of School Business BL502 Fundamentals of Law
Topic D Contract Law
Important notes to students Your main reference text is the prescribed text (Sweeney & O'Reilly). Other business law textbooks (see the list in the Unit Description) are also useful as well as texts that deal only with contract. A useful example of the latter is Stephen Graw's text, An introduction to the law of contract, 3rd or 4th edition (Graw). Crosling and Murphy, How to study business law (any edition) is also a useful text and it has flowcharts and exam hints. Note that we are not dealing with all aspects of contract law. Pay close attention to what is covered in the lecture guide, lectures, tutorials and any references made to the texts. 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 to learn and to keep track of whether you are up to date! 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 legal 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 neither the UB Library nor the Internet contains 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 judgements at this stage. To check your understanding: consider the questions and reflections set out in the lecture guide; review the objectives in the lecture guide; and attempt any questions in the texts.
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BL502 Fundamentals of Law OBJECTIVES
Contract Law Lecture and Tutorial Guide
At the end of this topic you should: know how a contract: o is formed; o has its content is determined; o has its validity tested; o is brought to an end; and o gives remedies 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 your knowledge of contract principles to manage legal risks that may arise in commerce and/or to communicate with your legal advisers have developed your analytical, written and oral communication and skills. LECTURE GUIDE Essential reading Sweeney & O'Reilly, Chapters 4, 5, 6, 9 and pages 188-196 of Chapter 7 One other contract or business law text (see list in Unit Description for suggestions)
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AN OVERVIEW OF CONTRACT
Objectives At the end of this section you 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; and understand how the principles of `freedom to contract' and freedom of contract' have influenced the content and development of contract law. 1. Importance of the law of contract 2. What is a contract? 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? One method of analysing a contract and its ramifications for the different parties is to use the following steps. This lecture guide is structured to reflect these steps. A. Decide whether in fact a contract exists To do this, check that the essential elements of: OFFER; ACCEPTANCE; INTENTION; and CONSIDERATION exist. B. Decide what the parties have agreed to To do this, work out which statements are: pre-contractual REPRESENTATIONS TERMS (express or implied) of the contract. Are there any EXCLUSION CLAUSES? C. Check whether the contract is valid and enforceable If the contract was induced by MISREPRESENTATIONS, a MISTAKE has been made (mistake has a narrow meaning in law). If 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.
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D. 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; or OPERATION OF LAW. E. 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, i.e. 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 (e.g. duress used) or the agreement was illegal (i.e. 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 (i.e. the common view of large corporations vs consumers). The courts have developed equitable principles to give relief from unfair conduct, e.g. 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) (hereafter referred to as "TPA"), the Fair Trading Act 1999 (Vic), amendments to the Goods Act 1958 (Vic), the various Commonwealth Insurance Acts, the various Credit Codes of the States and Acts licensing providers of services e.g. 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. This subject, `Fundamentals of Law', 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 Prepared by Chris Baker and Rosemary Shaw 4
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they fall within the definition of `consumers') is dealt with in other subjects, including `Commercial Law' (insurance and sale of goods legislation). 6. The classification of contract Below are some words you will come across in this topic. Most are defined in business law texts. Take note of the others from class and/or look them up in a law dictionary. Have a feel for what they mean now and when we come across them again in the coming weeks, add to your understanding. bilateral unilateral void voidable unenforceable illegal executed executory express implied quasi-contracts formal contracts simple contracts rescission repudiate subjective test objective test
IS THERE A CONTRACT? WHAT ARE THE ELEMENTS OF A CONTRACT?
Objectives At the end of this section you should: know what elements must exist before it can be said `we have a contract'; know the rules of those elements (i.e. of intention, offer and acceptance, consideration) and how to apply them to factual situations; and 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 Intention 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 or domestic arrangements and business agreements.
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Can you explain what the distinction is and why it is made? a) Social or domestic arrangements What is the presumption? What is required to rebut the presumption? Compare the following cases: Balfour v Balfour [1912] 2 KB 571 Merritt v Merritt [1970] 2 All ER 760 Wakeling v Ripley (1951) 51 SR (NSW) 183 Simpkins v Pays [1955] 1 WLR 975 Teen Ranch Pty Ltd v Brown (1995) 38 AILR 5-036 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 or 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 following cases: Edwards v Skyways Ltd [1964] 1 WLR 349 Rose and Frank Co v Crompton and Bros Ltd [1925] AC 445 Jones v Vernon's Pools Ltd [1938] 2 All ER 626 Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256 Reflection Next time you take out a tatts lotto ticket with some friends, what should you do and say? 2. Agreement between the Parties: Offer and Acceptance 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. 2.1. Offer 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. Rules relating to offers Who is the `offeror' and who is the `offeree'? a. Is the statement an offer?
