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April 18, 2023 BLO1105 – Business Law 1
BLO1105 – Business Law
Welcome to Business Law
LECTURERSCITY FLINDERS
Adv Andy Schmulow
(Subject coordinator)
Dr Daud Hassan
(Senior Lecturer: Victoria Law School)
FOOTSCRAY PARKMr Gerry Box
(Co-author: Parker and Box)
04/18/23 BLO1105 – Business Law 2
April 18, 2023 BLO1105 – Business Law 3
Contact Details: Andy Schmulow
Flinders Street Campus
Room 1030 Phone 9919 1483
Email [email protected]
Contact Details: Dr Daud Hassan
Queen Street Campus
Room 1.05 Phone 9919 1857
Email [email protected]
04/18/23 BLO1105 – Business Law 4
Contact Details: Gerry Box
Footscray Park Campus
Room 32.42 Phone 9919 8275
Email [email protected]
04/18/23 BLO1105 – Business Law 5
April 18, 2023 BLO1105 – Business Law 6
Subject Outline An Introduction to the Australian Legal
System. A detailed study of the Law of Contract.
All Business Graduates and their advisers should have a sound understanding of
Contract Law principles.
April 18, 2023 BLO1105 – Business Law 7
Assessment SummaryCheck Subject Guide p. 2. This is definitive and serves as a contract between you and the University.
NOTE: TUTORIAL PARTICIPATION IS
COMPULSORY AND YOU MAY NOT MISS MORE THAN TWO (2)
TUTORIALS. IF YOU DO YOU AUTOMATICALLY FAIL
April 18, 2023 BLO1105 – Business Law 8
Tutorials
Tutorial attendance and participation.
Your attendance at and your level of participation in Tutorial discussions will be
monitored and recorded by your Tutor.
At the end of semester, you will be allocated a mark out of a possible 10%.
WHAT HAPPENS IF YOU MISS MORE THAN 2?
April 18, 2023 BLO1105 – Business Law 9
AssignmentYou are required to submit during your
scheduled tutorial in the week commencing Monday 27th April, 2009 a written
assignment or research essay of 2,000 – 2,500 words on the topic in the Student
manual for Semester 1, p. 17.
NOT SEMESTER 2 TOPIC p. 18.
You will receive a mark out of a possible 25.
April 18, 2023 BLO1105 – Business Law 10
Final Examination
The final examination is a 3 hour exam, and is “Open Book”
You may take into the exam any written or printed materials, and use them to assist in
answering the questions, which are problem-based. Marks are out of a possible
60%
April 18, 2023 BLO1105 – Business Law 11
Teaching Method
Two hours of lectures each week. Check timetable details of lectures Tutorials.
You must also attend One tutorial of one hour’s duration each week.
TUTORIALS ARE COMPULSORY YOU MAY NOT MISS MORE THAN TWO
(2). IF YOU DO YOU AUTMOTAICALLY FAIL
April 18, 2023 BLO1105 – Business Law 12
Materials
Student Manual.The “Business Law Students Manual” is an
essential requirement for students. Cost is about $12 or from E Reserve or WebCT .
It is available at the Bookshop, and contains the Subject Outline, Syllabus details,
Tutorial programs and other materials, including past exam papers.
April 18, 2023 BLO1105 – Business Law 13
Materials (Continued)
Textbooks.The officially prescribed texts are “An
Introduction to the Law of Contract” by Stephen Graw, 5th ed., and “Business Law for Business Students”, Parker & Box,2nd
Ed., in VU bookshop for $98.88 as a package. If bought individually, Graw is about $72.10 and Parker & Box is about
$41.58
April 18, 2023 BLO1105 – Business Law 14
Materials (Continued)
“How to Study Business Law”
Crosling & Murphy, Butterworths.
Lecture Notes Summary.
Available at VU Library on Electronic (“E”) Reserve, or from the Faculty website. PowerPoint slides are available on the
WebCT website.
April 18, 2023 BLO1105 – Business Law 15
Student Support Programs
The Teaching and Learning Unit conducts various programs during the semester to
assist students with assignment preparation and examination preparation.
Details of these classes will be announced in lectures at the appropriate times.
April 18, 2023 BLO1105 – Business Law 16
Australian Legal System
Some knowledge is assumed.
Week 1 & 2 Lectures will overview this area, focusing on: -
The evolution of Australian Law The sources of law The “common law” The “doctrine of precedent”
April 18, 2023 BLO1105 – Business Law 17
Australian Legal System
Law reporting systems The “adversary system” Federal system of government State & Federal Court structures The Commonwealth Constitution Legislation and how to interpret it.
April 18, 2023 BLO1105 – Business Law 18
Evolution of Australian Law
Following “settlement” by the English in 1788, the English “common law” model
was imposed in Australia.
As a penal colony, martial law prevailed.
English law then applied from early 19th Century until late in the 20th Century
Many English concepts survive today.
April 18, 2023 BLO1105 – Business Law 19
Evolution of Australian Law
Australian law gradually developed its own “flavour” as an offshoot of English law
Finally, we severed our ties with English law, but only recently.
Result is a system heavily based on English law, but now completely independent of it.
Processes and precedents still apply today
April 18, 2023 BLO1105 – Business Law 20
Sources of Law in Australia
Primary Sources Legislation, and Precedent
Secondary Sources Commercial Custom Legal textbooks and journals Law Reform Commission Reports
April 18, 2023 BLO1105 – Business Law 21
Primary Sources of Law
Legislation comprises Acts of Parliament (“Statutes”), Statutory Rules & Regulations, and other “Delegated Legislation”.
For us as Victorians, this means both Australian and Victorian legislation
April 18, 2023 BLO1105 – Business Law 22
Primary Sources of Law
Precedent is “judge-made” law, as distinct from law enacted by Parliament.
It is law as pronounced by the courts when deciding cases over many years.
Legislation prevails over the common law.
Parliament has the final say as to what the law is in any area.
April 18, 2023 BLO1105 – Business Law 23
The Common Law
This term is used to describe A type of legal system.
(Contrast “common law” and “civil law” systems, for example)
The body of decisions made by courts over time that collectively comprise the “common law”. (Cf “Legislation”)
April 18, 2023 BLO1105 – Business Law 24
The Doctrine of Precedent
Inherited from the UK, it means that decisions of superior courts in a legal system (or “hierarchy”) are binding on inferior courts in the same hierarchy.
The Supreme Court of Victoria binds other Victorian Courts, because it is our (State) superior court.
The High Court of Australia binds all Australian Courts.
April 18, 2023 BLO1105 – Business Law 25
Advantages of Precedent
Properly applied, the courts become Consistent, Non-discriminatory and fair, and Predictable in their decisions
Some disadvantages apply.
There is a “safety valve” in the operation of the doctrine.
April 18, 2023 BLO1105 – Business Law 26
Law Reporting Systems
Vital to Precedent, the (printed) Law Reports recorded all significant legal judgments for future reference.They are very relevant to Contract Law, which is not “codified”.
CLR and VR are important to Victorians.
Meehan v Jones (1982) 149 CLR 571
Causer v Brown [1952] VLR 1
April 18, 2023 BLO1105 – Business Law 27
Useful Websites
Students should note two particular websites that are extremely helpful in tracking down Statutes and Cases.
All High Court cases and Acts can be found on http://www.austlii.edu.au
All recent Victorian cases and Acts can be found on http://www.dms.dpc.vic.gov.au
April 18, 2023 BLO1105 – Business Law 28
The Adversary System
All “common law” countries adopt the adversary system in conducting trials.
“Civil law” countries use the “inquisitorial” approach.
Differences include:- The role of the judge; Onus & burden of proof, and Some presumptions, eg “innocence”.
April 18, 2023 BLO1105 – Business Law 29
The Australian Constitution
This is the “charter” for operation of our “federal” system of government.
Adopted by a majority of people and States in 1900, it has operated since 1901 more or less unchanged.
Federal systems (cf. “unitary” systems) exist in many large countries, e.g., USA, Canada.
April 18, 2023 BLO1105 – Business Law 30
The Australian Constitution
This results in having two law-making authorities (Commonwealth
and State), and a division of law-making powers between the
two.Many complications arise from this, causing
conflicts between the two governments.The constitution enshrines the UK concept of the
“separation of powers”.
April 18, 2023 BLO1105 – Business Law 31
Federal System of Government
Every federation has the problem of two (competing) law-making authorities.
Unitary systems (the majority of countries) do not have this problem.
When confronted with a legal problem, we have to check both
Commonwealth (Australia-wide) laws, as well as State (Victoria-wide) laws
April 18, 2023 BLO1105 – Business Law 32
The State Court System
The State Courts are1. The Court of Appeal (the “Full Court”);
2. The Supreme Court
3. The County Court
4. The Magistrates Court.
5. Various Tribunals, including VCAT
April 18, 2023 BLO1105 – Business Law 33
The Federal Court System
The Federal Courts are1. The High Court of Australia
2. The Family Court
3. The Federal Court
4. The Federal Magistrates Court
The Federal & Family Courts, created in 1976, rank equally in importance.
April 18, 2023 BLO1105 – Business Law 34
Tribunals
Tribunals have succeeded becauseThey provide quick and easy accessThey are not as expensive as courtsThey are informal, andThey are very efficient.
Rapid growth reflects their popularity.
April 18, 2023 BLO1105 – Business Law 35
Statutory Interpretation
Interpreting Acts is now the main function of courts, rather than creating new law, which is now mostly done by parliament.
Problems include Human error in drafting Rapid technological change Changes in words and community standards
April 18, 2023 BLO1105 – Business Law 36
Common Law Rules (of interpretation)
The Courts developed three main Rules to assist in interpreting Acts:-
1. The Literal Rule,
2. The Golden Rule, and
3. The Mischief Rule.
Many “Maxims” (rules of lesser importance) were also developed by the Courts.
April 18, 2023 BLO1105 – Business Law 37
Statutory Rules (of interpretation)
Recently, (1984) Parliaments gave their own instructions to the Courts about this task.
They passed legislation to require the courts to use the “literal rule” when reading and applying statutes.
If that creates a problem, the courts then must use the “purposive approach”.
April 18, 2023 BLO1105 – Business Law 38
The “Purposive” Approach
If in doubt (as to what the words mean), the judge must ask
“What was the purpose of this Act?”, or “Why was this Act passed?”
The judge must then interpret and apply the Act to give effect to that purpose.
April 18, 2023 BLO1105 – Business Law 39
Different Branches of Law
One main division or distinction is between civil law and criminal law.
Civil law involves claims by one citizen against another in the litigation process.
Criminal law involves the prosecution of a citizen by the state (police) for a crime.
April 18, 2023 BLO1105 – Business Law 40
The Law of Tort
A “tort” is a civil wrong for which the remedy is an action for damages.
Examples of torts are negligence (the most common tort), defamation, nuisance,
trespass and deceit.
April 18, 2023 BLO1105 – Business Law 41
Contract Law
Contract law is the law concerning legally enforceable agreements. It is the
“cornerstone” of all of our commercial or business law.
We study it intensively simply because we are students of business. We will work in
business or advise people who do.
