible to comply with.
Argues that the contract was frustrated – became radically different
Courts – implied term that hours change, implied that there would be some extension to the time
periods agreed.
Courts – appropriate to consider BE approach – but not a contract where it was an obvious provision
and not so obvious that it would go without saying – they made a common assumption but did not
think what would happen if the assumption was incorrect.
The case concerned a contract for construction work. Both parties assumed that the work would
proceed on a continuous three-shift basis for six days a week. However, work was delayed when C
was restrained by injunction from working between 10pm - 6am each day.
Clarity
To be implied in fact, a term must not only be obvious, it must also be capable of being expressed in a clear
and precise manner.
Ansett Transport Industries v Commonwealth
“The width and lack of precision of such a condition is an argument against implying it”.
Consistency
BP refinery tests preclude the implication of a term which is not consistent with express terms
“Fairness” is not a guard for implying a term
Repeatedly stated that a term may not be implied simply because it is fair or reasonable; it must also be
necessary or obvious.
An assumption that is implicit is something that the parties have taken for granted and must therefore be
obvious in the context in which they are dealing.
PREVIOUS COURSE OF DEALINGS
Terms may be implied from a previous course of dealing between the parties
In order to establish that a term is implied from a previous course of dealing:
1. The term claimed to have been used in past dealings is clearly identifiable.
2. The previous dealings were sufficiently numerous and consistent to constitute a regular course of
dealing.
3. The present dealing fits into that course of dealing to the extent that it can reasonably be said that the
same terms should be included.
4. There is no conflict between the implied term and the express terms.
Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31
William sold nuts to Henry
3-4 transactions per month for the past 3 years
Sent sold notices stipulation to the buyer had the sirks of any defects.
Nuts used as poultry – poultry died as a result after eating a particular batch
Courts in this case held – implied term on the basis of a previous course of dealings
W Noall & Son v Wan [1970] VR 683
Stock broker case
Noall sold shares on behalf of wan
100 transactions over past year
Information sent regularly (after bought or sold)
Terms of the note included that the sale was subject to rules and regulation of Stock Exchange of
MELB.
Wan owed $$ to the broker – didn’t settle transaction
Under rules – broker could re-sell and recoup any loss.
Broker sold shares at significant loss and sought to recover
In order to be recoverable – had to prove an implied term of contract (PCOD)
Yes – implied term of contract as the MSE rules were implied in this contract because in all previous
dealings they were expressly stated to form part of the contract.
Express reference in bought and sold notice
Informal Contracts
BP refinery tests set high standard for implying a term in fact: all five requirements must be satisfied.
Requirements may not be strict where there is no formal contract.
Cases where parties have reached an agreement but have not attempted to spell out the terms and conditions
of their contract in full. (ie a doctor and a patient).
Where a contract is informal, the courts must identify the terms of the contract and THEN consider the
possibility of implied terms
Byrne v Australian Airlines Ltd (1995) 185 CLR 410
B, who was employed by A as a baggage handler, was dismissed for stealing from luggage. The relevant
industrial award provided that termination of employment would not be ‘harsh, unjust or unreasonable’.
Was this an implied term of B’s contract of employment?
Here, court took a different approach
This was an informal contract
Baggage handling was dismissed for stealing from luggage (immediate dismissal)
Unlawful to dismiss where it is hash, unjust or unreasonable
Assumed that this formed part of the agreement between the parties
Argued that the stat arrangement was an implied term of the contract. – gives the baggage handler
compensation for damages
This was informal (made up of letters etc etc)
Looked at unfair termination – is this termination necessary in these circumstances
Courts say no
Can terminate someone by giving reasonable conduct (term of common law)
No need for this term to for part of the contract as it is already covered by common law
Not needed if implied by common law
This is the test that applies for informal contracts.
‘In a case where it is apparent that the parties have not attempted to spell out the full terms of their
contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be
seen that the implication of the particular term is necessary for the reasonable or effective operation of a
contract of that nature in the circumstances of the case.’
– Quoting Deane J in Hawkins v Clayton (1988) 164
CLR 539
Limits to the efficacy of formal tests
In England, in implying terms of fact – courts make use of two alternative tests: whether an implied term would
be necessary to give business efficacy to the contract and whether the term would be so obvious that it “goes
without saying”.
The test of officious bystander provides an objective perspective for prediction the parties’ probably intentions.
TERMS IMPLIED IN LAW
Terms implied in law are term implied in all contracts of a particular class or description.
Terms implied by law are not based on the intentions of the parties
Example: Duty of care in the carriage of passengers
Requirements for implying terms in law for the first time
Categories of terms implied in law are not closed.
New terms that may be implied by the law may develop over time.
Two issues to consider when new terms to be implied.
i.
ii.
Term must be applicable to a definable class of contractual relationship
Term must be suitable for it to be recognised as implied in all contracts of that class.
In determining whether a term meets this criterion, courts faced a test of “necessity”:
Byrne v Australian Airlines Ltd
The requirement of necessity reflects the concern of the courts that, unless such a term be implied,
the enjoyment of rights conferred by the contract would or could be rendered nugatory, worthless, or,
perhaps, be seriously undermined.
The test of necessity is illustrated in Liverpool City Council v Irwin.
Liverpool City Council v Irwin
Landlord to take reasonable care of stairs, lifts and chutes
‘The relationship accepted by the corporation is that of landlord and tenant; the tenant accepts
obligations accordingly, in relation, inter alia, to the stairs, the lifts and the chutes. All these are not
just facilities, or conveniences provided at discretion; they are essentials of the tenancy without which
life in the dwellings, as a tenant, is not possible. To leave the landlord free of contractual obligation as
regards these matters, and subject only to administrative or political pressure, is, in my opinion, totally
inconsistent with the nature of this relationship. The subject-matter of the lease (high-rise blocks) and
the relationship created by the tenancy demands, of its nature, some contractual obligation on the
landlord.’