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Distinguish between an offer and I. merely supplying information/indicating future intent Harvey v Facey [1893] 1 AC 552 II. an invitation to treat Partridge v Crittenden [1968] 2 All ER 421 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 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? 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? b. Rules of offer I. 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 256 II. The offer must be communicated to the other party, i.e. 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 III. 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: Terms and exclusion clauses. c. The `fate' of the offer I. 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? Dickinson v Dodds [1876] 2 CHD 463 Byrne & Co v Leon Van Tienhoven & Co [1880] 5 CPD 344 II. 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
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III. The offer may lapse: 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; or on the death of either party before acceptance if it involves personal services. Ramsgate Victoria Hotel Co Ltd v Montefiore [1866] LR 1 EXCH 109 Carter v Hyde (1923) 33 CLR 115 d. What is an `option' and what does it require? 2.2. Acceptance An acceptance occurs when the offeree agrees to the proposal (offer) of the offeror. a. Rules of acceptance I. An offer can only be accepted by person(s) who knew of the offer. Why? Felthouse v Bindley (1862) 142 ER 1037 Tinn v Hoffman & Co (1873) 29 LT 271 II. 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) 91 CLR 353 What is meant by the `battle of the forms' and who `wins' the battle? III. When, where and how does acceptance occur? When and where acceptance takes place is vitally important. Why? 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 e.g. letter, phone call. That is, the contract is made when acceptance occurs. Acceptance occurs when the offeror receives an unqualified acceptance of his or her offer. Where the communication is instantaneous (e.g. over the phone), that occurs when the offeror hears the `yes, I agree to your terms'. What problems does this present when the parties are negotiating in a noisy public place, over the phone, by fax? Entores Ltd v Miles Far East Corp [1955] 2 QB 327 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 i.e. Prepared by Chris Baker and Rosemary Shaw 8
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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. AND, in some cases it is recognised that acceptance will occur at a different time: What is the time of acceptance where the parties agree (expressly or impliedly) that the post will be the means of communication? Adams v Lindsell (1818) 106 ER 250 When was acceptance in Carlill's case above? What is the time of acceptance if electronic communication e.g. email is being used? Mental acceptance is not sufficient. Acceptance must be indicated either by words or conduct. Felthouse v Bindley (1862) 142 ER 1037 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. Acceptance must be within the time prescribed by the offer or, if no time has been prescribed, within a reasonable time.
IV. Generally, the offeree can revoke (withdraw) his or 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? Reflection Offer and acceptance rules are critical to the formation of the contract.
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When you next go to a caf and buy food, buy a CD or some clothing, or catch a bus, make a note of how the contract was formed. Was there an invitation to treat, an offer and counter offer, an option? What were the terms of the offer; how was it indicated there was acceptance? What rules were being used by the parties? If you were in business, how would you require acceptance? Why? What issues arise when the contract is being negotiated between parties in different countries? Electronically? 3. Consideration a) 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 i.e. contracts under seal e.g. 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). b) What is consideration? Who is the `promisor' and who is the `promisee'? c) Rules of consideration I. Consideration is essential in every simple contract (subject to the doctrine of promissory estoppel). II. Consideration may be executed or executory, but must not be past. 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 Anderson v Glass [1869] 5 WW & A'B(L) 152 Lampleigh v Braithwait (1615) HOB 105; 80 ER 255 III. Consideration must move from the promisee but can be for the benefit of some other person. 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 (Cth) and the High
