UNIVERSITY OF BALLARAT SCHOOL OF BUSINESS BL502 - FUNDAMENTALS …€¦ · · 2003-04-09FIRST SEMESTER, 2003 AN INTRODUCTION TO THE LAW OF CONTRACT ... covered the material in it

Copyright- C.Baker, University of Ballarat, 2003

502 CONTRACT 2003SEM1

UNIVERSITY OF BALLARAT SCHOOL OF BUSINESS

BL502 - FUNDAMENTALS OF LAW

FIRST SEMESTER, 2003

AN INTRODUCTION TO THE LAW OF CONTRACT LECTURE GUIDE THREE

Prepared by Chris Baker, School of Business, University of Ballarat

IMPORTANT NOTES TO STUDENTS 1. The main reference text is Sweeney & O’Reilly (S&OR), your prescribed text. Also useful is S. Graw, An Introduction to the Law of Contract 3rd ed. or 4th ed. (Graw) or any Australian Business Law text (see examples in the Unit Description and on counter reserve). Crosling & Murphy, How to Study Business Law is also a useful text – with flowcharts. You should bring S&OR to lectures and tutorials. 2. As usual you should read ahead for each lecture so your understanding can be tested and deepened during the lecture. That is, BEFORE LECTURES you should read the lecture guide, the relevant paragraphs in S&OR and the cases mentioned IN THE LECTURE GUIDE according to the schedule on the next page. Not every point in the lecture guide will be covered in lectures. BY THE END OF EACH TOPIC you must go through the lecture guide and make sure you have covered the material in it and have a set of notes following the headings in the lecture guide and incorporating material from the lecture guide, cases referred to in the guide and relevant paragraphs from S&OR. 3. Note that we are not dealing with all aspects of Contract. Pay close attention to what is covered in the lecture guide and the references made to S&OR. 4. You will be examined only on the information contained and cases referred to in lectures and in the lecture guide and tutorial exercises although wider reading will enhance your understanding and ability to analyse. You are encouraged to keep summarising the cases using the headings suggested previously. This will help you learn and to keep track of whether you are up-to-date! 5. In some instances there will not be much information given about the cases in the texts. Don’t panic and think you have to find more information about them! Often cases are looked at for just one point. At this stage of your course, you are not required to go to the actual law reports and look up more information. One reason is that the UB Library or the internet do not contain many of the cases you would need to look up. Secondly, some cases involve many complex issues and you would only be confused if you tried to read the full judgments at this stage. 6. Self-checks: use the questions in the lecture guide, and objectives in the lecture guide to check your understanding. At the end of each chapter of the text by Stephen Graw there are useful questions and case studies.

Copyright to School of Business, University of Ballarat, 2003

OBJECTIVES At the end of this topic students should: * know how a contract: - is formed - its content is determined - its validity tested - it is brought to an end - what remedies are available if it is not performed adequately or at all; * know how to analyse a fact situation to identify the legal problem and which

contract rules and cases can be applied or used to suggest a likely outcome/solution to that problem;

* know how to use their knowledge of contract principles to manage legal risks

that may arise in commerce and/or to communicate with their legal advisers; * have developed their analytical, written and oral communication and team-

work skills.

Anticipated class schedule Week No./L No. Lecture Topic Tutorial Topic

Area Week 8 L1 L2

Complete Topic Two (Tort) Topic Three: Contract Part A: Overview of Contract Part B: Elements of Contract – Intention, start Offer

Negligence case study (see Tort Tutorial package)

Week 9 L1 L2

Offer and Acceptance Consideration/Promissory Estoppel

Old exam question as case study – is there a contract?

Week 10 L1 L2

Consideration/Promissory Estoppel; mention Capacity Commence Part C: Content of a Contract – Terms Terms and Exclusion Clauses

Negotiate a contract in class – revise elements of contract

Week 11 L1 L2

Part D: Vitiating Factors – misrepresentation Duress, undue influence, unconscionable conduct

Write up and bring contract to class – analyse for reps and terms

Week 12 L1 L2

Contracts in Restraint of Trade Part E: Discharge or Termination

Exclusion clause case study

Week 13 L1 L2

Part F: Remedies TOPIC FOUR – Introduction to business structures

Practice exam question – revise Parts C, D, E & F

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L E C T U R E G U I D E

ESSENTIAL READING: S&OR paragraphs set out in lecture guide and one other contract or business law text – see list in Unit Description for suggestions. FURTHER READING: any business law or dedicated contract textbook – use key words. Crosling & Murphy, How to Study Business Law is also a useful text – with flowcharts.

A. AN OVERVIEW OF CONTRACT

OBJECTIVES: At the end of this section students should: * understand the significance of the law of contract to business and consumers; * know the difference between an 'agreement' and a 'contract'; * know the legal components of a valid contract. * know the sources of contract law * understand the various ways in which contracts can be classified and in particular know the significance of the distinction between formal and simple contracts; * understand how the principle of 'freedom to/of contract' has influenced the content and development of contract law. 1. Importance of the law of contract – S&OR [4.1-4.2] 2. What is a 'contract'?- S&OR [4.3]

A valid contract is an agreement made between two or more parties, whereby legal rights and obligations are created which the law will enforce.

3. What are the components of a valid contract? See S&OR [4.2] [4.6] – [4.12] and attached chart. I believe that it is easier to analyse a contract and its ramifications for the different parties if the following steps are taken. This lecture guide is structured to reflect these steps. First decide whether in fact a contract exists. To do this, check that the

essential elements of INTENTION, OFFER AND ACCEPTANCE, CONSIDERATION exist. Check the CAPACITY of the other party.