April 18, 2023 BLO1105 – Business Law 42
Constitutional Law
Constitutional Law is the study of the constitution, in our case the constitution of
the Commonwealth of Australia.
This involves the relative powers of the Commonwealth (Australian) and State Governments, disputes between States,
between States and Commonwealth.
April 18, 2023 BLO1105 – Business Law 43
Administrative Law
Public servants can now have their decisions tested by citizens through various tribunals. Formerly, only the legality of the decision
could challenged. Under administrative law, the correctness of the decision can now be challenged and reviewed by the tribunal.
April 18, 2023 BLO1105 – Business Law 44
The Rules of Equity
Different in origin from the “common law”, equity developed in the “King’s Court”, later taken over by the Chancellor, and became known as “Chancery Courts”.
The rules of natural justice (as distinct from common law rules) were applied. The two systems have “merged” in all out courts.
April 18, 2023 BLO1105 – Business Law 45
Further Reading
“Business Law for Business Students”,
pages 1 – 53; or
The Introductory Chapters of either
“Business Law in Australia”,
Vermeesch & Lindgren, or
“Australian Business Law”,
Latimer, CCH.
April 18, 2023 BLO1105 – Business Law 46
Contract Defined
A contract is An agreement that the law will enforce; A promise (or set of promises) that the
courts will enforce; or A legally enforceable agreement.
All emphasize “agreement” (or set of promises), and “enforceability”.
April 18, 2023 BLO1105 – Business Law 47
Contract Formation Formula
Many problems require us to say whether a contract exists.
To resolve this, a useful formula is
Offer + Acceptance = Agreement
Agreement + Intention + Consideration = Contract
April 18, 2023 BLO1105 – Business Law 48
Typical Formation Process
The vast majority of contracts are formed by the process outlined.
An offer is made by A to B.
That offer (or some negotiated variation of it) is accepted by B.
Agreement exists.
(Courts still typically apply this test.)
April 18, 2023 BLO1105 – Business Law 49
An Exception to the Rule
In Clarke v Dunraven [1897] AC 59, the Court of Appeal held (decided) that agreement had been achieved between C and D.
They had each advised a “third party”, the secretary of a Yacht Club, that they would be bound by the Club’s rules in the conduct of yacht races.
April 18, 2023 BLO1105 – Business Law 50
Introductory Points (about contract).
Contrast “Simple Contract” and “Formal Deed”.
Does the contract have to be in writing? Doctrine of “part performance”. How to prove terms of “verbal” contract? Contrast bilateral and unilateral contracts.
April 18, 2023 BLO1105 – Business Law 51
Components of a Contract
Essential components, or elements, are:- Offer; Acceptance (these two make agreement); Intention (to be legally bound); and Consideration.(Some add “capacity”, “legality of purpose” etc,
but these are less important).
April 18, 2023 BLO1105 – Business Law 52
Intention (to be legally bound)
Not all “agreements” are “contracts”.
Some will not be enforced in a Court.
Why?
Because they were never intended to create legal obligations or legal consequences.
Consider some simple examples.
April 18, 2023 BLO1105 – Business Law 53
Testing by Using Presumptions
A presumption is a “probable outcome”. It is not an absolute.
It can be overturned (“rebutted”), but only by strong contrary evidence.
Examples:-
The presumption of innocence.
The presumption of survivorship.
April 18, 2023 BLO1105 – Business Law 54
The Relevant Presumptions
If an agreement concerns a personal, domestic or social transaction, the Court presumes that intention was not present.
and
If the agreement concerns a business or commercial transaction, the Court
presumes that intention was present.
April 18, 2023 BLO1105 – Business Law 55
Testing Methods
Courts use two quite different testing methods.
One is “subjective” testing. This involves testing by reference to the persons actually involved in the case.
“What did you intend when you made this deal”?
April 18, 2023 BLO1105 – Business Law 56
Subjective Testing
Although used a lot in criminal trials, where intention is an essential ingredient of a crime in many cases, subjective testing is not often used in civil trials.
It is flawed because we usually get two opposite and competing answers to the same questions.
April 18, 2023 BLO1105 – Business Law 57
Objective Testing
The preferred method in civil trials, this method tests by reference to some
“outside” or “objective” criterion or yardstick.
The benchmark is often “the reasonable person”, or “the intelligent bystander”.Although not perfect, it is better than
subjective testing.
April 18, 2023 BLO1105 – Business Law 58
Summary of Testing (for Intention)
We can solve any problem on this question (“whether intention exists”) by following this strategy:-
1. Applying the presumptions as above; and
2. Testing the question objectively, not subjectively.
We will look at some relevant cases.
April 18, 2023 BLO1105 – Business Law 59
Domestic Arrangements
Married couples, and closely-related family members.
See Balfour v Balfour [1919] 2 KB 571
Cohen v Cohen (1929) 42 CLR 91
Murphy v Simpson [1957] VLR 598
April 18, 2023 BLO1105 – Business Law 60
Balfour v Balfour
B promised to pay maintenance to his wife pending her return to Ceylon, where he worked with the UK diplomatic corps.
He did not pay. After divorce, she sued.
The court held that agreements between spouses – while living together – are not contracts. No intention exists.
April 18, 2023 BLO1105 – Business Law 61
Social Agreements
Coward v Motor Insurers Bureau [1962] 1 All ER 531 (an agreement between two fellow workers for transport to and from work on a motor cycle), and
Cameron v Hogan (1934) 51 CLR 358 (an agreement between members of a political party)
April 18, 2023 BLO1105 – Business Law 62
Rebutting the Presumption
Remember that the two presumptions apply, but each presumption can be rebutted.
Rebuttal is achieved by leading strong evidence to defeat the presumption.
The onus of proof is borne by the party seeking to rebut the presumption.
April 18, 2023 BLO1105 – Business Law 63
Rebuttal in Domestic Cases
See
McGregor v McGregor (1888) 21 QBD 424
Merritt v Merritt [1970] 1 WLR 1211
The precedent set in Balfour v Balfour (no intention in husband/wife agreements) does not apply if the married couple are separated when the agreement is made.
April 18, 2023 BLO1105 – Business Law 64
Rebuttal in the “Migration Cases”
Wakeling v Ripley (1951) SR (NSW) 183
Riches v Hogben [1986] 1 Qd R 315
Todd v Nichol [1957] SASR 72
The presumption of non-intention was triggered by close relationship, but was held to be rebutted by serious outcomes
to the parties in each case.
April 18, 2023 BLO1105 – Business Law 65
Wakeling v Ripley
W’s married sister migrated to Australia from UK (at W’s request) to look after him, in
return for promised benefits.
After disagreement, W reneged on his offer.
R sued for damages for breach of contract.
Held: Despite close relationship, intention exists, and there is a contract.
April 18, 2023 BLO1105 – Business Law 66
Further Rebuttal Cases
Parker v Clarke [1960] 1 All ER 93
(aged care agreement between two friendly, unrelated couples)
Popiw v Popiw [1959] VLR 197
(separated husband and wife)
Simkins v Pays [1955] 1 WLR 975
(competitions, raffles and lotteries)
April 18, 2023 BLO1105 – Business Law 67
Commercial (business) Agreements
The presumption of intention applies here.
Any agreement made “at arm’s length” ( with a stranger) will be treated as commercial, even when the subject-matter is personal.
This presumption can also be rebutted, but the cases show that rebuttal is difficult to
achieve.
April 18, 2023 BLO1105 – Business Law 68
Carlill v Carbolic Smoke Ball Co.
Defendant argued that a cash reward offered in a newspaper to promote product sales was an “advertising stunt”, with no intention to be legally bound (to pay).
Held: The reward is an offer, accepted by C by buying and using the product. Intention exists and there is therefore a contract.
April 18, 2023 BLO1105 – Business Law 69
Edwards v Skyways Ltd
An agreement between Defendant and E’s Union to pay superannuation payments on early retirement of pilots “taking a package” was a commercial agreement.
The presumption of intention applied, was not rebutted, and therefore prevailed, despite the fact that the payments were described as “ex gratia”, (voluntary).
April 18, 2023 BLO1105 – Business Law 70
Express Exclusion (of intention)
Can the (contracting) parties exclude intention by agreement?
This was achieved by an “exclusion clause” in Jones v Vernon’s Pools Ltd [1938] 2 All ER 626. A ticket in a soccer pools competition contained an effective exclusion clause (“this is not a legal contract”). The claim by Jones failed.
April 18, 2023 BLO1105 – Business Law 71
Honour Clauses in Contracts
Can the parties avoid a contract by inserting an “honour clause” in the agreement?
See Rose & Frank Co v Crompton Bros Ltd. [1925] AC 445. Dispute taken to Court, but agreement contained a detailed and specific “honour clause”. The Court held that there was no legal contract.
April 18, 2023 BLO1105 – Business Law 72
“Ousting” the Jurisdiction
It is acceptable to say “This agreement is not a contract”, as in the last case.
But it is not acceptable to say “This agreement is a contract, but the Courts cannot adjudicate upon it”. This is an attempt to “oust the jurisdiction of the courts”, and is against public policy.
April 18, 2023 BLO1105 – Business Law 73
“Letters of Comfort”
A letter by a parent company to a Bank lending money to its subsidiary company might be a “letter of comfort”, or a guarantee to repay the loan if the borrower fails to do so.
It is a question of intention. Would a reasonable person conclude that intention existed?
April 18, 2023 BLO1105 – Business Law 74
Letter of Comfort Cases
Kleinwort Benson Ltd v Malaysian Mining Corp Bhd [1988] 1 WLR 799 (No intention)
Commonwealth Bank of Australia Ltd v TLI Management Pty Ltd [1990] VR 510 (No intention)
Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 (Intention to guarantee repayment was found)
April 18, 2023 BLO1105 – Business Law 75
Administrative Arrangements
Is an agreement between government and a citizen a legal contract or not? See
The Administration of the Territory of PNG v Leahy (1961) 105 CLR 5, and
Australian Woollen Mills Ltd v Commonwealth of Australia (1954) 92 CLR 424
In both cases, no intention was concluded.
April 18, 2023 BLO1105 – Business Law 76
Summary of Intention
Problems involving intention can be solved by
1. Discussing and applying the two presumptions, using cases to illustrate the distinction between them, and
2. Remembering to use an objective, as distinct from a subjective, testing mechanism.
April 18, 2023 BLO1105 – Business Law 77
Offer Defined
“ A proposal or proposition which, if accepted, gives rise to an agreement”
The person making the offer (the “offeror”) will make it to
one person (the “offeree”), or to a group of persons, or sometimes to “the world at large”
April 18, 2023 BLO1105 – Business Law 78
Requirements of an Offer
The offer can be “express”, which means that it is expressed by being spoken or written, or it can be “implied”, usually from conduct or behaviour.
It must be “promissory”, i.e., it can be converted by acceptance into a binding obligation. Harvey v Facey [1893] AC 552
April 18, 2023 BLO1105 – Business Law 79
Offer v “Invitation to Treat”
Some activities appear to be making offers, but legally are not. They may be only extending an “invitation to treat” or an “invitation to negotiate or deal”. Consider
1. Display of goods for sale
2. Distributing brochures or circulars, and
3. Advertising goods for sale.
April 18, 2023 BLO1105 – Business Law 80
Display of Goods for Sale
A retailer of goods who displays them for sale appears to be “offering” the goods for sale to customers.
