Agreement
Understanding an Offer
An offer may be described as an expression to another of a willingness to be legally
bound by the stated terms.
Three features that must be present for the offer to be legally effective:
1. Statement by offeror containing stated terms. The statement must contain all
the elements of the proposed agreement and be sufficiently certain.
2. Statement made to another person. The offer must be made to another legal
entity.
3. Offeror indicates a preparedness to be bound. The offeror must be prepared
to be legally bound upon acceptance by the offeree.
Offers in Bilateral Contracts
A bilateral contract is one which, if accepted, is effective to bind both parties to his or
her undertaking. Each party undertakes to the other party to do or refrain from doing
something.
Offers in Unilateral Contracts
If contracts – One party (promisor) agrees to do or refrain from doing something if
another party (promisee) does or refrains from doing something but the promisee does
not himself undertake to do or refrain from doing that thing. A unilateral contract
differs from a bilateral contract in that it does not immediately impose an obligation
on either party to perform. The obligation on the offeror arises only if the offeree
performs the required task. The offeree will never be under an enforceable obligation
to perform.
Examples:
 Offers of Reward
 Offers for Prizes
What is not an Offer
Mere Puff
A mere puff is an exaggerated or unsustainable claims about products. In deciding
weather an advertisement is a mere puff or an offer capable of being accepted and
forming a contract, the courts must decide on how a ‘reasonable person” in the
position of the offeree would interpret the advertisement taking into consideration the
vagueness and other details of the advertisement itself.
Supply of Information
A request for information must be discerned from a contractual offer. A clearer
indication of a preparedness to enter into a contract than merely providing terms or
information upon which a party maybe prepared to enter into such a contract is
needed (Harvey v Facey).
Invitation to Treat
An invitation to treat is an indicator of a parties willingness to negotiate entry into a
contract. It is a technique used by a party who desire another party to make an offer
and cannot be construed or the terms be accepted as if it were a valid legal offer in
itself.
Categorizing Transactions
Advertisements
Most advertisements are considered invitations to treat but some may be regarded as
offers depending on language used and other relevant factors.
a) Advertisement in a Catalogue or in a Circular
Circulars which provide information about items for sale and their prices are regarded
as invitations to treat. If it were regarded as an offer and the manufacturer ran out of
stock, they would be in breach of contract for anyone who accepted such an offer as
they could not provide stock (Grainger v Gough [1896]).
b) Advertisements in Newspapers and Magazines
These are also considered invitations to treat unless the advertisement is couched in
terms which indicate the retailers willingness to be bound if the specified terms are
accepted ie there is a promise (Carlill) rather than a mere invitation (Partridge v
Crittenden [1968]).
c) Advertisements appearing on the internet
Application of the same principle as newspapers and magazines.
d) Display of Goods
Items appearing in retail outlets, even if the price is attached, is regarded as an
invitation to treat (Pharmaceutical Society of Great Britain v Boots Cash Chemists
[1953]).
Auction: AGC Ltd v. McWhirter
a) Advertisement of Auctions
The advertisement of an auction is considered an invitation to treat on the part of the
auctioneer. The auctioneer may withdraw items from the auction or cancel the
auction all together without incurring any liability from potential bidders.
b) Auctions with Reserve
Each bid represents an offer which the auctioneer may reject or accept. Acceptance
of the offers occurs and an agreement is formed when the auctioneer knocks down the
property to the successful bidder.
c) Auction without a Reserve
Even in an auction without a reserve, each bid represents an offer that could be
accepted or rejected by the auctioneer.
Tendering
An advertisement for tenders will generally be the same as an advertisement for an
auction which is akin to an invitation to treat. Therefore no liability will be incurred
if the person does not accept any of the tenders or even consider then in a bona fide
way (Spencer v. Harding). Each tender will be considered an offer which can be
accepted or rejected.
Standing Offers
A standing offer is an indication by one party of his/her willingness to provide goods
over a specified period of time. An offeror may withdraw the offer, anytime, before
acceptance of the offer is made in the form of an order. Further, unless the parties
agree to the contrary, there is no obligation of the offeree to order goods only through
the offeror, ie the offeree may choose not to accept the standing offer (Great Northern
Railway Co v. Witham).
Options
If the offeree provides consideration (eg paying money) to the offeror to keep the
offer open for some period, the offer cannot be withdrawn during this period. If no
consideration is paid, and only a promise to keep the offer is made, the offer may still
be revoked (Routledge v Grant (1828)).
Communication of an Offer
An offer becomes effective once it is communicated to the offeree (Taylor v Laird
(1856)). Acceptance must take place in reliance upon an offer. If the offeree
performs a particular act that corresponds to the terms of the offer without knowledge
of the offer, there is no agreement, and no contract comes into existence. If it is an
offer to the world at large, the offer could be accepted by any fulfilling the
requirements of the offer (Carlill).
Termination of an Offer
An offer may be terminated at any time before it is accepted (Goldsbrough Mort &
Co Ltd v Quinn (1910)). However, once an offer is accepted it becomes irrevocable.
An offer may be terminated by:
a) Revocation by the offeror
Revocation is the formal withdrawal of the offer by the offeror. Before acceptance,
an offer can be freely revoked unless a promise by the offeror to keep it open for a
fixed period is supported by consideration or under seal (Routledge v Grant (1828)).
A revocation will only be effective once it has been communicated to and received by
the offeree (Bryrne v Van Tienhoven (1880). In unilateral contracts, the offer cannot
be withdrawn after the offeree has begun to perform the necessary condtions of
acceptance of the offer and completion of the contract (Abbot v Lance (1860)).
b) Reject by the offeree
The rejection must be communicated to the offeror before it is effective. Once
rejected, an offer cannot be later accepted. If an offeree attempts to accept the offer
but introduces new terms, the offeree is rejected the offer and making a counter offer
(Stevenson Jaques & Co v McLean (1880)).
c) Lapse of time
An offeror may stipulate that his or her offer must be accepted within a certain period
of time, and if the offeree fails to accept, the offer will lapse. If no time is prescribed,
the offer must be accepted within a reasonable time (Ramsgate Victoria Hotel Co v
Montefiore)
d) Failure of a condition subject to which the offer was made
If a condition upon which the offer is made is not fulfilled the offer will lapse
(McCaul Pty Ltd v Pitt Club Ltd (1959)).
e) Death
If the offeror dies and the offeree has not been notified of that death, it is still possible
for the offeree to accept the offer, thus binding the offeror’s estate. If the offeree has
been notified of the death he/she cannot except the offer (Coulthart v Clementson
(1879)) nor can a representative of the offerors estate accept the offer on their behalf
thus the offer lapses (Reynolds v Atherton (1921)).
Requirements of Acceptance
Acceptance of an offer is the expression, by words or conduct, of assent to the terms
of the offer in the manner prescribed or indicated by the offer. Thus acceptance may
be expressed or implied (HBF Dalgety v Morton [1987]). There are two requirements
to satisfy for valid acceptance to occur:
1. The offeree must agree to accept the terms of the offer
2. This information must be communicated to the offeror.
Acceptance must Correspond to Offer
Offeree must have knowledge of and act in reliance to an offer
The offeree must have knowledge of the terms of the offer at the time of purported
acceptance. Acceptance is not valid if two identical offers are made or if a party
performs the act of acceptance without knowledge of the offer (Tinn v Hoffman &
Co).
A Counter Offer is not Acceptance
If a counter offer is made, the original offer is rejected and the counter offer can then
itself be accepted or rejected. Once a counter offer is made and the original offer
rejected, the offeree can no longer accept the original offer (Hyde v. Wrench). A
purported acceptance that departs from the terms of the offer but only in a minor nonmaterial way may be effective and not amount to a counter offer (Turner Kempson v
Camm [1932]).
Mere Inquiry does not Constitute Acceptance
After receiving an offer, an offeree may want further clarification of one or more
terms. This inquiry can at most, only communicate interest but not acceptance nor
rejection of an offer (Stevenson Jaques v McLean (1880)).
Notification to the Offeror of the Fact of Acceptance
The offeree must communicate acceptance of the offer to the offeror and agreement is
not complete until such communication is accepted (Byrne & Co v Leon Van
Tienhoven & Co (1880)).
Method of Acceptance
What is an appropriate method of acceptance in any given situation will depend on
each situation, whether the offeror has outlined a specified method of acceptance with
in the offer or if it is not stipulated the appropriate method of acceptance will depend
on the intention of the parties as derived from the particular facts. Whether
acceptance has occurred depends on whether the offeree has complied with the
requirements for the method of acceptance for the particular situation.
a) Method of Acceptance Stipulated by Offeror
The offeror may stipulate how acceptance should take place eg the performance of an
act, return post. If acceptance does not occur in this way, generally there is no
agreement.
b) Acceptance by Silence
The offeror cannot stipulate silence to constitute consent.
c) Acceptance by Conduct
An offeror may stipulate the manner of acceptance by advising the offeree that if
he/she wishes to accept the offer, the offeree should perform stipulated acts waiving
the need to communicate acceptance. Acceptance can be express or implied.
Instantaneous Communication: Acceptance must be communicated
a) General Rule
When the mode of acceptance is instantaneous communication, the general rule of
law is that the contract will be formed when acceptance of the offer is communicated
to the offeror and that communication is received.
b) Meaning of instantaneous Communication
Face to face communication, telephone conversations and telex messages are all
considered forms of instantaneous communication.
Postal Acceptance Rule
a) Statement of the rule
An agreement will be formed when the offeree posts the letter, not when the offeror
actually receives it (Henthorn v Fraser [1892]). The rule operates only where the
post is an acceptable method of communication between the two parties eg the offer
was made by post or it is stipulated in the offer that the post is an acceptable method
of communication (Adams v Lindsell (1818)).
b) To what communication does the rule extend
The postal acceptance rule applies to forms of communication that are akin to mail
but does not extend to any form of instantaneous communication, even if that
communication bears some similarities to communication by post.
c) Where is the rule displaced?
The rule is displaced if the court decides that it was not within the contemplation of
the parties that the post was an accepted method of communication. Whether the
postal rule is displaced turns the intention of the offeror. If the offeror says or implies
that actual notification is required before an agreement if formed the postal
acceptance rule will be displace (Bressan v Squires).
d) Revocation of the acceptance prior to receipt
The agreement is formed when the offer is accepted, once accepted the offer can not
be refused or revoked.
Acceptance in Unilateral Contracts
Acceptance commonly by conduct
The requirement for acceptance to be communicated is often impliedly waived.
Acceptance is effected by the offeree performing the requirements specified by the
offeror.
Withdrawal of an offer after acceptance has commenced
Generally, once an offeree has begun to accept the offer by performing the acts
stipulated, it is likely to be too late for the offeror to withdraw the offer and claim
there has been no contract formation.
Who may accept an offer?
An offer can only be accepted by the person to who it was made. Acceptance may be
communicated only by the offeree or his or her agent (Powell v Lee (1908)). If an
offer is made to the public at large it can sometimes be accepted by a number of
people. In Carlill’s Case the offer was capable of acceptance by anyone who
qualified under the terms of their offer ie anyone who purchased a smoke ball,
however, in the case of a reward, while many people may have the information which
qualifies them for the reward, only the first person to come forth will be eligible.
Certainty and Completeness
Statement of the Rule
In order to constitute a valid contract the parties must so express themselves that their
meaning can be determined with a reasonable degree of certainty. It is plain that
unless this can be done it would be impossible to hold that the contracting parties had
the same intentions; in other words the consensus ad idem would be a matter of mere
conjecture (G Scammell and Nephew Ltd v HC and JG Ouston).
There are a number of facets to this principle.
 A contract containing language that is so obscure and so incapable of any
definite or precise meaning that the court is unable to attribute to the parties
any particular contractual intention will be unenforceable (G Scammell and
Nephew v HC & JG Ouston). The uncertainty may relate to one of the pivotal
terms of the agreement or may go to the very heart of the agreement.
 Even where uncertain or ambiguous language is not used, if the parties have
not agreed on all of the essential terms of the agreement, the contract will be
unenforceable.
 A contract will be unenforceable if it reserves a discretion for one party not to
carry out his or her obligations (Thorby v Goldberg).
Ambiguity and Uncertainty
Individual Terms
There can be no contract unless what the parties agreed can be determined objectively
with a reasonable degree of certainty. Whether the clause is said to be vague,
ambiguous or uncertain the clause is void. Sometimes the court will label a term
meaningless or illusory. A meaningless clause is one to which a meaning cannot be
attributed and will be treated the same way as an uncertain clause. An illusory clause
has an identifiable meaning but will be treated as uncertain as it promises an illusory
term. The modern approach appears to emphasise the courts willingness to uphold an
agreement entered into by the parties, particularly where the circumstance indicate
that the parties intended to be bound by the agreement.
Agreements to Negotiate
Parties who are interested in pursuing some kind of joint venture, but are not yet at the
stage of being able to commit to final, specific terms, may choose to enter an
agreement to negotiate at a later state, also called a heads of agreement.
If parties do not reach final agreement on essential terms, instead agreeing to finalise
such matters at a later time, the contract is an agreement to agree and is
unenforceable. If an agreement to negotiate is regarded as an agreement to agree, it to
will be unenforceable (Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd).
Saving Ambiguous, uncertain or meaningless contracts
Link to External Standard
A clause in a contract which, on its face, appears uncertain may be enforceable if a
meaning can be given to it by reference to an external standard. The parties may
provide for “a standard, machinery or formula designed by the parties to take the
place of their own agreement” (Hawthorn Football Club v Harding).
The reference may be made in a direct way for example, incorporating standard hire
purchase terms used by the particular hiring company. If such a set of standard hire
purchase terms exists, the clause will be valid.
Recourse may also be made to external standards, even where the contract itself does
not expressly provide such a link. In Hillas and Co Ltd v Arcos Ltd the contract gave
the purchaser an option to buy more timber for delivery next year. The option was
held to be valid despite it not stating the kind, size or quality of the timber to be
supplied or dates or ports of shipment. Specifications agreed in the original contract
could be regarded as an external standard.
Link to reasonableness standard
The court may be willing, in some circumstances, to adopt principles of
reasonableness to make certain something that, on its face, is not. ‘The implication of
what is just and reasonable to be ascertained by the court as a matter of machinery
where the contractual intention is clear but the contract is silent on some detail’
(Hillas and Co Ltd v Arcos Ltd).
In Hillas v Arcos the parties had clearly intended to be bound by the contract and
consequently the court was prepared to give meaning to a clause which gave the
purchasers an option to buy ‘100 000 standards for delivery during 1931’. The
conclsion that this was a reference to a hundred thousand standards ‘of softwood
goods of fair specification’ was reached by the court both by reference to an earlier
clause in the contract and its preparedness to imply standards of reasonableness to
otherwise uncertain clauses.
