Contract in Commercial Law 0455237689, 9780455237688

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Contract in Commercial Law

Thomson Reuters (Professional) Australia Limited 19 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 legal.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only) INTERNATIONAL AGENTS & DISTRIBUTORS NORTH AMERICA Thomson Reuters Eagan United States of America

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Contract in Commercial Law edited by

Simone Degeling James Edelman James Goudkamp

Lawbook Co. 2016

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW National Library of Australia Cataloguing-in-Publication entry Contract in commercial law / Simone Degeling, James Edelman, James Goudkamp. ISBN: 9780455237688 (hbk) Includes index.Commercial law. Contracts. Degeling, Simone. Edelman, James. Goudkamp, James. © Thomson Reuters (Professional) Australia Limited 2016 This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. All Commonwealth legislative material is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. For reproduction or publication beyond that permitted by the Copyright Act 1968 (Cth), permission should be sought in writing from the current Commonwealth Government agency with the relevant policy responsibility Editor: Lara Weeks Indexer: Sandra McCullough Product Developer: Catherine Fitzgerald Publisher: Anne Murphy Typeset in Stone Sans and Times Roman, 101/2 on 12 point, by Midland Typesetters, Australia Printed by Ligare Pty Ltd, Riverwood, NSW This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests. For more info: www.pefc.org

Readers of Torts in Commercial Law have commented

This is an essential text for students and practitioners interested in torts and commercial law. The distinguished contributors address the cutting edge issues of the day throughout the common law world and they ‘share the goal of rationality’. Inevitably the exercise has a holy grail quality but it is a magnificent and welcome addition to the development of our jurisprudence. Lord Grabiner QC, Barrister, One Essex Court The aesthetics of the common law of torts in commercial disputes is disheartening. One author in this book describes the resulting picture as a ‘shambles’. To the semichaotic development of judicial doctrine must now be added a messy patchwork of statutes that render an overarching rational design hard to discern. The big world of global business markets and fantastic technology laughs in scorn at our law’s resistance to conceptual thinking, analogous reasoning and empirical analysis. Now, into this turmoil, comes this thought provoking book. The authors accept the lodestars of rationality and efficiency in legal responses. Their resulting insights are likely to help shape future developments in this most important corner of the law’s operation. The Hon Michael Kirby AC CMG, Justice of the High Court of Australia 1996-2009 This distinguished collection of essays by leading scholars and judges from the common law world is devoted to the conjunction of tort law, commercial law and legislation. All the contributors are committed, but each in a different way, to the idea of a rational tort law. The result is a monument to the breadth, diversity, and acuity of contemporary tort scholarship. Readers will find much to admire, to learn from, and to disagree with. Professor Ernest J Weinrib, Cecil A Wright Professor of Law, University of Toronto

Praise for Equity in Commercial Law and Unjust Enrichment in Commercial Law

Equity in Commercial Law is an indispensable reference work for any lawyer interested in general law principles touching upon Equity as a separate field of study; the relationship between Law and Equity; the Law of Restitution; Commercial Law; or the influence of taxonomy on the application and development of law. Geoff Lindsay SC (NSW Bar) writing in the Australian Bar Review It is impossible in this short review to do justice to all the essays in Equity in Commercial Law which, despite differences in approach, are lively, complex and thought provoking…[T]he essays contain arguments which will attract the attention of private lawyers in many countries…Although the essays in Equity in Commercial Law cover a lot of ground and are best understood if other works are also consulted, there is an inner cohesion and clarity…There is no doubt that it will be of most interest to those who work for corporate clients, but it should appeal to all those who care about the development of equitable doctrine in the future. Professor Janet Ulph (University of Leicester) writing in Trust Law International Many of the pieces in the book entail scholarship of this kind; dense and wellreferenced discussion which trusts and commercial practitioners will certainly find useful. Professor Charles Mitchell (University College London) writing in the Law Quarterly Review The vigorous debates which rage throughout the book about the role of equity in commerce are…not simply historic and abstract, but concrete, salient and imminently important…There can be no doubt that this book refines and redefines the debate about fusion in commercial law and beyond. It is fascinating throughout not least because of the difficulty and intensity of the controversies that it addresses. Associate Professor Kit Barker (University of Queensland) writing in the Modern Law Review This is clearly a book which is rich in ideas and debate from the protagonists in the developing story of unjust enrichment. It deserves a prominent place on the academic’s bookshelf. Amy Goymour (Cambridge) writing in the Law Quarterly Review

Preface This collection of essays derives from the “Contract in Commercial Law” conference that was held on 18–19 December 2015 in Sydney. Over two days, early versions of the chapters that comprise this book were presented and debated. They were revised for publication and edited for this volume. We are grateful to Carolina Roberts of UNSW Law, who assisted in organising the conference. We are also indebted to UNSW Law, the Oxford Law Faculty, Allens and Thomson Reuters for their financial support. The production of this book was superbly handled by the team at Thomson Reuters, especially Catherine Fitzgerald and Lara Weeks. Finally, we were assisted in proofreading by the following students and assistants: Cynthia Ang, Robert Bellin, Lauren Bourke, Grace Cheng, Eleni Katsampouka, Liron Shmilovits and Zhicheng Wu. Simone Degeling James Edelman James Goudkamp 26 September 2016

Table of Contributors The Hon Chief Justice James Allsop AO is Chief Justice of the Federal Court of Australia. The Hon Chief Justice Tom Bathurst AC is Chief Justice of the Supreme Court of New South Wales. Dr Andrew Bell SC is a barrister at Eleven Wentworth Chambers, Sydney and Adjunct Professor of Law at the University of Sydney. Professor Andrew Burrows QC (Hon) FBA is Professor of the Law of England at the University of Oxford and Fellow of All Souls College. Professor Mindy Chen-Wishart is Professor of the Law of Contract and Associate Dean of Taught Graduates at the University of Oxford, Tutorial Fellow in Law at Merton College and fractional Professor of Law at the National University of Singapore. Professor Hugh Collins FBA is the Vinerian Professor of English Law at the University of Oxford and Fellow of All Souls College. Professor Simone Degeling is Professor of Law at UNSW Law. The Hon Justice James Edelman is a Justice of the Federal Court of Australia, Adjunct Professor of Law at the University of Queensland and Conjoint Professor of Law at UNSW Law. Professor Joshua Getzler is Professor of Law and Legal History at the University of Oxford, Tutorial Fellow in Law at St Hugh’s College and Conjoint Professor of Law at UNSW Law. Associate Professor Yihan Goh is Associate Professor of Law at Singapore Management University. Associate Professor James Goudkamp is Associate Professor of Law at the University of Oxford and Tutorial Fellow in Law at Keble College, Senior Honorary Research Fellow, Faculty of Law, University of Western Australia, Professorial Fellow, School of Law, University of Wollongong and is a barrister at 7 King’s Bench Walk. The Rt Hon The Lord Hope of Craighead KT is a former Lord of Appeal in Ordinary and former Deputy President of the Supreme Court of the United Kingdom. The Hon Justice Susan Kiefel AC is a Justice of the High Court of Australia. Professor Ben McFarlane is Professor of Law at University College London and Honorary Senior Fellow, Melbourne Law School. Professor David McLauchlan is Professor of Law at Victoria University of Wellington, Professorial Fellow, University of Melbourne, and Honorary Professor, University of Queensland.