However, the courts take the view this action (placing goods on display for sale) is not an offer to sell as such, but only an invitation to customers to make an offer to buy. See
April 18, 2023 BLO1105 – Business Law 81
“Boots Case”
In Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795,
When B displayed goods (including prescribed drugs) for sale in a “self-service” chemist store, plaintiff claimed that B was guilty of the offence of “offering drugs for sale otherwise than under the supervision of a qualified chemist”.
April 18, 2023 BLO1105 – Business Law 82
Boots Case (Cont.)
B’s defence was that the customer makes the offer at the check-out, where a chemist was in attendance to supervise sales.
The issue becomes “where is the offer made”?
Does B offer to sell (at the display shelf), or does the customer offer to buy (at the check-out)?
Held: The latter. Therefore B not guilty.
April 18, 2023 BLO1105 – Business Law 83
Display in “conventional” shop
Boots Case was a self-service, or supermarket situation. What happens in a conventional store? See Fisher v Bell [1961] 1 QB 394, where B was charged with offering for sale an offensive weapon when he put a flick-knife in his shop window with a price tag.
Held: Not guilty; display only an invitation.
April 18, 2023 BLO1105 – Business Law 84
Brochure Distribution
Distribution of brochures, circulars, catalogues or other advertising material looks like the making of offers, but it legally is not. See Grainger & Sons v Gough [1896] AC 325, where a circular listing products and prices from a wine store was held to be only an invitation to treat.
April 18, 2023 BLO1105 – Business Law 85
Advertisements generally
An advert. in a paper or other media looks like an offer, but generally it is regarded legally as only an invitation.
The prospective buyer has to make an offer that the advertiser can accept or reject.
See Partridge v Crittenden [1968] 2 All ER 421
April 18, 2023 BLO1105 – Business Law 86
Exceptions to the Rule
The general rule is that an advert will not be an offer. There are two exceptions:-
1. The advert may convert (from an invitation) to an offer if conditions are imposed that the prospective buyer must satisfy to buy the article advertised.
2. If the advert offers a reward to the reader
April 18, 2023 BLO1105 – Business Law 87
The Smokeball revisited
In Carlill v Carbolic Smokeball Co., the company argued the general rule that an advert is not an offer, and there was thus no contract with Mrs C.
The court rejected this argument, noting that when a reward is advertised, the advert becomes an offer that the reader can accept by conduct (buying the product etc.)
April 18, 2023 BLO1105 – Business Law 88
Sales by Auction
When selling goods (or land) by auction, the auctioneer in calling for bids is extending an invitation to the assembled buyers to make him an offer.
The resultant bids are offers.
The contract is formed if and when the auctioneer accepts one of the bids (offers)
April 18, 2023 BLO1105 – Business Law 89
Sales by Tender
Sale by tender is becoming more popular. Tenders have long been used to form contracts for major works, or high volume supply of goods.
Calling for tenders is an invitation.Submitting a tender is making an offer.When the advertiser accepts the preferred
tender, if any, the contract is formed.
April 18, 2023 BLO1105 – Business Law 90
Evaluating Tenders
If the advert inviting tenders specifies a process or procedure that will be applied in evaluating tenders, that process or procedure must be strictly followed.
If not, damages will be payable to an aggrieved unsuccessful tenderer.
See Hughes Aircraft Systems Int. v AirServices Australia (1997) 146 ALR 1
April 18, 2023 BLO1105 – Business Law 91
Acceptance of Offer
Offer + Acceptance = Agreement
An acceptance is a clear and undoubted assent to the offer and all of its terms.
It can be express (stated or written), or it can be implied from conduct.
No “magic formula of words”.
Four rules of acceptance have evolved.
April 18, 2023 BLO1105 – Business Law 92
The Four Rules of Acceptance
1. It must be clear and undoubted.
2. The correct method must be used.
3. The acceptance must be given with knowledge of, and in reliance upon, the offer.
4. Acceptance must be communicated.
April 18, 2023 BLO1105 – Business Law 93
Rule One of Acceptance
Acceptance must be clear, undoubted.
If the offeree tries to change any terms of the offer, he is not accepting it but making a “counter-offer”.
This replaces the first offer with a second one.
Less obviously, it destroys the first offer.
April 18, 2023 BLO1105 – Business Law 94
Conditional Acceptance
An acceptance given subject to a condition will not operate unless and until the condition is satisfied.
A simple example would be
“ I accept your offer to sell me your car for $20,000 provided I can get a loan of $10,000 from my Bank”.
April 18, 2023 BLO1105 – Business Law 95
Masters v Cameron (1954) 91 CLR 353
A complex case of conditional acceptance. C sold a property to M, who paid a deposit of 10%. Both signed a “Sale Note” prepared by the agent, to be replaced later on by a formal contract of sale that C’s solicitors would prepare.
The sale note contained a clause that C insisted be inserted by the agent.
April 18, 2023 BLO1105 – Business Law 96
Masters v Cameron (Cont)
“This agreement is made subject to the preparation of a formal contract of sale
which shall be acceptable to my solicitors”.When the contract was prepared to replace the
Sale Note, M refused to sign it because he couldn’t get the loan he needed to buy the house.
Is the Sale Note a binding, legal contract?
April 18, 2023 BLO1105 – Business Law 97
Masters v Cameron (Cont)
Was C’s acceptance of M’s offer to buy conditional on the signing of the replacement contract?
The High Court held that it was, because the words used suggested that new terms could be added to those in the Sale Note. M should not be forced to include new terms that he had not even seen or considered.
April 18, 2023 BLO1105 – Business Law 98
Rule Two of Acceptance
This rule focuses on the method to be used in accepting an offer.
The offeror, when making the offer, can dictate HOW the offer is to be accepted.
If he does, his stipulations are binding on the offeree, and must be strictly followed.
April 18, 2023 BLO1105 – Business Law 99
Rule Two Sub-rules.
1. An exclusive method must be used2. A nominated method, or any quicker one,
may be used3. If no method nominated, the same method
(as the offeror used) may be used4. If communication is instantaneous,
acceptance is effective when received.5. The Postal rule of acceptance.
April 18, 2023 BLO1105 – Business Law 100
Rule Two - Sub-rule One
In rare cases, the offeror might say (when making the offer):-
“If you want to accept this offer, you must accept by (say) fax”.
If he does, acceptance by any method other than fax will not be binding on the offeror.
April 18, 2023 BLO1105 – Business Law 101
Rule Two - Sub-rule Two
If a method is nominated by the offeror, but not exclusively, that method – or any faster method – may be used by the offeree.
For example, if acceptance by post is specified, fax could be used as an alternative. But the new method must in fact faster, not just in theory. See Eliason v Henshaw (1919) 4 Wheaton 225
April 18, 2023 BLO1105 – Business Law 102
Rule Two - Sub-rule Three
This is a very helpful sub-rule.If no method is nominated by the offeror,
there is a presumption that the offeree can use (to accept the offer) the same method that the offeror used (to make the offer).
So an offer made by post can be accepted by post if no alternative is stated by the offeror.
April 18, 2023 BLO1105 – Business Law 103
Rule Two Sub-rule Four
If communication is “instantaneous”, the acceptance is effective only when
actually received by the offeror.
This applies to telephone, telex, fax.
See Entores Ltd v Miles Far East Corporation [1955] 2 QB 327
April 18, 2023 BLO1105 – Business Law 104
Entores Ltd v Miles Far East Corp
A contract was formed by telex, the offer being telexed from London to Amsterdam, and the acceptance was telexed back.
The question was “where was the contract made”? This establishes the law of the contract which must be applied in any dispute. Held, acceptance occurred in UK
April 18, 2023 BLO1105 – Business Law 105
Rule Two - Sub-rule Five
If the Postal Rule of Acceptance is activated, the posted acceptance is legally effective when the letter is posted, (as distinct from when it is received).
This curious rule, created in England in early 19th century can be explained only in the context of the Law of Agency.
April 18, 2023 BLO1105 – Business Law 106
The Postal Rule of Acceptance
Remember to justify using this rule if you invoke it. It applies if the offeror expressly nominates it, or the circumstances allow it to be invoked by implication.
Remember also that it applies only to acceptances – not revocations, counter-offers, or any other communications.
April 18, 2023 BLO1105 – Business Law 107
Electronic Transactions Acts
Recent Acts have been passed by the Australian and Victorian Parliaments to authorize the use of electronic communication (e-mail etc) in business and in dealing with government.
This has some implications for us in the area of contract formation.
April 18, 2023 BLO1105 – Business Law 108
Rule Three of Acceptance
An acceptance must be given with knowledge of the offer, and in reliance upon the offer. You cannot accept “by accident” – it must
be a conscious decision to make the contract.
See R v Clarke (1927) 40 CLR 227
April 18, 2023 BLO1105 – Business Law 109
R v Clarke
C had heard of an offer by the government of WA to pay a reward. When arrested and questioned, he gave the information sought. He claimed the reward in contract.
Held. On his own admission, he had forgotten the reward, and was seeking to protect himself. No valid acceptance of offer.
April 18, 2023 BLO1105 – Business Law 110
Rule Four of Acceptance
The acceptance must be communicated.
This can be express (stated or written), or
implied from the offeree’s conduct.
But it must be one or the other. See Felthouse v Bindley (1862) 142 ER 1037
See also Brogden v Metropolitan Railway Co (1877) 2 AC 666
April 18, 2023 BLO1105 – Business Law 111
Acceptance by Agent
An agent can be used to accept on behalf of the offeree.
But the agent must be properly authorized to accept the offer.
See Powell v Lee (1908) 99 LT 284
Contrast Northern territory of Australia v Skywest Airlines Pty Ltd [1987] 48 NTR 20
April 18, 2023 BLO1105 – Business Law 112
Cross Offers
What if two identical offers (A to sell to B, and B to buy from A) cross in transit? Is there a contract in this situation.
The court held in Tinn v Hoffman & Co (1873) 28 LT 271 that two identical offers are not the same as an offer and an acceptance. One offer has to be accepted.
April 18, 2023 BLO1105 – Business Law 113
Counter-offers
The counter-offer does two things1. It substitutes a new offer for the offer that
it replaces.2. It legally destroys the previous (replaced)
offer. The offeree cannot revive the replaced offer,
but the offeror may. See Hyde v Wrench 1840 49 ER 132
April 18, 2023 BLO1105 – Business Law 114
Request for Information
A counter-offer destroys the replaced offer. An enquiry or “request for information” does not.
See Stevenson Jacques & Co v McLean (1880) 5 QBD 346
This distinction can be very important in problem solving.
April 18, 2023 BLO1105 – Business Law 115
Revocation of Offer
The general rule is that an offer can be revoked at any time before it is accepted, even if the offeror says he will leave it open for a defined time period. See Routledge v Grant (1928) 4 Bing 653
Revocation of Offer
April 18, 2023 BLO1105 – Business Law 116
Exception to the Rule
The exception to the general rule occurs when an option is bought and paid for by the offeree in order to keep the offer open for an agreed amount of time.
See Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674
April 18, 2023 BLO1105 – Business Law 117
Revocation (Continued)
If revoking an offer before the expiry of its stated life-expectancy, which can only be done if there is no valid option, the offeror should take care to ensure that the offeree is notified of the revocation.
A revocation is not affected by the postal rule. See Byrne v Van Tienhoven (1880)
April 18, 2023 BLO1105 – Business Law 118
Lapse of Offer
How long does an offer last? At the latest, at the end of its allocated
timeframe, if one is set.But if none is set, it will lapse after a
“reasonable time”. See Ramsgate Victoria Hotel v Montefiore (1888).
This is a question of fact in each case. It could be seconds, or many years.
April 18, 2023 BLO1105 – Business Law 119
Consideration
Consideration emerged in the English courts in the 16th Century to defeat fraudulent claims.
Consideration is• Peculiar to the “common law” systems;• Traceable back to the 1500s.It means that a“gratuitous” promise will not
be legally enforced.
April 18, 2023 BLO1105 – Business Law 120
Consideration Defined
Lord Pollock defined consideration as
“An act or forbearance of one party, or the promise thereof, is the price for which the
promise of the other is bought, and the promise thus given for value, is
enforceable”.
Consideration must be “something of value”.
April 18, 2023 BLO1105 – Business Law 121
Elements of Consideration
Consideration can be• Positive (doing something, or promising to
do something), or• Negative (a “forebearance”, such as
promising that you will NOT do something).Consideration can be present or future, but
not past.
April 18, 2023 BLO1105 – Business Law 122
The 6 rules of Consideration
1. Necessary in all “simple contracts”.
2. Past consideration is “not good consideration”.
3. It must come from the “promisee”, but need not go back to the “promisor”.
Note: The promisor makes the promise, the promisee receives it.
April 18, 2023 BLO1105 – Business Law 123
The 6 Rules of Consideration
4. It need not be “adequate”, or commercially realistic.
5. It must not be too vague.
6. It must be “sufficient” in the eyes of the law.
These last three rules are inter-related.
April 18, 2023 BLO1105 – Business Law 124
Rule 1 of Consideration
If the contract is a simple contract, consideration must be proved to exist.
If it is a formal deed, consideration is not required.
Formal deeds are rare, and recognisable by the words used in the “jurat” or signing
clause, namely “signed, sealed and delivered”.
April 18, 2023 BLO1105 – Business Law 125
Rule 2 of Consideration
Consideration can be in the present or the future, but past consideration is not acceptable.
See Eastwood v Kenyon (1840),
Roscorla v Thomas (1842), and
Anderson v Glass (1868)
April 18, 2023 BLO1105 – Business Law 126
Possible Exception to Rule 2
In contracts of service, this rule might be overcome.
See Lampleigh v Braithwait (1615), and
Re Casey’s Patents, Stewart v Casey (1892)
A promise to pay something is implied when the work is requested.
April 18, 2023 BLO1105 – Business Law 127
Rule 3 of Consideration
Consideration must come from the promisee, but need not revert to the promisor.
That is, the benefit may move “sideways”, to a third party.
The doctrine of “privity of contract” states that only a party to a contract can sue or be sued under that contract.
See Dunlop Pneumatic Tyre Co v Selfridge.
April 18, 2023 BLO1105 – Business Law 128
Rule 3 – Joint Promisees
If a promise is made to 2 promisees “jointly”, as where
A promises B and C to pay for work done, or for value provided only by B or by C
See: Coulls v Bagots Executor & Trustee Co Ltd (1967)
One promisee providing value on behalf of 2 promisees is acceptable.
April 18, 2023 BLO1105 – Business Law 129
Rule 4 of Consideration
Put simply, this rule means that the price does not have to be right.
The court will not enquire whether the price is adequate or not.
It is not the court’s concern.
So long as some price is paid, the court will look no further.
April 18, 2023 BLO1105 – Business Law 130
Nominal Consideration
The price might be a price in name only.
See Thomas v Thomas (1842)
Does it have to be expressed in currency terms?
See Chappell & Co Ltd v Nestle Co Ltd (1960)
April 18, 2023 BLO1105 – Business Law 131
Rule 5 of Consideration
Consideration must be something of recognisable value – it must not be too vague.
See White v Bluett (1853)
Dunton v Dunton (1892), and
Loftus v Roberts (1902)
April 18, 2023 BLO1105 – Business Law 132
Rule 6 of Consideration
It must be legally sufficient.
A moral obligation “per se” is not enough.
What about a promise not to sue, or to abandon a claim?
See Wigan v Edwards (1973), and
Hercules Motors Pty Ltd v Schubert (1973)
April 18, 2023 BLO1105 – Business Law 133
Existing Legal Obligation
If the promisee is already legally obliged to do that which the promisor asks him to do to justify payment, there is no consideration for the promise.
See Collins v Godefroy (1831).
But if he does something extra, there is.See Glasbrook Bros Ltd v Glamorgan CC (1925)
April 18, 2023 BLO1105 – Business Law 134
Existing Contractual Duty
If payment is promised just to perform an existing contract, there may be a problem enforcing that promise.
See Stilk v Myrick (1809)
Hartley v Ponsonby (1857).
Contrast Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991)
Musumici v Winadell Pty Ltd (1994)
April 18, 2023 BLO1105 – Business Law 135
Existing Contractual Duty (cont)
The two old cases concluded that there is no consideration for a promise to simply perform your existing contract, and no more.
The “modern” cases are more creative in looking for things that might amount to consideration.
April 18, 2023 BLO1105 – Business Law 136
Discharge of Obligation
A contract can be formed to discharge an obligation created by an earlier contract, such as a debt or loan.
In other words, the first contract creates the debt and the second contract discharges it.
This is normally, but not always, done by total repayment of the debt.
April 18, 2023 BLO1105 – Business Law 137
Discharge of a Loan Contract
As with the first contract, the second contract must have all necessary components, including consideration.
Assume A owes $1000 to B under an existing contract. Assume it is due for repayment, but A cannot pay in full.
He offers B $700, and B agrees to accept it in full settlement of the debt.
April 18, 2023 BLO1105 – Business Law 138
Discharge of a Loan (cont)
In other words, B is promising A that he will not sue him for the other $300.
But, is this promise enforceable at law?
It is enforceable as a contract ONLY if there is consideration for it.
Sadly for A, there is no consideration.
So B can change his mind
April 18, 2023 BLO1105 – Business Law 139
The Rule in Pinnel’s Case
This rule states that “payment of a lesser sum will not extinguish a debt for a greater amount”.
Since 1608, the rule has impacted on the doctrine of consideration, and exposed the one area where it does not function fairly.
The rule enables a creditor to make a promise, and then change his mind.
April 18, 2023 BLO1105 – Business Law 140
Foakes v Beer (1884)
This case restated the rule in a different context.
B’s promise not to claim interest on a debt paid by installments was ignored by her.
The court held that her promise (to forego interest) was not binding as a contract, because it lacked consideration.
April 18, 2023 BLO1105 – Business Law 141
Exceptions to the Rule
Courts did not like the Rule, but could not avoid it without destroying consideration.
Their solution was to allow exceptions to the rule whenever possible.
The following exceptions were created and allowed by the courts over many hundreds
of years until its impact was effectively eroded.
April 18, 2023 BLO1105 – Business Law 142
Exceptions to the Rule (cont.)
1. Prepayment
2. Payment by transferring a chattel
3. Fraud on a “third party”
4. Composition with creditors or settlement of a valid legal claim, and finally
5. Promissory estoppel.
We will examine each exception.
April 18, 2023 BLO1105 – Business Law 143
Prepayment of Debt.
Payment (of a lesser sum) on the due date is a problem.
But, if the debtor pays a lesser amount before repayment is legally required, such prepayment benefits the creditor and disadvantages the debtor.
The benefit and/or disadvantage is good consideration for the creditor’s promise.
April 18, 2023 BLO1105 – Business Law 144
Transferring a Chattel
If, instead of paying cash, I give my creditor some object of value, and he agrees to
accept it in full settlement, he cannot later change his mind and sue.
This is because the court will not ascribe a value to the object. It could be worth a
fortune to the creditor
April 18, 2023 BLO1105 – Business Law 145
Fraud on a “Third Party”
If a person “outside the contract”, that is a “third party” pays part of the debt and the creditor agrees to accept it, the creditor cannot later sue the debtor for the balance.
If he could, it would amount to a deception of the person who paid part of the debt. See Hirachand Punamchand v Temple (1911)
April 18, 2023 BLO1105 – Business Law 146
Composition with Creditors
If a debtor convenes a meeting of creditors and they approve a composition under Part X of the Bankruptcy Act, no creditor can later sue for the unpaid balance of debt.
This applies even if the relevant creditor voted against the scheme. All creditors are bound if it is a valid composition.
April 18, 2023 BLO1105 – Business Law 147
Settlement of a Legal Claim
If a plaintiff settles a genuine legal claim for less than its “face value”, he cannot later sue for the balance.
Settlement is encouraged by the courts.
There are many reasons why a claimant may settle for less than he is owed.
Once settled, the claim cannot be revived.
April 18, 2023 BLO1105 – Business Law 148
Estoppel
If a person is “estopped” from doing something, he is prevented from doing it.
Estoppel is a legal doctrine that prevents a person saying one thing and meaning
another in a business dealing.
If another person acts on your statement, you are “estopped” from denying its truth.
April 18, 2023 BLO1105 – Business Law 149
Estoppel (continued)
Look at the agency example on pages 33 – 34 of the Lecture Notes on E-Reserve.
If I create a deception, or even allow it to be created and do nothing to correct it, I cannot later benefit from that deception by trying to revert to the true facts.
Why didn’t Dr.Foakes argue estoppel?
April 18, 2023 BLO1105 – Business Law 150
Limitation on estoppel
The limiting aspect of estoppel was that courts applied it only to statements of a
factual nature, and refused to extend it to promises of future intention.
“He is my agent” is a statement of fact.
“I will not sue you for the interest” is a promise of Mrs Beer’s future intention.
April 18, 2023 BLO1105 – Business Law 151
Promissory Estoppel
This approach was changed in 1947 in the “High trees House Case”.
Central London Property Trust Ltd v High Trees House Pty Ltd The facts are set out in detail on page 34.
Lord Denning, using lateral thinking for which he became famous, created “promissory estoppel”.
April 18, 2023 BLO1105 – Business Law 152
Promissory Estoppel (cont)
Ordinary estoppel applied to facts.
Promissory estoppel applies to promises.
By extending the concept in this way, making us accountable for our promises, Lord Denning effectively overcame 339 years of problems. It quickly caught on, despite being only “obiter dicta”.
April 18, 2023 BLO1105 – Business Law 153
Limiting the Doctrine
But, the logical extension of promissory estoppel arguably does away with consideration completely.
If I make you a promise, and you act on it to your disadvantage, I must perform it!
The fear of this result was overcome by the decision in Combe v Combe (1951)
April 18, 2023 BLO1105 – Business Law 154
Combe v Combe
Mrs Combe tried to create a new contract by arguing promissory estoppel.