Severance
The invalidity of one term will not necessarily mean that the whole contract will be
unenforceable. In some circumstances the invalid term can be severed and the
remainder of the contract will be enforceable. Generally, if the parties would have
intended to be bound in the absence of an uncertain clause, the clause can be severed
and the remainder of the contract be enforceable (Fitzgerald v Masters).
A contrary decision will be reached where the offending clause forms a pivotal part of
the contract, so that the parties could not have intended to be bound in its absence. In
Whitlock v Brew the granting of the lease to shell was considered to be ‘definitive of
the ultimate rights which its contemplated the purchaser is to get under his contract’.
Therefore, severance was not possible.
Waiver or Removal of Uncertainty
If a clause is inserted in a contract for the benefit of one party only, but is drafted in
such vague terms as to make it void, that party can choose to waive the benefit of the
clause and have the remainder of the contract specifically enforced (Whitlock v Brew
(1967)).
Incomplete agreement
Parties must reach final agreement on the essential aspects of the contract before they
will be regarded as having entered a contract. It is not enough for them to leave a
matter to be agreed upon at a later state ie an agreement to agree. However, if parties
provide a mechanism for finalizing terms it will no longer be regarded as an
agreement to agree and will be enforceable.
Agreement contains mechanism to complete
It may suit the needs of contracting parties not to finalise various aspects of their
agreement, but rather to insert in a mechanism for determining one or more terms at a
later date for example external standard or third party.
a) Reference to a third party
Parties to a contract may leave terms of the contract to be decided by a third party,
even essential terms (Godecke v Kirwan).
b) Discretion retained by a contracting party
It is uncertain that a contract that leaves terms to be determined by one of the
contracting parties is enforceable. A contract that leaves essential matter for later
determination by one of the contracting parties will be unenforceable as it is either
incomplete or uncertain or because the promises contained in the agreement are
illusory (Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd). However, if a subsidiary
matter was left to the determination of one of the parties such as how the contractual
obligation are carried out by that party, it may be enforceable (Godecke v Kirwan).
Breakdown of Mechanism to Complete
The traditional view of contract formation is that the court will not rewrite the
agreement for the parties where the parties themselves have failed to agree on all
terms. If the parties have established a mechanism for determining a term and the
mechanism fails, the court will not substitute its own view and complete the
agreement (Milnes v Gery).
Saving Incomplete Agreements
Implication of Terms
The willingness of the courts to imply terms into agreements is, however, illustrated
by the decision in Hillas v Arcos, which involved the enforceability of an option to
sell timber which did not specify the quality or price of the timber nor the dates for
delivery. The court held that it is not for the court to make the contract for the parites,
or to go outside the words they have used, except insofar as there are appropriate
implication of law, as for instance, the implication of what is just and reasonable to be
ascertained by the court as matter of machinery where the contractual intention is
clear but the contract is silent on some details.
However, the court may not rewrite the agreement for parties where the parties
themselves have failed to agree on essential terms. The greater the number of terms
not finally agreed upon by the parties, the less inclined the court will be to exercise its
discretion to imply a term. In Hall v Busst, Fullagar J opined that the contract could
only be regarded as concluded if the parties agreed on the three essential elements: the
parties, the subject matter and the price and if these elements have been agreed upon
with sufficient certainty the court will provide the rest.
In addition, there are two other factors which may be relevant in the courts
determination. First, if it is clear that the parties have gone beyond the state of
negotiation and intend to be contractually bound, the court will be more minded to
imply a term and enforce the agreement (Hillas v Arcos). Secondly, and related to the
first, if the contract has between partly executed, for example in a contract for the sale
of goods, property has been delivered and title has passed, the court will seek to imply
a term necessary for the validity of the agreement (Hall v Busst).
Failure to specify price
a) Contract silent on price
The general principle is that a contract will only be regarded as validly constituted if
the parties to agree on price would mean that the contract is not complete, and would
not be upheld by the court.
However, there are exceptions. There is a distinction between the sale of land and
sale of goods with respect to the implication of terms by a court. For the sale of
goods, the court is sometimes prepared to imply a term that the purchaser will pay a
reasonable price for the goods. This intention is demonstrated for example, where the
contract is partly executed and property in the goods has passed. A court will not
imply a term for payment at a reasonable price into a contract for the sale of land
(Hall v Busst (1960)).
b) Contract provides for parties to agree in future
An agreement to agree in the future also offends against the general principle of
completeness. However, in some instances, in contracts for the sale of goods the
court may imply a reasonable price and the contract will be upheld (Foley v Classique
Coaches Ltd). However, if the contract is to sell land, or on rental in an option to
renew a lease, it is unlikely to be upheld (Stocks &Holdings Pty Ltd v Arrowsmith)
and will be treated as such matters which are silent on price.
c) Contract makes provision for mechanism to complete
A contract that contains a mechanism for setting a term at a later time is likely to be
valid. It is not uncommon for such a mechanism to be used in relation to setting a
price.
d) Contract provides for payment of a reasonable price
Again, whether the agreement is upheld as being sufficiently certain may turn on the
nature of the subject matter in dispute. A contract for the sale of goods at a
reasonable price is likely to be valid. Reasonable price is an objective standard that
can be determined without further agreement between the parties. If one party
breaches the agreement, the court can assess the price to be attributed to the goods,
and damages can be awarded accordingly. However, clause to attribute to reasonable
price to the sale of land will be generally be uncertain or for the sale of goods if they
are unique or of very special character eg original painiting (Hall v Busst).
Subject to agreements
Sometimes parties may be ready to sign a contract but not able or not prepared to
commit to one or more aspects of the agreement. In these circumstances pares may
decide to enter into agreements subject to the happening of a particular event.
Subject to finance agreements
Contracts for sale may contain a clause stating that the contract is subject to the
purchaser receiving approval for finance on satisfactory terms and conditions. The
contract is immediately binding on the parties but will come to an end of the
purchaser is unable to obtain finance and terminates the contract pursuant to its terms.
a) Satisfactory Finance
It has been argued that a clause which provided for finance to be obtained on
‘satisfactory terms’, is either to uncertain to be valid or gave the purchaser such a
wide discretion that it was illusory. The High Court disagreed, and stated that as the
clause was inserted for the benefit of the purchaser, the determination of whether the
finance was satisfactory was left to he purchaser (Meehan v Jones).
b) Steps to be taken to obtain finance
The finance clause in most standard land contracts impose an obligation on the
purchaser to take all steps reasonably necessary to obtain finance approval.
Subject to Contract
For agreements that are formed subject to contract, the case could fall into one of
three categories:
1. The parties have reached finality in arranging all terms and intend to be
immediately bound to perform those terms, but at the same time propose to
have the terms restated in a form which will be fuller or more precise but not
different in effect. The parties intend to be bound immediately thus a binding
contract is formed.
2. The parties have completely agreed upon all terms and intend no departure
from or addition to those terms, but have made performance of one or more of
those terms conditional upon the execution of a formal document. An offer is
such a case is not expressed to be subject to or conditional upon a formal
execution of a contract and all essential terms have been agreed upon thus a
binding contract is formed.
3. The intention of the parties is not to make a concluded bargain at all, unless
and until they execute a formal contract. Parties in such a case do not intend
to be bound until they entered into a formal document thus no binding contract
is formed.
The category a particular case falls into turns on the intention of the parties. If the
parties intend the agreement to be binding on them even before entry into the final
contract, the contract will fall into one of the first two categories.
The case law provides illustration of the three categories described by the High Court
in Masters v Cameron.
a) First Category Branca v Corbarro
The parties agreed to the sale of a mushroom farm, the buyer paying a deposit to the
seller. The agreement contained a clause stating that the agreement was a provisional
agreement until a fully legalized agreement, drawn up by a solicitor and embodying
all the condition herewith stated is signed.
The court held that the parties intended to be bound immediately. Relevant to this
determination was the use of the words provianl and until. Also relevant was the
payment by the purchaser to be made by a date before the formal agreement was to be
executed.
b) Second Category Niesmann v Collingridge
The parties agreed on the sale of land, the seller signing a written document which
provided for certain portion of the price to be payable on the signing of the contract.
The document also contained a statement that value received for option sixpence and
that amount was paid by the purchaser to the seller.
The court held that the parties had entered into a binding agreement. The offer was
not expressed to be subject to or condition upon the execution of a formal contract.
The execution of the contract was simply relevant for the fixing of a date of payment
for the purchase money. All of the essential terms had been agreed upon.
c) Third category Masters v Cameron
The parties agreed to the sale of a farm. The agreement was stated to e ‘subject to the
preparation of a formal contract of sale which shall be acceptable to the vendors
solicitors on the above terms and conditions. The purchaser agreed to the purchase in
these terms, paid a deposit to the vendor’s agent and, among other things, made some
minor structural alteration to the property. The purchaser subsequently claimed that a
binding contract had not been entered into.
The court agreed and held that a binding agreement had not been entered into. The
parties had not intended to be bound until they entered into a formal document. The
payment of deposit to the seller was made on the basis that if a formal contract should
be executed, the amount should be treated as a deposit and, if such an agreement were
no entered into, should be returned to the purchaser.
Intention to create legal relations
Statement of the Rule
To create a contract there must be a common intention of the parties to enter into legal
obligations, mutually communicated expressly or impliedly (Rose and Frank Co v JR
Crompton & Bros Ltd).
It is open for the parties to use express language to indicate an intent (or lack of) to
impose legal obligations on each other. Alternatively, this intention can be impliedly
from the circumstances.
The courts use an objective test in making a determination about the intention of the
parties. In making an objective determination of the parties, intention the court looks
at the surrounding circumstances and asks if a reasonable person would regard the
agreement as intended to be binding.
Domestic and social relationships
Presumption
The presumption is that domestic and social agreements are not intended to have legal
force.
Rebutting the presumption
The presumption can be easily rebutted for example if parties who are in a familial
relationship are contracting in a business context or if a husband and wife enter into
an agreement in circumstances in which they are no longer living in harmony.
Similarly, if the words used in the contract indicate a legal intention, the presumption
that may otherwise have arisen may be rebutted.
Case Examples
a) Husband and Wife (Balfour v Balfour)
Parties intended involved in a domestic relationship, will generally not have intended
legal consequences to follow their arrangement thus a contract will not be
enforceable. Given many couples now choose to cohabit without marrying, the same
presumption should apply where an agreement is entered into between ac acouple
living ain a de facto relationship.
b) Separated husband and wife (Merrit v Merrit)
Where parties are divorced, separated, or in the process of separating, the negotiation
do not take place in the context of natural love and affection therefore there is no
room left for the application of such a presumption and the court will generally find
that the requisite contract intent existed.
c) Other familial relationships (Jones v Padavatton)
Parties in other familial relationships are considered the same as married or de facto
couples, and it is presumed that they do not intend to cerate legal relationships as the
agreement is made in this context are based on natural love and affection. The bond
of natural love and affection is likely to weaken according to the remoteness of the tie
and will subsequently be easier to rebut. In fact, those cases where the court finds that
the presumption has been rebutted, one or more of the following factors are often
relevant
 The seriousness of the conduct involved (such as moving countries or giving
up full time employment)
 The expense involved, especially if the relevant party is not wealthy
 Whether there is or has been a degree of hostility in the relationship
 The closeness of the family ties
 Whether the subject matter of the agreement is business or commercial in
nature
Examples
Jones v Padavatton
A resident of England invited her daughter who lived and worked in the United States
to move to England to study. They agreed that the mother would let the daughter stay
in the house rent free. A dispute arose and the mother brought an action to evict the
daughter from the house.
The court found for the mother in that there was no legally binding agreement
between the parties regarding the offer to live in the house in reliance on the
presumption that family members do not intend to enter into legal relations. This was
the case, notwithstanding the seriousness and expense of the daughters actions in
moving.
Wakeling v Ripley
An elder many of considerable wealth invited his sister and her husband, who gave up
paid employment, to come to Australia to live with him and care for him until his
death in which he agreed to give consideration of this of an income for life provided
by the elderly man and his property upon his death. A dispute arose and the couple
sued for breach of contract.
The could held that in the circumstances the agreement was something more than a
familial relationship because of the serious consequences of the arrangements for the
plaintiffs, namely the husband giving up his salaried position and pension and both of
them moving permanently to Australia.
Roufos v Brewster
Mr. and Mrs. Brewster owned a motel at Coober Pedy while their son in law, Roufos,
ran a small store. Roufos drove the Brewster’s truck to Adelaide for repairs. It was
agreed between them that if Roufos could arrange for someone to drive the truck back
to Coober Pedy, Roufos could transport goods for his business back on the truck. The
truck was involved in an accident and the Brewster’s sued Roufos for the cost of
repairs.
The court held that the parties had entered a binding contract as the setting of the
agreement was commercial and no domestic or social.
d) Social Relationships
The presumption of lack of legal intent can extend beyond familial relationships to
agreements entered into in a social context, or agreements made between friends. In
Heslop v Burns the deceased allowed his fiends to stay in a house owned by him free
of charge. In an action for possession by the deceased’s estate the friends argued they
were in possession as tenants at will but were unsuccessful, the court finding that in
the circumstances in which possession was given the parties had not entered legal
relations.
Commercial Agreement
Presumption
Where parties negotiate and agree in a business setting, it is assumed that the parties
intended the agreement to have legal consequences. Therefore, the party alleging that
an agreement relating to business matter is of no legal effect has the heavy onus of
demonstrating that to be the case.
It can sometimes be difficult determining whether a transaction has taken place in a
business setting (Esso Petroleum Co Ltd v Customs & Excise).
In Esso Petroleum v Customs & Excise Esso, for promotion purposes distributed
millions of coins, of no intrinsic value, to petrol stations that sold Esso petrol. The
advertisement to the public indicated that these coins were a gift and for every four
gallons of petrol purchased a coin would be given. The matter before the court was
whether the coins were being sold (and therefore liable to be assessed for purchase
tax). On of the issues was whether the parties had the necessary intention to form a
contract.
In a 3:2 majority, the court held that the parties possessed the requiste legal intent in
relation to the provision of the coins upon a customer buying the ptrole. First, the
promotion took place in a business setting, it was intended that sales would be
promoted as a result of the coins. Second, this scheme had a potentially large
commercial benefit to Esso. Third, this view was supported by authority (Rose and
Frank v JR Crompton). The contrary view was that the offer of a gift of a free coin
could not properly be regarded as a business matter that attracted legal intention.
Rebutting the Presumption
The intention not to create legal relations may be evident in a number of different
ways. For example, the agreement may contain an express clause that no legal
consequences flow from the document, or the overall tenor of the particular document
may indicate that the parties had no intention to enter into legal relations.