x Contract in Commercial Law Professor David R Percy QC is Borden Ladner Gervais Professor of Energy Law and Policy at the University of Alberta. The Hon Justice Andrew Phang is a Judge of Appeal of the Supreme Court of Singapore. Professor Andrew Robertson is Professor of Law at the University of Melbourne. Professor Robert Stevens is the Herbert Smith Freehills Professor of English Private Law at the University of Oxford and Professorial Fellow of Lady Margaret Hall. Professor Andrew Tettenborn is Professor of Commercial Law in the Institute of International Shipping and Trade Law at Swansea University. Associate Professor Chee Ho Tham is Associate Professor of Law at Singapore Management University. Mr Nicholas Tiverios is Teaching Fellow in Law at University College London. Dr David Winterton is Lecturer in Law at UNSW Law.

Contents Prefacevii Table of Contributorsix Table of Casesxiii Table of Statutesxxxvii Table of Conventionsxli   1. James Edelman, James Goudkamp, and Simone Degeling, Introduction 1   2. Tom Bathurst, Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 25   3. Hugh Collins, Is a Relational Contract a Legal Concept? 37   4. Susan Kiefel, The Doctrine of Consideration in Contract: Some Historical and Comparative Perspectives 61   5. Mindy Chen-Wishart, Reforming Consideration: No Greener Pastures 77   6. James Allsop, Characterisation: Its Place in contractual Analysis and Related Enquiries 105   7. Joshua Getzler, Interpretation, Evidence, and the Discovery of Contractual Intention 121   8. Andrew Robertson, The Foundations of Implied Terms: Logic, Efficacy and Purpose 143   9. Robert Stevens, The Meaning of Words and the Intentions of People 167 10. David McLauchlan, The Many Versions of Rectification for Common Mistake 193 11. David R Percy, The Emergence of Good Faith as a Principle of Contract Performance 231 12. Andrew Phang and Yihan Goh, Encounters with History, Theory and Doctrine: Some Reflections on Discharge by Breach of Contract 257 13. Andrew Tettenborn, Of Debts, Damages and Errant Trustees 297 14. David Hope, Specific Implement and Specific Performance: Are They Really Much the Same? 313 15. David Winterton, Commonwealth v Amann Aviation Pty Ltd 25 Years On: Re-examining the Problem of Pre-breach Expenditure in Contract Law 333 16. Ben McFarlane, Equitable Estoppel as a Cause of Action: Neither One Thing Nor One Other 359 17. CH Tham, The Mechanics of Equitable Assignments: One Engine or Two? 381 18. Andrew Bell, Excluding Exclusion Clauses: Judicial and Statutory Techniques, Freedom of Contract and Public Policy 405 19. Andrew Burrows, Illegality as a Defence in Contract 435 20. Nicholas A Tiverios, Doctrinal Approaches to the Law of Penalties: A Post Andrews Intention-based Defence of Relief against Fixed Contractual Penalties 457 Index493

Table of Cases A & J Inglis v John Buttery & Co (1878) 3 App Cas 552 (HL)................................. 177, 187 Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56; [2012] SLT 205.............................................................................................................. 149 Abrahams v Bunn (1768) 4 Burr 2251; 98 ER 173 (KB)................................................... 125 Abrahams v Performing Right Society Ltd [1995] ICR 1028 (CA).................................. 306 Abu Dhabi National Tanker Co v Product Star Shipping Company Ltd (The “Product Star”) (No 2) [1993] 1 Lloyd’s LR 397 (CA)........................................ 48 ACN 074971109 Pty Ltd (as Trustee for the Argot Unit Trust) v National Mutual Life Association of Australasia Ltd [2008] VSCA 247; (2008) 21 VR 351...........................................................................................362, 374, 379 Adams, Re (1878) 9 Ch D 307 (CA)................................................................................... 306 Admantine Energy (Kenya) Ltd v Bowleven (Kenya) Ltd [2016] EWHC 130 (Comm)........... 1 Agip Spa v Navigazione Alita Italia Spa [1984] 1 Lloyd’s Rep 353 (CA).................. 185, 227 Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570.............................................................................................. 3, 26-35 Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 285 FLR 121...................................................................................................... 302 AHA General Construction Inc v New York City Housing Authority, 92 NY 2d 20; 699 NE 2d 368 (1998)................................................................................................... 412 AIB Group (UK) Plc v Mark Redler & Co Solicitors [2013] EWCA Civ 45; [2013] PNLR 19...............................................................................................14, 298, 302 AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58; [2015] AC 150...................................................14, 297, 298-300, 303, 304, 306, 308, 311 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 (SC)........ 207 Air New Zealand Ltd v Leibler (unreported, Supreme Court of Victoria, 19 November 1996)...................................................................................................... 185 Airport Industrial GP Ltd v Heathrow Airport Ltd [2015] EWHC 3753 (Ch)............... 129 Akai Pty Ltd v People’s Insurance Company Ltd (1996) 188 CLR 418............................ 434 AL Challis Ltd v British Gas Trading Ltd [2016] EWHC 513 (QB Comm).................... 129 Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219; (2015) 324 ALR 355.............................................................................................. 405, 421 Alan Estates Ltd v WG Stores Ltd [1982] Ch 511 (CA)...................................................... 88 Aldabe Fermin v Standard Chartered Bank [2010] SGHC 119; [2010] 3 SLR 722......... 283 Alderslade v Hendon Laundry Ltd [1945] KB 189.................................................... 411, 420 Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd [1983] 1 WLR 87 (CA)............. 81 Allen v Pink (1838) 4 M & W 140; 150 ER 1376............................................................... 180 Alliance Bank Ltd v Broom (1864) 2 Dr & Sm 289; 62 ER 631........................................ 102 Alliance Concrete Singapore Pte Ltd v Comfort Resources Pte Ltd [2009] SGCA 34; [2009] 4 SLR(R)............................................................................................................ 275 AMA (New Town) v Law [2013] CSIH 61; 2013 SC 608...................................426, 328, 329 Amann Aviation Pty Ltd v The Commonwealth (1988) 100 ALR 267 (FCA)......335, 337, 338, 340-346, 349, 352-354, 357 Amann Aviation Pty Ltd v The Commonwealth (1990) 22 FCR 527..............335, 337, 338, 340-346, 349, 352-354, 357 Amantilla Ltd v Telefusion plc (1987) 9 Con LR 139........................................................ 305