Secondly decide what the parties have agreed to. To do this work out what

statements are pre-contractual REPRESENTATIONS and which are TERMS (express or implied) of the contract. Are there any EXCLUSION CLAUSES?

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Thirdly check whether the contract is valid and enforceable. If the contract was induced by MISREPRESENTATIONS, a MISTAKE had been made (mistake has a narrow meaning in law), the contract was made under DURESS or UNDUE INFLUENCE or it was UNCONSCIONABLE (unfair) or ILLEGAL it may be invalid or unenforceable. In addition, if a party does not have capacity the contract may be void or voidable.

Fourthly has the contract been discharged (come to an end)? This can occur

by PERFORMANCE (the usual way), AGREEMENT, LAPSE OF TIME, BREACH OF CONTRACT, FRUSTRATION, the OPERATION OF LAW.

Fifthly if there has been a breach of contract or the contract is invalid for

some reason (eg misrepresentation) the injured party may be able to claim damages, specific performance, an injunction, a quantum meruit payment, rescission or repudiate the contract.

4. What are the sources of contract law? Is there a need for reform? 5. The underlying common law principle of contract is 'Freedom of Contract' * What effect has this principle had on the development of contract law? * Is this principle still recognised today? Should it be? Much of the law of contract as we know it today developed in England in a laissez-faire economic environment. Thus, the fundamental basis on which the principles of contract law rested was the notion of freedom of contract and equality of bargaining power, ie. that the parties were free to make a contract if they wanted to. If they did, it was up to them to agree on the terms. The courts were reluctant to interfere unless one of the parties could show that his/her consent to enter the contract was not genuine (eg. duress used) or the agreement was illegal (ie. against public policy, eg. a contract to commit a crime). It was not for the courts to adjudicate on the fairness of the terms of the contract, or on whether adequate consideration was given.

In recent years this laissez-faire attitude has been changed with the courts and governments recognising that in our modern commercial society equal bargaining power is a myth (ie the common view of large corporations vs consumers). The courts have developed equitable principles to give relief from unfair conduct, eg. the doctrine of unconscionable conduct. More importantly, Federal and State Parliaments have been active in passing consumer protection legislation, especially since the 1960s. Such legislation includes the Trade Practices Act 1974 (Cth.), the Fair Trading Act 1999 (Vic.), amendments to the Goods Act 1958 (Vic.), the Insurance Acts (Cth.), the Credit Codes (State) and Acts licensing providers of services eg. Travel Agents Act 1986 (Vic.). This wealth of legislation in most cases affects business in its dealings with consumers (as defined in each piece of legislation). Dealings between businesses have been largely left unaffected and the ordinary contract principles apply. BL502 concentrates on these fundamental business common law principles. The examination of the modification of these principles where consumers are concerned (and in some cases businesses when they fall within the definition of 'consumers') is dealt with in BL503 (insurance and sale of goods legislation) and in more depth in BL741 Marketing Law and BL621 Tourism Law.

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6. Some words you will come across! We will give the flavour of their meaning now, when you come across them again, make a more detailed note of their meaning. You could look them up in a law dictionary too! Add to this list as you go – ie make your own dictionary.

(a) formal contracts (b) simple contracts (c) void (d) voidable (e) unenforceable (f) illegal (g) executed (h) unexecuted (i) express (j) implied (k) rescission (l) repudiate (m) subjective test (n) objective test

B. IS THERE A CONTRACT? - WHAT ARE THE ELEMENTS OF A CONTRACT? OBJECTIVES: At the end of this section students should: * know what elements must exist before it can be said 'we have a contract' * know the rules of those elements (ie of intention, offer and acceptance, consideration and capacity) and how to apply them to factual situations * understand how different parties may try to argue that there is or is not a contract, depending on whether it is in their interests to do so.

1. INTENTION TO CREATE LEGAL RELATIONS S&OR CH 5 [5.2] – [5.5]

* This is the critical element that distinguishes agreements and contracts. Why? Because a contract is an obligation voluntarily entered into by the parties, it cannot come into existence if neither party intended to be legally bound, even if a party makes a promise he or she intends to keep at the time. The intention to be legally bound is often not expressly stated by the parties, but can be implied from the circumstances surrounding the arrangement. The test is objective, not subjective. Would a reasonable person conclude that the parties had intended to be legally bound and had agreed to the terms of the contract? More often than not, since the intention to be legally bound is not expressed, a presumption will be drawn in particular circumstances as to whether such intention was present. However, it is open to the parties to bring evidence to rebut the presumption made. A distinction is made between social/domestic arrangements and business agreements.

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* Can you explain what the distinction is and why it is made? (a) Social/domestic arrangements: * What is the presumption? * What is required to rebut the presumption (see Graw 4.2.5-4.2.7)? Compare the cases of Todd v Nichol [1957] SASR 72 and Roufos v Brewster [1971] 2 SASR 218 * 'Intention' is often the critical legal issue in disputes involving the distribution of tatts lotto/lottery/competition winnings - Why? How can disputes be avoided? (b) Business/Commercial agreements The law presumes that parties to an agreement concerning commerce or business intend to be legally bound. This presumption may be rebutted by a sufficiently strong inference drawn from the surrounding circumstances or by the insertion of an 'honour clause'. Compare the cases of: Rose and Frank Co. v J.R. Crompton & Bros Ltd. [1923] 2 KB 261 and Edwards v Skyways Ltd. [1964] 1 All ER 494 and Esso Petroleum Ltd. v