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Court has recognised one exception (i.e. where a promise is made by two people as joint promisees (e.g. husband and wife), the Court will not inquire who in fact provided the consideration. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 Coulls v Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460 IV. Consideration need not be adequate, but must have some value in the eyes of the law, be possible and be definite. What was the consideration in Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87? 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 neither 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 (e.g. 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 has had an impact on this rule. V. 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. Hercules Motors Pty Ltd v Schubert (1953) 53 SR(NSW) 301 VI. A promise to do what a promisor already has to do is not consideration. There is no consideration if all the party promises to do now amounts to something he was already obliged to do under an existing obligation. Three examples are: Performance of an existing duty imposed by law Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270 Performance of an existing contractual duty owed to the promisor 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, then nothing is being promised at all the consideration is illusory! Stilk v Myrick [1809] 2 CAMP 317 Hartley v Ponsonby (1871) 119 ER 1471
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Note, however, that recent English and NSW cases seem to have relaxed this rule on the grounds of `commercial reality' or `practical benefit' Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1 All ER 512 Parties agreeing to compromise a debt i.e. where a creditor promises to discharge or end a debtor's obligations 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? Foakes v Beer (1884) 9 App Cas 605 The situation is different if something new or different is being offered Pinnel's Case (1602) 77 ER 237 What are some practical ways around the rule in Foakes v Beer? The harshness of the rule in Foakes v Beer has been modified by the development of the doctrine of promissory estoppel. 4. Promissory or equitable estoppel 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. a) 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 or her strict legal rights under the contract and the other party acts on that representation and alters his or her position to his or her detriment and it would be unfair (unconscionable) for the promisor to go back on his or her word. The doctrine originates from Lord Denning's obiter dictum in his judgment in the case of Central London Property Trust v High Trees House Ltd [1947] 1 KB 130. b) What has to be proven? The main High Court case in Australia is Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 What are the elements or requirements that have to be proven? 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?
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How can a business conduct its affairs so that another party cannot rely on this doctrine? This area is still being developed and is of critical importance to business.
CONTENT OF THE CONTRACT: WHAT HAVE THE PARTIES AGREED TO?
Objectives At the end of this you section should: understand how the courts determine what the terms (rights and obligations) of the parties to a contract are. In particular, you 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; and 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 or 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. a) Determine what statements, oral or written, are to be attributed to the parties. What is the parol evidence rule and what should you now think about when making a contract? b) Determine which statements: were made only to influence the other party to enter the contract and were not to be legally binding i.e. non-contractual representations; and were intended to form part of the contract i.e. terms (or promissory or contractual representations).
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Why is this distinction important? An objective test of intention is applied to determine whether statements are representations or terms. Consider the 5 common sense factors (and cases to explain them) that are used by the courts to determine whether a statement is a representation or a term. Please note that collateral warranties are not examined in this subject. c) 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 a) above). After deciding what the express terms are, you need to determine whether any other terms should be implied into the contract. Be aware of the effect of, for example, the TPA. Unfortunately we do not have time to consider this Act in this subject; it is dealt with in other law subjects. How can terms be implied into contracts? What does it mean for the parties if a term is implied? d) 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). Terms which are of crucial importance are called conditions. Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 Those which are less important, or subsidiary to the main purpose of the contract are called warranties. Poussard v Spiers & Bond [1876] 1 QBD 410 Bettini v Gye [1876] 1 QBD 183 Some times it may be difficult to determine whether a term was a condition or warranty when the contract was made. Merely using the words `condition' and `warranty' are also not conclusive. In England particularly, the courts may consider the seriousness of the effect of the breach to determine the rights of the parties, classifying the terms as intermediate terms. Where terms are implied by statute, the statute usually states whether the terms implied by it are conditions or warranties. For example, the Fair Trading Act 1999 (Vic) and the TPA (which are dealt with in more detail in other law subjects).