Government Activities
Commercial Agreements
If a government contract arises out of the commercial need for the operation of
government, for example the order of stationary or contracts to purchase vehicles, the
usual contractual principles apply to determine whether a contract has been formed.
Increased formality may be required to demonstrate the necessary legal intent when
one of the contracting parties is the government (Coogee Esplanade Surf Motel Pty
Ltd v Commonwealth of Australia).
Policy Initiatives
Where the government activity relates to a policy initiative a court may be less likely
to find that the parties intended to enter contractual relations (Administration of PNG
v Leahy). In PNG v Leahy the department of Agriculture, at the request Leahy,
provided assistance to help Leahy eliminate an infestation of cattle tick on his
property, an activity which was consistent with government policy. After the
exercise, the Department was sued by Leahy who claimed damages for breach of
contract on the basis that the departmental officers did not perform their activities
skillfully.
The court held that the agreement between the parties was not contractual in nature.
The conduct of the parties constituted an administrative arrangement by which the
Administration in pursuance of its agricultural policy gave assistance to an owner to
prevent that stock contracting a disease which was prevalent in the territory. The
work done was analogous to a social service which generally does not have as its
basis a legal relationship of a contractual nature.
Similarly in Australian Woollen Mills v The Commonwealth a company was
unsuccessful in its action against the commonwealth for breaching the government’s
subsidy arrangement which was merely an announcement of policy.
Voluntary associations
Rules or constitutions of voluntarily association do not constitute a binding legal
contract between parties ‘unless there was some clear positive indication that the
members contemplated the creation of legal relations inter se, the rules adopted for
their governance would not be treated as amounting to an enforceable contract
(Cameron v Hogan). The parties could possess requisite legal intent if the member
has a proprietary interest in the club.
Circumstances indicating absence of intention
Honour Clauses
The presumption that arises in a commercial context is that the parties intended to
create legal relations by entering the agreement. It is however, open for the parties to
form a contrary. The presence of an honour clause in contracting parties agreements
will indicate by express words that they did not intend the agreement to have legal
consequences (Rose and Frank Co v JR Crompton and Bros Ltd).
Promotional puff and free gifts
Where language such as ‘free gift’ is used, or an apparently extravagant claim is set
out in an advertisement, there may be a tendency to think that a person who acts in
response to the advertisement may not intend legal consequences to follow. To
determine whether the requisite intention exists, the court will look not only at the
words used, but at the entire context in which the advertising takes place. For
example, if such language is used in a business setting, or to promote a commercial
end such as a gift of free coins with the purchase of petrol, a court may be persuaded
that the necessary intention existed (Esso Petroleum Co Ltd v Customs & Excise
Commissionersi). Similarly, if the language used conveys intention, such as the
deposit of $1000 in a bank for the purpose of payment would have legal consequences
(Carlill v Carbolic Smoke Ball Co).
Ex gratia payments and without prejudice offers
Parties who offer to make an ex gratia payment or who write a ‘without prejudice’
letter which is accepted, are still seen to posses the intention to create legal relations.
Both of these situations were referred to by Megaw J in Edwards v Skyways. The
case involved a redundancy package for crew members negotiated between an airline
company and the British Air Line Pilots Association. Agreement was reached to pay
redundant air crew members an ‘ex tratia amount approximating to the company’s
contribution for each member of the pension and superannuation fund’.
The company later refused to pay this amount and was sued by one of the pilots made
redundant. The court held that ‘the words ex gratia do not carry a necessary, or even
a probably, implication that the agreement is to be without legal effect . . . a party is
certainly not seeking to include the legal enforceability of the settlement itself by
describing the contemplated payment as ex gratia’.
Letter of Comfort
Where an advance is made, for example to a subsidiary company, the lender may
request the holding company to guarantee performance of the borrower’s obligation.
If the holding company is not prepared to give a guarantee, the lender my instead
request that a letter of comfort be provided which gives an assurance that the
subsidiary company will be able to meets its obligations when they fall due.
Central to the determination of whether a letter of comfort gives rise to legal intent is
whether the parties intended to create legal obligations by the giving and receiving of
the letter. To determine this, the courts look at the construction of the document and
the circumstances surrounding its sending. In Banque Brussels Lambert SA v
National Industries Ltd the following points were considered in assigning legal intent
to the letter of comfort:
 On a construction of the letter, the terms were sufficiently promissory in
nature
 The letter was part of a commercial transaction in which there is a
presumption that legal relations were intended
 Intention is deduced from the document as a whole seen against the
background of the practices of the particular trade or industry
Letter of intent and understandings
Parties sometimes conduct their affairs on the basis of an understanding between them
which may arise orally or put in writing. Question about its contractual standing may
arise where one party no longer wishes to be bound. A related issue arises in the area
of letters or documents of intent. Generally, a letter of intent or understanding will
represent something short of an intention to enter a concluded agreement.
In Coogee Esplande Surf Motel v Commonwealth following the negotiations for the
sale of a motel but before entry into a formal contract, the Head of the relevant
Department sent a letter of intent to the seller. The letter advised that approval had
been given for the purchase and that the Head of the department was requested to
complete the transaction in the near future. The letter of intention indicated only the
intention of one party – there the commonwealth – to enter into a contract to buy. The
reaching of an understanding between the parties has been likened to an expression of
present intention, resulting in something less than a binding contract.
Consideration
Introduction
Whether or not a promise that is part of an agreement can be enforced depends on,
among other things, whether the promisee has given consideration for the promise.
Consideration is perhaps best understood as an act or promise of an act which is the
price paid for the other's promise (Dunlop Pneumatic Tyre Co v Selfridge & Co). The
common law will only enforce a promise for which a price is paid.
Nature of Consideration
Consideration in Bilateral Contracts
A bilateral contract is formed where the parties exchange promises. At the time
agreement is reached, each party makes a promise. The price paid for that promise –
the consideration – is the other party’s promise. Each party promises to do an act or
refrain from doing an act.
Unilateral Contracts
Unlike bilateral contracts, a unilateral contract does not constitute an exchange of
promises. The only promise is the one made by the promisor to do or refrain from
doing and act if the other party does or refrains from doing an act. Thus, the act itself
constitutes the consideration.
Executed and executory consideration
In bilateral contracts, the consideration is considered executory. In bilateral contracts
each party exchange promises with the other to do or refrain from doing an act. This
means that the obligation to perform has not yet fallen due. In unilateral contracts the
parties do not exchange promises. Only one party will make the promise and an
obligation will only arise if the other party carries out the specified acts.
Consideration for the promise is not executory because the act has not been promised
by the promisee. If the promisee chooses to and does perform the specified acts,
consideration is said to be executed.
Rules governing consideration
For there to be a contract formed between the promisor and the promisee,
consideration must move from the promisee. Failure of a litigant to provide
consideration to the promisor was one of the reasons that the plaintiff was
unsuccessful in Dunlop Pneumatic Tyre Co v Selfridge & Co.
In Dunlop Pneumatic Tyre Co v Selfridge & Co Dunlop sold some products to a third
party at a discount price. In consideration for the discount price, the third party
agreed that if it onsold for a discount price it would require an undertaking by that
purchaser not to sell at less than the list price. The third party sold to Selfridge and
obtained the required undertaking, Slefridge did not honour this undertakeing and was
sued by Dunlop.
The court found that even if it could be considered that an agreement was entered into
between Dunlop (the third party acting as an agent for Dunlop) and Selfridge, Dunlop
could not be regarded as having provided consideration for Selfridge’s promise not to
sell at less than the list price. Consideration for this promise moved only from the
third party.
Consideration must move from the promisee
a) Benefit need not move to promisor
It will generally be the case that consideration moves from the promisee to the
promisor, whether the promisee promises to pay money, or do or forbear from doing
an act. However, it is sufficient if consideration moves from the promisee to a third
party at the direction of the promisor.
b) Joint promisees
B and C agree with A that A may quarry and remove stone from land owned by B in
exchange for A paying royalties to B and C. These facts disclose a valid agreement.
In consideration of A’s promise to pay B and C royalties for the quarried stone, B
allows A access to the land to remove the stone. In this case, B and C are joint
promisees. If a contract is formed with joint promisees, consideration need only flow
from one of the promisees for the contract to be enforceable (Coulls v Bagot).
c) Overlap with doctrine of privity
The doctrine of privity provides that only a person who is a party to a contract can sue
on it. A promisee is only able to sue on a promise if the promisee has given
consideration for the promise. The following example demonstrates the overlap
between principles.
Example
A and B agree that if B does specified work for A, A will pay C $500. B does the work but A
refuses to pay the $500.
Applying common law principles, C will not be successful in an action against A to
enforce A’s promise for two reasons. First, C is not a party to the contract so is
unable to sue upon it. This is because of the doctrine of privity. Alternatively, it
could be argued that C has not provided consideration for A’s promise and therefore,
cannot sue upon it (Tweddle v Atkinson). If in the example, A, B and C signed the
contract, C will be a party to the contract, and the doctrine of privity will not discount
legal action on his/her part. However, C will still be unable to sue because C has not
provided consideration for A’s promise.
In Tweddle v Atkinson the plaintiff and a woman were engaged to be married. The
plaintiff’s father and the deceased (woman’s father) agreed for each to pay specified
amounts to the plaintiff upon the marriage. The deceased died without paying the
agreed sum and the plaintiff sued. The court found that the plaintiff could not succeed
because the plaintiff is a stranger to the consideration.
Consideration must be bargained for
An act of forbearance (or promise to forbear) can only constitute valid consideration
if it is bargained for. The notion of bargain involves both the promisor and the
promisee. The action or forbearance from action of the promisee must be in reliance
on the promisor’s promise, and done at the request of the promisor (Combe v Combe).
In Combe v Combe a married couple separated and the husband promised to pay the
wife £100 per year. Because of this promise, the wife did not apply to the divorce
court for maintenance. The husband failed to pay the money as promised and the wife
brought an action to recover the money.
The court held that the parties had no entered a contract as the wife had provided no
consideration. The wife’s forbearance from bringing an action for maintenance did
not constitute consideration because it was not done at the express or implied request
of the husband.
Similarly in Australian Woollen Mill v The Commonwealth the Commonwealth
entered a subsidy scheme to lower the purchase price of wool for local manufactures.
Upon discontinuation of the scheme a local manufacturer sued the Commonwealth for
breach of contract to recover the outstanding subsidy claiming that a contract was in
existence to provide the subsidy. The court held that there was no indication that the
Commonwealth’s promise was made to induce the manufacturer to purchase wool,
nor the manufacturer purchased the wool because of the Commonwealth’s promise.
Consideration must be sufficient
a) General principle
To be valid, consideration must be sufficient in that it is ‘something which is of value
in the eyes of the law’ (Thomas v Thomas). The decisions, in turn, provide guidance
concerning the kinds of acts, forbearance or promises that can be regarded as
something of value for this purpose. Consideration may be valid although it cannot
be given monetary equivalent.
In Chappell v Nestle Nestle, manufacturer of chocolates, promised to gtive a record to
any member of the public who sent in 1s 6d plus three wrappers. The issue before the
court was whether the three chocolate wrappers as well as the money could properly
be regarded as part of the sale price of the record. The court held that the chocoloate
wrappers did form part of the sale price. Consideration for the record was both the
money paid and the three chocolate wrappers . The sending in of the wrappers was of
value to Nestle given the large number of records sold, there would be a large number
of wrappers sent in. This would be of commercial value to Nestle.
Even if the item lacks intrinsic value, requiring it to be provided can constitute good
consideration (Chappell & Co v Nestle Co Ltd).
b) Consideration need not be adequate
Consideration must be sufficient but need not be adequate. When used in reference to
consideration, adequacy is a reference to the commercial value of the consideration.
By saying that consideration need not be adequate, it means that a court is not
interested in ensuring that a promisee provides value for the promisor’s promise.
c) Consideration can be nominal
Consideration will be regarded as valid even if it is nominal only (Thomas v Thomas).
Consideration must not be past
a) General Principle
Consideration moving from the promisee will not be valid to support a promisor’s
promise if that consideration is past. The consideration will be regarded as being past
if it has already flowed from the promisee to the promisor (Roscorla v Thomas).
In Roscorla v Thomas a buyer bought a horse from a seller. After the sale the seller
promised tat the horse was free from vice. The horse was vicious and the buyer sued
the seller for breach for his promise. The court held that the buyer provided no
consideration as the agreement to buy the horse could not be regarded as
consideration because the sale had already taken place.
b) Past consideration distinguished from executed consideration
If the act, forbearance or promise that is claimed to be consideration has already
occurred or been given before the agreement is entered into, the consideration is past
not executed.
Consideration and formal agreements
Deeds
Formal agreements are signed under seal, and are more commonly referred to as
deeds. Because of the solemnity or seriousness of the manner of execution of such
documents, the common law has recognized these agreements as valid even if
consideration has not been provided. Simple agreements are agreements other than
formal agreements which are oral or written and require consideration to be valid.
Consideration: specific examples
Moral Consideration
A promise made because of a sense of moral obligation to the promisee will not be
sufficient consideration to support that promise.
In Eastwook v Kenyon upon the death of a girl’s father, the father’s executor looked
after the girl’s interests and investments, and spent his own money in the process.
When the girl attained majority, she under took to repay the plaintiff. This promise
was adopted by the girl’s husband, the defendant when she married. The plaintiff
brought an action against the defendant to recover the amount promised.
The court held that the plaintiff had not provided consideration for the husbands
promise. Any moral obligation that the defendant may have felt on the basis of the
care taken of his wife and money expended by the plaintiff on her over the years did
not constitute valid consideration.
A promise made because of the love and affection that the promisor and promisee
have for each other, or that the promisor has for the promisee is not legally recognized
(White v Bluett).
In Thomas v Thomas the testator, on his death bed, that he wanted his wife to receive
his house which was conveyed to her in consideration of such desire. In the same
agreement, the wife was required to pay the executors £1.1.0 yearly towards the rent
payable in respect of the house, and to keep the house in repair. The executors
refused to transfer the property.
The English court held that the executors were required to transfer the house to the
wife as her promise to pay £1.1.0 and to keep the premises in repair was consideration
for the promise to transfer the property, however, the court held that fulfilling that
testator’s desire could not form part of the legal consideration for the agreement.
Performance of existing duties
a) Performance of existing contractual duties
Generally a promise by one party (the promisee) to perform an existing contractual
duty owed to another party (the promisor) does not constitute good consideration for
the promisor’s promise (Wigan v Edwards). Where the plaintiff is bound by an
existing contractual duty to the defendant, performance of that duty will not amount to
sufficient consideration to support a further promise made by the promisor, unless the
duty is exceeded.
