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Contracts 2 LAWS1072
Chapter 12: Identifying Express Terms
Introduction
- Express terms are expressly agreed between the parties
- Implied terms are implicit terms in the contract or recognised as a matter of law
- Express terms are found in communications, negotiations, signed or unsigned documents, notices, course
of dealings
- The courts adopt the objective approach to assess the parties’ intentions; the intention of the reasonable
person in the parties’ position
- Courts seek to give effect to the intentions of the parties concerned by identifying the terms and
construing their meanings
Standard Form Contracts (Hillman NYU Law Review)
- There are few basic terms to be filled in by the parties and the remaining terms are already drafted, take
it or leave it basis
- Customer would not understand much of the language of the ‘boilerplate’ (contract)
- Competitors employ comparable terms
- Remote risks are unlikely to eventuate
- Business seeks to maintain good reputation
- Consumer expects the law to enforce the contract with the exception of offensive terms
- Businesses standardise their risks to reduce bargaining costs by offering one set of terms to all
consumers. Careful allocation of these risks minimises the costs of goods and services businesses offer
- However hidden risks allow businesses to exploit a gap in the consumer’s knowledge about the product’s
risks
Statements Made During Negotiations
- If the statement was promissory it is a term of contract and there will be remedy for the breach of
contract if the statement was false
- If the statement was a mere representation and not part of a contract, relief is sought relating to
misrepresentation
- Factors that distinguish a promise from a mere representation include: language used, relevant expertise
of the parties, importance of the statement, timing of the statement, form of written contract
- A statement is a mere representation without legal consequences if it is only an expression of opinion
evident by the language used; a statement of opinion is not a binding term of the contract based on the
language used i.e. ‘estimated speed’ (Savage v Blakney)
- A disparity in the bargaining powers or expertise of the parties can give rise to an innocent
misrepresentation that is not a binding promise (Oscar Chess)
- If a representation without foundation is made by an expert during a course of dealings for the purpose
of inducing the other party to enter into a contract, it is prima facie ground for inferring that the
representation was intended as a warranty (Dick Bentley)
Written Terms and the Effect of Signature
- A party will be bound by the terms contained in a contractual document which she or he has signed,
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whether or not she or he has read the document (L’Estrange v Gaucob)
- However this will not apply where the signature was induced by misrepresentation or fraud, mistake or if
the document would not be reasonably considered a contractual document but rather has another
function e.g. a receipt (L’Estrange v Gaucob)
- Where there is no disparity in knowledge or bargaining power; no misrepresentation, fraud, duress, a
conclusive signature will make the terms of contract enforceable (Toll v Alphapharm)
- Signature is usually a very strong indication of intention to be bound but does not exclude consideration
of facts and circumstances which may show it was not (Toll v Alphapharm)
- Misrepresentation, whether fraudulent or innocent is sufficient to disentitle the creator the benefit of an
exemption (Curtis v Chemical Cleaning)
- A document considered to have another function, e.g. receipt cannot be expected to contain legally
binding terms (Curtis v Chemical Cleaning)
Incorporation of Terms by Notice
- Notice of terms must be given before the contract was formed and reasonable steps must be taken to
bring the terms to the notice of the parties to be bound
> Timing
- For delivered or displayed terms to form a part of a contract they must be made available before the
contract is made (Oceanic Sun v Fay)
- If a contract is made and an unknown clause is later inserted by incorporation in a ticket issue pursuant to
the original contract, the clause does not form part of the contract. The carrier cannot rely on the clause
unless at the time of the contract the carrier had done all that was reasonably necessary to bring the
exemption clause to the passenger’s notice (Oceanic Sun v Fay)
> Knowledge or Notice
- A party will be bound by delivered or displayed terms if he or she has either knowledge or reasonable
notice of the terms, that is he or she knows that the relevant document contains contractual terms and will
be bound regardless of whether he or she has read them (Thornton v Shoe Lane Parking)
- Reasonable notice depends on type of contract, nature of the terms and circumstances of the case
- The onus lies on the party that is seeking to enforce the condition to prove that the other party had
knowledge of the condition (Thornton v Shoe Lane Parking)
- If one party is unable to withdraw from the contract e.g. exit parking, he or she is not given reasonable
notice to consider the terms displayed. Furthermore there is something irrevocable about the process
where a ticket is issued by an automatic machine (Thornton v Shoe Lane Parking)
> Unusual or Onerous Terms
- A party has the responsibility to bring unusual conditions to the notice of another party before they
would be bound by them (Baltic Shipping Co v Dillon)
- Reasonable opportunity to see and agree to the terms and conditions must be provided before the
contract is made, and not delivered in a later document (Baltic Shipping Co v Dillon)
Incorporation by a Course of Dealings
- Where parties have a history of dealings, contractual terms introduced in earlier contracts may be
incorporated into subsequent contracts (Balmain New Ferry Co v Robertson)
- Where reasonable notice is given and where the conditions are reasonable and fair, actual knowledge of
the terms can be inferred through a course of dealings (Balmain)
- For a term to be incorporated by a course of dealings, that course of dealings must be regular and
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uniform (Kendall v Lillico)
- In addition the document relied upon in previous transactions must also reasonably be considered a
contractual document rather than a mere receipt or docket (Rinaldi v Precision)
- If the document is not considered to be a contractual document, and no more than a delivery document,
one would not expect to see conditions and thus no knowledge of the conditions can be inferred from a
course of previous dealings (Rinaldi)
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Chapter 14 Extrinsic Evidence
Parol Evidence Rule
> Extrinsic Evidence
- The Parol Evidence Rule prevents extrinsic evidence being given to add to, vary or contradict the terms of
a contract as they appear in the written document (State Rail Authority of NSW) – including oral
conversations, letters or early drafts
- It limits the evidence which might be given to explain the meaning of those terms
- Applies only to contracts wholly in writing, will not exclude evidence of oral terms of a contract which is
only partly in writing (State Rail Authority of NSW)
> Collateral Contracts
- A collateral contract is where one party makes a promise connected to but independent to the main
contract, and as consideration for the promise, the other party agrees to enter into the main contract
(Hoyt’s v Spencer)
- The parol evidence rule will not apply to exclude evidence of a collateral contract (Hoyt’s v Spencer)
- The main contract can be the consideration for the collateral contract, only when the terms of the
collateral contract do not reduce or alter the rights created by the main contract (Hoyt’s v Spencer)
- Collateral contracts are rare and must be strictly proven; the burden of proof is eased if the subject
matter with which the main contract deals is more unusual (Heilbut v Symons)
- Collateral contracts may be antecedent (preceding) or contemporaneous (simultaneous) and can prevail
if it is not inconsistent, contradicts or impinges on the main contract (Hoyt’s v Spencer)
- Parties have the right to make an agreement and the right to modify the terms of the agreement; the
courts should follow the intentions of the parties (Hoyt’s – Ferguson dissenting)
> Estoppel
- Courts remain divided as to whether the parol evidence rule applies to exclude extrinsic evidence for the
purpose of establishing estoppel
- Clear and convincing proof is necessary to establish estoppel, material giving rise to estoppel can arise
pre-contract negotiations (Whittet v State Bank of NSW)
- The written document should be final and conclusive, using extrinsic evidence will lead to extensive,
discursive, inconclusive results and thus trying to find pre-contractual estoppels is wasteful and uncertain
(Australian Co-op Foods v Norco)
> Construction
- Extrinsic evidence is only admissible to make certain ambiguities, to complete gaps, or to correct
injustices (by way of operation of the law, rather than intention of the parties)
- An ambiguous clause invites the court to permit extrinsic evidence to determine the scope of the clause
(Royal Botanic Gardens and Domain)
- Evidence surrounding the circumstances can be admitted to resolve ambiguities in the meaning of the
words, and aid the construction of contract (Codelfa Constructions)
- Language with special meaning to a particular trade or industry may be clarified by extrinsic evidence if
the trade meaning is well known, uniform and certain (Homestake Australia)
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Chapter 13 Construing the Terms
> Construction
- Construction is the process where the court determines the meaning and the legal effect of the terms of
the contract; the intentions of the parties are considered objectively and the meaning of the terms are
considered as understood by the reasonable person (Pacific Carriers)
- The court will give the words their plain and ordinary meaning, even if this leads to unreasonable results
(Australian Broadcasting Commission)
- However if the ordinary meaning leads to an absurd result, the terms should be construed so as to avoid
the absurdity (Westpac Banking)
> Exclusion Clauses
- An exclusion or exemption clause is a term which modifies the principal obligations; or limits or excludes
the liability of a party that would otherwise result in a breach of that party’s primary obligations
- An indemnity clause similarly seeks to exclude the liability of one party by imposing on the other a duty to
indemnify the former in respect of any loss incurred
- Before a party can rely on the protection of an exclusion clause it must be shown the clause was
incorporated into the contract and can be constructed to exclude or restrict liability in relation to the
dispute
- Interpretation relies upon the language of the particular clause rather the context in which they appear
(Darlington Futures)
- Contra proferentum – in a case of ambiguity, an exclusion clause is to be construed according to its
natural and ordinary meaning, in light of the contract as a whole, giving due weight to the context (nature
and objective of the clause), and construed strictly against the proferens (the parties seeking to rely on the
clause) (Darlington Futures)
> Trade Practices Act 1974
- An exclusion clause may be void under statute
- Sections 68 – any term that purports to exclude, restrict or modify the applications of any provision of the
Division is void
- Section 68A – exceptions
(1) terms regarding the supply of goods and services (other than the kind ordinary acquired for personal or
domestic use) is not void under 68 if it deals with the replacement, repair, payment of cost of
replacement/repair of goods; or the re-supply or payment of cost of re-supply of services
(2) ss1 does not apply if it is unfair or unreasonable to rely on the clause
(3) ss2 is determined by considering the circumstances of the case, the relative bargaining power,
inducement, knowledge, special order
- Section 70 – the goods supplied do not correspond to the description in the contract or the sample
- Section 71 – quality and fitness
(1) there is an implied condition that he goods supplied are of merchantable quality except: (a) if defects
are drawn to the customer’s attention or
(b) reasonable time to inspect or examine
(2) the goods are reasonably fit for the particular purpose for which the goods are acquired
(3) this includes supply by an agent, except where it was brought to the customers notice
- Section 72 – where supply is by sample, there is an implied condition that
(a) the bulk will correspond with the sample in quality;
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(b) reasonable opportunity is given for comparison;
(c) the goods are free from defects rendering the unmerchantable, that would not be apparent on
reasonable examination
- Section 74 – warranties in relation to supply of services
(1) implied warranty that the services will be rendered with due care and skill and any materials supplied in
connexion with those services will be reasonably fit for the purpose for which they are supplied
(2) when a service is supplied (other than professional services of a architect or engineer), there is an
implied warranty that the services supplied and any materials supplied in connexion with those services
are of nature and quality that they might reasonably expected to achieve the result expressly desired by
the consumer EXCEPT where the consumer does not rely, or it is unreasonable to rely on the skill and
judgement of the corporation
(3) this section does not include services that are provided under
(a) a contract in relation to the transportation or storage of goods for the purposes of business, trade,
profession or occupation
(b) a contract of insurance
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Chapter 15 Implied Terms
- Terms may be implied in law or fact, and by custom or statute e.g. Trade Practices Act
> Terms Implied in Law
- Implied conditions of reasonable fitness and merchantable quality on a contract for sale of goods, for
concurrent payment and delivery, implied warranty of seaworthiness, letting of a furnished house that is
reasonably fit for habitation
- Terms are implied only if they are expressly agreed on or reasonably inferred by the parties and necessary
to make a contract business efficacious (Byrne and Frew v Australian Airlines)
- A contract may be workable or effective without the introduction with provisions from statute, unless
without the provision the contract is deprived its substance, seriously undermined or drastically devalued
in an important respect
> Terms Implied by Fact
- Traditionally based on presumed intentions of the parties and unique to the contract in question
- In formal contracts for a term to be implied it must be (BP Refinery):
1) Reasonable and equitable
2) Necessary to give business efficacy to the contract
3) So obvious that it goes without saying
4) Capable of clear expression
5) Not contradict any express term of the contract
- For informal contracts a term may be implied by reference to the imputed intention of the parties, but
only if it is necessary for the reasonable and effective operation of the contract in the circumstances of the
case (Hawkins v Clayton)
-Where a dispute involves an assumption of risk, a term cannot be implied to shift the risk from one party
to another – someone has to take on the risk (Codelfa)
- The more detailed (specific) the contract the less room there is for implication (Codelfa)
- When a complex factual matrix exists, the dispute should be resolved without implication, however in the
event of ambiguity, the terms may be clarified by implication using extrinsic evidence (Codelfa)
- Facts surrounding the circumstances can be admitted if they were known by both parties, notorious or
knowledge of them will be presumed (Codelfa)
> Terms Implied by Custom
- Circumstances in which trade, custom of usage may form the basis of implication of terms have
established the following propositions (Con-Stan Industries):
1) The existence of custom or usage is a question of fact
2) There must be evidence that the custom relied is so well known and acquiesced that it can be
reasonably presumed to have imported that term, however it is not necessary for the custom to be
universally accepted
3) Uniformity – a term will not be implied if it is contrary to the express terms
4) A person may be bound by a custom although he had no knowledge
- The objective test must be applied, is the custom reasonable, complete, fair?