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Reflection What are the consequences if a term is a condition compared to a warranty? (This tells you why it is important to know the difference!) How can parties try to ensure that the terms are correctly interpreted as conditions or warranties? 2. If there are Exemption Clauses: What is Their Effect? a) Definition and use Note the difference between an exclusion clause and a limiting clause and the significance of standard form contracts. Reflection Why do businesses want to use exclusion clauses? Are there any policy issues i.e. can you see when exclusion clauses can be used in an unfair way? This area can be conveniently broken down into a two-stage process: check whether the exemption clause is in the contract; and check the meaning of the clause Does it IN FACT protect the writer of the clause as he or she contends? I. Did the Exemption Clause Become a Term of the Contract? The following is slightly different in arrangement to G&F, but essentially the same. Signed documents If the exclusion clause was in a signed document, it is a term irrespective of whether it was read or understood. L'Estrange v Graucob Ltd [1934] 2 KB 394 This is subject to some exceptions, e.g. where there was misrepresentation. Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661 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. Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379 Unsigned/oral contracts If the exclusion clause was in an unsigned document (e.g. 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 or 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 15
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offer). Different types of notice are required depending on whether the document or situation is contractual or non-contractual. A. Is the document/situation contractual or non-contractual? The document (e.g. ticket) or situation is contractual if a reasonable person would presume it was contractual (i.e. a reasonable person would expect to find terms or would feel obliged to read the docket or sign the document. To understand the test you need to look at cases to see what it means! Chapelton v Barry Urban District Council [1940] 1 KB 532 Causer v Browne [1952] VLR 1 B. What notice is required? If the document or situation is contractual, actual or constructive notice is sufficient. What is meant by actual and constructive notice? Thompson v L M & S Railway Co [1930] 1 KB 41 If the document or situation is non-contractual, then actual notice must be given. C. If the notice required is constructive (i.e. the document or situation is contractual), we need to check: (i) were reasonable steps taken to bring the clause to the notice of the other party? (ii) was the notice given before or at the time of the contract? Olley v Marlborough Court [1949] 1 KB 532 (You need to know when the contract was made to answer this. How do you tell?) In essence: first, the exclusion clause must be a term of the contract. The above rules have been developed by the courts to ensure that exclusion clauses only become a term when the other party knew or should have known about them. II. 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 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.
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According to the contra proferentum rule, any ambiguities in exemption clauses will be construed (or interpreted) against the party seeking to rely on them. White v John Warwick & Co Ltd [1953] 1 WLR 1285 In some types of contracts one party can limit their liability by excluding liability for negligence. [The TPA makes this illegal for some consumer transactions). General statements, such as `All care no responsibility' or `All loss howsoever caused' will not generally be effective. 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. However the exemption clause will not apply where the acts committed were done outside the terms of the contract (i.e. were not permitted or authorised by the contract). This is some times called `the four corners rule'. The Council of the City of Sydney v West (1965) 114 CLR 481 Statutory Reforms The TPA and State and Territory Fair Trading Acts or Goods Acts imply certain terms into contracts and the Acts make it illegal for businesses to exclude out of those responsibilities. There are some exceptions. A recent addition to these exceptions has occurred as a result of the statutory reforms in the area of negligence, i.e. providers of recreational services may include exclusion clauses. However, there are further protections for consumers the inclusion of an exclusion clause (or the clause itself) may be found to be misleading or unfair. The detail of the above is covered in other law subjects. Imagine you want to protect yourself from liability when selling goods. What would you have to remember when: thinking of how to include an exemption clause; or writing that clause?
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Contract Law Lecture and Tutorial Guide
VITIATING FACTORS
Is the contract valid and enforceable or is it void, voidable or unenforceable because of: lack of capacity; misrepresentation; duress or unconscionable conduct; or because it was illegal? Please note that we are not dealing with the law of mistake in this subject. 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: understand when and why the law protects those without the capacity to protect themselves or when society itself needs protection from certain classes of persons; be able to recognise when an innocent or fraudulent misrepresentation has been made (i.e. 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 (i.e. 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, and, 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. Capacity to Contract (Note: Only an overview will be given. Students should be aware of the implications for business.) 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 following have limited capacity for various reasons: o minors; o bankrupts; o mentally unsound persons; and o intoxicated persons. Prepared by Chris Baker and Rosemary Shaw 18
BL502 Fundamentals of Law
Contract Law Lecture and Tutorial Guide
a) The position of minors Contracts by or with minors can be: Valid: legally enforceable 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 common law in Victoria, NSW and SA.) Valid contracts Minors will be bound by 2 types of contracts: 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 i.e. the contract is void. 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?
2. Misrepresentation This action has largely been made redundant by s52 TPA and equivalent state legislation (see below.). Nevertheless an understanding of the contract principles assists in understanding the operation of that legislation. In addition, s52 will not apply in all circumstances and contract law may need to be relied upon. a) Distinguish between statements which are terms and those which are (noncontractual) representations and puff. Review the previous section 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. b) To prove misrepresentation the following must be proved: o that a false statement was made. Silence will not normally satisfy this but there are exceptions. What are they? o 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? 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? Prepared by Chris Baker and Rosemary Shaw 19
BL502 Fundamentals of Law
Contract Law Lecture and Tutorial Guide
o the false statement of fact was addressed to the party misled, before or at the time the contract was made. o that the false statement was intended to induce and did actually induce the plaintiff to enter the ...