In Stilk v Myrick two sea men deserted in the course of a voyage and the captain was
unable to replace them so he entered into an agreement with the rest of the crew to
distribute the wages of the two deserters equally among them if they continued to
work the ship. The crew did so and the captain refused to pay. The court held that
the agreement to share the wages was void for want of consideration. As part of the
original agreement, the crew had undertaken to do all that they could under all the
emergencies of the voyage. The desertion of part of the crew was such an emergency
and the crew members were merely performing what they originally agreed to do
under the existing contract.
A court may be prepared to find that the parties have agreed to abandon their original
agreement and enter a new one. In Hartley v Ponsonby the facts were similar to those
of Stilk v Myrick however the ship was in the harbour instead of at sea. The court
held that after the desertion, it was dangerous to life for the ship to go to sea. This
operated to release the original crew from their contracts therefore, the plaintiff
agreeing to remain on the ship for the rest of the voyage was consideration for the
captain’s promise to pay additional money.
The court may be willing to accept performance of an existing contractual duty as
good consideration where it provides a benefit to the promisor. In Williams v Roffey
Bros, a subcontractor who had underquoted and found itself in financial difficulties
advised the head contractor that unless it was paid an additional amount, it would be
unable to complete its work under the contract. This would have meant the work
under the head contract would not have been completed on time and under that
contract, the head contractor would have incurred a penalty for late completion. The
court held that despite the fact the subcontractor was only doing what it was already
contract to do, it had provided good consideration for the head contractor’s promise to
pay the extra amount by conferring a benefit in the form of enabling the head
contractor to avoid incurring the penalty.
b) Performance of a public duty
Performance of a public duty does not constitute good consideration for a promise.
The rationale for the rule is that if a person is obliged by law to do a particular act,
then in undertaking to perform that act in exchange for a promise, he/she is providing
no consideration. That act would have been performed in any event. Thus, if the
promisee promises to do something over and above what the public duty requires,
there would be consideration for the promise (Glasbrook Bros v Glamorgan County
Council). In Glasbrook Bros v Glamorgan Country Council police who were under a
public duty to provide mobile patrols in an area but who also provided special on site
guards were held to be acting in excess of their public duty and thus there was good
consideration to support the defendants promise to pay for those services.
c) Where promise is made to a third party
A promise to perform an existing contractual duty owed to another party can be good
consideration for a promise. There are a number of possible rational for this. First, it
may be of benefit for the promisor to ensure that the original agreement is carried out.
Second, although the promisee may be contractually bound to perform the original
agreement, by entering into the subsequent agreement, he or she incurs further
liability to the promisor if the first agreement is not performed (Pao On v Lau Yiu
Long).
In NZ Shipping v Satterthwaite a bill of lading which exempted the carrier of drilling
equipment from liability for ‘any loss or damage or delay of whatsoever kind’. All
person working for the carrier were deemed to be parties to the contract which
consisted of the bill of lading. The equipment was damaged whilst being unloaded by
a stevedoring company employed by the carriers. The stevedoring company pleaded
the exclusion clause in defence to an action by the plaintiffs.
The court held that the stevedores were able to take advantage of the exclusion clause
as the contract had been made by the carriers as agents for the stevedores. The
stevedores had provided consideration for the contract by unloading the goods on
arrival.
Part Payment of Debt
a) Rule in Pinnel’s Case
The principle that the promise to pay part of a debt cannot constitute consideration for
a creditor’s promise to forgo the balance is commonly referred to as the ‘rule in
Pinnel’s case’.
If an amount of money is owing by a debtor to a creditor, and those parties enter into
a subsequent agreement that the creditor will accept a lesser amount in full
satisfaction of the amount, the later amount agreement will generally not be binding
because the debtor has not provided consideration for the creditor’s promise to forgo
the balance due. Therefore, even if the debtor acts on this agreement by paying the
lesser sum agreed – and the sum is accepted by the creditor – the creditor will
generally be able to sue the debtor for the balance due (Foakes v Beer).
b) Circumstances in which the rule will not operate
Parties Enter into a deed
Consideration is not required, however, for specialty agreements (formal agreement
under seal). If the parties enter into a deed under which the creditor forgoes part of
the amount owing, that arrangement will be enforceable despite the absence of
consideration.
Accommodation to benefit the creditor
If a debtor provides consideration for the creditor’s promise, the rule will not apply.
For example, if the circumstances surrounding a payment altered to accommodate the
wishes of the creditor so that the creditor received some benefit from the new
arrangement, consideration may have been provided for the creditors promise (Van
Burgen v St Edmonds Properties). Examples of how the arrangement could be altered
by the creditor:
 Payment on an earlier than scheduled date
 Payment at a location more convenient to the creditor
 Payment in a currency more desirable to the creditor
Payment made at a different place for the debtor's convenience does not evade the
rule.
Amount owing is disputed
The rule in Pinnel’s case will only operate when there is no dispute between the
parties as to the amount owed. If the parties cannot agree on an amount owing, they
may wish to enter into a compromise agreement. In the case of a compromise,
although the creditor promises to accept an amount less than what the creditor
contends is the account of the debt in full settlement of the debt, the debtor has
provided consideration for the creditor’s promise. The debtor has agreed to pay an
amount more than the debtor believes to be due. This is good consideration even if
the creditor is in fact correct and the amount claimed by the creditor is actually due (H
B F Dalgety LTd v Moreton).
Payment by a third party
If a debtor is unable to meet his debt to the creditor and obtains assistance from a third
party to do so, the third party to placate the creditor may offer a lesser some than the
full amount owed to bring the matter to an end. As the third party is not indebted to
the creditor, his/her promise to pay an amount should be good consideration for the
creditor’s promise to forgo the balance of the debt. The fact that payment is by a third
party and not the debtor takes the case outside the operation of the rule in Pinnel’s
case (Hirachand Punamchand v).
Composition with creditors
Under a composition with creditor’s agreement, the creditors all agree to accept
payment of something less than the full amount owing by the debtor, in exchange for
giving the debtor a full release. Creditors may agree to such an arrangement if it
appears that this is the most likely avenue to recover any amount from the debtor (In
the Estate of Whitehead).
Forbearance to sue
To promote settlement of potential legal claims, the court is prepared to recognize the
validity of agreements to compromise claims or agreements to forbear from suing
even if the claim by the party is one that may not have succeeded. A promise not to
sue may be good consideration for the other party’s promise even if in fact that claim
would have been unsuccessful.
Bargain for conduct already performed
The exception to the rule that past consideration will be ineffective to support a
promise is that if the services would only have been provided on the basis of payment
(Lampleigh v Braithwaite). Services are frequently provided without discussion of
payment, but it is presumed by all parties that there will be payment for those services
for example obtaining the services of a medical specialist for a particular complaint or
an accountant for the preparation of a tax return.
In all cases where a promisee seeks to enforce a promise made after theprovision of
the services, or other conduct relied upon, the promisee must be able to demonstrate
that
1. the act must have been done at the promisor’s request:
2. the parties must have understood that the act was to be remunerated either by
payment or the conferment of some other benefit
3. payment, or the conferring of the benefit, must have been legally enforceable
had it been promised in advance
Equitable Estoppel
The Doctrine of Equitable Estoppel states that a promise not supported by
consideration could give rise to rights in circumstances where it would be
unconscionable conduct for the promisor to renege on the promise. An estoppel may
arise from pre-contractual negotiations (Waltons Stores (Interstate) Ltd v Maher
(1988)).
Unconscionable conduct is the touchstone for the operation of equitable estoppel but
requires more than a mere failure to fulfill a promise. Unconscionable conduct
denotes a creation or encouragement by the defendant in the other party of an
assumption that a contract will come into existence or a promise will be performed
and for the other party to have relied upon that assumption to his or her detriment to
the knowledge of the first party (Waltons Stores (Interstate) Ltd v Maher (1988)).
However, a different result may apply where the parties subsequently execute a
formal contract that is expressed to constitute the whole of the contract between the
parties, but where one party asserts that the other is estopped from relying on rights
created by the written contract due to an assumption formed during negotiations
(Skywest Aviation Pty Ltd v Commonwealth (1995)).
The elements of estoppel must be positively proved and will rarely if ever be inferred
(Chellaram & Co v China Ocean Shipping Co [1991]).
Elements of Estoppel
Assumption or Expectation
There must be a clear and unambiguous assumption or expectation by Party A that a
contract will come into existence or that a promise will be fulfilled (Waltons Stores
(Interstate) Ltd v Maher (1988)).
Encouraged or Induced
An aspect of unconscionable conduct is that the defendant played a part in the other
party adopting the assumption or expectation, often by way of a promise or
representation on the behalf of the defendant.
A clear and unambiguous representation may be implied from words used or be
adduced from a failure to speak, where there was a duty to speak, or from conduct
(Thompson v Palmer (1933), Waltons Stores (Interstate) Ltd v Maher (1988)).
If a party acts upon mere hope rather than a belief induced or encouraged by the other
party, will not be sufficient grounds for estoppel Lorimer v State Bank of New South
Wales, Chellaram & Co v China Ocean Shipping Co [1991]).
If an unauthorized statement is made to the knowledge of the principle in
circumstances where the principal knows or ought to know that the statement is being
relied upon, a failure to deny the statement is in fact authorized and may reasonably
be relied upon by the other party (Corpers (No. 664) Pty Ltd v NZI Securities
Australia Ltd (1989)).
Reliance
The party claiming estoppel must act or abstain from acting in reliance upon the
assumption or expectation.
The parties reliance upon an assumption must be reasonable (Waltons Stores
(Interstate) Ltd v Maher (1988)).
The characteristics of the plaintiff in assessing the reasonableness of the reliance, are
relevant. For example, if the parties are stockbrokers and merchant banker
experienced in commerce with the intention of their solicitor to prepare formal
documentation (Austotel Pty Ltd v Franklins Self Serve Pty Ltd (1989), or are large
commercial entities represented by solicitors (Capital Market Brokers Pty Ltd v
Hamelyn UPC Ltd ).
Knowledge or Intention
The party who induced the adoption of an assumption or expectation must know or
intend the other party to act or abstain from acting on reliance on the assumption or
expectation (Waltons Stores (Interstate) Ltd v Maher (1988)).
Detriment
The party will suffer detriment if the assumption or expectation goes unfulfilled.
The party claiming estoppel must suffer detriment in the sense that ‘as a result of
adopting the assumption as the basis of action or inaction, the plaintiff will have
placed himself in a position of material disadvantage if departure from that
assumption is permitted (Thompson v Palmer (1933)).
The detriment is determined as at the date the defendant seeks to resile from the
assumption or expectation he or she has encouraged or induced, and upon which the
othe party has acted (Lorimer v State Bank of NSW).
Failure to avoid detriment
The party encouraging or inducing the assumption must fail to avoid the detriment
suffered by the party claiming estoppel, by failing to fulfill the assumption or
encouragement (Waltons Stores (Interstate) Ltd v Maher (1988)).
Depending on the circumstances, the defendant may be required to do no more than
warn the plaintiff that the assumption or expectations mistaken before the plaintiff
incurs irreversible detriment (Lorimer v State Bank of NSW).
It may be possible to show the relevant detriment where the defendant has made an
attempt to avoid detriment being suffered by the plaintiff but the attempt proves to be
inadequate (Silovi Pty Ltd v Barbaro (1988)).
Remedies
The object of equitable estoppel is not necessarily to enforce promises but to avoid the
detriment suffered by a party who relies on a promise. The remedy for equitable
estoppel is the minimum equity to do justice between the parties and that it is in the
nature of the reliance or loss (Commonwealth v Verwayen (1990)). However, in some
circumstances the enforcement of a promise may be the only means of avoiding the
detriment (Waltons Stores (Interstate) Ltd v Maher (1988)).
The remedy should be proportionate to the unconscionability. Normally this will be
reliance loss rather than expectation loss, i.e. compensation for loss incurred in
reliance on the assumption rather than making good the expectation of the parting
invoking estoppel (Commonwealth v Verwayen (1990)).
There may, however, be a prima facie entitlement to have the expectation made good
where the relief to reliance would exceed what could be granted by enforcing the
expectation. Also, where the nature or likely extent of the detriment cannot be
accurately or adequately predicted, it may be necessary in the interest of justice that
the assumption be made good to avoid the possibility of detriment. Conversely, if the
enforcement of the expectation is shown to be too great a remedy it will not be
enforced (Giumelli v Giumelli (1999)).
Privity
General
A third party to a contract is unable to acquire rights or benefits under the contract.
Wilson v Darling Island Stevedoring Co (1955).
Statutory Abrogation of Privity
Queensland
The Property Law Act 1974 (Qld) s54(1) provides that:
A promisor who, for a valuable consideration moving from the promisee, promises to
do or to refrain from doing an act or acts for the benefit of a beneficiary shall, upon
acceptance by the beneficiary, be subject to a duty enforceable by the beneficiary to
perform that promise.
(a) Promisor
The relevant promisor under the statue is the party who actually makes the promise
for the benefit of the beneficiary. In the absence of an assignment the promise is not
binding upon a new party who merely stands in the shoes of the promisor who makes
the promise for example where the promise is made by a trustee of a trust who is
subsequently replaced by a new trustee, the promise will not be binding on the new
trustee.
(b) Beneficiary
A party is clearly a beneficiary if they are expressly named in a contract as receiving
the benefit of performance of work under a contract (Re Burns Philp Trustees).
A person who is not named in the promise but is incidentally benefited by the promise
generally cannot enforce the promise in reliance of s55 (Re Burns Philp Trustees).
(c) Promise
Promise is defined in s56 as being a promise:
 Which is or appears to be intended to be legally binding and
 Which creates or is intended to create a duty enforceable by a beneficiary
A contractual term that merely regulates the relationship between promisor and
promisee will not be enforceable by a third party if it does not amount to a promise to
benefit the third party and create an enforceable duty (Davis v Archer Park
Newsagency Rockhampton).
(d) Acceptance
Section 55(6) defines ‘acceptance’ as an assent by words or donduct communicated
by or on behalf of the beneficiary to the promisor – or to a person authorised on his or
her behalf – in the manner (if any) specified in the promise and within the time
specified in the promise.
It seems that an acceptance must on its face be an assent. It is insufficient for there to
be words or conduct that is merely consistently with acceptance (Re Davies).
It may be sufficient if the promise comers to the notice of the beneficiary’s solicitor
(Re Davies).
Provided the beneficiary’s assent purports to accept the promise, it is immaterial if in
fact the purported acceptance precedes the promise to benefit the beneficiary thus an
anticipatory acceptance may suffice (Hyatt Australia Ltd v LTCB Australia Ltd).
(e) Defences
Section 55(4) provides that any matter that would otherwise be relied on as rendering
a promise void, voidable or unenforceable will be available by way of defence in
proceedings for the enforcement of a duty under s 55.