Commissioners of Customs and Excise [1976] 1 All ER 117 2. THE AGREEMENT: OFFER AND ACCEPTANCE (Generally S&OR ch 4) Often business transactions are complex and involve negotiations and representations but in the final analysis it must be shown that somewhere one person has made an offer and somewhere another person has accepted that offer expressly or impliedly in the terms in which the offer was made. This agreement, consensus or "meeting of the minds" is the basis of a contract. There are well established rules of both offer and acceptance. NOTE: There is a useful summary chart in S&OR page 90, [4.55] OFFER [4.13] – [4.34], [4.47] – [4.49] An offer is a proposal or promise by one party to enter into a legally binding contract with another. The offer may be made in writing, orally or be implied by conduct. * Who is the 'offeror' and who is the 'offeree'? (1) Is the statement an offer? Distinguish between an 'offer' and

(a) merely supplying information/indicating future intent – Harvey v Facey [1892] AC 552 plus other cases S&OR page 71

(b) an invitation to treat

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- Partridge v Crittenden [1968] 2 All ER 421 - Fisher v Bell [1960] 3 All ER 731 - Pharmaceutical Society (G.B.) v Boots Cash Chemists (Southern)

Ltd. [1952] 2 QB 795 - Grainger & Sons v Gough [1896] AC 325

GENERALLY advertisements, displays in shop windows, and mail catalogues, tenders and auctions are treated as invitations to treat rather than offers.

* Why? And when might an advertisement be treated as an offer? See Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256

* Can you now explain the difference between an offer and an invitation to

treat? (Have you used cases in your explanation?) * What is the position of auctions and tenders? See S&OR [4.19] and [4.20] (2) Rules of offer (a) The offer may be made to one person, to a number of specified persons or to

the whole world. - Carlill v Carbolic Smoke Ball Company [1893] 1 QB 257 (b) The offer must be communicated to the other party. ie. by the offeror to the

offeree. It is essential that the offeree knows of the offer or has it in mind. Why?

- R. v Clarke (1927) 40 CLR 227 in Graw 2.6.2

(c) The offeror may attach conditions to the offer or specify how the offer is to be accepted. But all the terms of the offer must be brought to the notice of, and communicated to, the offeree.

Most problems arise where the 'conditions' attempt to exclude the offeror

from liability if an accident should occur. See later topics: Terms & Exclusion Clauses.

(3) The ‘fate’ of the offer

(a) The Offeror's Options - The offeror may revoke or withdraw the offer at any time prior to acceptance

(an exception is if the offer is an offer in an option contract). .

* When will revocation/withdrawing an offer be successful? (b) The Offeree’s Options -

The offeree may ask for further information, accept or reject the offer outright or make a counter offer - Hyde v Wrench (1840) 3 Beav. 334

(c) The offer may lapse: S&OR [4.47] – [4.49]

• if it is not accepted within the time stated in the offer or within a reasonable time if no time is set;

• if a condition is not fulfilled, for example, if the offer is made 'subject to finance' and no finance is forthcoming;

• on the death of either party before acceptance.

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ACCEPTANCE See S&OR [4.35] – [4.46] An acceptance occurs when the offeree agrees to the proposal (offer) of the offeror. Rules of Acceptance 1. An offer can only be accepted by person(s) who knew of the offer. Why? 2. Acceptance must be final and unqualified and correspond exactly with the

terms of the offer. A qualified acceptance would amount to a counter-offer. Hyde v Wrench (1840) 3 Beav 334 Masters v Cameron (1954) 92 CLR 353

* What is meant by the ‘battle of the forms’ and who ‘wins’ the battle?

3. When, where and how does acceptance occur? * When and where acceptance takes place is vitally important - why? (a) The general rule is that acceptance must be communicated by the offeree

or his or her agent to the offeror before it is said the offer is accepted and therefore a contract exists. Unless the offeror sets a specific manner of acceptance, acceptance can be made in any way eg letter, phone call.

* What problems does this present when the parties are negotiating in a noisy public place, over the phone, by fax?

BUT, because the offeror can set the conditions of the offer, the offeror may

indicate that the general rule of communication is not to apply ie the offeror may indicate (expressly or by implication) in the offer that he/she does want/need to be told the offer has been accepted.

* S&OR [4.42] lists five such examples – what are they? * In order for the postal rule to apply – what evidence must there be? * How is acceptance made when a purchase is made via the internet? (b) Mental acceptance is not sufficient: acceptance must be indicated either by

words or conduct - Felthouse v. Bindley (1862) 11 CBNS 869 in S&OR [4.39] (c) Where an offeror sets out a particular method of acceptance and no other then

the offeree must follow this requirement for his acceptance to conclude a binding contract. Where the offeror does not indicate it to be the only acceptable method, then an alternative may be valid provided it is no less advantageous to the offeror. In Spectra Pty Ltd v. Pindari Pty Ltd [1974] 2 NSWLR 617, D granted P an option to be exercised by notice in writing, "To be sent by pre-paid registered mail." P sent notice exercising the option through the ordinary post and it arrived in time. D claimed no acceptance. Held. The option had been exercised. As the notice had been received within the agreed time limit, it was valid. The fact that ordinary post had been used did not make the notice invalid when received, it simply placed the risk of the communication not reaching the destination on the offeree.

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(d) Acceptance must be within the time prescribed by the offer or, if no time has been prescribed, within a reasonable time. 4. Generally, the offeree can revoke (withdraw) his/her acceptance only if the revocation is communicated to the offeror before the acceptance is received * Can you think of how this could occur? * What problems does this present if the postal rule is being relied upon? 5. The Agreement must be ‘certain’ – what does this mean? S&OR [4.50] – [4.54] 3. CONSIDERATION – S&OR [5.11] – [5.44] (1) The Concept

* Do you think 'consideration' should still be a requirement before it is said 'there is a contract'?