The Court of Appeal limited the doctrine to cases where there is an existing contract, and an attempt is made to vary or discharge it by entering into a second agreement.
The doctrine of consideration was preserved.
April 18, 2023 BLO1105 – Business Law 155
Detriment or Disadvantage.
To invoke the doctrine, the promisee must act on the promise.
But need he act to his detriment?
Yes, but potential detriment will suffice. See Je Maintiendrai Pty Ltd v Quaglia (1980) and Legione v Hateley (1983)
April 18, 2023 BLO1105 – Business Law 156
A “New” Development
Consideration has evolved over 400 years of cases, the “standout” 20th century case being High Trees House.
But the Australian case of Waltons Stores (Interstate) Ltd v Maher in 1988 could have even more repercussions in the long term.
Some say it could do away with consideration.
April 18, 2023 BLO1105 – Business Law 157
Waltons v Maher
Maher won a claim for damages against W, even though there was no contract signed, because
• W had promised M that they would sign, • M acted on that promise to his substantial
detriment, and • the court held that W’s conduct was
“unconscionable”
April 18, 2023 BLO1105 – Business Law 158
Waltons v Maher (cont)
This is a radical departure from established precedent.
You can get damages for a person’s failure to enter into a contract as promised.
But its application is limited, and subsequent cases show that it has not, as was once feared, opened the floodgates.
April 18, 2023 BLO1105 – Business Law 159
Contents of the Contract
A contract can contain • Express (stated or written) terms, and• Implied terms, that is terms that are not
apparent, but may be implied into the contract by the court.
This can be done by reference to prior dealings, trade custom, to make the contract workable, or by statute.
April 18, 2023 BLO1105 – Business Law 160
Express Terms
Some typical questions about express terms are: -
• How important is the term?
• Are all terms of equal importance?
• What if its meaning is not clear?
• What if it is ambiguous?
• How to you prove oral terms?
April 18, 2023 BLO1105 – Business Law 161
Proving Oral Terms
There are obvious problems in proving oral terms that are not admitted by an opponent. But it is possible to do so by giving credible evidence of them, having witnesses present
and so on.It is always better to have a written contract.See Buckenara v Hawthorn Football Club
Ltd (1988)
April 18, 2023 BLO1105 – Business Law 162
The “Parol Evidence Rule”
Whenever we have a written contract, an important rule is activated.
The Parol Evidence Rule states that if we have a written contract that appears to cover
all the details, verbal evidence to add terms, vary existing terms, or change the written contract in any way, will not be
considered by the Court.
April 18, 2023 BLO1105 – Business Law 163
The Rule Explained
Courts assume that the written contract will accurately tell the whole story about the
transaction.
If prepared by experts, it should!
If either party can add or subtract terms, or change terms, what is the point of having a
written contract in the first place?
April 18, 2023 BLO1105 – Business Law 164
Exceptions to the Rule
Custom or trade usage; Verbal “condition precedent”; Written contract is not complete; Ambiguous terms; Mistake in the terms; and Confusion as to identity of the parties.
April 18, 2023 BLO1105 – Business Law 165
Custom or Trade Usage
If contracts in a particular industry or trade always contain fixed terms, they do not
have to be included in the written contract. They will be implied by the Court if they
are established and accepted by most people in that industry.
See British Crane Hire Corp. Ltd v Ipswich Plant Hire Ltd (1974)
April 18, 2023 BLO1105 – Business Law 166
Limit to this Exception
But a term based on trade customs or conventions will not be implied into the contract if it will directly contradict an
express term in the contract.
See Summers v Commonwealth of Australia (1918)
April 18, 2023 BLO1105 – Business Law 167
Verbal “Condition Precedent”
A detailed, written contract might fail to mention that it is conditional.
For example, it is not to commence operation until some event occurs to activate it.
If so, verbal evidence of the “condition precedent” is allowable.
See Pym v Campbell (1856)
April 18, 2023 BLO1105 – Business Law 168
Incomplete Written Contract
It is possible, but difficult, to prove that some vital clause has been omitted from the
contract, and to argue for its inclusion.
There must be special circumstances to succeed in this approach.
See Van Den Esschert v Chappell (1960)
This exception is rarely invoked.
April 18, 2023 BLO1105 – Business Law 169
Ambiguous or Mistaken Terms
If a term has more than one meaning, or has been included in the contract by mistake, the Court will allow verbal evidence to be lead to remove the ambiguity, or to rectify
the mistake.
This is necessary to make the contract operate properly, and to achieve its purpose.
April 18, 2023 BLO1105 – Business Law 170
Identity of the Parties
Confusion can arise as to the correct identity of a party – usually when a “natural
person” enters into a contract “on behalf of a company to be incorporated”.
Pending incorporation, who was liable?
The “shelf company” industry has largely overcome this problem.
April 18, 2023 BLO1105 – Business Law 171
Analysis of Statements
Consider statements made during negotiations.
Are all “promises” potential terms?
Putting that another way, is everything said actionable if false or incorrect?
The Parol Evidence Rule covers this if the contract is written.
April 18, 2023 BLO1105 – Business Law 172
Verbal (oral) Contracts
Some statements become terms, allowing a contractual remedy if untrue. You can get
damages for breach of condition or for breach of warranty.
But if the statement is not a term, it might be a misrepresentation.
The remedies are different.
April 18, 2023 BLO1105 – Business Law 173
Oscar Chess Ltd v Williams
An important case outlining the method of deciding whether a pre-contract statement
becomes a term or not.
W. traded in his car, which he said was a 1948
model, on a new one. It was actually a 1939
model, but he did not know. OCL sued for damages for breach of warranty to recoup
the excess money they had allowed.
April 18, 2023 BLO1105 – Business Law 174
Tests Applied
In deciding that it was not a warranty, the court examined: -
The objective intention of the parties; The actual words used; The proper inferences from known facts; Was it written down? Comparative skill and knowledge.
April 18, 2023 BLO1105 – Business Law 175
The Result
Having concluded that it was not a warranty, the court could not award damages to OCL.
They could have proved innocent misrepresentation (W unknowingly made a false statement), but the remedy for that is
rescission, not damages.
The court could not rescind this contract.
April 18, 2023 BLO1105 – Business Law 176
Collateral Contract
The preferred result for the victim of a false statement is to be able to show that a term has been breached, rather than to try and
argue misrepresentation.
The remedies are stronger.
This has lead to the emergence of the “collateral contract” argument.
April 18, 2023 BLO1105 – Business Law 177
Collateral Contract Explained
A collateral contract is a separate contract from the main contract, and is represented by a separate promise not included in the
main contract.
It can be argued that A signed the main contract only because B made the
collateral promise.
April 18, 2023 BLO1105 – Business Law 178
Consideration??
If the collateral promise is to become a collateral contract, there must be
consideration for that promise.
What consideration exists?
The act of signing the main contract arguably provides the consideration for the collateral
promise, making it contractual.
April 18, 2023 BLO1105 – Business Law 179
De Lassalle v Guildford
A lease had been drawn up between D and G, and they were about to exchange parts (copies) of the lease, which would result in the lease contract existing.
When asked, the owner promised the tenant that the drains were in good order. They were not! D claimed damages for breach of a collateral contract.
April 18, 2023 BLO1105 – Business Law 180
De Lassalle v Guildford (cont)
In defence, the owner pleaded the Parol Evidence Rule. The court held that the
tenant had signed the lease only because the collateral promise had been made.
There was thus consideration for the promise, transforming it into a collateral contract. As
the promise was false, this contract had been breached. D got damages.
April 18, 2023 BLO1105 – Business Law 181
Interchangeable Arguments
The collateral contract argument is virtually interchangeable with the 3rd exception to the Parol Evidence Rule argument, as used in Van Den Esschert v Chappell.
Both arguments emerged as creative solutions to the Parol Evidence Rule.
Both have limited application.
April 18, 2023 BLO1105 – Business Law 182
Limiting Aspects
Our Courts limit the argument, requiring 1. Consistency between the collateral
promise and the terms of the main contract [See Hoyts Pty Ltd v Spencer (1919)]
2. A strong motivational link between the promise and the signing of the main contract. [J.J Savage & Sons Ltd v Blakeney (1970)]
April 18, 2023 BLO1105 – Business Law 183
Interpreting Contract Terms
Courts often have to give meaning to a term if it is unclear. But if it is so uncertain that they cannot save it, they will either
preferably, sever the uncertain term, or reluctantly, declare the whole contract
“void for uncertainty”.
They will try and uphold contracts if possible.
April 18, 2023 BLO1105 – Business Law 184
Scammell & Nephew v Ouston
To illustrate, an agreement to buy a new truck on “hire purchase terms over 2 years”
could not be enforced by the court, because the term was too uncertain.
Since the price was not clearly defined, and the price is a vital term in any contract, the
contract was held to be “void for uncertainty”.
April 18, 2023 BLO1105 – Business Law 185
Importance of Terms
The terms (clauses) of a contract fall into three possible categories.
1. Conditions.
2. Warranties.
3. Intermediate (or “innominate”) terms.
Correct classification controls the remedy for breach of each category.
April 18, 2023 BLO1105 – Business Law 186
Conditions
A condition is an important term or clause in the contract. It is central to the contract, and “goes to the root of the contract”.
If you took this term away, the contract would be radically different.
Note that, if there is a dispute, the court will decide if the term is a condition, whatever
the parties might have called the term.
April 18, 2023 BLO1105 – Business Law 187
Warranties
A warranty is a term of lesser importance than a condition.
It is “subsidiary” to the condition, but it is nevertheless still important.
It deals with “cosmetic” rather than “structural” or “fundamental” aspects of
the transaction.
April 18, 2023 BLO1105 – Business Law 188
Intermediate Terms
A recent creation, intermediate or “innominate” terms are “hybrids”, being sometimes treated as conditions and at other times treated as warranties.
The choice (between condition and warranty) is made depending on the timing and importance of the relevant breach.
April 18, 2023 BLO1105 – Business Law 189
Remedies for Breach
A breach of condition entitles repudiation of the contract and/or damages.
A breach of warranty entitles damages only.Breach of an intermediate term entitles either the remedy for breach of condition
(if it was a condition at the time), or the remedy for breach of warranty (if it
was a warranty at the time).
April 18, 2023 BLO1105 – Business Law 190
Relevant Cases
Cases illustrating the distinction between conditions and warranties include
Bettini v Gye (1876); Poussard v Spiers & Pond (1876);
Associated Newspapers Ltd v Bancks (1951).
Note that intermediate terms are rarely found.
April 18, 2023 BLO1105 – Business Law 191
Condition Precedent
A condition precedent is a term in a contract that relates to some outside event.
That event must occur before performance is required.
A common example is a clause making the buyer’s performance conditional upon
obtaining the necessary loan.
April 18, 2023 BLO1105 – Business Law 192
Condition Subsequent
A condition subsequent is also a term relating to some outside event.
When it occurs, it will bring an operating contract to an end.
The return of faulty goods is a common example. See Head v Tattersall (1871)
April 18, 2023 BLO1105 – Business Law 193
Exclusion Clauses
An exclusion clause is a term in a contract that seeks to either
Totally exclude (called an “exclusion clause”), or
Limit in some way (called a “limitation clause”)
the liability of one party if a breach occurs.