- Circumstances include the complexity of the contract, the relationship between the parties, their relative
bargaining power, pre-contractual negotiations, trade/industry
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Textbook Chapter 19 Termination by Agreement
Categories of Agreement to Terminate
- An express term within the existing contract can cover the termination of a contract
- A subsequent agreement (mutual agreement) can be made to terminate a contract (requires fresh
consideration)
- Termination of a contract can also be found to be implied within an existing contract or subsequent
contract (by usage of trade, custom, course of dealings)
- Termination via breach or abandonment
Termination Under the Original Contract
> Express Powers to Terminate
- A term in a contract could specify a fixed period of time the contract is to be active,
after which, the contract is set to expire
- Or the passing of the specified time period does not put the contract to an end but
rather would allow one or both parties the option to terminate the contract;
‘termination at will’
- A term may allow a party to terminate after a specified period of notice
- A party may be given the right to terminate after certain specified events, e.g.
breach of contract or non-fulfilment of a contingent condition
- Precise compliance with specified termination procedures can be required (Lintel v
Pines, 1991 VR)
- However the HCA has expressed the contrary view; that requirements should not be
construed in an overly technical or restrictive manner, termination is to be allowed if
the strict procedures weren’t followed as long as it did not prejudice the other party
in a substantial way (Pan Foods v ANZ, 2000)
> Implied Right to Terminate a Contract of Otherwise Indefinite Duration
- Where a contract’s duration is not specified, courts may imply a right for one or
both parties to terminate a contract (Crawford Fitting v Sydney Valve, 1988 NSW)
- The right is dependent on an inference that the parties would not have intended for
the contract to continue indefinitely, reasonable notice is also required to be
provided by the terminating party (Crawford Fitting)
- The period of time for reasonable notice depends on the circumstances of the case
(Crawford Fitting)
Termination by Subsequent Agreement
> Express Agreements
- An agreement outside of the existing contract may be formed to terminate that
contract, and must also comply with the normal rules of contract formation
> Partly Performed Contracts and the Issue of Consideration
- A party who has performed contractual obligations can give good consideration by
agreeing to release the non-performing party from contractual obligations
- However, the non-performing party cannot provide a release, unless the performing
party executes a deed to terminate the contract
- Alternatively, the non-performing party can provide ‘fresh’ consideration; ‘accord
Crawford Fitting v
Sydney Valve
Sydney Valve, a
distributor of
Crawford Fitting
agreed to exclusively
sell Crawford Fitting
products.
- At some stage,
Sydney Valve
purported to
terminate the
contract by giving 6
months notice in
advance
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and satisfaction’ which is a “purchase of a release from obligation... by means of any
valuable consideration, not being the actual performance of the obligation itself”
(British Russian Gazette v Associated Newspapers, 1933 KB)
- Fresh consideration can be in the form of a promise or the doing of a promise act
(McDermott v Black, 1940)
- Whether consideration for accord and satisfaction is a promise or an act is a matter
of interpretation (McDermott)
- Courts are inclined to interpret accord and satisfaction as requiring performance of
the promised act and not merely the promise if the matter is ambiguous
> Formal Requirements
- Certain contracts are required to be in writing, however termination of such
contracts is not required to be in written form (Tallerman v Nathan’s Merchandise,
1956)
- Writing is required if the subsequent contract purports to vary the existing contract
rather than terminate (Suttor v Gundowda)
> Termination Inferred from Subsequent Agreement
- There may be an absence of an express term explaining the relationship of a
subsequent contract to a previous contract
- Subsequent agreements can be interpreted to either replace and thus terminate a
previous contract, or simply just vary it – depending on the parties’ intentions based
on the terms and circumstances as construed by the courts (Tallerman v Nathan’s)
- The distinction between the two possibilities is a ‘matter of degree’, e.g. if the
obligations in the subsequent agreement are inconsistent with those of the original
contract, they would be construed as to replace the original contract (Tallerman v
Nathan’s)
- If the parties cannot be presumed to have abandoned the previous rights,
termination of the original contract is unlikely to be inferred (Tallerman v Nathan’s)
- If a subsequent contract substitutes existing parties with new parties, even if it does
not alter obligations, it is deemed to have replaced the original contract; ‘novation’
(Vickery v Woods, 1952)
> Termination by Abandonment
- Can be by mutual agreement or an inferred agreement to discharge the contract
(Fitzgerald v Masters, 1956)
- Abandonment may be inferred where:
1) Neither party considers the contract to be further performed (DTR Nominees v
Mona Homes, 1978)
2) An ‘inordinate’ period of time has elapsed where neither party has performed or
had called the other party to perform (Fitzgerald v Masters)
- However if the contract was partially performed it is unlikely courts will arrive at this
conclusion, because the performing party is unlikely to walk away (Fitzgerald v
Masters)
McDermott v Black
Contract for the
purchase of shares
where the purchaser
alleged he was
fraudulently induced
into the agreement.
- The purchaser
made complaints but
later withdrew them
and agreed to
complete the
contract on the
condition of a time
extension grant
- Time extension was
granted but
purchaser still did not
want to complete,
seller rescinded the
contract and
purchaser sued
Fitzgerald v Masters
Contract for the
purchase of an
interest in a farm.
- The farm owner had
deceased and the will
written in the
defendant’s name
- Much time had
passed before the
purchasers wanted
to uphold the
contract
- Vendors argued the
contract had been
abandoned
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Textbook Chapter 20 Failure of a Contingent Condition
Contingent Conditions
- The performance of the contract depends on the fulfilment of contingent conditions
- Performance can be conditional upon an event not occurring
- May qualify the performance of a single obligation, a few obligations or all obligations under a contract
Different Uses of the Word ‘Condition’
> Contingent and Promissory Conditions
- Contract can be terminated if the contingent condition is not fulfilled, but there will
be no breach because neither party had promised the condition to be fulfilled
(voidable)
- However sometimes the condition may be promissory and non-fulfilment will result
in a breach for the other party to claim damages
- Whether a condition is contingent or promissory depends on the language of the
contract (McTier v Haupt, 1991)
> Contingent Conditions to Performance and Formation
- A contingent condition may ‘suspend’ performance of obligations under a contract
but it still binds the parties (and prevents them from performing inconsistently with
contractual obligations) even before the contingent condition is fulfilled
- A contingent condition may be required to qualify the formation of a contract, e.g.
“this agreement is subject to the preparation of a formal document” (Masters v
Cameron)
- Courts tend to treat a contingent condition as qualifying performance rather than
formation (Perri v Coolangatta)
> Contingent Conditions Precedent and Subsequent to Performance
- A contingent condition precedent to performance is one that must be fulfilled
before the parties are bound to the agreement (Meehan v Jones)
- A contingent condition that is subsequent will render the parties’ obligation to
perform to come to an end should the condition occur (Suttor v Gundowda)
- It is more important to identify the effects of the condition rather than identify it as
‘precedent’ or subsequent (Perri v Coolangatta)
The Duty to Co-operate
- Parties may be under an implied duty to co-operate (with the contingent condition);
but reasonable steps need to be taken to ensure fulfilment of the contingent
condition (Perri v Coolangatta)
- Where the implied duty to co-operate is breached, the party in breach cannot rely
on the failure of the condition as a reason for termination of the contract (Suttor v
Gundowda)
- If a party fails to co-operate, the contingent condition may be treated as fulfilled
(Mackay v Dick, 1881), probably on the ground of estoppel
- However the condition may not be treated as fulfilled even if the implied obligation
to co-operate is breached, in Newmont v Laverton, the Privy Council reasoned that
the parties did not have the power to dispense with the performance of the condition
McTier v Haupt
Contract for the sale
of a house with
furniture included.
- At one stage before
the transaction was
complete the house
was broken into and
furniture burnt
-The purchasers
refused to complete
the contract until the
property was
restored
- The contract
stipulated the
purchaser’s were
only entitled to
compensation
Suttor v Gundowda
Contract for the sale
of pastoral property
on the condition that
consent of the
treasurer was
obtained before the
expiry date.
- The consent was
obtained, but a few
days after the expiry
date
Perri v Coolangatta
Contract for the sale
of land where time
was not of the
essence.
- The vendor issued a
notice to complete
which was not
complied by in time
- The vendor then
gave notice
rescinding the
contract
- The purchaser
sought to complete
the contract but was
found the contract to
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be already rescinded
Non-Fulfilment
> When will a Contingent Condition not be Fulfilled?
- If the specified condition does not occur
- Or if it does not occur within the specified time period
- If no time is specified, courts will implement a ‘reasonable’ period of time the
condition would have had to be fulfilled based on the circumstances of the case (Perri
v Coolangatta)
- If a date is specified for the completion of a contract but not for the fulfilment of the
contingent condition, the deadline for the fulfilment of the contingent condition will
usually be deemed to be the completion date for the contract (Aberfoyle v Cheng)
> Objective or Subjective Test?
- Use of objective or subjective test depends on the language of the contract
- Contingent conditions can depend on a discretionary judgement, e.g. one party
would have to be ‘satisfied’, the party making the judgement would have to act
honestly but not necessarily ‘reasonable’ (Meehan v Jones)
- There is still some support for the standard of reasonableness in making such a
judgement (Renard Constructions v Minister for Public Works)
The Consequences of Non-Fulfilment of a Contingent Condition
> Void or Voidable
- Consequences vary depending on the language of the contract
- Voidable means one or both parties have the option to void the contract but in the
event that they choose not to, the contract remains on foot
- If a contingent condition relates to only a single obligation of the contract, then only
that obligation will be set aside, but if it relates to the whole contract then the whole
contract will be generally voidable (Perri v Coolangatta)
- If the intentions of the parties are clear in terminating a contract upon nonfulfilment of the contingent condition, courts will deem the contract to be terminated
or void automatically (Rudi’s Enterprises v Jay)
- Courts are likely to render a contract terminated if neither party has control over the
event, e.g. ‘it not raining’ (New Zealand Shipping v Societe des Atelier)
- If a party is at fault for non-fulfilment of a contingent condition, i.e. they did not take
reasonable steps or weren’t co-operative, then the innocent party will generally be
granted the right to void the contract (Suttor v Gundowda)
- If the default of the contingent condition occurs without either party at fault, then
both parties reserve the right to terminate the contract (Suttor v Gundowda)
> Notice
- A notice is not required to terminate a contract where its contingent condition has
not been fulfilled (Perri v Coolangatta)
> Who Can Elect to Terminate?