xiv Contract in Commercial Law AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170...........................464, 470, 476, 477 Anaconda Nickel Ltd v Edensor Nominees Pty Ltd [2004] VSCA 16; (2004) 8 VR 38...................................................................................................... 362, 367 Anderson Ltd v Daniel [1924] 1 KB 138 (CA).................................................................. 449 André et Cie v Cook Industries Ltd [1987] 2 Lloyd’s Law Reports 463 (CA).................... 13 Andrews v Australia and New Zealand Banking Group Ltd [2011] FCA 1376; (2011) 211 FCR 53.........................................................................................459, 460, 464 Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205.................................................................21, 113, 409, 457-463, 465, 468, 472, 475-479, 481, 483, 484, 485, 486-492 Angullia v Estate & Trust Agencies (1927) Ltd [1938] AC 624 (PC)........................ 308, 309 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 (HCA)..................................................................................................... 117 Antons Trawling Co Ltd v Smith [2003] 2 NZLR 23 (CA)........................................... 75, 79 Archbold’s (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 (CA)............................. 438 Archer Capital 4A Ltd as trustee for the Archer Capital Trust 4A v Sage Group plc [2015] FCA 960.................................................................................. 133 Ardlethan Options Ltd v Easdown (1915) 20 CLR 285 (HCA)........................................ 306 Arfaras v Vosnakis [2016] NSWCA 65............................................................................... 372 Arnold v Britton [2015] UKSC 36; [2015] AC 1619..........................................7, 8, 128, 149 Ashmore v Corp of Lloyd’s (No 2) [1992] 2 Lloyd’s Rep 620 (Com Ct)......................... 162 Ashmore Benson Peace & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828 (CA)........ 449, 452 Ashton v Pratt [2015] NSWCA 12; (2015) 88 NSWLR 281.................73, 360, 366, 367, 371 Ashworth v Royal National Theatre [2014] 4 All ER 238 (QB)................................ 287, 291 Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255 (QB)........................................................................................................... 163 Associated Pan Malaysia Cement Sdn Bhd v Syarikat Teknikal and Kejuruteraan Sdn Bhd [1990] 3 MLJ 287...................................................................... 35 AstraZeneca UK Ltd v Albermarle International Corporation [2011] EWHC 1574 (Comm); [2011] 2 CLC 252................................................................... 426 Athenæum Life Assurance Society, Re (1858) 4 K & J 549; 70 ER 229............................. 306 Attorney-General v Blake [2001] 1 AC 268 (HL).............................................................. 467 Attorney-General v Colchester Corporation [1955] 2 QB 207 (QBD)............................ 320 Attorney-General (NSW) v Perpetual Trustee Co (Ltd) (1940) 63 CLR 209 (HCA)........................................................................................106, 112, 115 Attorney-General for England and Wales v R [2002] 2 NZLR 91 (CA)............................ 75 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988....................................................................7, 127, 129, 130, 144-146, 148-152, 157, 162, 164, 165 AusNet Transmission Group Pty Ltd v Federal Comr of Taxation [2015] HCA 25; (2015) 255 CLR 439...................................................................................................... 108 Austin v United Dominions Corporation Ltd [1984] 2 NSWLR 612.............................. 409 Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 (CA).................. 362 Australia and New Zealand Banking Group Ltd v Paciocco [2015] FCAFC 78; (2015) 321 ALR 5.......................................................................................................... 113 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51............................................................... 477 Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204............................................................................................... 23 Australian Financial Services Ltd v Hills Industries Ltd (2014) 253 CLR 560................. 377 Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385....................... 110, 111 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No 4) [2007] FCA 963; (2007) 160 FCR 35................................................................................................ 111, 420



Table of Cases xv

Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 294.............................................................................................. 300, 308 Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 (HCA)................................................................................................... 61, 69 Automatic Fire Sprinklers Proprietary Limited v Watson (1946) 72 CLR 435................ 281 AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133; [2011] 2 Lloyd’s Rep 1.................................................................................................. 423 Bacon v Clark (1837) 3 My & C 294; 40 ER 938....................................................... 308, 309 Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (Ch)....................................................... 222 Bainbridge v Firmstone (1838) 112 ER 1019...................................................................... 95 Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274; [2002] 1 All ER (Comm)........................................................... 47, 48, 240, 250, 360, 365 Baker v Paine (1750) 1 Ves Sen 456; 27 ER 1140 (LC)...................................................... 124 Ballet v Mingay [1943] KB 281 (CA)................................................................................. 309 Banc of America Securities LLC v Solow Building Co II LLC, 847 NYS 2d 49; 47 AD 3d 239................................................................................................................. 412 Bank Line Ltd v Arthur Capel & Co [1919] AC 435 (HL)................................................ 117 Bank of Australia v Palmer [1897] AC 540 (PC)............................................................... 180 Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66; [2016] AC 176........................... 380 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corporation v York Montague Ltd) [1997] AC 191 (HL).................................................................................................................. 129 Barnett v Creggy [2014] EWHC 3080 (Ch); [2015] PNLR 13......................................... 306 Barney, In re; Barney v Barney [1892] 2 Ch 265 (Ch)...................................................... 385 Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515 (Ch D)...............301, 308, 310 Bell v Lever Brothers [1932] AC 161 (HL).......................................................................... 93 Bell’s Indenture, Re [1980] 1 WLR 1217 (Ch D)....................................................... 301, 308 Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA)......................... 473 Benson v SA Mutual Life Assurance Society 1986 (1) SA 776 (A)................................... 314 Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274 (CA)........................14, 260, 264, 271 Beppler, Re & Jacobson Ltd [2016] EWHC 20 (Ch)......................................................... 129 Beswick v Beswick [1968] AC 58 (HL).............................................................................. 310 Bettini v Gye (1876) 1 QBD 183........................................................................................ 266 Bexhill UK Ltd v Razzaq [2012] EWCA Civ 1376............................................................. 385 Bhasin v Hrynew [2014] SCC 71; [2014] 3 SCR 494.................................12, 13 43, 48, 231, 235-246, 250-254 Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93 (CA).................................................... 305 Bilta (UK) Ltd (in liq) v Nazir (No 2) [2015] UKSC 23; [2016] AC 1............................... 18 Bisset v Burgess (1856) 23 Beav 278; 53 ER 109................................................................ 304 Blackpool and Fylde Aero Club v Blackpool BC [1990] 1 WLR 1195 (CA).............. 95, 102 Blencowe, Re (1866) LR 1 Ch App 393 (CA)......................................................306, 307, 309 Blue Haven Enterprises Ltd v Tully [2006] UKPC 17....................................................... 379 Blue Sky One Ltd v Balli Group plc [2010] EWHC 631 (Comm); 2010 WL 902909........................................................................................................... 311 Bobux Marketing Ltd v Raynor Marketing Ltd [2001] NZCA 348; [2002] 1 NZLR 506......................................................................................................... 37 Boissevain v Weil [1950] AC 327 (HL).............................................................................. 448 Boone v Eyre (1777) 1 H Bl 273; 96 ER 767.............................................................. 263, 264 Bosanquet v Wray (1815) 6 Taunt 597; 128 ER 1167........................................................ 306 Bottiglieri di Navigazione SpA v Cosco Qingdao Ocean Shipping Co (The Bunga Saga Lima) [2005] EWHC 244 (Comm); [2005] 2 Lloyd’s Rep 1......... 368 Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 (CA)........................................ 445 BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783.................................. 368