Consideration is not required in formal contracts ie. contracts under seal eg. deeds. But it is required in simple contracts. However, in recent years equity has overcome the strictness of the consideration rule through the development of the doctrine of promissory estoppel (see later). (2) What is ‘consideration’? S&R [5.14] – [5.15] * Who is the ‘promisor’ and who is the ‘promisee’? (3) Rules of Consideration (a) Consideration is essential in every simple contract (subject to the doctrine

of promissory estoppel). (b) Consideration must move from the promisee but can be for the benefit of

some other person. S&OR [5.16] –[5.17], [5.44] Under the doctrine of privity, however, only a party to a contract can sue or be

sued on the contract. The consideration rule runs parallel to that doctrine and provides that a person cannot enforce a contract unless he or she has provided consideration. These requirements have been criticised as being unduly restrictive and unfair. The position has been changed with respect to insurance contracts by the Insurance Contracts Act 1986 and the High Court has recognised one exception. That is, where a promise is made by two people as joint promisees (eg husband and wife), the Court will not inquire who in fact provided the consideration.

See cases of Dunlop Pneumatic Tyre Co. Ltd. v Selfridge and Co. Ltd. [1914-

15] All ER Rep 333 and Coulls v Bagot’s Executor and Trustee Co. Ltd. (1967) 119 CLR 460

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(c) Consideration may be executed, or executory but must not be past. S&OR [5.20] Consideration is "executed" when it has been performed by one party in exchange for the other party's promise. Consideration is "executory" where both promises remain to be performed in the future. Thus the mere making of a promise may amount to consideration. However past consideration is no consideration. Past consideration is an act which has been performed before the making of a later promise. - Roscorla v. Thomas (1842) 3 QB 234

(d) Consideration need not be adequate but must have some value in the eyes of the law S&OR [5.22] – [5.24]

What was the consideration in Esso Petroleum Ltd. v Commissioners of Customs and Excise [1976] 1 All ER 117? On the other hand, a promise by a man "not to bore his father" in return for the father's promise of financial assistance is too vague to be recognised as consideration: White v. Bluett (1853) 23 LJ Ex 36. Courts do not have the resources, nor the interest, in ascertaining whether a fair or adequate price was paid (recall the basis of contract law is the principle of freedom of contract). So long as consideration exists, the courts are not concerned as to its adequacy provided it is of some ascertainable value (eg. if A pays $1.00 for 50 acres, the $1.00 is the consideration. (Sometimes inadequate consideration is an indication of unconscionable conduct- see later.) The wider acceptance and application of the doctrine of unconscionable conduct (see later in Section D) has had an impact on this rule.

(e) The forbearance to sue (promise not to take legal action or to discontinue legal action) can be good consideration provided the claim on which the legal action is to be or was based was reasonable, and the person taking legal action honestly believed in the likelihood of success. S&OR [5.25]

(f) Renegotiating contracts : a promise to do what a promisor already has to

do is not consideration S&OR [5.26] – [5.33] There is no consideration if all the party promises to do now amounts to

something he was already obliged to do under an existing contract. Two examples are: (i) Performance of an existing contractual duty owed to the promisor -

S&OR [5.26]-[5.28] A promise to perform a certain act will often look like consideration; but check what the promisor is already required to do - if in reality the 'new' promise is only performance of an existing duty - nothing is being promised at all - the consideration is illusory!

Compare Stilk v Myrick (1809) 2 Camp 317 with Hartley v. Ponsonby

(1857) 7 E and B 872 - both cases are in Graw 5.4.3. Note, however, that recent English and NSW cases seem to have

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relaxed this rule on the grounds of ‘commercial reality’ or ‘practical benefit’ – see Williams v Roffey Bros & Nicholls (Contractors) Ltd. [1991] 1 QB 1

(ii) Parties agreeing to 'compromise a debt' ie where a creditor promises to discharge or end a debtor's obligations – S&OR [5.29]

Assume that A owes B $100 to be paid on 1st April. If A promises to pay $50 on the 1st April and B agrees to accept $50 from A on the 1st April and not to sue for the remaining $50 in the future, is this promise by B enforceable? What has A promised in return? See also example in S&OR page 108.

See Fookes v Beer (1884) 9 App Cas 605 – facts given in class. The situation is different if something new or different being offered:

see Pinnel's case. * What are some exceptions to Foakes v Beer? The harshness of the rule in Fookes v Beer has been modified by the development of the doctrine of promissory estoppel.

PROMISSORY OR EQUITABLE ESTOPPEL – S&OR [5.34] – [5.43] This doctrine operates where there is no consideration but nevertheless a promise or representation made may be enforced. In this way it protects parties from unfair conduct and has important ramifications for the way business is conducted. (1) Definition Promissory Estoppel is an equitable doctrine which has provided relief from the strict rule that a promise is not enforceable unless some consideration is given by the promisee. The usual application of this doctrine has been where one party to a contract promises, or by words or conduct, leads the other party to believe, that the promisor will not enforce his/her strict legal rights under the contract and the other party acts on that representation and alters his/her position to his/her detriment and it would be unfair (unconscionable) for the promisor to go back on his/her word. The doctrine originates from Lord Denning's obiter dictum in his judgment in the case of High Central London Property Trust Ltd. v High Trees House Ltd. [1947] KB 130 in S&OR [5.35] (2) What has to be proven?

* What are the four elements or requirements that have to be proven? S&OR [5.38]

The main High Court case in Australia is Waltons Stores (Interstate) Ltd. v Maher (1988) 164 CLR 387 - facts in S&OR [5.41] This area is still being developed and is of critical importance to business.