The intended object of this subsection provides that defences such as mistake, fraud,
misrepresentation, Stature of Frauds and Statue of Limitations etc, which may be
available to the promisor against the promisee are also available to the former against
the beneficiary.
(f) Variation or Recission of Promise
Under s 55 (2), before acceptance, the parties to the contract may vary or rescind the
promise. However, s 55(3) provides that after acceptance, their terms of the promise
and the duty of the promisor or beneficiary may be varied or discharged only with
consent of the promisor and the beneficiary.
(g) Imposition of Burdens
Section 55(3)(b) states that the beneficiary will be bound by any promise or duty that
is imposed as part of the promise that benefits him or her. An obligation may be
imposed upon the beneficiary but only as part of a promise that confers a benefit upon
him/her.
(h) Common Law Still Applicable
Section 55(7) saves the common law so that where the statue cannot be applied, the
common law still does. Consequently, a beneficiary who is unable to make out a case
under the statue would be left to rely on an exception to the privity doctrine if one
were available in the circumstances.
Commonwealth
Insurance Contracts Act 1984 (Cth) s48
Section 48 of the Insurance Contracts Act 1984 has provided a third party with a right
to recover directly from an insure the amount of his or her loss.
Entitlement of named persons to claim
(1)
Where a person who is not a party to a contract of general insurance is
specified or referred to in the contract, whether by name or otherwise, as a
person to whom the insurance cover provided by the contract extends, that
person has a right to recover the amount of the person's loss from the insurer
in accordance with the contract notwithstanding that the person is not a party
to the contract.
Maritime contracts of carriage
(a) Servants or agents of sea carriers
If the privity rule were to be applied, then the usual exemption from liability that
appear in contracts of carriage exempting the carrier from liability to the owner of
goods for loss or damage to the goods could be simply evaded by, for example, suing
instead the servants or agents of the carrier. This has, in the past, been avoided by the
inclusion of a bill of lading evidencing the contract of carriage a prosion known as a
‘Himalaya Clause’.
Such a clause makes the carrier the agent for its servants, agents or independent
contractors in relation to an exemption of liability for loss or damage to the goods.
The clause has been held effective to exempt from liability third parties to the contract
of carriage such as the master, crew, or stevedores who are entrusted with loading and
unloading the goods.
(b) Consignees and indorsees
The other issue concerning sea carriage and privity is the routine action of the owner
of goods selling a part or the whole of the cargo to a third party, or while, the goods
are in transit. In such a case, the contract of carriage is entered into between the
original owner and the carrier of the goods. A longstanding issues is weather the
buyer as a consignee or indorsee, is entitled to make a claim against the carrier if the
carrier breaches any of the provision of the contract of carriage including breaches
which result in loss or damage.
Disadvantages arose where the consignee may have paid a considerable amount for
goods that arrived damaged or not at all and where the carrier is unable to enforce
outstanding liabilities under the contract to the original owner.
These situations have been remedied by the Sea Carriage Documents Act. It effect is
twofold. First all rights in the original contract of carriage are transferred to a third
party buyer as from the time of consignment or indorsement. Effectively, therefore, a
consignee or indorsee may now enforce rights under a contract to which he or she was
a third party.
Secondly, all outstanding liabilities under the original contract of carriage are
transferred to a third party buyer when he or she demands or takes delivery of the
goods. Thus, it is possible to impose a burden on a consignee or indorsee despite the
fact that he or she was a third party to the original contract of carriage.
So called exceptions at common law
Agency
(a) General
Agency is a legal relationship between two people where one of them, the principal,
give to the other, the agent, the authority to create legal relations between the
principal and the third party. If the agent acts within his or her actuaql authority,
either express or implied, or within his or her ostensible authority, such act will bind
the principal: that is the principal can take action in his or her own name to enforce
the contract made by the agent or become personally liable should the contract be
breached.
Definition
The principal is not a stranger to a contract made by the agent, he is one of the parties,
the agent being the medium by which the contract is made (Harvester Co of Aust Pty
Ltd v Carrigans Hazeldene Pastoral Co).
The principles of agency may also apply where the agent does not disclose to the
other contracting party that he or she is acting on behalf of a principal if the other
party is willing to contract with anyone on whose behalf the agent acts, such a
willingess may be assumed by the agent (Teheran – Europe Co Ltd v St Belton
(Tractors) Ltd).
Exemption clauses and third parties
The issue of whether a party who is not party to a contract, particularly for the
carriage of goods, can nevertheless rely on an exemption from liability contained in
that contract.
An exclusion clause in a document like a bill of lading may be drafted so at to
effectively protect third parties such as stevedores if four conditions are met
(Scruttons v Midland Silicones):
1. the relevant bill of lading must make it clear that the stevedore is intended to
be protected;
2. the bill of lading must also make it clear that the carrier is contracting not only
on its own behalf but also as agent for the stevedores in relation to the
exemption;
3. the carrier was so authorised by the stevedores, although later ratification by
the stevedores will do; and
4. any difficulties concerning consideration moving from the stevedores are
overcome.
If these four conditions are satisfied, the carrier-promisor effectively contracts as
agent for the stevedore-beneficiary.
Trust
A trust is created where a trustee holds property on behalf of a beneficiary.
The trustee holds the legal title to such property subject to the interest of the
beneficiary in such property. An example of a trust can be seen in the case of a will
where an executor of a will, the trustee, holds the deceased’s property, the estate,
upon trust for any infant beneficiary until such beneficiary reaches the stipulated age
or fulfils specified requirements.
It can be argued that a promisee in a contract holds the promise, to confer a benefit on
a third party under the contract, on behalf of that party. The promisee would be the
trustee and the third party the beneficiary. While the beneficiary, not being party to
the contract, could not directly enforce the promise under the contract could take
proceeding against the trustee, making them a co defendant in the action, to compel
the trustee to enforce the contract.
A promisee will be regarded as a trustee of a promise if that was the clear intention of
that party at the time of the contract was entered into. Unless an intention to create a
trust is clearly to be collected from the language used and the circumstances of the
case, the courts will be reluctant to infer such a trust exists (Re Schembsman; Trident
v McNiece)
Whether a trust is created will depend on a true construction of the terms of the
contract and the intention of the parties. In deriving intention from the language
which the parties have employed the courts may look to the nature of the transaction
and the circumstances, including the commercial necessity of the arrangement
(Trident v McNiece).
The intention required to create a trust need not be held by both parties, it is sufficient
if the promisee alone holds the intention (Trident v McNiece).
Unjust Enrichment
If an insurer is paid and refuses to offer benefit to a third party on the ground that they
are not party to the contract, the third party may take action on the principles of unjust
enrichment (Trident v McNiece).
The key element of unjust enrichment is the unconscionability of the defendant’s
conduct in retaining a particular benefit at the expense of the plaintiff. But this issue
remains whether the benefit retained by the defendant is the premium paid or the
promised benefit. An argument could be made that the defendant has been unjustly
enriched only to the extent of the premium paid to it.
Formalities
Provided a contract is validly formed and there are no vitiating factors, action can
usually be brought to enforce a verbal contract. Notwithstanding this general
proposition, however, a limited number of contracts must be evidenced by writing to
be enforceable.
Guarantees
A contract of guarantee must be in writing and signed by the party to be charged in
order to be enforceable. Section 56(1) of the Property Law Act 1971 (Qld) provides:
No action may be brought upon any promise to guarantee any liability of another unless the
promise upon which such action is brought, or some memorandum or note of the promise, is
in writing, and signed by the party to be charged, or by some other person by the party
lawfully authorised.
Nature of Guarantee
A contract of guarantee has been defined as ‘a contract to answer for the debt, default
or miscarriage of another who is primarily liable to the promisee. The person who
provides the guarantee is referred to interchangeable as the guarantor or surety.
In situations were a guarantee is given there will be two separate transactions. The
first (principal transaction) is the first transaction to take place for example in a
contract for loan the principal would be between the lender and debtor in which the
debtor is primarily liable. The second transaction (contract of guarantee) makes the
guarantor secondarily liable, a liability which only arises if the principal transaction
between the lender of the debtor is valid and has been defaulted.
Transactions which are not guarantees
Transaction which are not guarantees will not have to comply with the statutory
requirements of formalities.
a) Contracts of indemnity
In an indemnity, the surety undertakes primary liability, rather than secondary
liability, meaning that the surety will be liable notwithstanding that the principal
transaction is unenforceable (Yeoman Credit Ltd v Latter)
b) Promise of guarantee made to the debtor
It is possible for a person to promise the principal obligator (the debtor), rather than
the creditor, that he or she will pay the debt of the debtor. As the promise is not made
to the person with whom the principal obligor contracts, the contract is not one of
guarantee (Eastwood v Kenyon).
c) Person agree to take over the debt of another
Where a debtor and creditor have entered into a contract of loan, it could occur that t
third party agrees with the creditor to take over the debt of the debtor. Such an
arrangement is not a contract of guarantee and therefore need not comply with the
statutory requirement of formality (Gray v Pearson).
d) The agreement imposes no personal liability on the person
If a person does not undertake personal liability, but instead proffers his or her
property as security to the promisee under the principal transaction it is not a
guarantee. In Harvey v Edwards, Dunlop & Co Ltd Harvey agreed to pay the debt
owed to Edwards by a third party through the sale of his property. Higgins J held that
‘liability was imposed only on the proceeds of the sale of the property. Mr. Harvey
had not promised to answer for the debt of the company. If the proceeds of sale were
insufficient to cover the debt, there was no obligation on Harvey to pay out of his
other assets’.
e) Letters of comfort
When third parties are not prepared to provide the lender with a guarantee they may,
as a compromise, be prepared to give the lender some assurance about the likelihood
of the debtor meeting obligation under the principal contract. Such assurances are
commonly referred to as letters of comfort. A letter of comfort often contains the
following information:
1. the third party is aware of the facility the lender is providing
2. the terms of the facility are accepted with the consent and knowledge of the
third party
3. it is the policy of the third party to ensure that the debtor is at all times in a
position to meet its liabilities
Whether the letter of comfort is binding as a contractual document, so that he third
party may be called upon to pay, depends on the construction of the document.
Frequently the issue is whether there was an intention by the parties, namely the third
party and the lender, to create legal relations.
Requirement of writing: content
For a contract of guarantee to be enforceable the relevant statutory provision requires
either the promise is to be in writing, or some ‘memorandum or not’ of the promise is
to be in writing. The provision does not, however, elaborate on precisely the
information that must be contained in the writing to satisfy the statutory requirement.
Guidance from case law, in Harvey v Edwards, Dunlop & Co, provides that the
document must contain ‘all essential terms of the agreement’.
a) Information particular to the guarantee
First, the guarantee must contain the names of the relevant parties: the lender, the
debtor and the guarantor. It may happen that the guarantee makes reference to a party
without expressly identifying them. Authorities suggest that even if a party is not
expressly identified, ‘a description of the party will be sufficient if the description
used can be explained by extrinsic evidence without having to resort to evidence to
prove the intention of the author (Rosser v Austral Wine & Spirit Co).
Secondly, the relevant terms of the guarantee must be stated. This would generally
require the amount of debt being guaranteed to be specified. If the guarantee is given
of the amount advanced by the lender together with interest on that amount, the
interest payable by the debtor should also be specified.
There are two other important caveats to the general proposition that a guarantee must
contain all of these essential terms.
First, while the lender must provide valuable consideration to the guarantor for a valid
contract of guarantee to be formed, the nature of that consideration is not required to
be contained in the guarantee (Property Law Act 1974 (Qld) s 56(2)).
Second, where a material term has been omitted from the guarantee, there may be
limited circumstances in which the guarantee will still be enforceable against the
guarantor for example, if the term is for the benefit of the lender, the lender will be
entitled to waive the benefit of the oral term not reduced to writing to enforce the
guarantee as modified (a waiver to collect interest on the amount owed if details of
the interested are omitted) (Hawkins v Price).
b) Acknowledge of the agreement
The guarantee must indicate that the guarantor has undertaken the obligation of the
guarantor has undertaken the obligation to guarantee. However, in the context of
guarantees, the very nature of the agreement being reduced to writing will probably
indicate the guarantor’s undertaking to repay on the debtors default.
Requirement of writing: signed by party to be charged or agent
To satisfy the statutory provision, the promise or note or memorandum of the promise
must be ‘signed by the party to be charged, or by some other person by the party
lawfully authorised’. Upon the debtor’s default, the lender will seek to enforce the
guarantee against the guarantor. Therefore, it is the guarantor who is the party to be
charged. To satisfy the formalities requirement, therefore, the guarantee must be
signed by the guarantor.
In Durrell v Evans, it was discussed whether something less than a full signature is
sufficient to satisfy the statutory requirement. The court had to determine whether the
printing of the defendants name at the top of a sales note the agent, for goods the
defendant no longer wanted, by was sufficient to satisfy the statutory requirement.
The court held that when it is ascertained that he meant to be bound by it as a
complete contract, the statue is satisfied, there being the note in writing shewing the
terms of the contract, and recognized by him.
This concept is sometimes referred to as the ‘authenticated signature of fiction’.
To apply this principle in the context of a guarantee, if the guarantor’s name appears
on the guarantee, and it is the guarantor’s intention that the name authenticates the
document, it will be sufficient to satisfy the statutory requirement.
The statutory provision makes it clear that the signature can be by the guarantor or the
agent acting on the guarantor’s behalf. Appointment of this guarantor need not be in
writing.
Contracts relating to land
Section 59 of the Property Law Act (Qld) requires the statutory requirement for
formality where the contract concerns land. Section 59 provides:
59 Contracts for sale etc. of land to be in writing
No action may be brought upon any contract for the sale or other disposition of land or any
interest in land unless the contract upon which such action is brought, or some memorandum
or note of the contract, is in writing, and signed by the party to be charged, or by some person
by the party lawfully authorised.
Nature of contract needing writing
The requirement of formality applies to a contract for the sale of land or any interest
in land as well as a contract for the other disposition of land or any interest in land.
Disposition is a wide term; it will include such transaction as the mortgage of land,
lease of land, and the declaration of a trust in relation to the land.
Requirement of writing: content
The majority judgment in Harvey v Edwards, Dunlop & Co, that the document must
contain ‘all the essential terms’, is also relevant to land.
a) Information particular to the contract
It was suggested in Twynam Pastoral Co v Anburn that there are four matters that
must be recorded to satisfy the statutory requirement in a contract involving land.
First, the document must contain the parties to the contract (Williams v Byrnes). As
with guarantees, as long as the intention of the parties is clear, extrinsic evidence may
be introduced to establish the identity of the parties (Rosser v Austral Wine & Spirit
Co).