April 18, 2023 BLO1105 – Business Law 194
Common Examples
Such clauses are to be found, for example, in
1. Car park tickets;
2. Dry cleaning dockets;
3. Entertainment tickets;
4. Airline tickets;
5. Film processing dockets, and elsewhere.
April 18, 2023 BLO1105 – Business Law 195
Signed & Unsigned Documents
Such clauses can be found in signed contracts, or in what we call “ticket
cases”, where the clause is found on a ticket or docket that has not been signed by the
customer.The examples listed above are all “ticket
cases”.The distinction matters as the rules differ.
April 18, 2023 BLO1105 – Business Law 196
Signed Document Rules
Predictably, a person is bound by the terms of any contract that they sign.
This applies whether or not they have read it, and also whether or not they understand it.
Put simply, if you sign it, you wear it!
See L’Estrange v Graucob Ltd (1934).
April 18, 2023 BLO1105 – Business Law 197
Possible Exceptions
The only possible escape routes from this are
1. If the clause is misrepresented to the customer. See Curtis v Chemical Cleaning & Dyeing Co (1951).
2. If the customer can successfully plead “non est factum”.
April 18, 2023 BLO1105 – Business Law 198
“Non Est Factum”
Literally, this means “It is not my deed!”, which implies that the wrong document is
signed.
Historically a defence for illiterate people, it is very hard to prove in modern times.
See Gallie v Lee (1971), and contrast Petelin v Cullen (1975)
April 18, 2023 BLO1105 – Business Law 199
Unsigned Documents
Most problems occur in this context. The question that the court must decide is
“Has the exclusion clause printed on the ticket or docket become part of (a term of) the contract?”
If so, it will affect the customer’s rights.
If not, it will not bind the customer.
April 18, 2023 BLO1105 – Business Law 200
The Testing Process
To test whether the clause has become part of the contract, the courts will apply two tests, namely
1. The “nature of the document test”, and
2. The “reasonable notice test”.
These tests are applied sequentially in the order stated.
April 18, 2023 BLO1105 – Business Law 201
Nature of the Document Test
This test involves examining the docket and asking “what is its role in the transaction?”
Would a reasonable person expect it to contain terms of the contract?
Does it have any other logical function, such as proving payment (a receipt), or proving
ownership (a voucher)?
April 18, 2023 BLO1105 – Business Law 202
Cases on the First Test
See Causer v Brown (1952), where the court held that a dry cleaning docket was logically a voucher to prove ownership of garments.
Also Chapelton v Barry Urban District Council (1940), where the ticket was logically a receipt to prove payment of a deck chair hiring charge.
April 18, 2023 BLO1105 – Business Law 203
Signed Delivery Dockets
When delivery dockets are signed after receipt of goods, it is too late to try to include new terms in the contract, which has already been performed.
See Walter Wright Pty Ltd v DJ Hill & Co Pty Ltd (1971), and Rinaldi & Patroni Pty Ltd v Precision Mouldings Pty Ltd (1986)
April 18, 2023 BLO1105 – Business Law 204
Future of the First Test
As exclusion clauses become more common, and more accepted by society, it will be increasingly hard to pass this test, since the test is applied objectively.
It is no advantage to say “I didn’t know it was there”, because the question is whether a reasonable person would know.
April 18, 2023 BLO1105 – Business Law 205
The Reasonable Notice Test
This test is applied only if the customer fails the first test.
It requires that reasonable steps be taken by the business operator to bring the clause to the notice and attention of the customer.
Again, the test is applied objectively.
April 18, 2023 BLO1105 – Business Law 206
Relevant Cases
See, as examples Parker v South Eastern Railway Co (1877)
[clause on back of ticket] Thompson v L. M.&S. Railway Co (1930)
[clause on train timetable on platform] Thornton v Shoe Lane Parking Co (1971)
[clause hidden on back of pillar in car park]
April 18, 2023 BLO1105 – Business Law 207
Exclusion Clause on Display
The clause may be displayed on a sign, rather than (or as well as) being printed on a ticket or docket.
This is quite effective, so long as the sign containing the clause is prominently on display at a point where all customers can see and read it.
April 18, 2023 BLO1105 – Business Law 208
Actual & Constructive Notice
See Balmain New Ferry Co v Robertson (1906), where the High Court held that terms may be communicated by displaying them for the public to read.
Those who see and read the sign have actual notice of the clause. Those who could have, but didn’t read it have constructive notice.
April 18, 2023 BLO1105 – Business Law 209
Timing of the Notice
Notice (of the exclusion clause) must be given before or when the contract is formed, not later. If given afterwards, it is too late.
See Olley v Marlborough Court Ltd (1949), where an attempt to rely on a clause of which details were given after formation of the contract, failed.
April 18, 2023 BLO1105 – Business Law 210
Prior Dealings
The business operator can rely on previous dealings with the same customer to try and invoke an exclusion clause.
But it can be difficult. See Hollier v Rambler Motors (1972).
In this case, the court refused to allow reliance on the clause when prior dealings were pleaded.
April 18, 2023 BLO1105 – Business Law 211
The “Contra Proferentem” Rule
Because exclusion clauses damage our rights, change the rules of the game, and are sometimes introduced in a “sinister” way, courts do not like them.
They interpret them “contra proferentem”, that is adversely to the business operator. See White v John Warwick & Co. (1953)
April 18, 2023 BLO1105 – Business Law 212
Implied Terms
Implied terms, as distinct from express terms, are not evident in the contract.
We have to find them elsewhere, either by using some common law rules to imply
them, or – more frequently – by relying on a statute to imply them.
Terms will be implied only if it is necessary.
April 18, 2023 BLO1105 – Business Law 213
Common Law Implication
Terms can be implied as follows: - By industry custom or convention,
sometimes called “trade usage”; By reference to past dealings; To give “business efficacy” to a contract,
in order to make the contract work properly .
April 18, 2023 BLO1105 – Business Law 214
Industry Custom or Convention
See British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd (1974) as an example.
Note that a term will not be implied in this way if it contradicts an express term in the contract.
Summers v Commonwealth of Australia (1918)
April 18, 2023 BLO1105 – Business Law 215
Past Dealings
Previous dealings between the parties will often lead to the inclusion by the Court of “missing” terms .
See Hillas & Co Ltd v Arcos Ltd (1932);
Balmain New Ferry Co v Robertson (1906);
Hollier v Rambler Motors (AMC) (1972).
April 18, 2023 BLO1105 – Business Law 216
Business Efficacy
If the contract does not make sense, a term may be implied to make it function.
See “The Moorcock” (1886).
But a term will not be implied in this manner if the contract makes sense without it. See Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982).
April 18, 2023 BLO1105 – Business Law 217
Statutory Implied Terms
Part I of the Victorian Goods Act 1958 (originally enacted in the 1890s) implied terms into all contracts for the sale of goods.
These related to title, fitness for purpose, quality and description of goods sold, and protected the buyer against unscrupulous sellers. But they could be avoided!
April 18, 2023 BLO1105 – Business Law 218
Part I of Goods Act 1958
Protection for buyers under this old Part of the Goods Act became ineffective, because sellers could – and therefore usually did – avoid these implied terms by getting buyers to sign away their rights.
See L’Estrange v Graucob Ltd (1934) as an example of this trend.
April 18, 2023 BLO1105 – Business Law 219
Trade Practices Act 1974
A Commonwealth Act, the TPA restored to buyers the old Goods Act protections.
They could not be avoided as previously.
But the TPA applied only to corporations (not “natural persons”), and only to “consumer sales”.
April 18, 2023 BLO1105 – Business Law 220
Goods Act Part IV
Because of the gaps in the TPA, the Victorian Parliament passed the Goods (Sales & Leases) Act 1981, which added Part IV to the “old” Goods Act.
Sales and leases to “consumers” in Victoria are covered by this Act. Dealers and wholesalers can look after themselves.
April 18, 2023 BLO1105 – Business Law 221
Fair Trading Act 1999 (Vic)
In 2003 the Victorian Government decided to move the statutory implied terms from Part IV of the Goods Act 1958 into the Fair Trading Act 1999.
It did so by enacting new Parts 2A and 2B of the FTA, being sections 32A to 32 ZD. Part IV of the Goods Act has been repealed.
April 18, 2023 BLO1105 – Business Law 222
Avoidance of Terms
As with the TPA, the new part of the Victorian goods Act does not permit a seller to escape these reinstated protections.
So long as the buyer is a consumer, and the criteria for application of the Acts are met, the seller cannot avoid the implied terms (as they once could).
April 18, 2023 BLO1105 – Business Law 223
Capacity to Contract
Some persons do not have the ability (the legal capacity) to contract.
These include minors, mentally ill persons, persons badly affected by alcohol or
drugs, bankrupts, foreign nationals (in time of war), prisoners.
In some cases, such as bankrupts, capacity is limited.
April 18, 2023 BLO1105 – Business Law 224
Married Women
Under the common law, married women lacked the capacity to contract, as we saw in
Eastwood v Kenyon.
This has now been overcome by statute.
The most common problem area is with minors (persons under the age of 18).
April 18, 2023 BLO1105 – Business Law 225
Legal Minors
The general rule is that a minor does not have the capacity to make a contract.
The exceptions are A contract for the purchase of
“necessaries”, and A contract of employment for the benefit
of the minor, such as an apprenticeship.
April 18, 2023 BLO1105 – Business Law 226
“Necessaries”
A necessary is something without which the minor cannot exist, such as basic food,
shelter, clothing, medical and like services in an emergency.
Clearly, a luxury item is not covered.
See Nash v Inman (1908)
April 18, 2023 BLO1105 – Business Law 227
Necessaries (cont)
Necessaries were summarized in Chapple v Cooper (1844), where the “station in life”
concept was evident.
More modern examples appear in Scarborough v Sturzaker (1905), and in
Bojczuk v Gregorcewicz (1961).
Some statutes affect minor’s contracts.
April 18, 2023 BLO1105 – Business Law 228
Mistake
If a mistake occurs during contract formation, the court may declare the “contract” void
for (because of the) mistake.If so, there was never a contract at all, since
the parties never reached agreement in the first place.
The “contract” is “void ab initio”, or a nullity from the beginning.
April 18, 2023 BLO1105 – Business Law 229
Consequence of Voidness
It is vital to understand that, when a finding of mistake occurs, the “contract” is void.
It follows that there can be no legal outcomes resulting from the contract.
For example, if the contract was intended to transfer ownership from A to B, such
transfer cannot be achieved!
April 18, 2023 BLO1105 – Business Law 230
Categories of Mistake
Mistake is not easily proved, since it allows a convenient escape route from a contract.
But three categories of mistake exist, namely Common mistake; Mutual mistake; and Unilateral mistake.
April 18, 2023 BLO1105 – Business Law 231
Common Mistake
Cases usually relate to non-existence of the subject matter.
See Pritchard v Merchants & Tradesmans Mutual Life Ass. Society (1858)
But if one party effectively guarantees the existence of the subject matter, he cannot argue mistake. See McRae v CDC (1951)
April 18, 2023 BLO1105 – Business Law 232
Mutual Mistake
This occurs when the parties are at “cross-purposes”, as where A owns cars 1 and 2.