- The party that was at fault for not fulfilling the contingent condition cannot rely on it
to terminate the contract (Suttor v Gundowda)
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Waiver of a Contingent Condition
- A contingent condition may be waived by one or both parties, if this happens the
parties may not terminate the contract on the ground of non-fulfilment of the
contingent condition
- One party may have the option to waive the contingent condition if it was
‘primarily’, ‘wholly’ and ‘solely’ for the benefit of that party (Perri v Coolangatta)
- If both parties benefit from a contingent condition then neither party can waive it
without the consent of the other (Gough Bay Holdings v Tyrwhitt-Drake, 1976 VR)
- Even if a contingent condition was for the benefit of a single party, the other party
may still terminate the contract for non-fulfilment of the contingent condition in the
absence of waiver (Perri v Coolangatta)
- Additionally the waiver would only be effective if it was done before termination of
the contract under non-fulfilment of the contingent condition (Perri v Coolangatta)
Restrictions on the Right to Terminate for Non-Fulfilment of a Contingent Condition
- A party who waives the right to rely on non-fulfilment of a contingent condition, is
bound by the decision
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Chapter 21 Termination for Breach
- By common law, in the occurrence of a breach, regardless whether or not aggrieved party decides to
terminate the contract, he or she will have the right to damages to compensate for the loss caused by the
breach
- The other party may argue that the right to terminate (by the aggrieved) has been lost by the conduct on
the part of the aggrieved party
Breach of Contract
- A breach occurs when a party fails to perform at the time or by the standard required by the contract
- Whether or not there is a common law right to terminate for breach depends on the classification of the
term breach:
1) If the term is a condition, the aggrieved can terminate, regardless of the gravity/consequences of breach
2) If the term is a warranty, the aggrieved can only recover damages
3) If the term is intermediate (innominate), the aggrieved party’s right to terminate depends on the
gravity and consequences of the breach, if the breach is serious the aggrieved party can terminate and
claim damages
Termination for Breach of a Condition
- In the absence of classification by statute or express statement, whether a term is a
condition is a matter of construction (Associated Newspapers v Bancks)
- Construction depends on the intention of the parties, the nature of the contract, or
particular terms of such importance to the promisee that he would not have entered
into the contract unless he had been assured of strict or substantial performance of
the promise, and this was apparent to the promisor (Luna Park)
- If a party who becomes entitled to terminate by reason of breach of an essential
promise does not exercise this right when he becomes aware of the breach he loses
his right and is remitted to remedy by way of damages only (Luna Park):
1) He proceeds to do some act which infers that the contract subsists
2) If a party in default proceeds to carry on with the performance of the contract at
the request or permission of the innocent party (express or tacit)
- If a contract is not validly terminated by reason of breach, that termination itself is a
breach of the contract (Luna Park)
- An essential term exists where the failure to perform the condition went to the root
of the contract (Luna Park)
Termination for Breach of Intermediate Term
- Right to terminate depends on the nature of the breach &foreseeable consequences
- A breach of an intermediate gives rise to rights to terminate if it is so serious that it
deprives substantially the whole benefit that was intended by the contract
(Hongkong Fir Shipping v Kawasaki)
- The courts will not expressly acknowledge contributory fault, however the loss to
the aggrieved party may be attributed to the actions of both parties to reduce the
severity of the breach where a term is intermediate (Hongkong Fir)
Tramways v Luna
Park
- Tramways agreed to
display ad for at least
8 hours a day
- Luna Park alleged
Tramways did not
meet that obligation
- Tramways argued it
had displayed it for
an average of 8 hours
a day for the seasons
- Luna Park wanted
damages for breach
- Tramways sued for
the recovery of the
payment
Hongkong v
Kawasaki
Contract for the
charter of a ship.
- Charterer claimed
ship was not properly
fitted for the purpose
for the first 5 months
of the charter and
purported to
terminate
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Chapter 22 Termination for Repudiation
- Repudiation is the refusal by, or inability of one party to carry out its obligations to
the extent the aggrieved is justified in discharging the contract
- Anticipatory breach occurs when one party repudiates his or her obligation prior to
the time set for those obligations. In such a case the aggrieved is entitled to terminate
and sue for damages even though the date for performance by the repudiating party
has not arrived
- Termination for anticipatory breach does not affect the measure of damages
available, but gives rise to the duty of the aggrieved to mitigate his or her damages
(Hochester)
- If the aggrieved party chooses not to accept a repudiation before the time set for
performance, the contract will continue and there will be no right to damages until
and unless an actual breach occurs (Carr v Berriman)
Absence of Willingness or Ability
- If anticipatory breach amounts to repudiation, whether an essential term or
otherwise, goes to the root of the contract (Laurinda v Capalaba Park)
Conduct Amounting to a Repudiation
- Either unwillingness or inability will suffice
- Whether conduct amounts to repudiation does not depend on the subjective
intention of the party, deliberate blameworthy or otherwise, it covers all breaches
that are bound to happen (Universal Cargo Carriers)
- Repudiation may be by express statement or indicated by the words and conduct of
the repudiating party
> Conduct Showing Inability or Unwillingness to Perform
- An objective test is applied to determine if the reasonable man can infer that the
repudiating party intended to take the contract seriously or rather was prepared to
carry out his part of the contract only when it suited him (Carr v Berriman)
- If one breach is not sufficient, two breaches together can have a combined
significance (Carr v Berriman)
- If the aggrieved party allows a breach or an ongoing series of breaches, they must
live with the consequences (Carr v Berriman)
> Repudiation Inferred from a Combination of Events
- A combination of breaches can amount to termination and damages by repudiation
although each single breach is not sufficient (Progressive Mailing House)
> Instalment Contracts
- In a case of defective instalments, it must be determined from the circumstances of
the case if the breach is a repudiation of the whole contract or a severable breach
giving rise to claim for compensation (Maple Flock)
- The test is not the subjective mental state of the defaulting mental party, but an
objective test of the impact on the whole purpose of the contract (Maple Flock):
Universal Cargo v
Citati
Contract for the
charter of a ship, the
charterer had failed
to nominate an
effective shipper on
time.
- Owners cancelled
the charter 3 days
before due date and
re-chartered the ship
- The charterer’s
efforts to find cargo
failed and the owners
refused to accede to
the charterer’s
demand to detain the
ship
Progressive v Tabali
Tabali leased factory
premises to
Progressive, the
agreement held that
certain breaches
would allow the
lessor to re-enter the
premises.
- The agreement also
held the lessor had
complete certain
work on the premises
which the lessee
alleged was not
satisfactorily carried
out
- The lessee ceased
paying rent, lessor
purported to
terminate and sue
for arrears
Maple Flock v
Universal Furniture
Contract for the sale
of 100 tons of rag
flock, where it was
stipulated 30 parts of
chlorine for 100,000
parts of flock.
- The 16th delivery
exceeded 30 parts
per 100,000
- Buyer purported to
terminate contract
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1) Qualitative test – the breach as proportion of the whole contract
2) The degree of probability that the breach will be repeated
> Repudiation and Erroneous Interpretation of the Contract
- Erroneous interpretation itself is not a fundamental breach (DTR Nominees v Mona
Homes)
DTR Nominees v
Mona Homes
Contract for the sale
and subdivision of a
block of land.
- The vendor
misinterpreted the
agreement and
lodged plans for only
lots 1-9 when he had
to lodge plans for 35
lots
- Purchaser
purported to
terminate, vendor
viewed purchaser’s
action as a
repudiation and also
purported to
terminate
Chapter 23 Termination for Delay
At What Time is Performance Required?
- Specified precisely, if not then law will imply a period of ‘reasonable time’ (Louinder
v Leis)
Where Time is of the Essence
- Where the time for performance of that obligation is described as essential and the
time stipulation construed as a condition, then a breach of the time stipulation will
entitle the aggrieved party the right to terminate
> When is Time of the Essence
- When expressly designated the with the words ‘time is of the essence’
> Where time is not of the essence - failure by one party to perform on time, while
givin rise to damages for breach of contract, does not itself give rise to a right of the
aggrieved party to terminate
- A right to terminate may arise if the delay should continue for so long or in such
circumstances as to amount to repudiation (Laurinda Pty Ltd v Capalaba)
- That means the delay must be ‘gross’ or ‘protracted’ (Neeta in Louinder)
- The delay may be combine with other conduct to indicate a repudiation (Laurinda)
eg deliberate unreasonable delay
> Construing Time Stipulations of Being of the Essence
- Courts are most likely to interpret time stipulations to be essential in commercial
contracts for the sale of goods (United Scientific Holdings v Burnley Borough Council)
- Time stipulations for shipments or delivery of goods are also typically construed to
be essential (Harrington v Browne)
- However, where the time stipulation is left silent in relation to being essential, then
Louinder v Leis
Louinder sold
property to Leis, the
agreement had no
essence of the time
stipulation.
- However, execution
of transfer was
required to be due
after 28 days of the
receipt of the
vendor’s statement
of title
- The vendor agreed
to extend to period
to 3 months but then
decided to give only
1 week
- After 1 week,
vendor gave notice
to complete within
21 days
- After that, vendor
purported to
terminate contract
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it is treated as not essential (Sale of Goods Act 1954)
Notice
- Where time is not of the essence, aggrieved party can terminate by notice
procedure.
- A valid notice must: (Louinder v Leis)
a) specify a time for performance
b) allow reasonable time
c) clearly convey that time is of the essence or one will b entitled to termination if
notice is not complied with
- If a contract does not fix a time for completion, there is no foundation to give notice
to complete, the existence of unreasonable delay is an essential qualification for the
giving of notice. (Louinder v Leis) (A contract for the sale of land did not specify a
completion date and time was not described to be of the essence)
- When an innocent party makes time of the essence by effective notice, it is effective
for both him and the defaulting party (Laurinda v Capalaba)
The Effect of an Extension of the Time for Performance
- If time was originally of the essence, then a time extension which specifies the new
date for the obligation to be performed will still regard time to be of the essence;
breach of the time extension will give right to the aggrieved party to terminate for
delay (Mehmet v Benson)
- If time was originally of the essence but the time extension does not specify the new
date, but rather merely indicates willingness to accept late performance, then time
will be longer of the essence (Ogle v Comboyuro)
Laurinda v Capalaba
Parties entered into a
contract of lease.
- Laurinda wanted a
copy of the lease and
Capalaba promised
but did not deliver
- After many months
Laurinda terminated
the contract for
repudiation
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Chapter 24 Consequences of Affirmation or Termination
The Right to Elect
- In the occurrence of a breach, aggrieved party can elect to affirm (condone the
breach) or elect to terminate (Foran v Wright)
- The aggrieved cannot take up two inconsistent positions: “a door must be either
open or shut; a contract must either subsist or be at an end” – Higgins J (Bowes)
Consequences of Affirmation
> Damages
- If the aggrieved party affirms the contract, the aggrieved party loses the right to
terminate but may still claim for damages caused by the breach
- However if the breach is anticipatory, and if the aggrieved party elects to affirm, the
aggrieved party may not claim damages until an actual breach has occurred (Foran v
Wight)
- If the aggrieved party affirms, should an event occur that frustrates the contract, the
contract will be terminated without liability on part of either party (Avery v Bowden txtbk)
- That is the aggrieved party may only claim for damages from previous breaches, not
damages for the loss of the whole contract
> Right to rely on subsequent events
- If the aggrieved party affirms the contract, he gives the party in default an
opportunity to terminate for a future breach (Bowes v Chaleyer) - buyer cancelled
the silk contract but the seller affirmed the contract
Where the Contract is Terminated
> Consequences of Terminating for the Aggrieved Party
- Termination ends future obligations but does not rescind a contract from the
beginning; parties may still recover for accrued breaches and rights
- For example: payment for any part of the contract which has been performed, and
have the right to claim damages for any breaches occurring up until the time the
contract was terminated
- Arbitration clauses in the contract will still remain binding after termination
(Codelfa)
> Alternative Grounds for Termination
- An aggrieved party who has terminated a contract on an invalid ground may still rely
on another ground that was in existence of the time for a termination, even if the
aggrieved party was not aware of its existence at the time (Shepherd v Felt & Textiles
of Australia)
Bowes v Chaleyer
Plaintiff ordered silk
ties from defendant.