Second, the property must be adequately described. If the property the subject of the
sale is part only of a particular lot, care must be taken to specifically identify the
portion being sold (Pirie v Saunders). In contrast, if freehold property is sold subject
to an existing leasehold and the leasehold interest is known to the purchaser, there is
authority to suggest that the property is sufficiently described even if there is no
reference to the lease (Timmins v Moreland Street Property Co).
Thirdly, the consideration for the promise, namely the price, must be recorded (Wain
v Walters).
Finally, the principal terms of the contract must be disclosed. For example, if the
parties require time to be of the essence, that condition should be included in the
contract.
Failure to include in the document all essential terms might not necessarily be fatal to
the plaintiff, if the term omitted is for the benefit of the plaintiff they may waive the
benefit of clause and seek enforcement of the contract without it (Petrie v Jensen).
In Petrie v Jensen the parties entered into a contract for the sale of land that included
a requirement for the seller to obtain an undertaking from tenants of the property to
quit the premises within 60 days of the date of the contract which the seller was
unable to obtain and consequently treated the contract as at an end.
The court held that as the clause regarding the tenant’s undertaking to quit was
inserted solely for the buyer’s benefit, he was entitled to waive the benefit of the
terms and insist on performance of the contract.
In the context of formalities, if the written contract for sale had not contained the term
about the tenant’s undertaking, the buyer would have been entitled to waive the
benefit of the term and enforce the contract.
b) Acknowledgment of agreement
The writing must contain an acknowledgment of agreement as well as the terms of the
agreement. Such acknowledgement may be expressed or implied in the writing (Pirie
v Saunders).
Requirement of writing: signed by party to be charged or agent
The document must be signed by the party to be charged. If there is purported
contract for the sale of the land and the seller claims not to be bound by the
agreement, the seller will be the party to be charged for the purposes of any action
brought. Similarly, if the buyer claims not to be bound, the buyer will be the party
charged.
A person may have been taken to sign a document if the signature is absent as long as
the name of the party is placed on the document and that party expressly or impliedly
indicates that he or she recognizes the writing as being an authenticated expression of
the contract. This is known as an ‘authenticated signature of fiction’
It is sufficient if the document is signed by a person who is duly authorised by the
party to be charged. The agent must be expressly authorised to sign the document on
behalf of the party. While the authorization must be express, there is no requirement
for it to be in writing.
Joinder of documents
It is possible to satisfy the statutory requirement of writing even if all of the relevant
information is not contained in the one document. In certain circumstances, more
than one document may be joined together and, if the documents so joined contain all
the material terms, the contract will be enforceable.
In Harvey v Edwards, Dunlop and Co a majority held it possible to join documents
either by reference to another document or to some other transaction.
‘The memorandum need not be contained in one document; it may be made out from several
documents if they can be connected together. They may be connected by reference one to the
other but further, if you can spell out of the document a reference in it to some other
transaction, you are at liberty to give evidence as to what the other transaction is, and, if that
other transaction contains all the terms in writing, then you get a sufficient memorandum
within the statue by reading the two together.
Therefore, a document may be able to be joined if there is a reference, express or
implied, to another document or to a transaction.
Reference to a document
Where the document signed makes reference to another document, joinder of that
document is permitted.
In Tonitto v Bassal the parties negotiated entry into an option to purchase land. The
buyers signed the option agreement and sent it with a deposit to the seller’s solicitor.
Later, the seller no longer wished proceed with the sale and their solicitor wrote a
letter to the buyers, advising them that the sellers did not consider themselves bound
by the option and returning the deposit. The letter contained a reference to ‘the option
to purchase’ and ‘the option agreement’.
The court held that the option agreement could be joined to the solicitor’s letter. The
terms ‘option to purchase’ and ‘option agreement’ in the letter were sufficient to
incorporate the terms of the written option agreement.
As the document joined in this way is referred to in the document signed by the
defendant, it follows that the joined document will be in existence at the same time
the document signed by the defendant. There are two exceptions to this general
position.
a) Documents that are physically connected
There is authority that a document physically connected to the document signed by
the defendant may be joined (M’Ewan v Dynon).
Where a letter is signed by the defendant and sent to the plaintiff, but the letter does
not, on its own, contain the necessary information, the court will allow the envelope
to be joined to the letter. In this way, there will be a note or memorandum of the
information on the envelope, namely the name of the plaintiff (Pearce v Gardner).
b) Documents that are executed at the same time
It is not uncommon for a buyer to write a cheque for a deposit on land, send it to the
seller, and later receive a receipt from the seller. If the seller is the party to be
charged, it is likely that the cheque could be joined to the receipt (the document
signed by the party to be charged). The position is probably different if the buyer is
the party to be charged. The seller is unlikely to be able to join the receipt to the
cheque, because it is executed later than the cheque. As such it is difficult to suggest
that the cheque contained any express or implied reference to the later document.
In Timmins v Moreland Street Property Co the defendant buyer refused to proceed
with an oral agreement for the sale of land. The issue before the court was whether
there was a sufficient note or memorandum. The documents relied on by the plaintiff
were the cheque signed by the defendant and the receipt signed by the plaintiff. One
of the defences raised by the defendant was the inability to join the receipt to the
cheque because the receipt was signed after the cheque and therefore, the document
(cheque) signed by the party to be charged (the buyer) could not be considered to
refer expressly or impliedly to the receipt signed by the plaintiff.
The court held that ‘where two documents relied on as a memorandum are signed and
exchanged at one and the same meeting as part of the same transaction, so that they
may fairly be said to have been to all intents and purposes contemporaneously signed,
the document signed by the party to be charged should not be treated as incapable of
referring to the other document merely because the latter, on a minute investigation of
the order of events at the meeting, is found to have come second in the order of
preparation and signing.
Reference to a transaction
In Fauzi Elias v George Sahely & Co the parties orally agreed for the plaintiff to buy
the defendant’s property. The plaintiff’s solicitor wrote to the defendant’s solicitor
confirming the details of the purchase and enclosing a cheque for the deposit. The
defendant’s solicitor sent back a receipt in which he wrote that he had received the
money as deposit on the property ‘agreed to be sol’ by the defendant to the plaintiff.
The defendant later did not wish to proceed and the plaintiff brought an action in
reliance on a combination of the receipt and the letter to satisfy the statutory
requirement of writing.
The court accepted the plaintiff’s submission and allowed the receipt and letter to be
read together. Because the receipt made reference to the property ‘agreed to be sold’,
this was a reference to a ‘transaction’ – namely the contract to sell the defendant’s
property to the plaintiff. Where there is a reference to a transaction, parol evidence
may be given to explain the transaction, and to identify any document relating to it.
Such evidence was led in the present case; it brought to light a document, namely the
solicitor’s letter which contained in writing all the terms of the bargain.
Effect of statutory non-compliance: common law
Contract valid to pass title
Although a contract failing to comply with statutory requirements will be
unenforceable, it will be a valid contract. This means that, if the contract is performed
by the parties, it will be effective to pass good title (Maywald v Riedel).
Recovery of money paid under unenforceable contract
a) Recovery of deposit
A deposit paid by a buyer is considered to be ‘an earnest to bind the bargain’. If the
sale is not completed due to the buyer’s default, the deposit is liable to forfeiture to
the vendor. This is the position if the contract is one which complies with or fails the
statutory requirements (Freedom v AHR Constructions). If the contract fails to meet
the statutory requirements, the deposit is still forfeited because the defendant has not
need to bring an action within the meaning of the section to hold the deposit
(Freedom v AHR Constructions).
Where an enforceable contract for the sale of land is not completed because of the
seller’s default, the deposit is recoverable by the buyer as money had an received
upon a total failure of consideration, where the consideration for which it was paid is
the conveyance or transfer that has not taken place. The action is one brought in
restitution, not on the contract.
b) Recovery of amount more than deposit
If the buyer under an unenforceable contract pays more than the deposit before the
contract is terminated, the court will attempt to establish what portion of the payment
constituted a deposit (usually 10%). The remaining balance will be recoverable by
the buyer unless the money was intended to be a deposit liable to forfeiture in event of
the contract being defaulted by the buyer. The balance will be recoverable because
the buyer will not need to act in reliance on the contract as it is recoverable by
restitution (Freedom v AHR Constructions).
Other restitutionary claim may still be available
If the contract is unenforceable, it will not usually prevent a claim in restitution for
recovery on a quantum meruit basis. In Pavey & Mathews v Paul the plaintiff builder
undertook to carry out certain building work for the defendant which, upon
completion, the defendant refused to pay for alleging the contract was void as it failed
to comply with the statutory requirements for formalities in the Builders Licensing
Act. The court held that although the plaintiff was unable to recover the contract price
due to failure to comply with the statutory requirement, he could successfully claim
on a quantum meruit, restitutionary rather than contractual, basis for the value of the
work done.
Effect of statutory non-compliance: equity
Doctrine of part-performance
If parties enter into an oral contract for the sale of land and, relying on that contract,
one party does certain acts, the courts may be prepared to grant that person specific
performance of the contract if four conditions are satisfied.
a) Acts are unequivocally referable to some such contract
The acts of part performance relied upon must make clear the nature of the contract
relied upon. The acts must be unequivocally referable to some such contract alleged
between the parties (Maddison v Alderson).
For example, possession of property in McBride v Sandland was held not to be a
sufficient act of part performance. However, in Regent v Millet the High Court held
that the taking of possession was, of itself, an act which was referable to a contract of
the type alleged.
In Regent v Millet purchasers under an oral contract for the purchase of land went into
possession. They began making mortgage repayments and also undertook some
repairs and renovations. The purchasers relied upon these acts as acts of part
performance of the oral contract. The court held that the taking of possession was an
act which was referable to the contract of the type alleged. The court considered that
it would be inequitable for the vendors solely upon the lack of writing to claim there
was not contract and thus they were not allowed to do so.
Regent v Millet can be distinguished from McBride v Sandland on the basis that the
taking of possession was referable to some authority other than the contract alleged.
While it was held in Regent v Millet that possession alone was sufficient act of part
performance, there were a number of other acts performed such as improvements,
repairs, renovation and mortgage repayments that my have been relied upon.
The payment of money alone cannot be regarded as a sufficient act of part
performance.
b) Acts done in reliance on the agreement and with knowledge of other party
The plaintiff must show that the acts were done in reliance on the agreement and with
the knowledge of the other parties (McBride v Sandland). IT is not necessary that the
acts be required by the contract but the fact that they were done voluntarily is
sufficient.
c) Acts done by the party seeking to enforce the contract
If a vendor is seeking to enforce the contract, it is of no relevance, for example, that
the purchaser has packed his or her belongings in readiness for the move. It will only
be the acts of the vendor which may be relied upon by the vendor to support his or her
action for part performance.
d) Oral contract must be otherwise enforceable
The plaintiff must be able to show that the contact would have been enforceable had it
satisfied the statutory requirement of writing. The agreement must be concluded and
satisfy the usually contractual requirements for enforceability.
Estoppel
Alternatively, in appropriate circumstances a party may be estopped from relying on
the Property Law Act (Walton Stores v Maher).
Constructive trust
In an appropriate situation, a person can claim an interest in land on the basis of
creation of a constructive trust although there is no writing (Baumgartner v
Baumgartner).
Terms I
Incorporating Written Terms
In determining whether written terms form part of the contract between the parties,
the crucial issue is whether the parties can be regarded as having assented to the
terms.
Incorporation by signature
(a) General Rule
If the contractual arrangement of the parties is reduced to writing and the written
document is signed by the parties, both parties will generally be bound by all of the
terms contained in the agreement, regardless of whether the document was read or the
parties were aware of the existence of the terms contained in the agreement
(L’Estrange v F Graucob Ltd).
In L’Estrange v Graucob Ltd, a buyer bough an automatic slot machine. She signed
the sellers order form which contained a number of terms, some of which were in
ordinary print while the exemption clause appeared in small print. The machine did
not work properly and the plaintiff sued for breach of an implied warranty.
The court held that the plaintiff was bound to the terms of the contract. When a
document containing contractual terms is signed, in absence of fraud or
misrepresentation, the party signing it is bound and is wholly immaterial whether the
document was read or not.
(b) When the rule is displaced
The general rule has been displaced in circumstances where the signature does not
signify assent to the terms.
Misrepresentation on the effect of the clause
The court will not allow a party who has misrepresented the effect of an exclusion
clause to rely upon that clause in the event of a breach.
In Curtis v Chemical Cleaning Co, the plaintiff took a dress to the defendants shop
and was asked to sign a document headed receipt. When the plaintiff asked the
assistant the reason for signing, the assistant advised her that the defendant would not
accept liability for certain risks, such as damage to beads and sequins. In fact, the
exemption clause contained a much wider exclusion clause which the defendant later
relied upon to exempt them from liability for negligence.
The court held that the defendant could not rely upon the exclusion clause as the
effect of the clause had been misrepresented.
Document signed is not contractual in nature
Where the signed document has not contractual effect, the party who signed the
document may not be bound by its terms.
The reason is that signing a document in these circumstances does not signify assent
to the terms.
In DJ Hill and Co v Walter H Wright a carrying company verbally contracted with the
plaintiff to carry machinery for the plaintiff. Once the machinery was delivered, an
employee of the defendant handed two documents to the plaintiff’s employee for
signature one of which contained an exemption clause for loss or damage in transit.
The court held that the document signed was not contractual in nature as it had been
signed after the contract had been performed. The document was intended to be a
delivery docket, not a docket containing contractual terms.
Defence of no est factum
A person who signs a document may be able to plead non est factum, that is, he or she
did not know that was being signed (Petelin v Cullen). To succeed in such an action,
plaintiffs must show that there is a radical difference between what was signed and
what they thought they were signing and that they were not just careless in signing.
Incorporation by notice: Unsigned Document
Frequently, one party purports to contract with another on the basis of terms set out on
the back of a ticket and handed to that other party.
The other party may be bound by a clause on the ticket and have assented to the
terms, even if unaware of the existence of the term, if reasonable notice was given of
the existence of the term, and the notice was given before or on contract formation.
(a) Reasonable steps taken by defendant
Reasonable steps must be taken to give the class of person to which the recipient
belonged, notice of the existence of the term (Parker v The South Eastern Railway
Co).
In determining whether reasonable steps were taken, it may be relevant whether the
document was one which is assumed by a reasonable person to be contractual in
nature. If at the time of contract formation, the plaintiff is given a document by the
defendant that a reasonable person would regard as being a contractual document, the
plaintiff will generally be bound by the terms in the document. However, if the
document is not one that a reasonable person would regard as contractual in nature
and no extra steps have been taken by the defendant to advise the plaintiff that the
document contains contractual terms, the plaintiff would not ordinarily be bound by
the written terms.
