LAWS 1204
Contracts
Semester 2 – 2002
Mark: 92% (27.5 / 30)
QUESTION ONE
Part (1)
Is James’ mother liable under the guarantee?
James’ mother (Eliza – E) needs to show that it would be unconscionable for Financial (F) to enforce
the guarantee. If she successfully proves this, she will not be liable to pay for James’ (J’s) default on
the loan. If she cannot prove unconscionable bargaining or undue influence on the part of the bank, she
will probably need to sell her house in order to pay.
√
Elements of unconscionability (CBA v Amadio)
 special disadvantage of E
 knowledge of this by F
 exploitation of it by F
Disadvantage
In order for E to avoid liability, she must prove that she had a special disadvantage. This would not be
difficult, considering she left school at 13, has had little experience with banks, and can only read and
write with difficulty. The facts here are analogous to those in Amadio.\
√
Knowledge
The evidentiary burden is on E, to show that F should have (objective assessment) been aware of her
problems and that she needed careful explanation. √√
It was obvious to Trevor (T) that E was old – age is a relevant factor in deciding when a person will be
considered to be under a special disadvantage – although he was probably unaware of her lack of
education and experience. However women of bygone eras have often relied on their husbands (or,
failing that, another male in the family) to make business decisions. This is not relevant to the Amadio
principle, because even if T was aware of E’s disadvantage there is no evidence to show he exploited
this.
√
Exploitation of disadvantage
Unlike the facts in Amadio, where the bank knew that the Amadios only expected to be held liable for
a sum of only $50 000, the facts in the present case are different. They suggest that F relied on E’s son,
James, to explain all the details. E even asserted that he had done so. F therefore is not really at fault
like the bank was in Amadio.
√
The question, then, is whether or not F should bear the burden of J’s default, when clearly there was a
guarantee. This leads to an area of law which is not fully developed and is as yet very restricted in
operation. That is, the principle of law regarding the emotionally dependent, the Garcia doctrine. E is
obviously emotionally dependant on James, especially since her husband’s death. I think it would be
reasonable to assume that F must have realised that she had been unduly influenced by J, on whom she
depended.
√
Under the Garcia doctrine, it would be unconscionable for F to enforce a guarantee where:
1) E did not understand the transaction
2) E received no gain
3) F is aware that E put all her trust and confidence in J in matters of business
and YET,
4) F failed to explain accurately and fully the effect of the guarantee.
√
(Garcia v NAB)
The facts fit this doctrine – but there is a problem with its restrictive approach. The court very clearly
stated that Garcia was only to apply where wives were pressured into going guarantor by and for their
husbands.
It is appropriate to argue for an extension of that doctrine in the present circumstances. All the
elements of a wife’s emotional dependency are here, except E depends on her son – the next male in
her family once her husband had died. In this respect, J takes the place of a husband.
Very persuasive
√
It is relevant to note that T (acting on behalf of Financial) is only a trainee. The Amadio case asserts
some element of responsibility on T in that he cannot act to exploit E’s disadvantage – which he
clearly did not.T was supervised. F, here, did not really do anything wrong by the law unless the
Garcia doctrine is applied – when it would be unconscionable bargaining for T to neglect to explain
the details of the mortgage and guarantee documents, regardless of whether he is an inexperienced
trainee.
Thus I would argue that F should bear the burden of J’s default, but would be wary in asserting this
with certainty.
Turning now to Part (2) – the lease.
13/15
Part (2)
Remedies
J may be able to either claim damages or terminate the contract for breach.
In assessing whether or not J can terminate for breach, we need to ask, has the lessor breached an
essential term of the contract?
√
Breach of condition
The law relating to termination states that in order to know of the lessor (L) has breached we need to
determine whether there has been a breach of condition (an essential term) or a breach of warranty (a
non-essential term; subsidiary to the main purpose of the contract). A breach of condition will justify
termination of the lease by J. (Tramways v Luna Park)
√
Is the term a condition?
To determine this, we ask does the term go to the root of the contract – does it deprive J of a
√
substantial benefit of the contract if breached? (Hong Kong Fir) Clearly it does. The benefit is to
provide J with a means by which he can conduct his business. The machine hasn’t worked for 6 weeks
out of a potential 16 – obviously affecting his ability to do business.
√
Time clause
The term in question, however, is really to do with time. Being late will not generally amount to a √√
serious breach for which J can terminate, unless time is an essential term (Laurinda v Capabala). It is
considered that time will be of the essence in all commercial contracts (which a dry cleaning machine
lease is) unless stated to the contrary (Bunge v Tradax).
√
There will be a stronger inference – it does not automatically follow.
So a breach of time by the lessor gives J a reason to justify termination.
Election or waiver
Such repudiatory conduct by the lessor gives rise to an election by J to affirm or terminate the contract.
It could be argued by the lessor that J had affirmed the contract because on 2 previous occasions the
lessor had been late and J had not acted to terminate. But Tropical Traders v Goonan states that each
separate breach of the time clause would give rise to a new right of termination by J. SO J can
terminate the contract on the basis that lessor breached time condition.
√√
J is free to make such an election because he is clearly ready, willing and able to perform his
contractual obligations (Hyundai v Papadopoulos).
√
Consequences of terminating
If J purports to terminate on the basis of the lessor’s breach of condition, and he is wrong, he will be
held to have repudiated (Tramways). Thus, the lessor can terminate for J’s repudiatory conduct and
claim damages form J – probably only nominal damages because the lessor has not lost anything after
the point of termination What about the balance of the contract?– the contract is merely discharged
from that point. The lessor would be able to claim any outstanding debt form J, as this was a
contractual obligation which had already accrued.
Damages
J could claim damages form L if he successfully terminates for loss of profit (Victoria Laundry). J can
only do so if he can show causation, remoteness and mitigation.
Causation
Not having a machine for so long severely impacted J’s ability to get business and make profit.
He would have suffered no loss of profit but for the breach of the time clause in repairing the
machine (Alexander v Cambridge Credit).
√
Remoteness
The loss of profit is clearly foreseeable – L (Hadley v Baxendale). The second limb of H v B is
not relevant as J suffered no extraordinary losses as a result of the breach.
√
Mitigation
J must prove that he has taken all reasonable steps to mitigate his loss (Victoria Laundry). This
includes seeking another repairer to fix the machine – which may reduce his loss of profit
damages – but he would be entitled to the difference between the cost of the alternative
performance and the original quote (Victoria Laundry).
J can also claim damages even if he can’t terminate the contract. This is to put him in the same position
as he would have been in had L fixed the machine on time. This includes loss of profit, as discussed.
Arguable J suffered a loss of a chance to obtain goodwill and draw in customers, as his business was
new and needed to attract customers first off. As the award of damages in on the balance of
probabilities it may be difficult to prove – may be too remote (Cth v Amarin).
√
14.5 / 15