- Plaintiff sought to
cancel the order,
effectively
repudiating
- But defendant
delivered them
anyway, however,
they were delivered
not according to
agreement which
had put the
defendants in breach
of contract
- The plaintiffs
claimed for damages
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Chapter 25 Restrictions
Restrictions on right to terminate include:
- exclusion clauses
- statute
- performance of obligations
- election/affirmation to continue the contract
- aggrieved party must be ready and willing to perform
Readiness and willingness
- To be entitled to terminate for breach or repudiation, an aggrieved party must show
that he or she was able and perform the contract (Foran v Wright)
- ‘Willing and able’ should be interpreted at a low threshold, and should be assessed
at the date of performance, rather than the date of termination (Foran v Wright)
Election
- An aggrieved party when faced with an event which entitles him or her to terminate
the contract has a choice between terminating and affirming the contract (Tropical
Traders)
- Two requirements of election to affirm a contract are (Tropical Traders):
1. Knowledge of right to terminate
2. Unequivocal conduct consistent only with a choice to continue with the contract
- An election once made cannot be retracted, but the aggrieved party is not bound to
elect at once; it may keep the question open so long as it did nothing to affirm the
contract and so long as the other party’s position was not prejudiced by the delay
(Tropical Traders)
- The acceptance of a series of late payments can be considered as conduct
condoning the breach (Tropical Traders)
- A continuance of a contract based on a mistaken assumption does not constitute an
election to proceed (Immer)
- If the event giving rise to an election has not yet occurred, affirmation cannot be
forced, the party is entitled to exercise the right to terminate when/if the event
occurs (Immer)
Estoppel
- An aggrieved party may be estopped from terminating a contract where he or she
has induced the other party to believe that the contract will not be terminated in the
circumstances, and the other party relied on that assumption (Legione v Hateley)
Waiver
- The aggrieved party is sometimes said to waive a breach and indicates an intention
to continue performance
- However, it is the doctrine of election that operates in such circumstances to
deprive the aggrieved party the right to terminate
Foran v Wright
Contract for the sale
of land where a 10%
deposit was paid.
- Neither party
tendered
performance
- The purchasers
sought to rescind the
contract to claim
back deposit
Tropical Traders v
Goonan
Contract for the sale
of land where time
was of the essence.
- Purchaser was late
on payments
- Vendor sought to
‘rescind’ the contract
and keep deposits
and other
instalments that
were paid
Immer v Uniting
Church
Uniting Church had
airspace rights which
it agreed to sell to
Immer on the
condition that the
Council was satisfied
with the
refurbishment.
- Immer’s solicitor
mistakenly believed
the Council had
approved the
transfer and sent the
relevant documents
to Uniting Church
- The transfer went
ahead but Immer
sought to rescind
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Relief Against Forfeiture
- Termination of a contract may lead to one party suffering forfeiture of a proprietary
interest (interest in estate). In equity the court may order specific performance of the
contract in favour of the party in breach to provide relief against forfeiture (Legione v
Hateley)
- Equity is used to ameliorate the rigors of common law, forfeiture may provide relief
against conscionable dealings
- Factors in deciding relief against forfeiture include (Legione v Hateley):
1) Did the aggrieved party contribute to the breach
2) Was the breach trivial, accidental, unintentional
3) What damages were suffered by reasonable breach
4) What was the magnitude of the purchaser’s loss and vendor’s gain if the forfeiture
is to stand
5) Is specific performance with or without compensation an adequate safeguard for
the vendor
- However, equitable relief against forfeiture should be used restrictively (Stern)
- It may only be used to ameliorate unconscionable conduct, and should not be used
to marginalize common law principles (Tanwar)
- Equity will not relieve where the possibility of the accident was within the
reasonable contemplation of the parties (Tanwar)
Legione v Hateley
Contract for the sale
of land where time of
the essence.
- The purchasers had
built a house on the
land prior to
finalizing the
purchase of the land
- Plaintiff did not
meet time
stipulations and
contract was
terminated, plaintiff
lost house on the
land
Tanwar v Cauchi
Contract for the sale
of land where time
was of the essence.
- Purchaser was a day
late in finalizing the
payment and vendor
purported to
terminate the
contract
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Chapter 26 Measure of Damages
The Compensation Principle
- Damages for breach of contract are compensatory, types of damages include
(Amann):
1) Expectation – puts the party in the position they would have been in if the contract
had been fulfilled, compensates for the part of the contract that is unfulfilled
2) Reliance – damages incurred in reasonable reliance, money already spent
3) Restitution – puts the party back in the position had there been no contract
Expectation Damages
- If the breach involves defective work the issue arises of whether the difference
between the current market value and the value had the contract been properly
performed, or the cost of remedying the work should be awarded (Belgrove v
Eldridge)
- The argument of economic wastage suggests that the economically efficient cost of
modification must be weighed with the fairness of the situation
Reliance Damages
- Where a plaintiff is unable to prove the value of the expected benefit gained from
the performance of contract, damages may be recovered to compensate plaintiff for
wasted expenditure incurred in reasonable reliance of the contract being performed
(McRae)
- The benefit obtained can be assumed to at least equal to the detriment sustained in
order to perform the contract (Amann)
- A BoP test may be applied to reflect the possibility of alternative future events and
the proportional chance of the benefit obtained from contract. This should be
distinguished from a breach where it is impossible to estimate returns (Amann)
- The fairest method of assessing damages, or the most appropriate compensation
method in circumstances of uncertainty is to balance contingencies (Amann)
Damages for Loss of Chance
- Damages capable for assessment are not too remote; the presence of contingencies
does not render the damages incapable of assessment, although the calculation of
the loss may not be certain or precise (Howe v Teefy)
- Damages for loss of a chance may be awarded for a loss of chance to win prizes
(where the past expenditure is too little to cover expectation losses) (Howe v Teefy)
Restitutionary Damages
- It is damages awarded based on the gain made by the defendant in breaching the
contract, where the defendant may have received benefit without providing
reciprocal performance. The damages give back gain made at the expense of plaintiff
- Restitutionary damages have not been recognized in Australian Contract Law,
typically the plaintiff may recoup the value of the benefit through ordinary
expectation damages
Commonwealth v
Amann
Amann entered into
agreement with Cth
to provide coastal
surveillance services.
- Cth repudiated
- Vast damages were
granted to Amann
- Cth appealed
Bellgrove v Eldridge
The defendant built
house for plaintiff.
- House was not
properly built
- Plaintiff sought to
recover damages for
demolition and
rebuilding of the
house
Howe v Teefy
Defendant leased a
racehorse to plaintiff
for 3 years but
repudiated after 3
months.
- Plaintiff made claim
for damages for loss
of opportunity
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Date for Assessing Damages (Johnson v Perez)
- There is a general rule that damages for breach of contract are assessed at the date
of breach, but this rule is not universal, in exceptional cases it must be adapted to
provide damages which will most fairly compensate the plaintiff for the wrong
suffered
- Damages must consider inflation and convert the value of the injury into nominal
terms
- Once the injured party learns on the breach, he is obliged to mitigate his loss by
notions of fairness to the party at fault
Johnson v Perez
Respondent sued
appellant, a solicitor,
for failing to
prosecute a case
which led to losses.
- It was accepted the
respondent would
have won the case
the solicitor failed to
prosecute
Chapter 27 Limitation on the Award of Damages
Causation
- The plaintiff must show a cause or link between the defendant’s breach and the loss
suffered. This cause or link may be determined by the ‘but for’ test tempered with
common sense (March v Stramare)
Remoteness of Damage
- The plaintiff must show the loss to be compensated is not too remote
- The general rule laid down in Hadley v Baxendale is:
1) Damages for breach of contract should be fairly and reasonably considered as
naturally arising from the usual course of things from the breach itself
2) Or reasonably in the contemplation of both parties at the time they made the
contract as the probably result of such a breach
- The ‘but for’ test is not applicable where there is a novus actus interveniens, e.g.
credit crisis beyond anyone’s control and remote from the breach. Thus the ‘but for’
test should not be strictly applied but viewed from a common sense perspective
(Alexander v Cambridge)
- A breach merely has to be a cause of the damage and not the sole cause, a cause
will be sufficiently proximate if it was in the contemplation of the parties when they
contracted (Alexander)
- The damage must be a general sum rather than a specific amount if only a general
loss of business could have been contemplated (Victoria Laundry)
Mitigation of Damages
- There are three rules of mitigation (McGregor):
1) The plaintiff cannot recover for avoidable loss
2) The plaintiff can recover for loss incurred in reasonable attempts to avoid loss
3) The plaintiff cannot recover for avoided loss
- The aggrieved must take all reasonable steps to mitigate losses upon discovery of
breach. Mere impecuniosities does not relieve a duty to mitigate (Burns v Auto)
> Attempts at Mitigation which Increase Loss
Alexander v
Cambridge
Auditors who failed
to qualify provisions
for doubtful debts.
- As a result the value
of the company was
overstated
- Company eventually
went into
receivership
- It was argued if the
reports were done
correctly, company
would have only
owed $10m rather
than $115m
Victoria Laundry v
Newman
Defendants sold a
boiler to plaintiff
which was delivered
20 weeks late.
- Plaintiffs claimed
lost revenue due to
late arrival
- Plaintiffs also
claimed for a special
lucrative contract
that was also lost
Burns v MAN Auto
Def warranted that
the prime mover’s
engine was to be
reconditioned.
- The engine was
defective later but
defendant could not
pay to fix
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- A party who commits a breach is liable for additional losses incurred during
reasonable attempts by the aggrieved party to mitigate their loss (Simonius v Holt)
Limitations Relating to Specific Types of Claim
> Disappointment, Distress and Loss of Reputation
- Damages are not generally awarded to compensate non-pecuniary damages
- In exceptional cases, damages for disappointment and distress may be recovered if
they proceed from physical inconvenience caused by the breach or the object of the
contract was to provide enjoyment, relaxation and freedom from molestation (Balton
Shipping)
> Loss of Bargain Damages
- There will generally be no right to damages if the ‘aggrieved’ party exercises a
contractually defined termination right, as opposed to a right to terminate under the
common law (Shevill v Builders)
- Reliance on an express term in a contract to terminate provides a remedy and does
not allow for performance of the remainder of the contract, thus damages are
available for arrears but not for loss of bargain
> Contributory Negligence
- Contract allows one to extend upon heads of damages to expectation and reliance
(can only recover for Restitution in Torts)
- A wrong is a breach of contractual duty that is concurrent and co-extensive in a duty
of care in Torts, contributory negligence does not defeat a claim of damages,
damages must be reduced to an extent which is just an equitable regarding the
claimant’s share of responsibility for the damage (Wrongs Act 1984 (VIC))
Simonius v Holt
Defendants were
auditors working for
the plaintiff’s
company.