xvi Contract in Commercial Law BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).................................................................. 143, 144, 149, 150, 155, 164 Braddon Towers Ltd v International Stores Ltd [1987] 1 EGLR 209 (Ch D).......... 317, 320 Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 4 All ER 639.................................. 37 Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153......................................................................................... 148, 153 Brambles Ltd v Wail [2002] VSCA 150; (2002) 5 VR 169................................................. 421 Brand v Chris Building Co Pty Ltd [1957] VR 625 (SC).................................................. 379 Breen v Williams (1996) 186 CLR 71................................................................................. 252 Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corp Ltd [1981] AC 909....................................................................................... 276, 277 Bridge v Campbell Discount Co Ltd [1962] AC 600 (HL)....................................... 473, 478 Brikom Investments Ltd v Carr [1979] QB 467 (CA)......................................................... 96 Bristol & West Building Society v Mothew [1998] Ch 1 (CA)......................................... 301 Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014] EWHC 2145 (Ch)............................................................ 38, 41, 51, 54, 58, 212, 213, 226 Britel Fund Trustees Ltd v Scottish and Southern Energy plc 2002 SLT 223 (OH)......... 325 British Building & Engineering Appliances Ltd v Dedman [1973] ICR 82............. 281, 284 British Telecommunications plc v Ticehurst [1992] ICR 383 (CA)................................... 45 Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561 (CA)....................................... 211, 212 Bropho v Western Australia (1990) 171 CLR 1................................................................. 487 Bruno Appliance and Furniture, Inc v Hryniak [2014] SCC 8; [2014] 1 SCR 126......... 244 BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC); [2010] BLR 267............................................................................................................. 423 Buick Sales Ltd, Re [1926] NZLR 24 (SC)......................................................................... 306 Bull v Australian Quarter Horse Association [2015] NSWCA 354.................................. 164 Bunge Corporation, New York v Tradax Export SA, Panama [1981] 1 WLR 711......................................................................................................260, 261, 273 Burmah Oil Company (Burma Trading) Ltd v Lord Advocate [1965] AC 75 (HL).................................................................................................................... 309 Burragubba v State of Queensland [2015] FCA 1163....................................................... 439 Burt v Barlow (1792) 3 BCC 451; 29 ER 638 (LC)............................................................ 124 Burton v Camden London Borough Council [2000] 2 AC 399 (HL).............................. 381 Bushby v Dixon Holmes du Pont Pty Ltd [2010] NSWSC 234; (2010) 78 NSWLR 111................................................................................................. 462 Byrne v Australian Airlines Ltd (1995) 185 CLR 410 (HCA)..............................11, 155, 281 Byrnes v Jokona Pty Ltd [2002] FCA 41............................................................................ 117 Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253.....................................131, 138, 139, 140, 187, 205, 484, 486 C Itoh Co Ltd v Copanhia de Navegaçao Lloyd Brasileiro (The “Rio Assu”) (No 2) [1999] 1 Lloyd’s Rep 115 (CA)................................................................. 149, 163 C & P Haulage v Middleton [1983] 1 WLR 1461 (CA)...................................................... 89 C & S Associates UK Ltd v Enterprise Insurance Co Plc [2015] EWHC 3757 (Comm).................................................................................................. 129 C H Giles & Co Ltd v Morris [1972] 1 WLR 307 (Ch D)................................................. 320 Caffrey v Darby (1801) 6 Ves Jun 489; 31 ER 1159........................................................... 300 CAL No 14 Pty Ltd v Motor Accidents Insurance Board [2009] HCA 47; (2009) 239 CLR 390...................................................................................................... 443 Caltex Refineries (Qld) Pty Ltd v Stavar [2009] NSWCA 258.......................................... 455 Calthorpe’s Case (1573) 3 Dy 334b, 336b; 73 ER 756......................................................... 67 Camden v Cowley (1762) 1 W Bl 417; 96 ER 237 (KB).................................................... 125 Campbell, Ex p (1809) 16 Ves Jun 244; 33 ER 977............................................................ 307 Canada Steamship Lines Ltd v The King [1952] AC 192...................................411, 420-424 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534.......................................... 301