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* Why was the Walton Stores' case so important? * What is the meaning of 'detriment'? * When would a business want to rely on the doctrine of promissory estoppel? * How can a business conduct its affairs so that another party cannot rely on it? 4. CAPACITY TO CONTRACT This issue can be looked at as necessary for a contract to be formed, or one way in which a contract may not be valid. * Why is it important to know who has the 'capacity' to contract? THE POSITION OF MINORS S&OR [5.45] Contracts by or with minors can be:

Valid - legally enforceable and below Voidable - have legal effect until repudiated by the minor Void - have no legal effect; are null and void or invalid -

Note legislation has changed the law in NSW & SA. Valid Contracts in more detail

Minors will be bound by two types of contracts:

a. Contracts for the supply of "necessaries"

"Necessaries" can be defined as goods and services that are suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery.

The onus of showing the goods are "necessaries" is on the person seeking to hold the minor liable. If the goods are "necessaries" the minor must pay a reasonable price for them (not necessarily contract price). If they are not "necessaries" the minor cannot be sued to recover the price paid ie the contract is void. See Nash v Inman [1908] 2 KB 1. b. Beneficial Contracts of Service A minor will be liable under contracts of apprenticeship or other contracts of service that will improve his capacity to earn a living, provided the contract is for the minor's benefit. Could your contract with the University be an example?

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C. CONTENT OF THE CONTRACT: WHAT HAVE THE PARTIES AGREED TO? S&OR ch 6 OBJECTIVES: At the end of this section students should understand how the courts determine what the terms (rights and obligations) of the parties to a contract are. In particular students should: * know how to classify statements into terms and representations and know and

appreciate why this is important; * understand the difference between express and implied terms and how terms

can be implied into contracts; * understand the difference between conditions and warranties and the different

consequences which follow if terms are the latter rather than the former * understand why exemption clauses are used, when they will be incorporated

into contracts and how they will be interpreted.

1. HOW TO WORK OUT THE TERMS (CONTENT OF THE CONTRACT) Once it has been determined that there is a contract between the parties it may be necessary to decide what the parties have agreed to. Whenever there is a dispute about the content or interpretation of the contract the court must examine it to ascertain the intention of the parties and then give effect to that intention. However, where the parties have used language that is so incapable of any precise meaning the court may have no alternative but to find the contract is void for "uncertainty". While the courts are reluctant to destroy a bargain, they will not make a contract for people who have not bothered to do so for themselves. A process for determining the content of a contract is described below. Special rules apply to exemption clauses. The following is ordered a little bit differently to chapter 6, S&R but I think it provides an easier pathway to the end point ie what are the parties’ obligations. In class a diagram will be developed that can act as a relatively quick guide to work out the parties’ obligations and the effect of statements made by them. A sample contract is given in S&OR page 155. (Question: is it an example of a simple contract or a formal contract (deed)?)

(1) Determine what statements, oral or written, are to be attributed to the parties. Note the Parol Evidence Rule (S&OR [6.4] and [6.35]).

(2) Determine which statements:- (see S&OR [6.21]- [6.6.29])

a) were made only to influence the other party to enter the contract and

were not to be legally binding -ie non-contractual representations and b) were intended to form part of the contract - ie. terms (or promissory or

contractual representations). * Why is this distinction important?

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An objective test of intention is applied to determine whether statements are representations or terms. * Four common sense issues are looked at: see S&OR [6.23]-[6.29] and the cases listed therein – what are they?

We are not going to deal with Collateral Warranties in BL502.

(3) Terms can either be express or implied. Statements made by the parties which form part of the contract are called express terms. If the parties have put all these terms down in writing, the parol evidence rule applies: see (1) above.

After deciding what the express terms are, determine whether any other terms should be implied into the contract – see S&OR ch 7, [7.1] – [7.13]. Be aware of the effect of eg the Trade Practices Act 1974 (Cth). Unfortunately we do not have time to consider the Act in this unit, it is dealt with in BL503 Commercial Law, BL621 Tourism Law and BL741 Marketing Law. (4) Which terms are conditions and which are warranties? It depends on the

intention of the parties (or the Act imposing the term on the parties-see eg Goods Act example in lecture.) S&OR [6.36], [9.6]-[9.11]

Terms which are of crucial importance are called conditions: See Associated Newspapers Ltd. v Bancks (1951) 83 CLR 322 – S:&OR [9.7].

Those which are less important, or subsidiary to the main purpose of the contract are called warranties. See Bettini v Gye (1876) 1 QBD 183 – S&OR [9.11]. It is often difficult to decide whether statements are conditions or warranties; merely using the word 'condition' may not be conclusive. Where terms are implied by statute, the statute usually states whether the terms implied by it are conditions or warranties: see the Goods Act 1958 (Vic) (dealt with in more detail in BL503) and Trade Practices Act 1974 (Cth) (dealt with in more detail in BL741). Note: that there is a move in the United Kingdom to recognise a third category of term: an intermediate term. See S&OR [9.15]-[9.16]. * Why is it important to know if a term is a condition or a warranty? * Can parties ensure that the terms are correctly interpreted as conditions or

warranties? How? 2. IF THERE ARE EXEMPTION CLAUSES: WHAT IS THEIR EFFECT? - S&OR [6.39] – [6.55], [6.5]-[6.6.19] Definition and use – S&OR [6.39] – [6.40] Note the difference between an 'exclusion clause and a 'limiting clause' and the significance of 'standard form' contracts.