- Plaintiff lost alot of
money due to their
improper operations
not being discovered
by the defendants
Balton Shippping v
Dillon
Plaintiff went on a
cruise provided by
defendant.
- Ship sank and
plaintiff lost
possessions and
suffered personal
injuries
Shevill v Builders
Shevill was the
guarantor of due
performance of
lessee who was
under a contract with
the lessor, Builders.
- Lessee failed to
make due payments
and hence property
was re-entered by
the lessors
Chapter 28 Liquidated Damages and Penalties
Rule Against Penalties
- Amount payable in the event of a breach may be specified in the contract
- Whether such clauses are enforceable as liquidated or agreed damages rather than
invalid as a penalty, depends on the relationship of the sum specified and the
damages likely to be suffered from breach of contract
- Rule against penalties provides that if the sum is not a genuine pre-estimate of
damage, the clause will be a penalty and not be enforceable (AMEV v Austin)
- If the clause is held to be a penalty, damages for breach is recovered in lieu of the
penalty (AMEV v Austin)
- The nature of the sum as either a genuine pre-estimate or a penalty is a matter of
construction. Signals of penalty include lump-sum payments, extravagant payment,
lack of relationship with the loss sustained, or lack of effort or method to estimate
expected damages (Dunlop)
- If the damages are a reasonable estimate rather than an arbitrary measure, they are
more likely to be classed as liquidated damages (Esanda Finance v Plessnig)
- Resale price maintenance is prohibited by TPA 1974 (Cth)
Dunlop v New
Garage
Dunlop supplied to
retailer, New Garage,
products which were
agreed to be sold at a
certain price.
- The retailer sold
them below the
prescribed price
- The agreement
covered this breach
of contract with
liquidated damages,
$5 compensation per
item
- The Court of Appeal
reduced the
compensable amount
to $2 per product,
Dunlop appealed
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Chapter 29 Actions for Debt
Debts and Liquidated Sums
- A debt or liquidated sum is something separate and distinct and more tangible than
a mere action for damages in breach (Young v QLD Trustees)
- An action for debt will only arise upon an executed consideration or performance of
the contract
- An entire obligation is where the plaintiff’s complete performance is precedent to
the defendant’s obligation to pay
- Divisible obligations is where the plaintiff is entitled to payment for each segment
or part of the work that has been fully performed
- Where work is done outside the contract, and the benefit of the works is taken, a
contract may be implied to pay for the work so done at the current rate of
remuneration (Steele v Tardiani)
- Payment on a quantum meruit (unjust enrichment) basis is only available if the
payments and the corresponding consideration are entire, divisible units
> Payments may be Affected by Legislation, e.g. Apportionment Act, Property Law
- Rent like interest accrues from day to day, thus payment shall be apportioned by
considering the accrued rent calculated as a fraction of the period (Nemeth v
Bayswater)
> Substantial Performance
- The doctrine of substantive performance may allow recovery of the contract price
less a payment of damages as compensation for incomplete work (Hoenig v Isaacs)
- Only when a breach goes to the root of the contract is a substantial defect found
and the employer absolved from his liability for payment (Hoenig v Isaacs)
- General ineffectiveness for a primary purpose consists of a substantial nonperformance, however a party may be unjustly enriched if they are not required to
pay (Bolton v Maheva)
> Payment Independent of Performance
- Such a payment is owed as debt when the time for payment arises
- When a contract stipulates payment in advance of performance, the vendor is
entitled to enforce payment before the time of performance, yet his title to retain the
money is not absolute but conditional upon subsequent completion of the contract
(McDonald v Dennys)
> Deposits
- Deposit is a percentage of the overall purchase price paid in return for the vendor
entering into the transaction
- If the vendor breaches the contract, the purchaser will be entitled to recover the
deposit. If the purchaser defaults, the vendor will retain the deposit
- The vendor’s right to retain the deposit is not conditional upon the subsequent
completion of the contract (Bot v Ristevski)
- Although the due deposit has not actually been paid, and contract is terminated for
reason of purchaser’s breach, a right to recover and retain deposit arises before the
contract is discharged as consideration for the vendor to enter into the contract (Bot)
Steele v Tardiani
- Defendant accepted
the wood but
declined to pay for
the wood not cut to
specified dimensions
Nemeth v Bayswater
- The aircraft crashed
in middle of a month
- Appellants sought
to pay for hire for
only part of the
month expended
Hoenig v Isaacs
Plaintiff decorated
defendant’s home,
with minor defects
- Upon completion,
held that the
defendant was to pay
the remaining
balance less
remedying costs
Bolton v Maheva
Plaintiff installed a
defective hot water
system
McDonald v Dennys
- Plaintiff guaranteed
the first installment
to him in order to
save the initial
agreement
- Defendant did not
make payment,
plaintiff sued for the
guarantee
Bot v Ristevski
- The defendant
repudiated and the
plaintiff sought to
recover the
remaining balance on
the deposit promised
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Chapter 17 Frustration
Frustrated Contracts Act 1978 (NSW)
- Section 6 provides that the Act does not apply to contracts before the commencement of the Act, for the
carriage of goods by sea, of insurance, a contract governed by another Act such as the Corporations Act.
(3) where a contract is severable into parts, the Act only applies to the parts that have been frustrated and
not the whole contract
- Section 7 provides that if a promise is due for performance before the frustrating act, which had not been
performed after the frustrating act, it would be discharged except if was necessary to support a claim of
damages for a breach of contract that occurred before the frustrating act
- Section 8 provides that liability of damages for breach accrued before the time of frustration shall be not
be ignored
- Section 10 provides where whole performance has been received before time of frustration, the
performing party shall be paid an amount equal to the value of the agreed return for the performance
- Section 11 provides where part performance has been received before the time of frustration, the
performing party shall be paid (2)(a) an amount equal to the attributable value of the performance or
(2)(b) where the attributable cost of the performance exceeds its attributable value, the sum of the
attributable value and one half of the amount by which the cost exceeds the value must be paid
- Section 12 provides where money has been paid as an agreed return for performance, it shall be returned
- Section 13 provides where the performing party has suffered a detriment, the performing party shall be
paid an amount equal to one half of the amount that would be fair compensation for the detriment
suffered
- Section 15 provides where divisions 1 one and 2 are manifestly inadequate, inappropriate, unjust,
excessively difficult or expensive to apply, the court may by order substitute adjustments in money or
otherwise as it considers proper
Mistake and Frustration
- Pacta sunt servanda – there is no remedy to escape from obligations in contract if
something happens (Paradine v Jane)
- Mistake arises from a shared erroneous assumption before the formation of the
contract
- The contract is frustrated if circumstances beyond control arise after consent has
been given
Frustration as an Excuse for Non-performance
- Frustration occurs when, without default of either party, contractual obligation has
become incapable of being performed because the circumstances in which
performance is called for would render it to be radically different from that which was
undertaken in the contract (Davis Contractors approved in Codelfa)
- Non haec in foedera veni - it was not this that I promised to do
Destruction of Subject Matter
- If the existence of an object was the foundation of performance, in the absence of
express or implied warranty that the thing shall exist, performance becomes
impossible from the perishing of the object without the default of the contractor. The
contract is not construed as a positive contract, but as subject to an implied condition
Coldelfa v SRA NSW
Codelfa was
contracted to do railwork for SRA.
- Much of the work
occurred in
residential areas
- Legislation
protected the work
from being stopped
by an injunction
- However an
injunction was
granted to residents
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that the parties shall be excused before breach (Taylor v Caldwell)
Disappearance of the Basis of the Contract
- If something is regarded by both parties as the basis, foundation or purpose of the
contract, and could not have reasonably be supposed in the contemplation of the
contracting parties when the contract was made, and both parties are discharged
from further performance of the contract (Krell v Henry)
- It is not hardship or inconvenience or material loss itself which caused the principle
of frustration into play, but termination on the emergence of a ‘fundamentally
different’ situation which results in a change of obligations (Brisbane City Council
drawing on decisions of Lord Reid and Lord Radcliffe in Davis Contractors)
- In deciding whether a contract is frustrated, it is possible to look to extrinsic
evidence of the relevant surrounding circumstances . The assumption that some
particular thing or state of affairs essential to its performance will continue to exist or
be available must be found in the contract itself (Codelfa)
- Events working a frustration are generally caused by a supervening impossibility
owing to a change in the law (Codelfa)
- The High Court favours the Davis approach as opposed to the implied term theory,
as it offers greater flexibility and is applicable to a wide range of circumstances
(Codelfa)
- An ordinary change in the method of performance should be distinguished from a
fundamental change as to bring about frustration, especially in a case where there is
no fixed time for completion (Codelfa distinguishing from Suez Canal cases)
Limitations on the Doctrine of Frustration
1) The risk of the frustrating event must not have been provided for by the parties in
their contract (Codelfa)
2) The purported and pursuited must not have been one which the parties could have
reasonably foreseen (Davis Contractors)
3) Frustrating events must have occurred without fault by the party seeking to rely on
frustration (Bank Line)
to stop their work
- Coldelfa wanted
compensation from
SRA because it would
now take longer to
complete their work
Taylor v Caldwell
Defendants agreed to
allow plaintiffs use
their premises.
- The premises was
destroyed by fire
before it could be
used by the plaintiffs
Krell v Henry
The defendant
booked rooms to see
an event.
- The event was
postponed
- The defendant
declined to pay the
balance
Brisbane CC v Group
Projects
Brisbane CC agreed
to have land rezoned
as residential in
consideration of
Group Projects,
Brisbane CC secured
a $200k bond from
Group Projects as
security for the
performance of its
obligations.
- The land was
resumed by the
Crown for schooling
purposes
- Brisbane CC
contended the
obligations and
obligations on the
bonds of Group
Projects remained in
force
The Consequences of Frustration
- When frustration occurs the “loss lies where it falls” as the contract comes to an end
immediately. Any sums paid or rights accrued before the event are not to be
surrendered, but all obligations due for performance after the frustrating event will
be discharged (Fibrosa v Fairbarn)
- The party that has made payment and has not received the stipulated consideration
is not without any remedy after the contract has been frustrated (Fibrosa v Fairbarn)
- It does not follow that because the plaintiff cannot sue ‘on the contract’, he cannot
still sue dehors (outside) the contract for recovery of the payment in respect which
the consideration has failed (Fibrosa v Fairbarn)
- Generally speaking, it is not the promise that is referred to as the consideration but
Fibrosa v Fairbarn
the performance of the promise. The money was paid to secure performance and if
A Polish company
the performance fails the inducement which brought about the payment is not
made an order to
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fulfilled (Fibrosa v Fairbarn)
- Although expenses may be incurred in connection with the partial carrying out of
the contract, the English common law does not undertake to apportion a prepaid sum
in such circumstances (Fibrosa v Fairbarn)
purchase machinery
from an English
company and paid
1/3 of its price as a
deposit.