Table of Cases xvii

Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66......................................................................................................................... 6 Carmichael v National Power plc [1999] ICR 1226 (HL)................................................... 46 Casey’s Patents, Re [1892] 1 Ch 104 (CA)......................................................................... 100 Cator v Croydon Canal Co (1843) 4 Y & C Ex 593; 160 ER 1149.............384, 386, 397, 402 Cavanagh v Secretary of State for Work and Pensions [2016] EWHC 1136 (QB).......... 129 Cavendish Square Holdings BV v Makdessi [2015] UKSC 67; [2015] 3 WLR 1373, on appeal from [2013] EWCA Civ 1539; [2014] 2 All ER (Comm).................................................. 20, 21, 113, 363, 368, 459, 460, 464-466, 469, 470, 472, 476, 482, 484, 485, 486, 488, 490, 491 CCC Films (London) Ltd v Impact Quadrant Films Ltd [1985] 1 QB 16 (QBD)............................................................................................................. 338 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (KBD)......................................................................................4, 74, 367, 368, 369 Central London Property Trust Ltd v High Trees House Ltd [1956] 1 All ER 256 (KB)............................................................................................................ 90 Chalke v Inland Revenue Commissioners [2009] EWHC 952 (Ch); [2009] 3 CMLR 14................................................................................................ 305, 309 Chaplin v Hicks [1911] 2 KB 786 (CA)..............................................................334, 341, 348 Chappel v Somers & Blake [2003] EWHC 1644 (Ch); [2004] Ch 19............................... 308 Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 (HL)..................................................... 94 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101.......................................................9, 126, 128, 134, 135, 138, 149, 168, 176, 183, 187, 188, 197, 198, 200-202, 206, 209-212, 214, 216-221, 224-226 Chase Manhattan Bank v AXA Reinsurance UK plc, 752 NYS 2d 17; 300 AD 2d 16 (Supreme Court 2002).......................................................................... 430 Chatenay v Brazilian Submarine Telegraph Co [1891] 1 QB 79 (CA)............................. 107 Cheah Peng Hock v Luzhou Bio-Chem Technology Ltd [2013] SGHC 32; [2013] 2 SLR 577........................................................................................................... 289 Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736; [2013] Ch 305............................................................................................................... 150 Chiam Heng Hsien v Jurong Town Corp [1985] SGCA 5; [1985-1986] SLR(R) 92....... 283 Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209 (PC)............... 115 Chunna Mal-Ram v Mool Chand (1928) 55 IA 154 (PC).................................................. 35 Church Commissioners for England v Abbey National plc 1994 SC 651............................................................................................315, 324, 327, 328 Chye Lian Huat Sawmill Co v Hean Nerng Industrial Pte Ltd [2002] SGHC 300; [2003] 2 SLR(R) 23................................................................................... 283 Ciofalo v Vic Tanney Gyms, 10 NY 2d 294........................................................................ 412 Citibank NA v Allan R Plapinger, 66 NY 2d 90; 485 NE 2d 974 (1985)................... 412, 413 Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1.........................................470, 471, 477 City and Westminster Properties (1934) Ltd v Mudd [1959] Ch 129 (Ch)....................... 96 Clark v Clark [2006] EWHC 275 (Ch); [2006] 1 FCR 421............................................... 362 Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1................................................ 374, 473 Clarke v Commissioner of Taxation [2009] HCA 33; (2009) 240 CLR 272.................... 455 Clarke v Earl of Dunraven (The Santanita) [1897] AC 59 (HL)........................................ 95 Clarkson v Davies [1923] AC 100 (PC)............................................................................. 306 Clough v Bond (1838) 3 My & Cr 490; 40 ER 1016.......................................................... 300 Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 (CA)....................................................................................................... 194, 224 Cobbe v Yeoman’s Row Management Ltd [2008] UKHL 55; [2008] 1 WLR 1752.........................................................361, 362, 364, 366, 370-374, 378 Cochrane v Moore (1890) 25 QBD 57 (CA)....................................................................... 62

xviii Contract in Commercial Law Cocker v Quayle (1830) 1 Russ & M 535; 39 ER 206........................................................ 300 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (HCA)..................................................................6, 130-133, 138, 143, 146, 155, 161-163, 175, 224 Cohen v Cohen (1929) 42 CLR 91 (HCA).................................................................... 65, 66 Colbron v St Bees Island Pty Ltd (1995) 56 FCR 303....................................................... 110 Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 (HCA).......................... 108 Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (FCA)........ 108 Collie, Re; Ex p Adamson (1878) 8 Ch D 807 (CA).................................................. 303, 307 Collier v P&MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329; [2008] 1 WLR 643 (CA)..........................................................................................91, 97, 98, 369 Collins v Collins (1759) 2 Burr 820; 97 ER 579................................................................. 460 Colnaghi USA Ltd v Jewelers Protection Services Ltd, 81 NY 2d 821; 611 NE 2d 282 (1993)................................................................................................... 422 Combe v Combe [1951] 2 KB 215 (CA)...................................................................... 74, 370 Commissioner for New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 (CA).......................................................................................................... 185, 222 Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 (CA).................................................................................................... 194 Commissioner of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178 (HCA)....................................................................................................... 138 Commissioner of Stamps (WA) v West Australian Trustee, Executor & Agency Co Ltd (1925) 36 CLR 98 (HCA).................................................................... 305 Commonwealth v Amann Aviation Pty Ltd (1992) 174 CLR 64 (HCA)......... 16, 333-335, 375 Commonwealth v Verwayen (1990) 170 CLR 394 (HCA).....................................29, 73, 372 Commonwealth Bank of Australia v Barker [2014] HCA 32; (2014) 312 ALR 356.........................................................................................11, 155, 289 Commonwealth Bank of Australia v White; Ex p the Society of Lloyd’s [1999] VSC 262; [1999] 2 VR 681............................................................................................ 433 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 (HCA).............................................. 115 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 (HL)..........................................................................15, 316, 318-320, 326, 329, 330 Corinna Chin Shu Hwa v Hewlett Packard Singapore (Sales) [2015] SGHC 204.......... 171 Corinno Civetta Construction Corp v City of New York, 67 NY 2d 297; NE 2d 905...................................................................................................................... 412 Cosmetic Warriors Ltd v Gerrie [2015] EWHC 3718 (Ch).............................................. 129 Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 (HCA)............... 72, 74 County of Carleton v City of Ottawa [1965] SCR 663..................................................... 232 Couturier v Hastie (1856) 5 HLC 673; 10 ER 1065 (HL)................................................. 122 CPSU, the Community and Public Sector Union v State of Victoria (Department of Justice) [2014] FWCFB 6153................................................................ 6 Crabb v Arun District Council [1976] Ch 179 (CA)................. 364, 365, 369, 370, 374, 377 Craddock Brothers v Hunt [1923] 2 Ch 136 (CA)............................................................ 190 Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 (Ch)..................................... 204, 224 Cranleigh Precision Engineering Ltd v Bryant [1965] 1 WLR 1293 (QB)....................... 281 Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309................................................................................................................ 273 Crema v Cenkos Securities plc [2010] EWCA Civ 1444; [2011] 1 WLR 2066........................................................................................150, 164, 166 Crook v Dowling (1782) 3 Doug 75; 99 ER 546 (KB)....................................................... 125 Cross v Kirkby, Times, 5 April, 2000 (CA)................................................................... 18, 446 Crossco No 4 Unlimited v Jolan Ltd [2011] EWHC 803 (Ch)..........................206, 211, 361 Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619; [2012] 2 All ER 754....................................................................................................... 361



