Fundamentals of Law (BL502)
Fundamentals of Law
Terms of the Contract
Fundamentals of Law (BL502)
What are the Terms
 Terms can be
 In writing
 Oral
 Partly in writing and partly oral
 Implied
 The terms of the contract are ascertained by
examining the evidence
 Not all pre-contractual statements become terms
of the contract
Fundamentals of Law (BL502)
Ascertaining the terms
 Meaning of the terms may not be clear
 Where the parties have used language that is
incapable of any precise meaning the
contract may be void for uncertainty
 It is not the role of the Court to make a
bargain for people
 Courts are reluctant to destroy a bargain
Fundamentals of Law (BL502)
Parol Evidence Rule
 Courts presume that written formal contracts that
appear to be a complete record of the agreement,
contain the whole agreement
 Courts will not let a party ‘subtract from, add to or
contradict the language of the written agreement’
Fundamentals of Law (BL502)
Pre-Contract Representations
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An oral statement can be a term
Only promissory statements become terms
All other statements are mere representations
A statement does not have to be in the form of a
promise to be promissory
 Remedies
 Term of contract – Remedy for breach of contract
 Representation – law of misrepresentation
 Mere puff – no remedy
Fundamentals of Law (BL502)
Reasonable Bystander Test
 Which statements and representations would a
reasonable bystander, aware of the circumstances of
the case, regard as promissory?
 The test is objective
 Parties actual intention is irrelevant
Fundamentals of Law (BL502)
Reasonable Bystander Test (cont)
 Guidelines
 Was the representation included in a written
document
 When, in the negotiations, was the representation
made
 Did the representation sound promissory
 How objectively important is the representation to
the whole deal
 Did either party have special knowledge about the
subject matter of the representation
Fundamentals of Law (BL502)
Was There a Written Document?
 If the statement was included in a document drawn
up by the parties then this is good evidence that the
parties regarded the statement as sufficiently
important to be a term
 Alternatively, if it is left out, that indicates that the
parties did not intend it to be a term.
 State Rail Authority of NSW v Heath Outdoor Pty Ltd
(S&OR p131)
 This is not conclusive of itself, it is merely one matter
to be considered
Fundamentals of Law (BL502)
When was the statement made?
 How much time elapsed between the representation
and the making of the contract?
 Statements made only once early in negotiations are
less likely to become terms.
 Van Den Esschert v Chappel (S&OR p132)
Fundamentals of Law (BL502)
How Important was the Statement
 Must be judged in the context of the
negotiations
 Van Den Esschert v Chappel (S&OR p132)
 Hospital Products v United States Surgical
(S&OR p134)
What words were used
 The more precise the language, the more
likely it is a term
 Ross v Allis-Chalmers Australia (S&OR p133)
Fundamentals of Law (BL502)
Did a Party have Special Knowledge?
 Did one party rely on the other’s expertise or
special knowledge rather than form its own
judgement
 Oscar Chess v William (S&OR p130)
 Esso Petroleum v Mardon (S&OR p134)
Fundamentals of Law (BL502)
Conditions and Warranties
 Not all terms carry the same importance
 A condition is a core term of the contract
 Goes to the essence of the contract
 Tramways Advertising v Luna Park (S&OR
p209)
 Associated Newspapers v Bancks (S&OR
p209)
 Warranties are non-core terms of the contract
Fundamentals of Law (BL502)
Conditions and Warranties (cont)
 Intermediate terms will be conditions or warranties
depending on the seriousness of the breach
 A breach so serious as to deprive the innocent
party of substantially the whole benefit of the
contract
 Hong Kong Fir Shipping Co v Kawasaki (S&OR
p212)
 Breach of conditions allows the innocent party to
terminate the agreement
 Breach of a warranty only entitles the innocent party
to seek damages
Fundamentals of Law (BL502)
Conditions and Warranties (cont)
 To determine if a condition, courts will examine
 The way in which the term is expressed
 The likely consequences of a breach
 The objective importance of the term to the overall
contract
 Whether damages are likely to be an adequate
remedy (see Shevill v Builders Licensing Board)
 The use of the word “condition” is not conclusive
 Wickman Machine Tool Sales v L Schuler AG
(S&OR p210)
 Parties can expressly state that it is an essential term
Fundamentals of Law (BL502)
Conditions and Warranties (cont)
 Terms implied by statute are often expressed to be
conditions
 Time
 In a mercantile contract the presumption is that it
is a condition
 Bunge Corp of NYk v Tradax Export SA
Panama (S&OR p211)
 In other contracts it is usually a warranty
 Bettini v Gye (S&OR p211)
 Often made a condition by express words “time is
of the essence”
Fundamentals of Law (BL502)
Exemption Clauses
 A clause that limits or excludes the
consequences of a breach of a parties
obligations
 Courts are biased against them
 Bias is less noticeable in commercial
contracts
 Courts adopt a 2 step process
 Has the exemption clause become a term
of the contract?