- Germany invaded
Poland before the
Polish company could
make full payment
- Polish company
sought to recover the
deposit
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Chapter 31 Mistake
Law and Equity
- At common law if a mistake is recognised, a contract which appears valid is void at ab initio, that is, there
was never any contract between the parties, thus it interferes with partially or completely performed
contracts and the interests of third parties (Solle)
- In equity a contract affected by operative mistake is voidable rather than void ab initio. A voidable
contract is one that may be rescinded or set aside, and the parties restored to their original positions
before the contract was made. The contract may be rescinded on fair terms, and specific performance may
be granted or refused even though the contract is valid at common law (Solle)
- Remedy of rectification may be available for agreements mistakenly recorded
- Where a mistake relates not to facts existing at the time the contract was formed but to subsequent
events, the issue is one of frustration rather than mistake
Categorization of Materials
1) The parties are in agreement but they both erroneously assume some fundamental matter to be true,
mutual mistake
2) The parties are so much at cross purposes that it can be said they are not in actual agreement. If they
misunderstand one another, the mistake is mutual, but if one party knows the other’s error or is
objectively right in his or her interpretation, the mistake is unilateral
Parties in Agreement
- Where there is a mutual false assumption in respect of a fundamental matter, the
question is whether such a contract should stand; or whether it is void or voidable for
mistake; or whether the document in which the contract was recorded should be
rectified
- In a case of total failure of consideration, the question is whether the risk should be
shifted completely onto one party. If the mistake is fundamental, the contract is void,
or a constructionist device relieve the parties of the obligations by an implied
condition precedent in the contract
- If the contract is void there is no contract and performance can be avoided by
mutual mistake (Couturier in McRae)
- It is impossible for a party who caused the mistake to argue that the contract is
affected by mistake (McRae)
- A party cannot rely on common mistake where the mistake consists of a belief which
was entertained by him without reasonable grounds for such belief (McRae)
- Australian courts try to find some solution other than resolve to the doctrine of
mistake, for example negligent misrepresentation or misleading conduct (McRae)
Mistake as to Quality of Subject Matter
> Common Law
- Mistake must nullify or negative consent of the parties in order for the agreement to
be void. The parties may be mistaken about the identity of the contracting parties,
the existence of the subject matter, the date of contract, the quality of the subject
matter (Bell)
McRae
Plaintiff purchased
the right from the
defendant to salvage
an oil tanker which
did not exist.
- The defendant
made a reckless and
irresponsible mistake
in assessing the
existence of a tanker
- Plaintiff incurred
considerable expense
preparing and
attempting a salvage
expedition
Bell v Lever
Plaintiff entered into
an agreement to
terminate an
employment
contract.
- It was discovered
that the employee
had previously
breached his
employment contract
and his employment
contract could have
been terminated
without
renumeration
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- The question is whether the erroneous assumption must be of such a "fundamental
character as to constitute an underlying assumption without which the parties would
not have entered into the agreements", or whether it was only a common error to a
material element but not one going to the root of the matter and not affecting the
substance of the consideration (Bell)
- A mistake will not affect consent unless it is the mistake of both parties, and the
identity of the subject is destroyed (Bell)
- It would be wrong to decide that an agreement to terminate a contract is void if it
turns out that the agreement had already been broken and could have been
terminated otherwise (Bell)
- Bell set a higher standard on the finding of common mistake (mutual mistake), this
was later criticized in Solle where Denning LJ reduced the standard by enumerating
an equitable remedy to render the agreement voidable. Subsequently Great Peace
Shipping purported to overturn Solle and set a standard for common mistake in line
with the original Bell decision
> Equity
- Equity can set aside a contract that was good at law provided that the
misapprehension was fundamental and the party seeking to set it aside was not
himself at fault (Lansdowne in Solle)
- A contract will be set aside if the mistake of one party has been influenced by a
material misrepresentation of the other even though if it was not fraudulent or
fundamental, or if one party knowing the other is mistaken but allows him to remain
under his delusion rather than pointing out the mistake (Solle)
> Reversal of Solle and Reinstatement of Belle
- There is no jurisdiction to grant rescission of a contract of a contract on the ground
of common mistake where the contract is valid and enforceable on ordinary
principles of contract law (Great Peace Shipping)
- Contracts for sale of personal property have been void for mistake where the
property has ceased to exist at the date of the contract. However, after the contract
has been concluded by the execution of the conveyance and the payment of the
purchase money, the purchaser has no remedy at law or in equity in respect to any
defects either in the title to or the quantity or quality of the estate (Svanosio v
McNamara)
Mistake in Recording the Agreement
- Courts have an equitable power to rectify a contract in writing where the writing
does not express the parties’ common intention
- The party seeking rectification must establish that the alleged intention continued
concurrently to the minds of all parties down to the time of its execution, and must
show exactly and precisely the form to which the deed ought to be bought
(Maralinga v Major)
- The purpose of the remedy is to make the instrument confirm to the true agreement
of the parties where the writing by common mistake fails to express that agreement
accurately (Maralinga v Major)
- If one party to a transaction knows that the instrument contains a mistake in its
Solle v Butcher
Defendant leased to
plaintiff a flat for 7
years at $250 pre
annum, the flat was
previously rented at
$140.
- Both parties made
the mistake of
believing the flat was
not subject to rent
control when it in
fact a notice had to
be given to the
tenant to raise the
rent
- Plaintiff sought to
recover excess
payment
Great Peace Shipping
Tsavliris agreed to
hire the Great
Peace ship from the
respondents in the
belief that the ship
was close to their
desired destination.
- The ship was in fact
much farther away
but the mistake was
on the part of
Tsalviris
- Tsalviris sought to
cancel the agreement
to hire Great Peace
when they found a
closer ship
Maralinga v Major
Major Enterprises
sold a property to
Maralinga subject to
a condition that gave
the purchaser the
option to demolish
and obtain finance
from the vendor
- However the draft
agreement did not
contain a provision
for any part of the
price to remain on
mortgage for 3 years
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favour but does nothing to correct it, he will be precluded from asserting that the
mistake is unilateral and not common (Maralinga v Major)
- Equitable relief is not available to set aside conveyance of land made under a
written contract except for fraud or total failure of consideration or what practically
amounts to total failure of consideration (Pukallus v Cameron)
Parties Not in Agreement
- The mistake may relate to the terms of the contract or the identity of the parties
- One party may sign a document believing it has fundamentally different character
from what in fact has or what mistake has been made in the actual recording of the
agreement
Mistake as to Terms
- A subject inquiry can be made into the intentions of the parties to reveal that they
were not ad idem in respect to the terms of contract and there was no coincidence of
offer and acceptance
- If the parties as not ad idem, there is no contract, unless the circumstances are such
as to preclude one of the parties from denying that he has agreed to the terms of the
other (Smith v Hughes)
- Whatever a person’s mere intention may be, if he conducts himself so that a
reasonable man would believe that he was consenting to the proposed terms and a
contract is formed, the person is equally bound if he had intended to agree to the
other party’s terms (Smith v Hughes)
- If by any means a promisee knows that there was no real agreement between him
or her and the promisor, he/she is not entitled to insist that the promise shall be
fulfilled in a way which the mind of the promisor did not consent (Smith v Hughes)
- A party that enters into a written contract under a serious mistake about its
contents in relation to a fundamental term will be entitled in equity to an order
rescinding the contract if the other party is aware of that mistake and deliberately set
out to ensure that the first party does not become aware of the existence of his or
her mistake (Taylor v Johnson)
Smith v Hughes
Defendant agreed to
buy oats from
plaintiff believing the
sample was of old
oats rather than new
oats
- The mistake was on
the part of the
defendant
Taylor v Johnson
- The price as
stipulated in the
contract was much
lower than what
Johnson thought she
was selling it for
- Mr Taylor probably
knew of Johnson's
mistake but
remained silent on
the matter
Shogun Finance v
Hudson
Hudson unknowingly
bought a stolen
vehicle from a crook
who stole it from
Shogun Finance.
- Hudson's right to
retain the vehicle
depends on whether
he can establish that
the crook acquired
possession of the
vehicle under the
written hire-purchase
agreement between
the finance company
Mistake as to Identity
- Innocent third parties are protected by holding the original contract not void at
common law but voidable in equity. In equity the vesting of property in third parties is
a bar to rescission
> Parties not Face to Face
- There is no consensus between plaintiff, the rogue (the impersonator) or the third
party, the property remains as the property of the plaintiff and no title can be
transferred to the rogue or the third party (Cundy v Lindsay)
- However, if the rogue uses the name of a non-existent entity, the third party is not
Lewis v Averay
liable for conversion and the contract of property can be passed to the rogue and
then the third party (King’s Norton Metal)
- No contract can be formed using a stolen identity without authority because there
Petelin v Cullen
was no consensus ad idem (Shogun Finance)
Petelin signed a
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> Parties Face to Face
- If one party is mistaken as to the identity of the other, it does not mean that there is
no contract, or that the contract is a nullity and void from the beginning. It only
means the contract is voidable or liable to be set aside at the instance of the
mistaking person so long as he does so before third parties in good faith acquire
rights (Lewis v Averay)
Mistakenly Signed Documents: Non Est Factum
- It is not his deed, the rule is that if a person proves he or she signs a document
without carelessly and believes it to be a document fundamentally different to what it
was, (s)he is not bound by the signature. Non est factus is narrowly confined to
protect innocent third parties who may have relied on the existence of a contract
- The injustice of holding a person to a bargain to which he has not bought consenting
mind must be weighed against the necessity of holding the person who signs a
document to that document and to protect the innocent person who relies on that
signature (Petelin v Cullen)
- Defence is only available to those who are unable to read and must rely on others as
to advice to what they have signed or those who are unable to have any
understanding of the document. Furthermore there is a heavy onus on the defendant
who seeks to establish the defence (Petelin v Cullen)
- To make out the defence, the defendant must show that he signed the document in
the belief it was radically different to what it was in fact and his failure to read and
understand is not due to carelessness on his part (reasonable precautions in
ascertaining a document before signing it)
Mistake in Recording Agreement
- A contractual document could be rectified where one party mistakenly enters into a
contract in writing which does not express her or his intention and the other party
enters the contract knowing of the first party’s mistake (Thomas Bates v Wyndham)
- Rectification of a contract on the ground of unilateral mistake depends on (Leibler v
Air New Zealand Ltd):
1) A enters a contract under misapprehension of a particular provision
2) B knows of the omission, and of A’s mistake
3) B lets A remain under misapprehension and concludes the agreement on the
mistaken basis, where equity requires B to take steps to bring the mistake to A’s
attention
4) B would be precluded from relying upon A’s execution of the agreement to resist
A’s claim for rectification to give effect to A’s intention
document giving
Cullen the option to
purchase his
property upon
payment of $50,
Cullen wanted an
extension of that
option so he drew up
another document
and paid Petelin
another $50.
- Petelin could not
read English
- When Petelin
exercised the option,
Petelin refused
because he thought
he was signing a
mere receipt
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Chapter 32 Misrepresentation
- During pre-contractual negotiations, statements may be made by a representor that induces a
representee to enter into the contract. A statement may be a term of the contract or a collateral contract
in which case the statement has contractual force, and a false statement can give rise to damages for
breach of contract
- If the statement does not acquire contractual status and proves to be false, the representee may obtain
rescission of the contract on the basis of misrepresentation (TPA and Fair Trading Acts)
Misrepresentation of Fact
- A representation must be a statement of existing fact, written or implied by conduct
- No relief is available for mere puffs, statements of opinion or future intent
- A statement of opinion may also be a statement of fact (Smith v Land & House)
- Where the facts are equally well known to both parties, what one says to the other
is nothing but an expression of opinion (Smith v Land & House)
- But if the facts are not equally known to both sides, then a statement of opinion by
one who knows the facts best involves very often a statement of a material fact, for
he impliedly states that he knows facts which justify his opinion (Smith)
- In a case breach of warranty, honest belief in the truth of the warranty is no
defence, while it is a complete answer to a charge of false representation (Fitzpatrick
v Michel)
- If a statement is the honest expression of an opinion honestly entertained, it cannot
be said that it involved any fraudulent misrepresentation of fact (Fitzpatrick v Michel)
> Misrepresentation of Law
- The same rights and consequences should flow from the making of a fraudulent
misrepresentation of law and from the making of a fraudulent misrepresentation of
fact (Public Trustee v Taylor)
- Contrary to traditional belief that both parties have equal access to the law, it is
unconscionable to permit a party to gain from a fraudalent misrepresentation of law.