Table of Cases xix

Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26....................................................................................360-362, 369-372, 379, 380 Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2; [2015] 2 WLR 875......................................................................................... 477 Cunard Steamship Co Ltdv Buerger [1927] AC 1..................................................... 410, 411 Currie v Misa (1875) LR 10 Ex 153...................................................................................... 66 Cusack v London Borough of Harrow [2013] UKSC 40; [2013] 1 WLR 2022................ 484 Cutten and Harvey v Sun Alliance Life Assurance Ltd (1986) 4 ANZ Ins Cas 60-742.......... 115 Cyberchron Corp v Calldata Systems Development Inc 47 F 3d 39 (1995).................... 370 D & C Builders Ltd v Rees 1966] QB 617 (CA)................................................................... 98 D & G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB).......................................................................... 38, 41, 42, 51, 53, 54, 58 Darjan Estate Co plc v Hurley [2012] EWHC 189 (Ch); [2012] 1 WLR 1782................ 306 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500........................................................................... 416, 417, 420, 421, 423, 434 Data & Scientific Inc v Oracle Corp [2015] ONSC 4178; 127 OR (3d)................... 253, 254 Dato’ Abdullah bin Ahmad v Syarikat Permodalan Kebangsaan Bhd [1990] 3 MLJ 505.............................................................................................................. 282, 283 Daulia Ltd v Four Millbank Nominees Ltd [1978] Ch 231.............................................. 102 Daventry District Council v Daventry & District Housing Ltd [2010] EWHC 1935 (Ch).................................................................................. 214-216, 219, 226 Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153; [2012] 1 WLR 1333.................................. 135, 136, 168, 193, 194, 198, 202, 208, 210, 213-216, 219, 226 Dawson, Re [1966] 2 NSWR 211............................................................................... 300, 310 Dawson v Great Northern and City Railway Company [1905] 1 KB 260 (CA).............. 401 Day v Day [2013] EWCA Civ 280; [2014] Ch 114..................................................... 187, 188 De la Bere v Pearson Ltd [1908] 1 KB 280 (CA)................................................................. 95 Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 (CA)................................................................................................... 116, 281 Dedman v British Building & Engineering Appliances Ltd [1974] ICR 53 (CA)............ 281 Deglman v Guaranty Trust Co of Canada [1954] 3 DLR 785 (SCC)............................... 232 Delaforce v Simpson-Cook [2010] NSWCA 8; (2010) 78 NSWLR 483................... 366, 373 Delaney v Cascade River Holidays Ltd (1983) 44 BCLR 24 (CA)...................................... 32 Delhasse, Ex p; In re Megevand (1878) 7 Ch D 511.......................................................... 111 Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699...................... 281 Derry v Peek (1889) 14 App Cas 337 (HL)........................................................................ 244 Dewar v Mintoft [1912] 2 KB 373 (KBD)......................................................................... 306 DHJPM v Blackthorn Resources [2011] NSWCA 348; (2011) 285 ALR 311....................................................................... 360-362, 366, 367, 369 Dick v Swinton (1813) 1 V & B 371; 35 ER 145................................................................ 306 Doe d Lewis v Lewis (1842) 9 M & W 662, 664; 152 ER 280............................................ 382 Donaldson v Donaldson (1854) Kay 711; 69 ER 303.........................................386, 387, 397 Donne v Cornewall (1486)................................................................................................. 482 Donoghue v Stevenson [1932] AC 562 (HL)..................................................................... 252 Dougan v Ley (1946) 71 CLR 142 (HCA)........................................................................... 15 Dow Chemical of Canada Limited v R V Industries Ltd (1979) 9 Alta LR (2d) 129............. 273 Dowty Boulton Paul Ltd v Wolverhampton Corporation [1971] 1 WLR 204 (Ch D)................................................................................................ 320, 321 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423.............................. 29 Duke of Chandos v Talbot (1731) 2 P Wms 601; 24 ER 877............................................ 385 Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79 (HL)..............................................466, 485, 488 Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 (HL).................. 66

xx Contract in Commercial Law Dŵr Cymru Cyf v Carmarthenshire County Council [2004] EWHC 2991 (TCC).......................................................................................304, 310, 311 Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612............................................................................................................... 37, 58 Dymocks Franchise Systems (NSW) Pty Ltd v John Todd and Alicia B Todd Bilgola Enterprises Ltd and Lambton Quay Books Ltd [2002] UKPC 50; [2002] 2 All ER (Comm) 849................................................................................... 37, 58 Eadie v Township of Brantford [1967] SCR 573............................................................... 232 Earl v Hector Whaling [1961] 1 Lloyd’s Rep 459 (CA)..................................................... 224 Earl of Chesterfield v Janssen (1750-51) 2 Ves Sen 125; 28 ER 82; 1 Atk 301; 26 ER 191...................................................................................................................... 123 Eastern Distributors v Goldring [1957] 2 QB 600 (CA)................................................... 366 Eastwood v Kenyon (1840) 11 Ad & E 438; 113 ER 482............................................. 65, 100 Eastwood v Magnox Electric plc [2005] 1 AC 503 (HL)................................................... 291 ED & F Man International (S) Pte Ltd) v Wong Bark Chuan David [2007] SGCA 53; [2008] 1 SLR 663......................................................................................... 269 Edgeworth Construction Ltd v ND Lea & Associates Ltd [1993] 3 SCR 206.................. 234 Effort Shipping Co Ltd v Linden Management SA (The Giannis NK) [1998] AC 605 (HL).................................................................................................................. 408 EK Nominees Pty Ltd v Woolworths Ltd [2006] NSWSC 1172............................... 362, 379 Eldamos Investments Ltd v Force Location Ltd (1995) 17 NZTC 12,196 (HC)............. 209 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640.......................................................................................132, 175, 484 Electricity Generation Corporation t/as Verve Energy v Woodside [2014] HCA 9; (2014) 88 ALJR 473............................................................................................. 6 Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130 (CA)................................ 484 Elsey & Co Ltd v Hyde (Divisional Court, 9 June 1926)................................................... 473 Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168; [2011] 2 All ER (Comm) 223....................................................................................... 119 Emma Silver Mining Co v Grant (1880) 17 Ch D 122 (Ch D)......................................... 307 Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL)............. 48, 127, 157-159 Equuscorp Pty Ltd v Glengallan Investments [2004] HCA 55; (2004) 218 CLR 471...................................................................................................... 124 Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 798.............19, 438, 443, 448 Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95.......................................................................................................... 69 Errington v Errington and Woods [1952] 1 KB 290 (CA); [1952] 1 All ER 149........ 102, 374 Europa Plus SCA SIF v Anthracite Investments (Ireland) Plc [2016] EWHC 437 (QB Comm).............................................................................................. 129 Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 (HL)............................................................................................459, 469, 472 FAI General Insurance Company Limited v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641.............................................................................. 485, 486 Fales v Canada Permanent Trustee Co (1976) 70 DLR (3d) 257 (Can SC)..................... 300 Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The “Nanfri”) [1979] AC 757 (HL)...................................................................................................... 117 Ferguson v Gibson (1872) LR 14 Eq 379........................................................................... 307 FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45; [2015] AC 250............................................................................................................... 306 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL)...................................................................................................................... 93 Field v Zien [1963] SCR 632............................................................................................... 273 Financings Ltd v Baldock [1963] 2 QB 104....................................................................... 270