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This area can be conveniently broken down into a two-stage process: first check whether the exemption clause is in the contract, and secondly check the meaning of the clause - does it IN FACT protect the writer of the clause as he or she contends? FIRST : DID THE EXEMPTION CLAUSE BECOME A TERM OF THE CONTRACT? 1. Prior course of dealing Even if the exemption clause was not contained in the contractual document, it

may be implied where there has been a prior course of dealing between the parties: see Balmain New Ferry Co. v Robertson (1906) 4 CLR 379 (S&OR 6.6).

2. Signed documents - S&OR [6.44] If the exclusion clause was in a signed document, it is a term irrespective of whether it was read or understood: L’Estrange v F. Gaucob ltd. [1934] 2 KB

394 (S&OR 6.7)

This is subject to some exceptions eg where there was misrepresentation. - Curtis v Chemical Cleaning & Dyeing Co. [1951] 1 KB 805 and see D.J. Hill & Co. Pty. Ltd. v Walter H. Wright Pty. Ltd. [1971] VR 749.

3. Unsigned/oral contracts – S&OR [6.45]-[6.48], [6.9], [6.16]-[6.17] If the exclusion clause was in an unsigned document (eg a docket) or on a sign, the clause will only become part of the contract if the party relying on the clause can show he/she took reasonable steps to bring the clause to the notice of the other party before or at the time the contract was made (in essence the clause must have been part of the offer). Different types of notice are required depending on whether the document/situation is contractual or non-contractual. (a) Is the document/situation contractual or non-contractual

The document (eg ticket)/situation is contractual if a reasonable person would presume it was contractual ie a reasonable person would expect to find terms/

feel obliged to read the docket or sign. To understand the test you need to look at cases to see what it means! S&OR [6.45]-[6.48]

Compare: Parker v South Eastern Railway co. (1877) 2 CPD 416 (S&OR 6.16) Oceanic Sun Line Special Shipping Co. Inc. v Fay (1988) 165 CLR 197

(S&OR 6.17) Le Mans Grand prix Circuits Pty. Ltd. v Ilidias [1998] 4 VR 661(S&OR 6.44) D.J. Hill & Co. Pty. Ltd. v Walter H. Wright Pty. Ltd. [1971] VR 749 (S&OR

6.9) Thornton v Shoe Lane Parking Ltd. [1971] 1 All ER 686 (S&OR p.144)

(b) What notice is required? If the document/situation is contractual, actual or constructive notice is sufficient.

* What is meant by actual and constructive notice? If the document or situation is non-contractual, then actual notice must be

given.

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(c) If the notice required is constructive (ie the document/situation is contractual): check (i) were reasonable steps were taken to bring the clause to the notice of the other party? Eg Parker, Thornton and Balmain New Ferry (see above). (ii) was the notice given before or at the time of the contract? See Olley v Marlborough Court [1949] 1 KB 532 (S&OR 6.5)

(You need to know when the contract was made to answer this -how do you tell?)

SECOND: ONCE IT HAS BEEN DECIDED THE EXCLUSION CLAUSE IS A TERM OF THE CONTRACT, THE NEXT ISSUE IS THE SCOPE OR EFFECT OF THE CLAUSE S&OR [6.49]-[6.55] 1. The Approach of the Courts Where the exemption clause is a term of the contract the Courts will examine

it carefully to determine its effect and restrict its scope where possible. Although limitation clauses only limit the rights of the plaintiff, rather than totally deny liability, the High Court has decided they should be treated just as strictly. S&OR [6.52]

2. According to the Contra Proferentum Rule, any ambiguities in exemption

clauses will be construed (or interpreted) against the party seeking to rely on them. See S&OR [6.50]

- Alex Kay Pty. Ltd. v General Motors Acceptance & Anor. [1963] VR 458

3. In some types of contracts one party can limit their liability by excluding

liability for negligence (the Trade Practices Act makes this illegal for some consumer transactions). General statements such as ‘All care no responsibility’ ‘all loss howsoever caused’ will not generally be effective: S&OR [6.51]

4. To overcome the unjustness of some exemption clauses Lord Denning

(English judge) attempted to introduce a new device to invalidate them - the concept of "fundamental breach". Once there was a total (fundamental) breach of the contract, the party committing the breach would be precluded from relying on any exclusion clause, no matter how wide. The House of Lords rejected this notion and it was not followed by the High Court. Nevertheless a carefully worded clause may be effective. S&OR [6.53]-[6.54].

5. However the exemption clause will not apply where the acts committed were done outside the terms of the contract (ie were not permitted or authorised by the contract). This is some times called 'the Four Corners Rule'. See S&OR [6.55] and cases listed therein.

6. Statutory Reforms In Victoria for example, in consumer contracts for the sale of goods and services, it is illegal to attempt to exclude the terms implied by the Goods Act. Similar provisions are found in the Trade Practices Act. In addition the operation of an exclusion clause may constitute misleading and deceptive conduct or unconscionable conduct under the T.P.A. and Victoria's equivalent legislation, the Fair Trading Act. .

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* Imagine you want to protect yourself from liability when selling goods. What would you have to remember when (1) thinking of how to include an exemption clause; (2) writing that clause?