The representee should be entitled both to rescind a contract and resist the
enforcement of it by specific performance (Public Trustee)
Positive Misrepresentation
- Generally there is no duty of disclosure, one party cannot claim relief for failure of
the other party disclosing material fact
- Exceptions include a duty to disclose where a statement is literally true but gives rise
to a false impression or when a statement is true when made but is later rendered
false to a change of circumstances (Davies v London)
- Where one party is in a better position to know the material facts, a duty of
disclosure exists in respect of contracts uberrimae fidei such as a contract of
insurance (but not contracts of guarantee) (Davies v London)
- Unless a duty to disclose exists, a party may remain silent even in regards to facts
which he believes would be operative upon the mind of the other, and the party who
claims that there was a duty to disclose must show that the duty existed (Davies v
Smith v Land &
House
Plaintiffs leased a
hotel to Mr Fleck for
27.5 years on the
representation that
he was a desirable
tenant.
- In fact, Mr Fleck
was in arrears at the
time of sale
- Plaintiffs argued
they would not have
agreed to lease but
for the
misrepresentation
Fitzpatrick v Michel
Plaintiffs entered into
a lease for a block of
flats as an
intermediary.
- Defendant’s agent
had misrepresented
a unit in the block of
flats had rented out
for 6 guineas & 5 of
the flats would bring
no less than $6
Public Trustee v
Taylor
Plaintiff entered into
a contract with
defendant to sell
property that was
misrepresented to be
subject to road
widening.
- Defendant refused
to complete contract
because he would
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London)
- If there be pre-existing relationship between the parties, such as that of agent and
principal, solicitor and client, guardian and ward, trustee cestui que trust, implies a
duty of entire disclosure (Davies v London)
- Full disclosure is also imposed on fiduciaries (McKenzie v McDonald), and may also
arise in unilateral mistake as to a fundamental term (Taylor v Johnson), and
unconscionable dealing (CBA v Amadio)
- The primary obligations of a fiduciary are to avoid a conflict of interest between the
duty to the beneficiary and the interests of the fiduciary, and not to profit from the
position of trust enjoyed by the fiduciary. If the fiduciary is entering into a contract
with the beneficiary, a fusll diclousre of all material facts to the beneficiary will be
demanded (Casebook)
- An agent who occupies a s position of confidence towards the principle is not
prevented from purchasing from his principal, but shall deal with him only afta a full
disclosure of all he knows with respect to the subject (McKenzie v McDonald)
not have entered
into the contract but
for the
misrepresentation
Davies v London
Evans embezzled $$$
from an insurance
company, later the
arrest was
withdrawn.
- The plaintiff agreed
to return the $$$, the
defendant did not
disclose the
withdrawal of the
arrest
McKenzie
Plaintiff entered into
an agreement to
swap her farm for
defendant's
suburban property.
- The defendant, the
Plaintiff's agent,
misrepresented the
true value of her
farm.
- Defendant then
sold farm for
substantially higher
than what he had
acquireed it for
- Plaintiff wants
rescission and
damages for deceit
and negligence
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Chapter 39 Rescission
- The purpose and effect of rescission is to restore the parties to the positions they occupied before the
contract was made, the contract is set aside from the beginning (ab initio) and the parties restored to their
original positions (restitutio in integrum)
- Restitution is available to victims of the following vitiating factors: mistake, misrepresentation, breach of
fiduciary duty, duress, undue influence, unconscionable dealing
- Common law allows precise restitution in cases of fraud, duress or total failure of
consideration
- Equity allows substantial restitution by appropriate orders and decrees (Alati v
Kruger)
- Equity also provides remedy for innocent representation and undue influence.
Common law awards damages for fraudulent or negligent misrepresentations but not
purely innocent misrepresentations. Equity cannot award damages for innocent
misrepresentations but can grant rescission or award indemnity
- Where one party has been induced to a contract by an innocent misrepresentation
(Alati):
(1) He might sue for damages for breach of the warranty
(2) He might sue to recover as damages for fraud the difference between the price
paid and the fair value
(3) Provided that both parties may be restored to their original position, he might
avoid the purchase and sue to recover his purchase money back, with interest and
also with damages for any loss which he may have suffered through carrying on the
business in the meantime
- In common law, it might have been argued that at the date he was not entitled to
rescind the purchase, because he was not then in a position to return to the appellant
the thing that which he had received under the contract, in the same plight as that in
which he had received it (Clarke v Dickson in Alati)
- However, equity has always regarded as valid the dis-affirmance of contract induced
by fraud even though precise restitution in integrum is not possible. By the exercise of
its powers, including the power to take accounts of profits and to direct inquiries as
to allowances proper to be made for deterioration, it can do what is practically just
between the parties, and by so doing restore them substantially to the status quo
(Eralanger v New Sombrero Phosphate Co in Alati)
- Equity accounts for any benefit derived from the use of the property before
rescission, and compensates for deterioration during the interval (Brown v Smitt)
- Replacing them in a status quo does not involve replacing them in the same position
in all respects, but only in respect of the rights and obligations created by the contract
which is rescinded (Brown v Smitt)
- A party in case of rescission, cannot ask the court to award him compensation for all
collateral losses which he may have sustained by reason of the fact that he entered
into the contract, such as losses incurred in carrying the business, but only such
compensation as will restore the status quo ante in relation to the subject matter of
the contract (Brown v Smitt)
> Equity recognizes the possibility of partial rescission (Vadasz v Pioneer Concrete)
- Equity did not require complete restitution of the position which existed before the
contract but allowed its remedies, particularly an order for monetary accounts, to be
utilized to achieve practical restitution and justice (Alati v Kruger)
- He who seeks equity must do equity (Vadasz)
Alati v Kruger
Plaintiff was induced
into buying fruit
business that was
warranted to make
$100 a week and
claimed rescission of
the contract, the
return of the
purchase money and
damages
Brown v Smitt
Smitt was induced
into a contract to buy
farm by false
representations
- The farm was not as
good as described
- Smitt sought to
recover the purchase
cost and balance of
expenses incurred
over income
- Trial judge
compensated Brown
for losses incurred
upon return of prop
Vadasz v Pioneer
Concrete
Pioneer sued Vadasz
on a guarantee for
$357,427,
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- Unconscionability provides the justification for setting aside a transaction, not
necessarily in its entirety, so as to prevent one party obtaining an unwarranted
benefit at the expense of the other (Vadasz)
- If it appears that the other party would not have entered into the contract at all if
the true position were known, the contract would have been set aside in its entirety
as in Amadio (Vadasz)
Bars to Rescission
1) Contract for sale of goods is governed solely by the common law, thus equitable
rescission for innocent misrepresentation does not apply (Watt v Westhoven)
2) Contrary to prior rulings (Seddon’s case), in the absence of fraud contracts can be
rescinded if they have been executed (Vimig v Contract Tooling)
3) Rescission will be barred if the contract has been affirmed by the representee,
however the election to affirm must be unequivocal and not because the representee
was unaware of his right to rescind (Coastal v Melevende)
4) Elapse of time may be relevant to the courts’ exercise of discretion (JAD
International v International Trucks Australia)
5) The right to rescission for misrepresentation may survive if the representation
becomes a term of contract (Academy of Health and Fitness v Power)
6) Intervention of third party rights may also bar rescission, although a monetary
guarantee may then be granted
7) A non-fraudulent representor may be protected by a contractual provision such as
a no representations clause (Byers v Dorotea)
8) Rescission will not usually take effect until the representee has notified the
representor of the election to rescind (Car & Universal Finance v Caldwell)
9) Rescission for misrepresentation may be claimed for a defence to an action of
contract (Academy of Health v Power)
representing the
total indebtness of
Vadipile.
- Vadasz defended
the claim on the
basis that the
guarantee was
unenforceable
because the
agreement was to
guarantee future
indebtness and not
past indebtness
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Chapter 33 Misleading and Deceptive Conduct
Trade Practices Act 1974
> Part V Consumer protection
S51A – where a corporation makes a representation with respect to a future matter without reasonable
grounds, the representation shall be taken to be misleading (or likely to misled), unless evidence can be
adduced on the contrary
S52 – a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or
likely to mislead or deceive (common law requires misrepresentation to have intent of inducing or
misleading or deceiving – not required by TPA)
> Part VI Enforcement and remedies
S75B – a person is defined as one who has aided, induced, knew directly or indirectly or conspired to the
contravention of Part IVA, IVB, V
S80 – the court may grand, rescind or vary an injunction restraining a person whether or not it appears the
person will engage in the conduct again, has previously engaged in the conduct, or if imminent danger of
substantial damage exists relating to the conduct
S82 – (1) a person who suffers loss or damage by the conduct may recover the amount of the loss of
damage caused by the action against the person/s who was/were involved in the contravention
S82 (1B) – if the claimant makes a claim in relation to economic loss or damage to property, and the loss
was suffered partly as a result of the claimant’s failure to take reasonable care AND the defendant did not
intend to or fraudulently cause the loss  the damages may be reduced to the extend to which the court
thinks just and equitable having regard to the claimant’s share in the responsibility for the loss or damage
S82 (2) – action must be commenced within 6 years of the conduct
S87 – (1A) orders may compensate a person who has made the application, or prevent or reduce the
damage suffered or likely to be suffered (the court may void the contract or modify the terms)
S87 (2) – orders may:
(a) declare whole or part of a contract or a collateral arrangement to be void ab initio at any time on
before or after a date as specified by the order
(b) vary a contract on before or after a date as specified by the order (ba) refusing to enforce any or all
of the provisions of such a contract
(c) refund property or money
(d) pay for loss or damage suffered
(e) repair, provide parts for goods that have been supplied
(f) supply specified services
(g) vary or terminate and instrument creating or transferring an interest in land
S87AB – liability may be limited by occupational liability legislation
S6 of the Act extends the Act’s application beyond corporations, to individuals (however the provision
cannot apply to FS s51AF)
S87AC – the commisison may intervene
S87CA – a claim may be aportionable between concurrent wrongdoers (with the exception of an excluded
concurrent wrongdoer who intended to or fraudulently caused the economic loss S87CC)
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In Trade or Commerce Limitation
- The reference to ‘in trade or commerce’ should be construed to refer only to
conduct which is itself an aspect or element of activities which of their nature bear a
trading or commercial character (Concrete Constructions v Nelson)
- Internal communication by employees cannot constitute conduct ‘in trade or comm’
- The statutory prohibitions to misleading conduct that induces a contract are not
applicable in a non- commercial context (O’Brien v Smolonogov)
- An arrangement which is private in character is not conduct in trade or commerce,
unless done in the course of a business activity (O’Brien)
- Facilities commonly employed in commercial transactions cannot transform a
dealing which lacks any business character into something done in trade or commerce
and thus falls outside of the scope of Division 5 TPA (O’Brien)
- Statements made by a person not himself or herself engaged in trade or commerce
may answer the statutory expression if they are designed to encourage other to
invest or to continue investments in a partiuclar trading entity (Fasold v Roberts in
Houghton v Arms)
The relevant audience
- It is necessary to identify the effect of the misrepresentation on the audience to
whom the conduct is directed (CSL v Nike)
- Where representations are made to the public at large or to a sevction thereof such
as prospective retail purchasers, the effect on reasonable memebers of the class is
contemplated (Puxu in CSL v Nike)
- No conduct can mislead or deceive unless the representee labours under some
erroneous assumption, such as: worthy of credence, use of well known trade names,
and the mere fact that a person selling goods has manufacturered them (CSL v Nike)
- A company which does nothing more than pass on information supplied by another
does not engage in misleading or deceptive conduct if it is clear from all the
circumstances that the company is not the source of the information and that it
expressly or impliedly disclaims any belief in its truth or falsity, merely passing the
information on “for what it is worth” (Yorke v Lucas in Butcher v Lachlan)
- An agent is not liable because he had merely communicated the vendor’s
representations without adopting or endorsing them, especially if (Butcher):
1) the purchasers are intelligent, self-reliant and had the means to seek expert advice
2) the property was expensive and the purchasers had professional advisors
3) it was sufficiently clear that the brochure was not produced by the agent, and
4) a disclaimer existed to suggest the quality of the information is not guaranteed
Misleading conduct
- S52 is not limited to positive misrepresentations of fact, but also statements of law
and specific sale puffs, however difficulties arise in its application to silence, opinions,
predictions and promises
> Silence
- Silence would be misleading where there was a duty to disclose the relevant
information (Henjo v Collins)
- The reasonable expection of disclosure is a matter of context (EK Nominees v
Woolworths)
- Although generally it not necessary to show that the party intended to mislead the
other party, silence must be deliberate if it is to contravene the section (Demagogure
v Ramensky)
Concrete
Constructions
Employee was
injured due the
misleading conduct
of a fellow employee
in the company
O’Brien
Respondents
purported to rescind
the contract on
grounds that they
were induced by
misleading
statements found in
an advertisement
Houghton v Arms
Arms set up a webbased business in
reliance on misreps
by Houghton about
extent of
documentary
obligations & made
losses
CSL v Nike
CSL sold a sports
fragrance under the
trade mark NIKE,
displaying the
product next to
adidas perfumes
- Nike alleged this
was likely to mislead/
decieve the public
into thinking the
fragrance was related
to Nike itself
Butcher v Lachlan
- Butcher won an
auction for a
property planning to
redevelop it based on
a survey diagram in a
brochure which was
inaccurate
- The brochure
contained an
exclusion clause
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Chapter 34 Duress
- Categories of cases in which one of the parties enjoyed an ascendant position vis-à-vis the other party
and abused that position by subjecting the other to threats (duress) or undue pressure (undue influence) or
by taking advantage of the other’s special vulnerability (unconscionable dealing)
‘Unfairness’ is concerned with the ‘procedural unfairness’ aspect of a contract rather than the ‘substantive
unfairness’ in the contract itself
Basic Elements of Duress
- The governing principles are the common law principles of duress and compulsion
and the equitable principles of coercion; main remedy = rescission
- Duress negates, vitiates, destroys consent and renders the victim’s actions nonvoluntary; the victim’s will is so overborne that he or she cannot act as a free and
independent party:
1. A contract procured by duress is voidable not void
2. It is necessary to distinguish between legitimate and illegitmate pressure applied in
the deflection of freedom
- For duress to succeed there must be pressure of which the practical effect is
compulsion or absence of choice for the victim (Universe Tankships v International
Transport)
- Compulsion is not the lack of will to submit but the victim’s intentional submission in
the realisation there is no other practical choice available; a choice between two evils,
e.g. harm inflicted on oneself or incurring an alternate loss (Universe v International)
- For the argument of duress to succeed ‘the pressure (and the demand) must be one
of a kind which the law does not regard as legitimate’; many acts in commerce and
finance are done under pressure but not necessarily under duress (Barton v
Armstrong in Universe)
- If a pressuring action is unlawful, the argument of duress will succeed without the
need to consider the nature of the demand which the pressure is applied to support.