Table of Cases xxi

Firodi Shipping Ltd v Griffon Shipping LLC (“The MV Griffon”) [2013] EWCA Civ 1567; [2014] 1 CLC 1................................................................................. 306 First City Capital Ltd v Petrosar Ltd (1987) 61 OR (2d) 193........................................... 273 First City Trust Co v Triple Five Corp Ltd (1989) 57 DLR (4th) 554............................... 273 Firstmac Fiduciary Services Pty Ltd v HSBC Bank of Australia Ltd [2012] NSWSC 1122................................................................................................................. 417 Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 (HCA).........................19, 438, 439, 441, 446, 447 Fitzgerald v Masters (1956) 95 CLR 420 (HCA)............................................................... 149 Fitzroy v Cave [1905] 2 KB 364 (CA)................................................................................ 305 Flame SA v Glory Wealth Shipping PTE Ltd [2013] EWHC 3153 (Comm)................... 349 Flitcroft’s Case (1882) 21 Ch D 519 (CA).......................................................................... 307 Flyn v Breccia [2015] IEHC 547........................................................................................... 37 Foakes v Beer (1884) 9 App Cas 605 (HL)................................................................95, 97-99 Folkes v Chadd (1783) 3 Doug 340; 99 ER 686 (KB)........................................................ 125 Foo Jong Peng v Phua Kiah Mai [2012] SGCA 55; [2012] 4 SLR 1267............................ 144 Foran v Wight (1989) 168 CLR 385................................................................................... 278 Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd [2006] SGHC 3; [2006] 1 SLR (R) 927.................................................................................................... 152 Foster v Reeves [1892] 2 QB 255 (CA).............................................................................. 306 Fowler v Fowler (1859) 4 De Gex & J 250; 45 ER 97......................................................... 124 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603......................................................................................... 202, 203 Fraser v Thames Television Ltd [1984] 1 QB 44 (QBD)................................................... 154 Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd [1999] 3 SCR 108................ 4, 234 Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ld [1953] 2 QB 450 (CA).....................................................................................9, 10, 124, 183, 194 Freeth v Burr (1873–74) LR 9 CP 208 (Court of Common Pleas).................................. 116 Fu Yuan Foodstuff Manufacturer Pte Ltd v Methodist Welfare Services [2009] SGCA 23; [2009] 3 SLR(R) 925.................................................................................... 270 Fujitsu Services Limited v IBM United Kingdom Limited [2014] EWHC 752 (TCC)................................................................................................ 426, 428 Fulham v McCarthy (1848) 1 HLC 708; 9 ER 937.................................................... 384, 387 G & C Kreglinger v New Patagonia Meat and Cold Storage Company Limited [1914] AC 25 (HL).................................................................................................................... 482 Gallie v Lee [1971] AC 1004 (HL)...................................................................................... 171 Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395.................. 477 Gardner v Coutts & Co [1968] 1 WLR 173 (Ch)...................................................... 163, 164 Garland v Consumers’ Gas Co [2004] 1 SCR 629............................................................. 232 Garrard v Frankel (1862) 54 ER 961 (Ch); 30 Beav 445........................................... 184, 228 Gateway Realty Ltd v Arton Holdings Ltd (1991) 106 NSR (2d) 180 (SC TD) (“Gateway SC”); affd (1992) 112 NSR (2d) 180 (CA) (“Gateway CA”).................... 243 Gay Choon Ing v Loh Sze Ti Terence Peter [2009] SGCA 3; [2009] 2 SLR(R) 332........ 77, 80 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50..................................................................................................................... 37, 117 General Reinsurance Australia Ltd v HIH Casualty and General Insurance Ltd (in liq) [2009] NSWCA 22; (2009) 15 ANZ Ins Cas 61-796....................................... 115 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284 (CA)..........................................................................................................409-411 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 (HL).......... 411 George (Porky) Jacobs Enterprises Ltd v City of Regina [1964] SCR 326....................... 232 Germanotta v Germanotta [2012] QSC 116..................................................................... 373 Geys v Société Générale, London Branch [2012] UKSC 63; [2013] 1 AC 523..............................................................257, 279, 280-287, 291, 422, 423