D. VITIATING FACTORS

IS THE CONTRACT VALID AND ENFORCEABLE OR

IS IT VOID, VOIDABLE OR UNENFORCEABLE BECAUSE OF:

1. MISREPRESENTATION 2. DURESS OR UNCONSCIONABLE CONDUCT OR BECAUSE IT WAS 3. ILLEGAL? or BECAUSE THE PARTIES LACKED CAPACITY (see earlier)

OBJECTIVES: At the end of this section students should understand the various ways the law protects parties from being taken advantage of because of false statements or unfair conduct or where conduct is deemed to be 'morally wrong' and therefore against the interests of society. In particular students should: * be able to recognise when an innocent or fraudulent misrepresentation has been made (ie know the common law rules and how to apply them) and know what the civil consequences are for the parties involved; * understand the difference between duress, economic duress, undue influence and unconscionable conduct; and know the principles or elements of economic duress and unconscionable conduct and how to apply them to a new fact situation; * have an understanding of why some contracts are illegal or void and how they are made illegal or void (ie by common law or by statute); know the difference between illegal contracts and void contracts; know why and how contracts in restraint of trade can be declared void, in particular students should know how to apply the Nordenfelt test and restraint of trade case principles to employment contracts and contracts for the sale of businesses and be able to argue a clause/contract is void/not void and understand how to construct a valid restraining clause. 1. MISREPRESENTATION – S&OR [3.6]-[3.17]; [9.24]-[9.30] This action has largely been made redundant by s.52 Trade Practices Act 1974 (Cth) and equivalent state legislation (see point 5 below.). Nevertheless an understanding of the contract principles assists in understanding the operation of that legislation. In addition, s.52 will not apply in all circumstances and contract law may need to be relied on.

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1. Distinguish between statements which are terms and those which are (non-contractual) representations and puff. See Section C of this lecture guide. We are concerned here only with representations which were made to induce the other party to enter into the contract and which have turned out to be false. 2. To prove misrepresentation the following must be proved: [3.6] – [3.17] (a) that a false statement was made. 'Silence' will not normally satisfy this but

there are exceptions – see S&OR [3.13] and Lockhart v Osman [1981] VR 57 (b) the false statement was one of fact - not opinion or puff or a promise as to the

future. * When will an opinion be treated as a 'statement of fact'? See Smith v Land

and House Property Corporation (1884) 28 Ch D7 * What are the consequences for the injured party if the statement is said to be only an opinion or puff and not a statement of fact? (c) the false statement of fact was addressed to the party misled, before or at the

time the contract was made. (d) that the false statement was intended to induce and did actually induce the

plaintiff to enter the contract. A representee cannot rely on a statement which he or she knows is false; but a representee does not have an obligation to check the truth or otherwise of the statement: see Redgrave v Hurd (1881) 20 Ch D 1 and other cases in S&OR [3.15]

It is not necessary that the misrepresentation was the only reason for acting, providing it was a contributing factor. 3. There are three categories of misrepresentation: (a) Fraudulent misrepresentation – see examples [3.16], page 42. (b) Negligent misrepresentation or 'Professional negligence/negligent mis-

statement' heading in Tort topic. We will not deal with this area again. (c) Innocent misrepresentation – an example is Derry v Peek (1889) 14 App Cas

337. * Does it matter if the representor (person making the representations) knows or doesn't know his or her representations are false? 4. What rights do the parties have for – see S&OR [9.24]-[9.31]

(a) Fraudulent misrepresentation (b) Negligent misrepresentation (where contract is entered into) or

(b) Innocent misrepresentation?

* What does ‘rescission’ mean and will it always be awarded? * How can a party try to protect their rights to rescission?

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5. Legislation

Note the effect of especially s. 52, Trade Practices Act 1974 (Cth) and s. 11, Fair Trading Act 1985 (Vic). The TPA is dealt with in detail in BL741 Marketing Law.

* What is the advantage of using s.52, TPA rather than relying on common law

misrepresentation? 2. DURESS, ECONOMIC DURESS, UNDUE INFLUENCE AND UNCONSCIONABLE CONDUCT (1) Duress– S&OR [9.33]

(a) What is the difference between ‘duress to the person’ and ‘economic duress’?

(b) What are the essential elements of economic duress? See: North Ocean Shipping Co. Ltd. v Hyundai Corporation Co. Ltd. [1979] Q.B. 705 and Cockerill v Westpac Banking Corporation (1996) 142 ALR 227

(c) What remedy is available?

(2) Undue influence – S&OR [9.34]-[9.36]

(a) What is ‘undue influence’? (b) In what circumstances will it be presumed? (c) Even if it is not presumed, it can be proven.

(3) Unconscionable conduct: S&OR [9.32], [3.50]-[3.52]

(a) At common law a contract would be enforced even if the terms were very harsh and unfair: why?

(b) Equity will set aside a contract that is 'unconscionable': see CBA v Amadio (1983) 151 CLR 447 S&OR [3.50]

(c) Again there have been statutory developments: in the TPA and State Fair Trading Acts. These developments are dealt with in BL741.

* What is the difference between duress, undue influence and unconscionable conduct? 3. ILLEGAL AND VOID CONTRACTS S&OR [6.38] A brief overview of illegal and void contracts is given below. Only contracts void for being in restraint of trade will be looked at in detail. 1. Some contracts are illegal - (a) because they are prohibited by statute (expressly or impliedly)

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or (b) because they are 'injurious to the public good' and therefore illegal at common

law: There are six types of contract that are illegal on the grounds of public policy.

2. Some contracts are only void - (a) because they are declared void by statute or (b) because at common law they are 'injurious to the public good' although they

do not pose as serious a threat to the public interest as those deemed 'illegal'. There are three types. One type is ‘restraint of trade’ clauses or contracts.

3. What are the consequences for the parties if the contract is illegal or void?

Note that if part of a contract is illegal or void it may be able to be severed from the contract in some circumstances.