However, if the action is lawful, then the nature of the demand which the pressure is
applied to support will need to be considered (Universe v International)
- If the nature of the demand is unlawful, duress will succeed and vice-versa
(Universe v International)
Duress and Coercion of the Person
- ‘Duress’ as originally conceived, was narrow in scope. It was limited to threats of
violence to the person or unlawful imprisonment. The onus of proof is on the party
who exerted the duress to disprove that duress was a factor of the contract (Barton)
- Equity provides relief not only where a promise or undertaking was induced by a
threat of violence, but also by a threat of lawful prosecution of the promisor or his
family (Barton v Armstrong)
- Absence of choice does not negate consent in law when a person is under
overwhelming pressure to make a decision, the pressure must be one of a kind which
the law does not regard as legitimate (Barton v Armstrong)
- Illegitimate means of persuasion must be found to be used, and it must be the
Universe Tankship
The ship owners
acceded to demands
by the ITF Union to
get lift the ‘blacking’
and prevent the ship
from being stranded
in port
- The ship owners
claimed economic
duress
- ITF conceded but
claimed immunity by
the provisions of the
Trade Union Act 1974
Barton v Armstrong
Barton entered into
commercial
agreement under
threats of death
- It was not
established but for
the threats he would
have executed the
deed
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reason why the victim gave consent, for his argument of duress to succeed (Barton)
- However it is not necessary for the victim to prove the illegitimate action was the
sole reason for him entering into the contract, he only has to prove it contributed to
him entering into the contract (Crescendo Management v Westpac Banking)
Chapter 35 Undue Influence
- As distinct from duress, undue influence contains no element of wrongful threat, rather a weaker party,
by virtue of reliance on and confidence in a stronger party, suffers from impaired judgment as to her or his
own best interests.
- The main remedy available to victims of undue influence is rescission
Relationships of Influence
- An important element in proving undue influence is one party’s ascendency over the
other produced a relationship of influence; in such a circumstance there is a
presumption that undue influence was exercised by the stronger party over the
weaker
- Equity deems certain relationships to be relationships of influence: parent child,
guardian and ward, religious advisor and disciple, solicitor and client, doctor and
patient
- Fiduciary relationships not necessarily relationships of influence, although many are
- However, if a relationship is not deemed to be one of influence, a party may still
prove it to be by presenting evidence that he or she placed trust and confidence in
the other, and relied on guidance by the other
- If a relationship of influence is not proved, then the person seeking to avoid the
contract has the burden of proving ‘actual’ undue influence
- An antecedent relationship between the parties can lead to undue influence if there
is found to be trust and confidence in the relationship to support a presumption
(Barton v Armstrong)
- In cases where the person seeking to avoid the contract is much weaker than the
other, the onus of proof is on the other party to prove that the consent given by the
first party was of free exercise of that person’s will (Johnson v Buttress)
- There may be more emphasis on the limitations of one party to act with voluntary
consent than on the pressure applied on the other (Johnson v Buttress)
- Once a relationship of ascendency is established, the onus is on the ascendant party
to demonstrate that they did not exercise undue influence (Johnson v Buttress)
- For a presumption of undue influence to be raised, the party seeking relief must
prove that the transaction was ‘manifestly disadvantageous’ to that party (National
Westminster v Morgan)
- In Australia, the view that there should be no such requirement is preferred
(Blomley v Ryan)
Johnson v Buttress
Easily influenced who
was illiterate and
unstable transferred
property to Johnson
so son argued that
the man did not
understand the
transaction and the
transfer should be
set aside
- The man and the
son had a feud
- Johnson was a
friend who took care
of Buttress and
Buttress re-evaluated
his will several times
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Chapter 36 Unconscionable Dealing
Basic Elements and Background
- Equity would intervene without proof of duress, coercion or actual undue influence, and without proof of
a special relationship of influence giving rise to a presumption if one party has exploited or taken
unconscientious advantage of the special disability of another
- The court may give relief against contracts characterised by exorbitant terms entered into by
impecunious, sick, weak-minded or inexperienced persons who lack the advantage of independent advice
- Main remedy is rescission
Applications
- The circumstances which place a person in a position of special disability, vulnerable to exploitation are
many and varied including:
1) Drunkeness and mental disorder – a person who is unable to appreciate the general nature of the
transaction due to mental disabilities and drunkeness will be able to avoid the transaction provided the
other party was aware of the or suspected the impaired mental capacity (Blomley v Ryan)
2) Lack of knowledge and education (CBA v Amadio)
3) Emotional dependence – atmosphere of crisis, deliberate manufacture, position of influence,
manipulation (Louth v Diprose)
Unconscionable Dealing
- The common characteristic of unconscionable dealing is that they have the effect of
placing one party at a serious disadvantage vis-a-vis the other: (Blomley v Ryan in
CBA v Amadio)
1) one party to a transaction has a special disability so that there is an absence of any
reasonable degree of equality between the parties
2) the disability is sufficiently evident to the stronger party to make it prima facie
unfair or unconscientious that he procure, or accept, the weaker party’s assent to the
impugned transaction in the circumstances
- A disabling condition is one where seriously affects the innocent party to make a
judgment as to his own best interest, as the other party knows or ought to know of
the existence of that condition and circumstance of its effects (CBA v Amadio)
- Instead of having actual knowledge of the situation being aware of the possibility
that the situation may exist, in the mind of the reasonable person is sufficient (CBA v
Amadio)
- Unconscionable conduct is distinguished from undue influence, in the latter the will
of the innocent party is not independent or voluntary because it is overborne. In the
former, the will of the innocent party is independent and voluntary but the result of
his or her disadvantageous position and the other party unconscientiously taking
advantage of that position (CBA v Amadio)
Amadio v CBA
The Amadio’s gave
security over a
property they owned
to allows their son to
increase the
overdraft limit. Son
asked for a guarantee
for $50k for 6
months, however
there were no such
limits
- Elderly, no formal
education or English
- Son was an
important customer
of the bank
- Signature obtained
by bank rep
- Document was not
discussed or
explained
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Chapter 37 Impropriety by Third Parties
Third-Party Situation
- A victim of conduct which is recognised by the law as improper may obtain relief from a contract induced
by such impropriety even though the impropriety emanated from a third party, the victim will often be the
guarantor for the third party debtor
- The two questions that arise are:
1) Was there a vitiating factor in the relationship between the debtor and the guarantor such as
misrepresentation, duress, undue influence and unconscionable dealing
2) Did the creditor know of the impropriety or have reason to believe impropriety had occurred, and then
relied on the debtor to obtain guarantor’s agreement to the transaction, was the debtor who committed
the impropriety acting as the lender’s agent
Rule in Yerkey v Jones
- If a married woman consent to become a surety of her husband’s debts is procured
by the husband and without understanding its effects in essential respects, without
dealing with the creditor personally, she has prima facie right to have it set aside
- Principle also applies if the wife understood the transaction but if her consent was
obtained by her husband’s undue influence
- The wife must not benefit from the transaction
- If the debtor is a company controlled by the husband in which the wife has no
substantial interest, the principle still applies
- The lender is obliged to take steps to ensure that it can reasonably believe that the
consent of the guarantor was fairly obtained and adequately informed with the
benefit of independent advice
- The issues of social and economic equality as well as its application to other intimate
relationships and the effect of Amadio is discussed in Garcia v NAB
- The principle draws not on the subserviance inferior economic position of the
woman and their vulnerability to exploitation in an emotional relationship but is
based the trust and confidence between marriage partners (Garcia)
- An explanation of a particular transaction may be imperfect, incomplete or wrong
without bad faith, deception or imbalance of power between the parties (Garcia)
- There are at least two kinds of circumstances:
1) Undue influence applied by the debtor to secure the contract; in this situation
explaining the effect of the document will not protect the creditor, “nothing but
independent advice or relief from the ascendency of her husband over her judgement
and will suffice” (Bank of NSW v Rogers in Garcia)
2) A failure of the debtor to explain adequately and accurately the transaction, not
concerned with imbalances of power but rather the lack of proper information about
the purport and effect of the transaction (Garcia)
- In the latter, it is sufficient if the creditor takes adequate steps to inform the
guarantor and reasonably supposes that he or she has adequate comprehension of
the obligations she is undertaking (Garcia)
- Therefore the amount of reliance placed by the creditor upon the debtor for the
purpose of informing the guarantor must be of great importance
Garcia v NAB
The Appellant signed
a guarantee of debts
owed by her
husband’s company,
which he assured her
to be risk proof. She
did not understand
that guarantee was
secured by her all
moneys mortgage
- Fool v Expert
- No benefit to bank
- No unconscionability
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