B offers to buy car 1 from A, whereas A thinks that B is offering to buy car 2.
This type of confusion arose in Raffles v Wichelhaus (1864), when cargo was described as “Ex Peerless from Bombay”
April 18, 2023 BLO1105 – Business Law 233
Unilateral Mistake
This is “one-sided” mistake. One party is mistaken, and the other knows (or ought reasonably to know) that he is mistaken.
Note “actual” and “constructive” knowledge.
Usually unilateral mistake applies to The subject-matter of the contract, or The identity of the other party.
April 18, 2023 BLO1105 – Business Law 234
Payment by Personal Cheque
These cases often arise when goods are sold and paid for by personal (as distinct from bank) cheque.
To accept a personal cheque in exchange for goods is to give credit to the buyer.
Can the seller argue mistake (as to identity), and have the “contract” declared void?
April 18, 2023 BLO1105 – Business Law 235
Mistaken Identity
If the contract IS declared void, it means that it was void from the beginning, and it cannot achieve legal outcomes, such as transferring ownership.
Therefore, the goods “sold” have not been sold at all, and legal ownership of the goods never left the seller. He gets them back!
April 18, 2023 BLO1105 – Business Law 236
Mistake v Misrepresentation
There is a competing argument, namely that the buyer has fraudulently misrepresented
his identity.Mistake makes a contract VOID.
Misrepresentation makes a contract VOIDABLE.
This distinction is vitally important! The cases explain why it is important.
April 18, 2023 BLO1105 – Business Law 237
Phillips v Brooks Ltd. (1919)
P sold goods to X, believing him to be Y, and accepted a cheque drawn on Y’s account.
The cheque was forged, and “bounced”.X quickly pawned the goods to BL. P sued BL for the goods, arguing mistake.
Held. You cannot argue mistake when dealing “face-to-face”.
April 18, 2023 BLO1105 – Business Law 238
Phillips v Brooks (cont)
P could have proved misrepresentation of identity by X, and this would have made the
contract voidable (capable of being avoided at the option of P).
But P did not take any steps to avoid it before X resold the goods to BL. Therefore BL
keeps the goods. P can only sue X.
April 18, 2023 BLO1105 – Business Law 239
Avoiding the Contract
How do you avoid a contract that is voidable because of a misrepresentation?
This can be done by physical cancellation of the contract, or by endeavour.
See Car & Universal Finance Co v Caldwell (1965). It was held that a contract is avoided if all reasonable attempts are made.
April 18, 2023 BLO1105 – Business Law 240
Ingram v Little (1961)
This case appeared to contradict the precedent of Phillips v Brooks. Two ladies sold their car to a trickster, who said he was “Hutchinson”. He wasn’t. They took a cheque in payment. Later they found their car in Little’s used car yard. The court held they were mistaken, and they got their car back.
April 18, 2023 BLO1105 – Business Law 241
Lewis v Averay (1971)
Lewis sold his car to “Green”, another trickster who had Green’s cheque book and proof of identification.
He later found the car which had been bought from G by Averay, and sued for its return.
Lord Denning strongly criticised Ingram v Little, and reinstated Phillips v Brooks.
April 18, 2023 BLO1105 – Business Law 242
“Bona Fide Purchaser”
Note that the third party who buys the goods must be a genuine buyer, paying fair value for the goods, and being unaware of any defect in the title.
If he is not, he does not get good title as against the true owner.
A price comparison is a good guide.
April 18, 2023 BLO1105 – Business Law 243
Conclusion
In cases of this type, the better view is that the third party – if genuine – will obtain and retain good title to the goods.
The original owner therefore loses title, and is left with a doubtful remedy, namely an action to recover his loss from the trickster.
April 18, 2023 BLO1105 – Business Law 244
Non Est Factum
Remember the defence of “non est factum”, which is really based on unilateral mistake
as to the nature of the document signed.
The cases of Gallie v Lee and Petelin v Cullen, previously discussed in exclusion
clauses, apply. You must prove both mistake and an absence of carelessness.
April 18, 2023 BLO1105 – Business Law 245
Misrepresentation
If a false statement cannot be proved to be a term, the misrepresentation possibility
should be explored.
This is a false statement made during negotiations, that induces the person hearing it to enter into the contract.
The essentials are fact and inducement.
April 18, 2023 BLO1105 – Business Law 246
Types of Misrepresentation
There are three distinct categories of misrepresentation, namely
Innocent (unintended deception); Fraudulent (intended deception); and Negligent (breach of a duty of care).
The remedies vary for the different types.
April 18, 2023 BLO1105 – Business Law 247
Statement of Fact
The offending statement must be of a factual nature – not a statement of law or an
expression of opinion.
Note that an apparent statement of a factual kind might in some circumstances be
treated as only an expression of opinion.
See Bissett v Wilkinson (1927)
April 18, 2023 BLO1105 – Business Law 248
The Converse Result
Similarly, what appears to be an expression of opinion might in some cases be treated
by the court as a statement of fact.
This is specially so if the person making the statement knows exclusively all of the facts upon which the apparent opinion is based.
See Smith v Land & House Property Corp Ltd.
April 18, 2023 BLO1105 – Business Law 249
Silence as a Response
Generally speaking, silence (as a response to a question) will not be misrepresentation.
Exceptions apply, including “Utmost good faith” contracts; Special relationships; If silence distorts the truth; and If a statute requires disclosure.
April 18, 2023 BLO1105 – Business Law 250
“Utmost Good Faith”
Some types of contract are governed by the requirement that the parties are bound to apply the utmost good faith in their dealings.
Insurance contracts require full disclosure in proposals by the customer because of the “imbalance” of knowledge.
April 18, 2023 BLO1105 – Business Law 251
Special Relationships
When a special relationship exists between the parties, the dominant party must make full disclosure when contracting with the “subservient” or weaker party.
Examples include doctor/patient, solicitor/client, parent/child, teacher/pupil, banker/customer, director/shareholder etc.
There is a “fiduciary duty” owed.
April 18, 2023 BLO1105 – Business Law 252
Distortion of the Truth
Sometimes, silence can distort the truth, if only part of the story is told.
In such case, silence is not acceptable.
See R v Kylsant (1932) to illustrate.
Director’s statement in a prospectus that profits had been paid for 6 years did not tell
the full story.
April 18, 2023 BLO1105 – Business Law 253
Statutory Requirements
Some Acts of Parliament require that certain information be disclosed, such as the Sale of Land Act 1962 (Vic).
The vendor of real estate must supply detailed information to prospective buyers before the contract is signed.
Similar rules apply to sale of a business.
April 18, 2023 BLO1105 – Business Law 254
Inducement is Required
The second requirement for misrepresentation is that the innocent party must be induced by the false statement to
enter into the contract.
If he isn’t induced, no harm results.
See Attwood v Small (1838) as an example. The same would apply to an RACV check.
April 18, 2023 BLO1105 – Business Law 255
Misrepresentations Classified.
The false statement may be Innocent (unintended); Fraudulent (intended); or Negligent (carelessly given).
An innocent misrepresentation is relatively easy to prove, requiring only proof of a
false statement that induced the contract.
April 18, 2023 BLO1105 – Business Law 256
Fraudulent Misrepresentation
More difficult to prove, this requires the additional component that the person knew that the statement was false, or that he couldn’t care less whether it was true or false.
See Derry v Peek (1889) for discussion on the elements of fraudulent misrepresentation.
April 18, 2023 BLO1105 – Business Law 257
The Remedies
In all cases of misrepresentation, rescission is the appropriate remedy. In the case of fraudulent and negligent misrepresentation, damages are also available.
The problem with rescission is that – although in theory a good remedy – the right to rescind is easily compromised or lost.
April 18, 2023 BLO1105 – Business Law 258
Limitations on Rescission
Rescission will not be awarded if there is Unreasonable delay; Affirmation of the contract; Intervention of third parties; Change or destruction of subject-matter; The rule in Seddon’s Case applicable.
April 18, 2023 BLO1105 – Business Law 259
Effect of Losing Rescission
When the right to rescind is lost for one or more of the foregoing reasons, this places
the victim of an innocent misrepresentation in an invidious position.
He cannot get damages, since they are not available for innocent misrepresentation. He has lost the right to rescind. He has no
remedy at all!
April 18, 2023 BLO1105 – Business Law 260
Possible Solutions
The options are
1. Try to prove it is fraudulent or negligent.
2. If an oral contract, try to prove it is a term, as was tried in Oscar Chess v Williams.
3. If a written contract, try to include it as a term by arguing the 3rd exception to the PER, or arguing collateral contract.
April 18, 2023 BLO1105 – Business Law 261
Continued
While these solutions are possible, we have seen that they have their difficulties.
Proving fraud is not easy, if denied.
The 3rd exception to the Parol Evidence Rule has limiting factors, as does the collateral contract argument.
There is thus no simple solution available.
April 18, 2023 BLO1105 – Business Law 262
Negligent Misrepresentation
Negligence is “breach of a duty of care”. There must therefore be a case where the duty is owed and breached.
This can occur in a special relationship, or if an opinion is given carelessly by an expert.
As an example, see Esso Petroleum Ltd v Mardon (1976).
April 18, 2023 BLO1105 – Business Law 263
Statutory Misrepresentation
Business operators are now subject to legislation in this area. Relevant Acts are
Trade Practices Act 1974 (C’th); and Fair Trading Act 1999 (Vic).
Misrepresentation occurs if a “misleading or deceptive” statement is made in the conduct of a business. Note s.52 TPA.
April 18, 2023 BLO1105 – Business Law 264
Duress, Undue Influence & Unconscionable Conduct
Here we examine 3 types of behaviour or conduct occasionally apparent when
contracts are being negotiated.
If occurring, the contract becomes “voidable at the option of the victim” of such activity.
This makes sense, because “agreement” has not been freely and voluntarily given.
April 18, 2023 BLO1105 – Business Law 265
Duress
Duress is the use of violence, or the threat of violence to a person, his goods or his
assets in order to force him into a contract.
The victim of such contract can – at his option – have the contract set aside (avoided)
because of the duress.
See Barton v Armstrong (1974)
April 18, 2023 BLO1105 – Business Law 266
Duress (continued)
Historically, physical violence or threats to harm the person or immediate family was
required. Today, threats of economic damage will suffice.
See Universe Tankships of Monrovia v International Transport workers
Federation (1982)
April 18, 2023 BLO1105 – Business Law 267
Undue Influence
Less obvious, undue influence occurs when the free will of a party is compromised by
a person in a dominant situation.Usually this involves a “special relationship”
between the two parties.In such cases, the courts presume that the
stronger party has unduly influenced the weaker.
April 18, 2023 BLO1105 – Business Law 268
Undue Influence (cont)
The onus is then upon the dominant party to prove that the weaker party was not unduly
influenced.
If he fails, the contract is voidable at the option of the victim.
See Lloyd’s Bank Ltd v Bundy (1974), and Tate v Williamson (1866)
April 18, 2023 BLO1105 – Business Law 269
Unconscionable Conduct
This means conduct that offends good conscience. Relatively unknown under the
common law, due to the “freedom of contract” doctrine, it is now a recognized
reason to have a contract set aside.