* What is the difference between an illegal contract and a void contract? 4. Contracts in Restraint of Trade-at common law: S&OR [6.38] * What is meant by a "contract in restraint of trade" and when will a

clause/contract be void? Three types of contracts where restraint of trade clauses are often found are:

(i) contracts of service (employment contracts): Compare: Drake Personnel Ltd. v Beddison [1979] VR 13 in T149 and Buckley v Tutty

(1971) 125 CLR 353 – facts given in class In determining whether employment restraints are reasonable, the court may have regard to the relative bargaining position of the parties: see A Schroeder

Music Publishing Co. Ltd. v Macauley [1974] 1 WLR 1308 - facts given in class

(ii) contracts for the sale of businesses * If you were selling your present business - what type of clause would (a) you the seller (b) the buyer want in the contract? What would you have to be careful of? (iii) solus and other restrictive trading agreements: eg ICI Pty. Ltd. v Sea Containers Ltd. (1995) ATPR (Digest) 46-145; Peters (WA) Ltd. v Petersville Ltd. (1999) ATPR 410-714. These are also affected by the Part IV of the Trade Practices Act 1974.

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E. DISCHARGE OR TERMINATION S&OR ch 9 [9.1]-[9.23]

OBJECTIVES: At the end of this section students should appreciate the consequences of a contract being performed or not being performed. In particular students should know the ways a contract can be brought to an end.

----------------------------------- A contract can be brought to an end (called discharged or terminated) in six ways. 1. Termination by Performance: S&OR [9.2] The general rule is that performance must be exact. There are exceptions. 2. Termination by Agreement: S&OR [9.3] 3. Termination by a term of the contract: S&OR [9.4] 4. Termination by Frustration: S&OR [9.5] (a) What is meant by ‘frustration’ and when will it occur? Compare: Davis Contractors Ltd. v Fareham Urban District Council [1956] AC 696 with Davis, Codelfa Construction Pty. Ltd. v State Rail Authority of NSW (1982) 149 CLR 337 and Taylor v Caldwell (1863) 122 ER 309 (b) What is the effect of frustration on a contract? see Victorian Frustrated

Contracts Act 1959 5. Termination by Breach (a) For Breach of Condition or an Intermediate Term : S&OR [9.6]-[9.11]

Refer back to section C of this Lecture Guide. Termination is only possible if the breach is of a condition or if the term is recognised as an intermediate one with serious consequences.

(b) If a party repudiates ie indicates he/she will not perform: S&OR [9.17]-[9.20] If one party indicates in advance that he/she will not perform, it is called anticipatory breach = a form of repudiation and the other party can then elect to terminate the contract.

6. Termination by operation of law: eg bankruptcy * What is the procedure for termination? S&OR [9.21]-[9.9.23]

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F. REMEDIES: S&OR [9.24]-9.30], [9.42]-[9.60]

OBJECTIVES: At the end of this section students should understand the consequences of a contract being breached and therefore the need to consider these consequences when forming a contract. In particular students should: * know the main common law remedy of damages- its object, rules, the difference between liquidated and unliquidated damages and how to distinguish damages from a penalty; * be aware of the equitable remedies such as rescission, and orders for specific performance and injunctions.

----------------------- 1. Rescission: Recall that this was the remedy for misrepresentation, undue influence, unconscionable conduct, duress. S&OR [9.24]-[9.30]

(a) What is the effect of rescission? (b) What is the difference between rescission and termination? (c) How do you rescind? (d) When is rescission unlikely to be possible?

2. Suing for the contract price: S&OR [9.42]-[9.43] 3. The Common Law remedy of Damages: S&OR [9.44]-[9.55] (a) The object of damages is to compensate for loss actually suffered. (b) Damages will be recoverable provided the damage is not too remote: S&OR [9.49].

The test of remoteness was laid down in Hadley v Baxendale (1854) 9 Ex. 341 and is well illustrated in Victoria Laundry (Windsor) Ltd. v Newman Industries Ltd. [1949] 2 K.B. 528

(c) How are damages calculated? S&OR [9.52]-[9.55]

(i) Damages for expectation losses (ii) Damages for personal injuries (iii) Damages for disappointment, distress and discomfort

See Jarvis v Swans Tours Ltd. [1973] 1 QB 233 and Baltic Shipping v Dillon (1993) 111 ALR 289

(d) The innocent party must take steps to mitigate his or her loss: S&OR [9.48] (c) The plaintiff may claim unliquidated or liquidated damages: Liquidated damages

must be a genuine pre-estimate of actual loss, however, and not amount to a penalty: S&OR [9.47]

3. Equitable remedies: be aware of (a) Orders for specific performance: S&OR [9.56]. (b) Injunctions: S&OR [9.57] 4. Restitution/Quantum Meruit: S&OR [9.59]-[9.60]

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AN OVERVIEW OF CONTRACT A CONTRACT

Is an agreement made between two or more parties whereby legal obligations are created which the law will enforce

A contract is either SIMPLE or FORMAL (eg deed)

AND REQUIRES ELEMENTS * Intention to create legal relationships All are needed * Offer and acceptance (the agreement) before there is * Consideration a contract * (check capacity)

CONTENT OF CONTRACT Distinguish between * Representations

and * terms

* exclusion clauses

VALIDITY/ENFORCEABILITY OF CONTRACT THE ‘VITIATING FACTORS’ Was there genuine consent Or was the contract * induced by misrepresentation * gained by mistake * made under duress, undue influence * unconscionable Is the contract * illegal? Did the parties * lack capacity?

DISCHARGE/TERMINATION OF THE CONTRACT A contract can come to An end by * agreement * performance * lapse of time * breach of contract * frustration * operation of law REMEDIES: What is the injured party * damages (at common law) entitled to? * specific performance * injunction * quantum meruit/restitution * rescission

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UNIVERSITY OF BALLARAT SCHOOL OF BUSINESS BL502 - FUNDAMENTALS …€¦ · · 2003-04-09FIRST SEMESTER, 2003 AN INTRODUCTION TO THE LAW OF CONTRACT ... covered the material in it