 If so, does it cover the breach in question?
Fundamentals of Law (BL502)
Is It a term of the contract?
 Essentially the same test as for all terms
 An exclusion clause cannot be incorporated after the
contract has been made (e.g. parking ticket)
 Past dealings may imply an exemption clause but the
Courts are reluctant to do this
 Signed documents will usually be binding even if the
party was unaware of the term unless
 Signed document could not reasonably be
regarded as likely to contain contractual terms
 Estoppel exists
 Exemption clause has been misrepresented
 See Curtis v Chemical Cleaning Co (S&OR p142)
Fundamentals of Law (BL502)
Is It a term of the contract?
 Unsigned exemption clauses will be binding if
 The innocent party was aware of it; or
 reasonable notice of it has been given to
the innocent party
before the contract is made.
Fundamentals of Law (BL502)
What is reasonable notice (cont)
 What is reasonable notice depends on:
 The nature of the document;
 The nature of the transaction; and
 The nature of the exemption clause.
 Would it be reasonable to expect the
document to contain an exemption clause
(e.g. a receipt)
Fundamentals of Law (BL502)
What is reasonable notice
 Is the transaction one where you would
expect an exemption clause to exist
 The wider the exemption the greater the
steps to be taken to bring it to the attention of
the other party
 Cases
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Thornton v Shoe Lane Parking (p144)
Parker v South Eastern Railway (p126)
Oceanic Sun Line Special Shipping v Fay (p127)
DJ Hill & Co v Walter H Wright Pty Ltd (p124)
Fundamentals of Law (BL502)
Does the Clause Cover the Breach?
 Courts will examine the clause carefully to determine
its effect and limit its scope where possible
 Generally, the Courts will give effect to the parties
intentions as evidenced by the natural and ordinary
meaning of the words
 There are 3 rules that courts use to limit exemption
clauses:
 The Contra Preferendum rule
 Negligence Clauses
 The Four Corners Presumption
Fundamentals of Law (BL502)
Contra Preferendum Rule
 Any ambiguities in the exemption clause will
be construed against the party seeking to rely
on the clause
 Andrews Bros v Singer Car Co (S&OR
p145)
 Alex Kay v General Motors Acceptance
Corp & Hartford Fire Insurance (S&OR
p145)
Fundamentals of Law (BL502)
The Negligence Rule
 Liability for negligence may be expressly or impliedly
excluded but if the words could reasonably be
applied to protect against some ground of liability
other than negligence, then liability for negligence will
not be excluded
 White v John Warick & Co (S&OR p146)
 To exclude liability for negligence, clear words are
required
 Tech Pacific v Air Pacific (S&OR p146)
Fundamentals of Law (BL502)
The 4 Corners Presumption
 The exemption clause will only cover matters within
the 4 corners of the contract
 Whether an event falls outside the contract depends
on the a reasonable person test – would a
reasonable person aware of the terms of the contract
conclude that the parties must have had the relevant
event in mind in drawing up the contract.
 Sydney Corporation v West (S&OR p148)
 TNT v May & Baker (S&OR p149)
 Darlington Futures v Delco Australia (S&OR p149)
Fundamentals of Law (BL502)
Statutory Reforms
 In many cases, it is Illegal to attempt to
exclude terms implied by statute e.g. Trade
Practices Act
 Attempting to exclude statutory liability (where
not permitted) may be misleading and
deceptive conduct contrary to section 51 of
the Trade Practices Act