There is usually an inequality of bargaining power, and the weaker is disadvantaged.
April 18, 2023 BLO1105 – Business Law 270
….continued
Such inequality can result from ignorance, illness, pressing need, financial desperation.
See Clifford Davis Management Ltd v WEA Records Ltd. (1975), where advantage was taken of the business inexperience of
musicians and composers to negotiate grossly unfair management terms. The
contract was set aside.
April 18, 2023 BLO1105 – Business Law 271
Australian Cases
Apart from the case of Waltons v Maher, important Australian cases on unconscionability include
Commercial Bank of Australia Ltd v Amadio (1983), and
Nolan v Westpac Banking Corporation Ltd (1989)
April 18, 2023 BLO1105 – Business Law 272
Parliamentary Intervention
This is another area where Statutes have been passed to strengthen the common law.
Conduct in business that is “harsh and oppressive” is now outlawed by the TPA
and the Fair Trading Act (Vic).The courts will consider bargaining strength,
conditions imposed, clarity of documents, unfair tactics and so on.
April 18, 2023 BLO1105 – Business Law 273
Discharge of Contract
A contract can be discharged (terminated) by
1. Performance;
2. Agreement;
3. A term in the contract;
4. Breach of a condition in the contract;
5. Operation of law; and
6. Frustration.
April 18, 2023 BLO1105 – Business Law 274
Performance
The most common method of discharge, as most contracts are formed and performed without
problems.
Note that part-performance is not acceptable.See Cutter v Powell (1795)
Performance must exactly comply with the terms of the contract. See Moore v Landauer (1921)
April 18, 2023 BLO1105 – Business Law 275
Part Performance Exceptions
The total ban on “part performance” created hardship, and exceptions have been allowed when
The contract is “divisible” into parts; and When the contract has been substantially
(almost totally) performed.Contrast “divisible” and “non-divisible”
contracts.
April 18, 2023 BLO1105 – Business Law 276
Quantum Meruit
If a contract has been partly performed, and there is a reason for not completing it, the court will use the “quantum meruit” rule to decide how much the contractor should be paid. This also applies if there is no agreement as to price.
A reasonable price will be paid for a reasonable quality job.
April 18, 2023 BLO1105 – Business Law 277
Time of Completion.
The term setting the date for completion of the contract is usually only a warranty.
It can be converted to a condition by saying time shall be “of the essence” in this contract.
If this is done, any late completion is breach of condition, not breach of warranty.
April 18, 2023 BLO1105 – Business Law 278
Discharge by Agreement
A contract is created by agreement. Logically, it can be discharged in the same way. This can be done by a term in the original contract, or by a separate agreement.
If it is done by a separate agreement, remember that there must be consideration, or the agreement will not be enforceable.
April 18, 2023 BLO1105 – Business Law 279
Discharge by a Term
This is a reference to a “condition subsequent”, which we have discussed
previously.
It is a term referring to some event which – when it occurs – will bring the contract to
an end.
April 18, 2023 BLO1105 – Business Law 280
Discharge by Law
The possibilities here are: - Merger of two contracts, when the smaller
contract merges with the larger one; Bankruptcy, when the Act prevents the
continuation of some contracts; and Document alteration in a material way.
April 18, 2023 BLO1105 – Business Law 281
Discharge by Breach
This refers to breach of condition, entitling repudiation, as distinct from breach of warranty, which entitles only damages.
Note the terms: - “Repudiatory breach”, and “Anticipatory breach”.
April 18, 2023 BLO1105 – Business Law 282
Discharge by Frustration
An outside, “supervening” event, might make performance of the contract impossible.
Prevention of performance by an “act of God”, natural disaster, “force majeur”, riot, civil commotion, might discharge the contract.
The event must be beyond the control of the parties, and not anticipated by them
April 18, 2023 BLO1105 – Business Law 283
Historical Background
Historically, courts would not entertain this argument, saying that the parties should have protected themselves by terms in the contract.
In theory, that is alright, but how do you foresee the unforeseeable? A contract covering every possibility would be too heavy to carry into court.
April 18, 2023 BLO1105 – Business Law 284
Acceptance of Frustration
In Taylor v Caldwell (1863), the frustration argument was accepted when a building hired to stage concerts was destroyed by fire the night before the first concert.
The promoter’s action to recover expenses from the owner failed, since the contract was discharged by the frustrating event (in this case, the fire).
April 18, 2023 BLO1105 – Business Law 285
Proving Frustration
In National Carriers Ltd v Panalpina (Northern) Ltd (1981) it was held the requirements are
1. A supervening event;
2. Not caused by either party;
3. Not contemplated by the contract;
4. Changes the nature of the contract; and
5. Causes resulting injustice to the parties.
April 18, 2023 BLO1105 – Business Law 286
Examples of Frustration
Destruction of the subject-matter, as in Taylor v Caldwell;
Illegality of purpose, as in Esposito v Bowden;
Circumstances ceasing to exist, as in Horlock v Beal;
Cancellation of event, as in Krell v Henry;
April 18, 2023 BLO1105 – Business Law 287
Examples (continued)
Change of government policy, as in MWB v Dick, Kerr & Co.;
Event making performance impossible, as in Wong Lai Ying v Chinachem Investment Co.;
Event causing unreasonable delay, as in Bank Line v Capel
April 18, 2023 BLO1105 – Business Law 288
Limitation on Frustration
Note that frustration will not apply if it still possible to perform the contract. This applies even though it might be much more onerous and/or less profitable to do so.
See the Tsakiroglou Case, arising out of the closure of the Suez Canal in wartime. The frustration argument failed in this case.
April 18, 2023 BLO1105 – Business Law 289
Codelfa Constructions Case
This Australian case in 1982 against the NSW State Rail Authority shows a more flexible approach by the High Court to the frustration argument.
Codelfa was able to have the contract rewritten because of the intervention by residents to limit the hours of work.
April 18, 2023 BLO1105 – Business Law 290
Frustrated Contracts Act
Under the common law, frustration does not operate retrospectively, so that prepayments for work not done at time of frustration cannot be recovered.
The Act changes this, and the contractor may now only retain money paid for work already done at time of frustration.
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Remedies for Breach (of contract)
Before we discuss damages – the traditional and main remedy for breach of contract - we need to examine 2 equitable remedies, namely: -
Specific performance; and Injunction (restraining order).
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Specific Performance
If a legal contract exists between A and B, and B refuses (for no valid reason) to perform it, A can seek an order for “specific performance of the contract” by B.
If satisfied (that the contract exists, is valid, and B’s refusal to perform cannot be legally justified), the court will order B to perform his contractual obligations.
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Continued…….
We thus have a strategy to compel performance of a contract when refusal occurs. This covers cases, such as a property purchase, where damages might not properly compensate.
An assertive threat to take this step (seek specific performance) usually works.
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Injunction
In contrast to specific performance, which is a positive remedy, the injunction is a
negative remedy.
It prevents or restrains a person from taking action that will breach the contract or will damage property that is the subject-matter
of the contract.
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Injunction Risks
By their nature, injunctions are often sought and obtained “ex parte”, in the absence of
the party restrained.
The applicant must give undertakings to the court that he will pay costs and damages if it emerges that he has improperly sought
and obtained the injunction. This is a significant deterrent.
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Damages
The court’s objective in awarding damages is to compensate the victim (of the breach of contract), not to punish or penalise the one
who breached the contract.
Punitive damages have no relevance to contract law, although applied in some
other areas, such as tort.
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Two Aspects of Damages
Two questions arise for determination.
1. Do the losses claimed result from the contract breach? This is the question of “remoteness of damage”.
2. How much damages do we award? This is the question of the “measure of damages”.
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Remoteness of Damages
Not all damages that appear to result from a breach of contract can necessarily be claimed.
They may be too remote from (too far removed from) the breach.
There has to be a “causal connection” or an identifiable link between the breach and the loss claimed to result from it.
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Continued ………
Consider the textbook examples of bizarre cases.
You could argue that these losses could be claimed, specially if you apply the “but
for” test.
In Leisbosch Dredger v SS Edison (1933), Lord Wright said we have to draw the line.
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Hadley v Baxendale (1854)
Still the leading case on remoteness, involved a cartage contract under which B agreed to transport H’s broken crankshaft from his flour mill to the manufacturer to use as a pattern for a replacement shaft.
B was also to transport the new shaft, when made, back to H.
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Continued ………
B took much too long to perform the contract, and H claimed damages for loss of production in his mill.
It was held that B is liable only for losses that he can foresee. He can foresee losses that are either
A natural consequence of his breach, or Losses he has been told about by H.
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Foreseeable Losses
Any losses falling outside these two categories were not foreseeable by B when the contract was formed, and he cannot be liable to pay them.
H could have made the production losses foreseeable by B simply by telling him that the broken crankshaft was his ONLY crankshaft.
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Continued ……..
Losses are too remote from the breach if they are not foreseeable by the contracting party.
They are foreseeable if they are either Natural consequences (everyone knows, or
should know, they will result!), or Consequences that the contractor has
been told about when the contract is made.
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The Practical Solution
The solution is to make sure that you tell your contractor what the consequences of any
breach by him will be, and he will be liable for resultant losses.
But, in business, people often are too secretive as they do not want others to
know their commercial secrets.
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Victoria Laundry Case
The decision in Hadley v Baxendale was followed and endorsed in Victoria
Laundry (Windsor) Ltd v Newman Industries Ltd (1949).
Again, the defendant was liable for losses they could foresee, but not for those that
they could not foresee.
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Interest on Lost Capital
If capital is lost and successfully claimed as damages, the High Court held in Hungerfords v Walker (1989), that the plaintiff could also claim interest on the capital for the duration of the loss.
Interest paid on lost capital, or lost on investing it, is a “natural consequence” of the breach causing the loss of capital.
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Measure of Damages
Damages can be special, general, nominal or punitive. As noted, the latter are not given in contract disputes.
Restoration – not punishment – is the aim.
Damages are measured by the “expectation loss” method if applicable, and by the “reliance loss” method if not.
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Amann Aviation Case
In Commonwealth v Amann Aviation Pty Ltd (1992), an award of $410,000 under the expectation loss method was increased on appeal to the Full court of the Federal Court to $6.6 million by using the reliance loss method.
The High Court upheld this increase on a further appeal.
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Mitigation of Loss
All plaintiffs are required to keep losses to a minimum, and to prevent unnecessary escalation of loss.
This applies to contract and other areas of law. It is tempting to allow the losses to mount up, but this can work against the claimant. Reasonable steps to mitigate are required.
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Examples of Mitigation
Examples include The wrongfully dismissed employee must
take reasonable steps to find another job; The landlord must take reasonable steps to
find a replacement tenant if the tenant leaves before end of lease.
They might not succeed, but they must try!
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Jarvis v Swan Tours Ltd (1972)
Tourism students should note that Jarvis won a claim for damages for “injured feelings” and “emotional upset” against a tour operator who breached a contract with him.
This was the first recorded case of this happening in a contract case (cf tort), and was a typical Lord Denning innovation.