In Causer v Brown the plaintiffs dress was damaged by the defendant dry cleaners
who sought to rely on an exclusion clause in the ticket. The court held that the
defendant could not rely upon the exclusion clause as the document was not such that
reasonable person would assume it to be contractual; it appeared to be a mere receipt.
If the document is contractual, reasonable steps must be taken to give the class of
person to which the recipient belonged, notice of the existence of the term.
In Parker v South Eastern Railway Co the plaintiff deposited a bag at a railway
station and was given a ticket which, on its face, see back. The back contained an
exclusion clause which limited the railway’s liability. When the bag was lost, the
Railway sought to rely on the clause. The court held that rather than whether the
plaintiff had an obligation to read the terms, the question should be did the Railway
do what was reasonably sufficient to give the plaintiff notice of the conditions.
If reasonable steps are taken, it does not matter that the recipient of the notice did not
read the terms or that he or she was unable to read (Thompson v LM & S Railway Co).
(b) Reasonable steps taken before or upon contract formation
For the terms in a document to form part of the contract, the reasonable steps to bring
them to the attention of the plaintiff must occur before or at the time of contract
formation.
In Thornton v Shoe Lane Parking the plaintiff drove his car into the defendants car
park. There was a notice outside which stated cars were ‘parked at owner’s risk’.
Upon entry to the car park, the machine produced a ticket. The plaintiff took the
ticket and parked. Upon his return, there was an accident and the plaintiff was severly
injured. On the back of the ticket was stated that the ticket was issued subject to the
condition displayed on the premises. On a pillar opposite the machine, eight
conditions were displayed, the second one being that the garage would not be liable
for any injury to the customers occurring when their cars were on the premises. This
pillar could not bee seen from where the driver obtained the ticket from the automatic
teller.
The court held that the defendant could not rely upon the exemption clause because
the plaintiff did not know of the exemption clause; and the defendants had not done
what was reasonably sufficient to bring it to the plaintiff’s notice before the contract
was made.
Incorporation by notice: signs
In some cases, a person may wish to incorporate into a contract a term which appears
on a sign. As for incorporating terms on an unsigned document, it is likely that the
person will need to demonstrate both of the following elements.
(a) Reasonable Steps
Reasonable steps must be taken to give the class of person to whom the recipient
belonged, notice of existence of the term (Balmain New Ferry Co Ltd v Robertson).
In Balmain New Ferry v Robertson, a notice was exhibited over the entrance to the
plaintiff’s wharf which stated that a fare of one penny had to be paid by all persons
entering or leaving the dock whether they had travelled on the plaintiff’s ferry service
or not. The defendant having paid his on penny to enter, missed the ferry and, upon
attempting to leave through another turnstile, was asked to pay another penny and
refused. The court held that the notice had become a term of the contract and thus the
company was justified in demanding the additional penny.
It does not matter that the recipient of the notice did not read the terms or that he or
she was unable to read provided the reasonable steps were taken to bring the terms to
the attention of an ordinary person in the position of the plaintiff. (Thompson v LM &
S Railway Co).
(b) Reasonable steps
For the terms in a document to form part of the contract, the reasonable steps to bring
them to the attention of the plaintiff must occur before or at the time of contract
formation (Thornton v Shoe Lane Parking).
Incorporation of Notice – Website
It is likely that same test will apply as for incorporating terms on an unsigned
document or a sign. Reasonable steps must be taken to give the class of person to
whom the recipient belonged, notice of existence of term; and these steps must be
taken before or when contract is made.
Incorporation of Notice – Reference
Terms contained elsewhere can be incorporated into a contract by reference to those
terms (Smith v South Wales Switchgear Co Ltd).
In Smith v South Wales Switchgear Co Ltd parties agreed for the plaintiff to overhaul
the defendant’s electrical equipment. The written purchase order that was later
accepted by the plaintiff stated that the supply of services was subject to the
defendant’s general conditions of contract obtainable on request. Although the
plaintiff did not request such general conditions, a copy was forwarded to the
plaintiff, at some later point, with an amended purchase order. The court held that
general conditions had been incorporated into the contract and implied that it was
irrelevant that the general conditions were sent.
Incorporating Oral Terms
In the negotiation stage of a contract many things are said by the parties. What must
be determined is which of those pre-contractual statements form part of the contract
(terms) and which do not (mere representations or puff). It is only those terms which
form part of the contract which will enable an injured party to sue for breach of the
contract. If the statements or assurances do not form part of the contract then an
injured party will have to rely on other areas of the law to provide a remedy.
Mere Puff
Some statements made in the course of negotiations are clearly exaggerated and thus
unlikely to be true. The common law does not provide a remedy for statements that
any reasonable person would not believe in the truth of the statement.
Representation
A representation is a statement that induces the representee to enter into the contract
but the truth of the statement is not guaranteed by the representor. 0413462200
The general test to determine whether the statement is a mere representation or a term
is the intention of the parties, that is, did the maker of the statement intend to
guarantee the truth of the statement. This intention is ascertained objectively: what
would a reasonable third person have understood the statement to be (Oscar Chess
Ltd v Williams).
The following are guidelines used by the court when determining whether a precontractual oral statement is a mere representation or a term.
(a) Words and conduct of parties
If the words of the statement maker indicate that he or she warrants the truth of the
statement, this is strong evidence that the statement was intended to be contractual in
nature.
(b) Knowledge or expertise of the statement maker
Where the statement maker is in a better position than the other party to ascertain the
accuracy of the statement, it is probably a term.
Where the statement maker professes to have personal knowledge of the relevant
information, it is more likely that he or she can be regarded as guaranteeing its truth.
However, if the statement maker is merely passing on information of which he or she
has become aware, but does not profess to have any personal knowledge, it would be
more difficult to establish the statement as promissory.
In Dick Bentley Production v Harold Smith Motors, a motor dealer sold a luxury car
to the plaintiff and during negotiations the dealer stated that the car had only done 20
00 miles since a replacement engine when in fact it had done 100 000. The court held
that the statement was of a promissory nature, even though innocently made. Here,
the seller was a motor car deal and in a much better position to know the state of the
car.
In Oscar Chess v Williams the buyer was in fact a car dealer and so the court held
that as the seller had no expertise and only repeated the year of manufacture from the
registration book, he know less than the buyer, thus, the statement was a
representation not a term.
(c) Oral statements not reduced to writing
Where a statement is made orally and it is not included when the contract is reduced
to writing, it is probably not a term (Routledge v Mckay.).
(d) Interval of time
Where there is a long interval between the making of a statement and the conclusion
of the contract, it is probably not a term of the contract but merely a representation
(Routledge v McKay).
In Routledge v McKay the parties entered into a contract for the sale of a motorcycle.
Seven days before the sale, the seller stated it was a 1941, however, when the
agreement was reduced to writing this statement was omitted and the bike was in fact
a 1931 model. Relevant to the finding for the defendant was the seven day interval.
Collateral Contracts
(a) Nature of collateral contracts
A collateral contract is one which consideration for the promisor’s promise, is the
promisee’s entry into the main contract (Heilbut Symons v Buckleton).
In De Lassalle v Guildford in negotiation for the lease of a house, the tenant refused
to conclude the deal unless the landlord assured him that the drains were in good
order. When the drains were found not to be in good order, the landlord defended the
action by arguing that the assurance was not part of the contract.
The court held that the assurance constituted a separate collateral contract, the
consideration for which was the entry into the man lease. The landlord, thus, was in
breach of the collateral contract.
There will be no collateral contract where there is only past consideration (that is,
where the main contract precedes the purported collateral contract) (Hercules Motors
v Schubert).
Bipartite Collateral Contracts
Bipartite collateral contracts are made between the same parties who enter into the
main contract.
In Sheppard v The Council of the Municipality during pre contractual discussions
concerning the purchase of a house from the defendant, the plaintiff was told by
reference to a council plan and a promotion brochure that the land opposite the house
would become a park. The importance of this to the plaintiff was made clear to the
defendant. A year after the contract, the defendant decided to subdivide the land.
The court held that the assurances by the council gave rise to a collateral contract
between the parties. It was the council’s intention that the plaintiff should rely upon
these documents and he had done so by entering into the main contract.
Tripartite collateral contracts
A tripartite collateral contract is one where the promissory statement whih induced the
innocent party to enter into the main contract may have been made by a third party
who had no involvement in the main contract.
In Wells v Buckland Sand and Silica the defendant (a sand merchant) assured the
plaintiff (a commercial flower grower) that BW sand had a certin compostion and
would be suitable for its needs. The plaintiff then purchased BW sand from a third
party who in turn had purchased it from the defendant. The sand did not conform to
the defendant’s assurances.
The court held that a collateral contract existed between the plaintiff and the
defendant in the terms of the latter’s assurances, even though the plaintiff had
purchased it from another source. This was because the defendants’ assurances had
been promissory in nature and the plaintiff had relied upon them when purchasing the
sand.
Elements of a collateral contract
Three elements must be established for a statement to form the basis of a collateral
contract:
 an intention by the statement maker that the statement be relied upon;
 reliance by the other party on the statement that has been made; and
 an intention by the statement maker to guarantee the truth of the statement
(Savage v Blakney).
Breach
Breach of a collateral contract, in effect, only gives the innocent party the rights to
damages. It is not possible for the innocent party to terminate the main contract nor to
specifically enforce the main contract.
Implied Terms
Terms can be implied to reflect the presumed intention of the parties, or for reasons of
public policy. The different bases for implying terms are considered below.
Terms Implied to Give Effect to Presumed Intention of Parties
Term implied on the basis of business efficacy
(a) Rationale of implication
The court will imply a term as a matter of fact for the purpose of business efficacy.
Business efficacy means that the parties require that term in order that the contract
will work (The Moorcock). Terms implied on this ground are intended to reflect the
presumed intention of the parties
(b) Five-Tier Test
The following rules for implying a term on the basis of business efficacy were
summarised by the Privy Council in BP Refiner v Shire of Hastings and later
approved by the High Court in Codelfa v State.
 The term must be reasonable and equitable;
 Implication must be necessary to give business efficacy to the contract so that
no term will be implied if the contract is effective without it;
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Term must be so obvious that it goes without saying;
Term must be capable of clear expression; and
Term must not contradict any express term of the contract.
(c) Impact of parol evidence rule
In Codefela v State Rail Authority of NSW it was noted by Mason J that evidence of
surrounding circumstances is admissible to assist in the interpretation a contract if it
contains provision with ambiguous meaning. This is done in an attempt to ascertain
the presumed intention of the parties. The implication of a term is also a matter of
construction of a contract. The same evidence therefore, should be admitted in
deciding whether a term should be implied on grounds of business efficacy. Thus the
objective background to the contract is admissible in determining whether it is
appropriate in the circumstances for the case to imply a term necessary to give
business efficacy to the transaction.
Terms implied from previous consistent course of dealings
(a) General Principle
The test of whether a term can be incorporated on the basis of a course of dealing is
based on reasonableness. In the circumstances of the case, is it reasonable to hold that
the parties entered into the contract on the basis, and with the knowledge, that their
agreement would be on the terms set out in previous contracts entered into (Henry
Kendall & Sons v William Lillico & Sons)?
Lord Reid in McCutcheon v David MacBrayne Ltd explained the principle:
“If two parties have made a series of similar contracts each containing certain conditions, and
then they make another without expressly referring to those conditions it may be that those
conditions ought to be impled. If the officious bystander had asked them whether they had
intended to leave out the conditions this time, both must, as honest men, have said of course
not.”
(b) Criteria relevant to establish previous consistent course of dealings
The relevant term or terms must have been part of earlier agreements between the
parties and the must be evidence of an earlier consistent course of dealings between
the parties. Relevant in this assessment are –
 the number of dealings between the parties; and
 the consistency of dealings between the parties.
The greater the number of prior dealings, the greater the likelihood of incorporating
the term. Consistency of contractual dealings is also important as the argument for
incorporation is less compelling if the terms are incorporated into earlier contracts on
some occasions but not others (McCuthbert v David MacBrayne Ltd).
(c) Impact of parol evidence rule
Terms implied from custom or usage
The parties to a contract are presumed to contract with reference to whatever customs
that prevail in the trade or locality in question. In Con-Stan Industries of Aust Pty Ltd
v Norwich Winterthur Insurance the High Court set out a number of rules that must be
satisfied before a term will be implied on the grounds of custom or trade usage:
1. The existence of a custom or usage that will justify the implication of a term
into a contract is a question of fact. In making the determination, the focus
must be on the custom or usage in the particular trade or prefession under
construction.
2. There must be evidence that custom or usage relied upon is so well known and
acquiesced in that everyone making a contract in that situation can reasonably
be presumed to have imported that term into the contract, however, the custom
need not be universally accepted. Firstly, there must be sufficient evidence
that a custom of the kind alleged in the fact exists. Thus custom must be
sufficiently widespread and consistent that it can be articulated with some
certainty. Secondly, the custom must5 be so widespread that it is well known
to the people within the trade or profession.
3. A term will not be implied on the basis of custom or usage where it is contrary
to the express term of the agreement. As term implied must on custom and
usage must reflect the presumed intention of the parties, if the parties
expressly exclude such a term, or insert a term inconsistent with it, the term
cannot be regarded as reflecting their intention.
4. A person may be bound to custom notwithstanding the fact that he or she had
no knowledge of it. Unless the parties have agreed to the contrary, a term is
implied provided the elements of the second limb above are met.
Impact of Parol evidence rule
The parol evidence rule will not operate. As a term is implied to reflect the presumed
intention of the parties, the parties must not have intended the writing to form the
entire agreement but rather to contract on the basis of the implied term also not
intending the writing to form the entire agreement.
A term implied to complete agreement
The judiciary attempts to uphold agreements if at all possible. As a means of
upholding contracts where not all the terms have been finalized, in an appropriate case
the courts may be prepared to imply a term (Hillas &Y Co v Arcos).
Impact of Parol Evidence Rule
See implication for the purposes of business efficacy.
Terms Implied Irrespective of Parties’ Intention
Term Implied as a Legal Incident of a Particular Class of Contract
A term may be implied as a matter of law in contracts of a particular class (Liverpool
City Council v Irwin).
Examples of terms being implied as a legal incident of the contract are:
 Contract for the provision of goods and services: goods or services will be
reasonable fit for the purpose supplied or rendered (Samuels v Davis).
 Contracts for the provision of professional services: reasonable care will be
taken by professional in provided services (Greaves Y Co v Baynham).
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Contracts of employment: duty to proved a safe work place (McLean v
Tedman).
Building contracts: the completed house will be fit for habitation and the work
done will be carried out in a proper and workman like fashion (Perry v Haron
Developments).
Terms are implied in all contracts of a particular class and not dependent on the
particular circumstances of that contract.
General Duty of Co-operation
There is an implied term a general duty of cooperation of all contracts that each party
agrees to do all things necessary to enable to other party to have the benefit of the
contract (Butt v McDonald).
Examples
 A term may be implied to give effect to the presumed intention of the parties
(Curro v Beyond Productions).
 Duty to comply with reasonable requests
 There is a duty to do all things necessary to enable the agreement to be
completed (Adelaide Petroleum v Poseidon).
 Where a contract requires concurrent performance it may be implied that
rights are to be exercised in good faith and there is a duty to cooperate
(Service Station Association v Berg Bennet & Associates).
 There is a duty to exercise contractual powers reasonably (Renard
Constructions v Minister for Public Works).
Term Implied by Statute
Sale of Goods Act 1896 (Qld)
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Implied condition that the seler has title to the goods bing sold, or will have
title at the time property in the goods is to pass: s15(a)
Implied warranty that the buyer will have quiet possession of the goods:
s15(b)
Implied warranty that the goods are free from any charge or encumbrance:
s15(c)
In a contract for the sale of goods by description, an implied condition that the
goods correspond with the description (and if the sale is by sample, as well as
by description, it is not sufficient that the bulk of the goods corresponds with
the sample if the goods do not also correspond with the description): s16
Where they buyer, expressly or by implication, makes known to the seller that
particular purpose for which the goods are required, so as to show that the
buyer relies on the sellers skill or judgment, and the goods are of a description
that it is in the course of the seller’s business to supply, an implied condition
that the goods are reasonably fit for the purpose: s17(a)
When goods are bought by description from a seller who deals in goods of that
description, an implied condition that the goods are of merchantable quality:
s17 (c)
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In a contract for sale by sample, implied condition that the bulk corresponds
with the sample in quality, that the buyer will have a reasonable opportunity of
comparing the bulk with the sample, and that the goods are free from any
defect, rendering them unmerchantable, which would not be apparent on
reasonable examination of the sample: s18
Clear words are required to exclude implied terms (Wallis v Pratt and Haynes).
Trade Practices Act 1974 (Cth)
The Trade Practices Act will only operate where the supplier is a corporation and the
acquirer is a consumer within the statutory definition (ss4 and 4b) or if the transaction
falls within one of the categories of extended application of the legislation for
example, if the tranaction occurred as part of the supplier engaging in trade or
commerce internationally, interstate or between a state and territory (s6(2)(c)).
Terms implied by the Trade Practices Act are not limited to contract for the sale of
goods but also extend to their supply. Supply is defined to include sale, exchange,
lease, hire or hire purhcaes (s4).
The Trade Practices Act implies in a contract for supply of service, a warranty that
the service will be rendered with due care and skill and that any materials supplied
will be reasonably fit for the purpose for which they are supplied. A further warranty
will be implied that the services and materials supplied in connection with them will
be reasonably fit for the purpose for which those services are required – or of such a
nature and quality that they might reasonably be expected to achieve the result
(s74(2)).
Terms II
Legal Effect of Words: types of terms
Promissory Terms
Whether a promissory term of a contract is classified as a condition, warranty or
intermediate term will become important when the term is breached, as the remedies
will turn on the classification.
The relevant classification depends upon the intention of the parties, ascertained
objectively, at the time when the contract was made (Associated Newspapers Ltd v
Bancks).
(a) Conditions
A condition of a contract is a term which is essential or is so important to the contract
that if breached the innocent party has the right to terminate the contact and sue for
damages.
One test for condition is the test of essentiality – one party would not have entered
into the contract unless assured of the strict or substantial performance of the term and
the other party knows or ought know of this (Associated Newspapers Ltd v Bancks).
The fact that a term is described in the contract as a condition, is persuasive not
conclusive (L Schuler AG v Wickman Machine Tool Sales Ltd)
In legislation relating to the sale of goods, it is implicit in the drafting that a breach of
condition in a contract for the sale of goods will have the same effect as a breach of
condition under the common law, see s.14(2) of the Sale of Goods Act 1896 (Qld).
(b) Warranty
A warranty is a term that is subsidiary to the main purpose of the contract.
A breach of a warranty entitles the innocent party to damages only and does not give
him or her right to terminate the contract (Bettini v Gye).
A consistent approach to the meaning of "warranty" is taken in the sale of goods
legislation. "Warranty" is defined in s.3 of the Sale of Goods Act 1896 (Qld) to mean
"an agreement with reference to goods which are the subject of a contract of
sale but collateral to the main purpose of such contract, the breach of which
gives rise to a claim for damages but not to a right to reject the goods and
treat the contract as repudiated".
(c) Intermediate Terms
An intermediate term (sometimes referred to as an “innominate term”) cannot be
categorised as either a condition or warranty (Hong Kong Fir Shipping Co v
Kawasaki Kisen Kaisha Ltd).
In Bunge Corporation & Tradax it was established that to determine whether a term is
an intermediate term, two steps must be followed:
 it is necessary to determine the type of term the parties intended using general
objective test; and then
 if it is a term that is capable of both major and minor breaches (intermediate
term) how serious was the breach?
An intermediate term may be defined as one capable of a variety of breaches, some
serious some trifling (Bunge Corporation New York v Tradax Export SA (Panama))
If the breach was serious - if it deprived the innocent party of substantially the whole
of the benefit of the contract, the innocent party has the right to terminate the contact
and sue for damages, and if the breach was not to serious, the innocent party will only
be entitled to damages.
Time clauses are terms which are capable of only one kind of breach, namely to be
late, and therefore cannot be an intermediate term (Bunge Corporatin New York v
Tradax Export SA).
This approach was adopted in Australia in Ankar v National Westminster Finance.
Contingencies
The terms do not denote any relationship with a condition as in the sense of
promissory condition and neither party undertakes or guarantees that the event will
occur or will not occur.
Condition precedent means that the contract is not intended to come into effect until
the even specified in the terms occurs for example subject to contract (Masters v
Cameron).
Condition subsequent is an event whose occurrence may give rise to a right to
terminate further performance of the contract for example a subject to finance clause
(Meehan v Jones). If the event specified in the term does not occur, the contract will
be rescinded.
A party may waive a condition subsequent that is solely for his/her benefit (Meehan v
Jones).
Exemption Clauses
An exclusion clause will only be effective to limit the liability of the party seeking to
rely upon it if two matters are satisfied:
 the exclusion clause must form part of the contract; and if it does
 the exclusion clause must be wide enough to cover the breach or the even that
has occurred.
Does the clause cover the breach?
The general rule is that an exemption clause is determined by construing the clause
according to its natural and ordinary meaning, read in light of the contract as a whole
(Darlington Futures Ltd v Delco Australia Pty Ltd).
There are also a number of rules of construction the courts use to assist in interpreting
an exemption clause:
1. A party inserting a clause will not be protected if there has been a
misrepresentation of the effect of the clause (Curtis v Chemical Cleaning Co.).
2. The clause will be construed strictly (Wallis v Pratt and Haynes).
3. The clause is read contra proferentem if there is an ambiguity. This means
that where there is an ambiguity, the clause will be read strictly against the
party trying to rely upon it (Akerib v Booth). The exclusion clause will only
provide protection if it clearly and unambiguously states the situations in
which it will operate.
4. In the case of negligence, according to Canada Steamship Lines Ltd v The
King:
 An express exclusion is effective. For example, where an exclusion clause
states ‘The operator will not be liable for any loss or injury arising from
his or her negligence’, this may be effective to exclude an action in
negligence (specific reference to negligence may be required).
 Where the only possible cause of action against the defendant is an action
for damages in negligence, the court will interpret a wide clause to cover
the defendant’s liability for negligence. For example, where such as
‘howsoever caused’ or ‘whatever the cause’, these terms have been ehld to
be wide enough to cover negligence (Rutter v Palmer).
 Where ta cause of action may be based on some ground other than
negligence (that is, breach of contract) a ‘wide’ clause must be confined to
the heads other than negligence (that is, the breach of contract) (White v
John Warwick Ltd).
5. The four corners rule. This rule requires that the exclusion clause will only
cover a breach that has occurred within the scope of the contract. An act
which was not authorized by the contract may not be covered by the exclusion
clause (Council of the city of Sydney v West).
Parol Evidence Rule
The rule provides that the use of extrinsic evidence (evidence outside the actual
document itself) to add, subtract from or vary the written terms of the contract is
prohibited.
Innes J in Mercantile Bank of Sydney v Taylor (1891) 12 L.R. (N.S.W.) 252 at p.262
concisely stated the parol evidence rule as follows:
“where a contract is reduced into writing, where the contract appears in the writing to be
entire, it is presumed that the writing contains all the terms of it and evidence will not be
admitted of any previous or contemporaneous agreement which would have the effect of
adding to or varying it in any way.”
The rule excludes evidence of extrinsic terms only where the document was agreed
to be a complete record of the entire contract, hence does not apply where the
agreement is partly written and partly oral (Couchman v Hill).
Agreements between parties are not always entirely reduced to writing. This is
particularly the case where pre printed standard form contracts are used and any
changes to the standard form may not be written down, but perhaps agreed to on a
handshake.
There are two aspects to the rule, i.e. in relation to:
 the content of the contract and;
 the interpretation of contracts
The Content of the contract
This aspect states that if the parties intended the contract to be wholly in writing, parol
evidence is not admissible to add to or vary or contradict the writing: Robertson v
Kern Land Pty Ltd.
The intention of the parties is construed objectively (Couchman v Hill). The rule does
not apply where the parties contract partly in writing and partly orally (Couchman v
Hill).
Exceptions to the rule
(a) Evidence of collateral contract
The parol evidence rule preventing estrinsic evidence being led to affect the main
contract does not apply to the collateral contract, therefore, oral evidence relating to
that contract can be led. The rule will continue to operate in relation to the main
contract.
(b) Evidence that the written contract is not yet in force
The parol evidence rule operates to exclude extrinsic evidence to add to, subtract from
or vary the agreement only if the contract is in force, and the written document
reflects the contractual arrangement.
(c) Evidence that the written document was later varied or discharged
Parties who have reduced their contract to writing may later wish to vary or
completely discharge that agreement. Unless the contract was one required to be in
writing to be enforceable, neither the variation nor discharge need be in writing.
Therefore, oral or other evidence can be led that the written agreement has been
subsequently varied or discharged.
The parol evidence rule prevents introduction of extrinsic evidence that the parties
added to, subtracted from or varied the agreement before it was reduced to writing,
not evidence that the parties later agreed to its variation or discharge.
(d) Evidence necessary for rectification
Although the parol evidence rule will generally prevent the introduction of evidence
to add to, subtract from or vary the agreement, the rule will not exclude such evidence
if it is necessary to rectify the written document so as to correct such an error eg the
recording of a different sum other than agreed upon for the purchase of a house (NSW
Medical Defence Union v Transport Industries).
The interpretation of the contract
This aspect involves the rule being used to determine the true meaning of a contract
and applying that meaning to the circumstances surrounding the entry into the
contract.
Extrinsic evidence of antecedent negotiation, the subjective intention of the parties
and subsequent conduct appear to be inadmissible.
Factual Matix
However, extrinsic evidence of the factual matrix or setting of the contract is
admissible. When a court embarks upon a process of construing a document, it must
place itself in thought in the same factual matrix as that in which the parties were.
Accordingly, when determining the parties intentions, the court may validly take into
account not only the words recorded in the document but also evidence of the
surrounding circumstances. The evidence of surrounding circumstances must be
known to both parties.
In Codelfa v State Rail Authority it was held that discussions between the parties to a
construction contract, prior to the contract being executed, were admissible for the
purpose of establishing the common understanding of the parties in relation to a
matter of fact (namely the work to be carried out in 8 hour shifts).
Exceptions to the Rule
(a) Ambiguity
Extrinsic evidence may be admitted to resolve an ambiguity in the contract.
Ambiguity extends not only to patent ambiguity - language that on its face is capable
of more than on possible meaning, or is otherwise made unclear by the other language
in the document (White v Australian and New Zealand Theatres Ltd) , but also latent
ambiguity – where an apparently clear meaning is shown to be ambiguous when
extrinsic facts are taken into account (Hope v RCA Photophone of Australia Pty Ltd).
(b) Identification of subject matter
Extrinsic evidence is admissible to resolve ambiguity about the subject matter of the
contract. This is usually as a result of latent ambiguity. Thus the doubt created by
extrinsic knowledge is resolved by extrinsic evidence.
(c) Identification of the parties
Extrinsic evidence is admissible where there is ambiguity concerning the identity of
the parties to the agreement, or concerning their relationship or the capacity in which
they have entered into the contract.
(d) Identification of real consideration
Extrinsic evidence is admissible to prove the real consideration under a contract
where:
 No consideration or nominal consideration is expressed in the instrument;
 The expressed consideration is in general terms or ambiguously stated; or
 A substantial consideration is stated but an additional consideration exists,
provided the additional consideration proved is not consistent with the
instrument.
Where the additional consideration is of a different kind, it will not be inconsistent
unless perhaps the written instrument says that the stated consideration is the only
consideration. Where a substantial consideration is stated, and the additional
consideration is the same kind, for example the stated consideration is $100 000 and
the true consideration is claimed to be $150 000, the argument for inconsistency is
stronger.
(e) Custom or usage
Where the language used in the instrument has a particular meaning, for example, by
custom or usage in a particular trade, industry or region, evidence of that meaning is
admissible, even if there is no patent ambiguity.
(e) Rectification
Extrinsic evidence may be admitted to show that the parties intention was not
accurately recorded in the written instrument. In appropriate circumstances, the
document may be rectified so that it accords with the parties actual agreement.
Inadmissible Evidence
Regardless of surrounding circumstances, certain evidence is remains inadmissible.
(a) Subjective intention
Evidence of the actual, subjective intentions of the parties is not admissible. When a
court tries to ascertain the intention of the parties, it must do so objectively, there a
court cannot receive evidence from a party regarding his or her intentions and
construe the contract by reference to those intentions (Life Insurance Co of Australia
v Phillips)
(b) Prior Negotiations
Evidence of negotiations that precede the written document is generally not admitted
because the evidence is unhelpful (Prenn v Simonds). The nature of negotiation is
that even if the parties intentions are convergent, they are still not the same and only
the final document will properly reflect a consensus of the parties.
(c) Subsequent conduct
Evidence of subsequent conduct cannot be referred to for the purpose of interpreting
the contract (Administration of Papua & New Guinea v Daera Guba) as parties may
tailor their post contract behavior according to the case they believe they later have to
present in court; they may seek to advance their understanding of the agreement
simply to persuade the other party to accept their construction; they expansion in the
field of inquiry would add to the burden of fact finding and consequently the length
and cost of litigation; and subsequent conduct may be based on an erroneous
understanding of the parties rights (Hide & Skin Tradig v Oceanic Meat Traders).