xxii Contract in Commercial Law Giap Hon v Westcomb Securities Pte Ltd [2009] SGCA 19; [2009] 3 SLR(R) 518......... 189 Gibaud v Great Eastern Railway Co [1921] 2 KB 426....................................................... 411 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZSC 109...................... 171 Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39, (2003) 214 CLR 604...................................................................................................... 115 Gillespie Bros & Co v Cheney, Eggar & Co [1896] 2 QB 59 (QBD)................................. 181 Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400.............................. 411 Gillett v Holt [2001] Ch 210 (CA)..................................................................................... 377 Giumelli v Giumelli (1999) 196 CLR 101 (HCA)..............................................370-372, 375 GKN (Cwmbran) Ltd v TI Lloyd [1972] ICR 214............................................................ 281 Glaholm v Hays (1841) 2 M & G 257; 133 ER 743............................................................ 266 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206 (CA).................................................................................................... 421 Glencore Grain Ltd v Flacker Shipping Ltd (The “Happy Day”) [2002] EWCA Civ 1068; [2002] 2 Lloyd’s Rep 487........................................................... 31, 119 Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 4 All ER 514 (CA)............................................................................ 13 Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396......... 129 Glynn v Margetson & Co [1893] AC 351........................................................................... 410 Goldcorp’s Exchange Ltd, Re [1995] 1 AC 74 (PC)........................................................... 366 Golden Key Ltd, Re [2009] EWCA Civ 636....................................................................... 132 Golding’s Case (1586) 2 Leo 71; 74 ER 367......................................................................... 64 Gorringe v Irwell India Rubber and Gutta Percha Works (1886) 34 Ch D 128 (CA)................................................................................................. 382, 383 Gould v Curtis [1913] 3 KB 84 (CA)................................................................................. 115 Graham v The Royal National Agricultural and Industrial Association of Queensland [1989] 1 Qd R 624 (SC)........................................................................... 421 Gravesham Borough Council v British Railways Board [1987] Ch 379 (Ch D).............. 320 Gray v Thames Trains Ltd [2009] UKHL 33; [2009] AC 1339................................... 18, 446 Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ 1407; [2003] QB 679............................................................................................................... 139 Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd 2016 BCSC 68; 2016 CarswellBC 94..................................................................................... 254 Grey v Inland Revenue Commissioners [1960] AC 1 (HL).............................................. 385 Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190...................................................................................................................... 133 Gross v Sweet 49 NY 2d 102............................................................................................... 412 Grosvenor Developments (Scotland) plc v Argyll Stores Ltd 1987 SLT (Sh Ct) 134.................................................................................315, 317, 327, 328 Grosvenor Developments (Scotland) plc v Argyll Stores Ltd 1987 SLT 738 (IH).........315, 317, 324, 327, 328, 328 Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (QBD, TCC).............................................................................................. 129 Guarantee Co of North America v Gordon Capital Corp [1999] 3 SCR 423.............................................................................................................. 413, 415 Gunton v Richmond-upon-Thames LBC [1981] Ch 448 (CA)........................279, 282, 283 Gwynne v Heaton (1778) 1 BCC 1; 28 ER 949.................................................................. 123 Hadley v Baxendale (1854) 9 Ex 341 (Exch)...................................................................... 337 Hall v Hebert [1993] 2 SCR 159............................................................................20, 443, 448 Hall v Libertarian Investments Ltd [2013] HKCFA 94; (2013) 16 HKCFAR 681............ 301 Hallman Holding Ltd v Webster [2016] UKPC 3.............................................................. 129 Hallstroms Pty Ltd v Federal Comr of Taxation (1946) 72 CLR 634 (HCA).................. 108 Hamlyn & Co v Wood & Co [1891] 2 QB 488 (CA)......................................................... 158 Hammond v Messenger (1838) 9 Sim 327; 59 ER 383.............................................. 400, 401



Table of Cases xxiii

Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd [2013] EWHC 3251 (Pat)........................................................................................................... 52 Hang Seng Finance Ltd v Lin Kwok Man [1991] 2 HKC 613........................................... 273 Harding v Harding (1886) 17 QBD 442 (QB)........................................................... 394, 395 Harding v Wealands [2006] UKHL 32; [2007] 2 AC 1...................................................... 186 Hardy v Martin (1783) 1 Cox Eq 26; 29 ER 1046.............................................................. 481 Hardy v Motor Insurers Bureau [1964] 2 QB 745 (CA)................................................... 442 Hare v Murphy Brothers Ltd [1973] ICR 331................................................................... 281 Harling v Eddy [1951] 2 KB 739 (CA)................................................................................. 96 Harris v Pepperell (1867-68) LR 5 Eq 1 (Ch)............................................................ 184, 228 Hart v MacDonald (1910) 10 CLR 417 (HCA)................................................................. 154 Harter v Harter (1873) LR 3 P&D 11................................................................................. 189 Hartog v Colin & Shields [1939] 3 All ER 566 (KB)..........................................127, 172, 222 Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1986] AC 207 (HL)..... 101 Hawkes v Saunders (1782) 1 Cowp 289; 98 ER 1091.......................................................... 65 Hawkins v Clayton (1988) 164 CLR 539 (HCA)............................................................... 155 Haydon v South Eastern District of the Workers’ Education Association (1972) 7 ITR 318....................................................................................................................... 284 Hayfin Opal Luxco 3 SARL v Windermere VII Cmbs Plc [2016] EWHC 782 (Ch)........ 129 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)............................ 373 Heisler v Anglo-Dal Ltd [1954] 1 WLR 1273 (CA)............................................................. 13 Henjo Investments v Collins Marrickville (1988) 39 FCR 546......................................... 416 Henkle v Royal Exchange Assurance Co (1749) 1 Ves Sen 317; 27 ER 1055.................... 124 Henry v Henry [2010] UKPC 3; [2010] 1 All ER 988....................................................... 374 Herbert v Doyle [2010] EWCA Civ 1095; [2011] 1 EGLR 119......................................... 362 Hewett v Foster (1843) 6 Beav 259; 49 ER 825.................................................................. 300 Hickman v Haynes (1875) LR 10 CP 598.......................................................................... 368 Hickman v Turn and Wave Ltd [2011] NZCA 100; [2011] 3 NZLR 318......................... 144 Highland and Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297..................................................................................................... 314, 319, 322-331 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2001] 1 All ER (Comm) 719................................................................................................... 430 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6; [2003] 2 Lloyd’s Rep 61...................................................................43, 430, 431 Hill v CA Parsons & Co Ltd [1972] Ch 305............................................................... 284, 291 Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 (PC (Hong Kong))............ 117 Hodgkinson v Simms [1994] 3 SCR 377........................................................................... 253 Holman v Johnson (1775) 1 Cowp 341; 98 ER 1120........................................................ 453 Homburg Houtimport BV v Agrosin Private Ltd (“The Starsin”) [2004] 1 AC 715 (HL)............................................................................................................... 174 Honda Canada Inc v Keays [2008] SCC 39; [2008] 2 SCR 362........................................ 247 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA).................................................................................... 13, 14, 116, 131, 257, 258, 260-267, 269-274 Hooper v Brodrick (1840) 11 Sim 47; 59 ER 791.............................................................. 320 Hope v Premierspace (Europe) Ltd [1999] BPIR 695....................................................... 305 Hopgood v Brown [1955] 1 WLR 213 (CA)...................................................................... 364 Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287; [2005] ICR 402................................................................................................................ 48 Horsley v Cox (1868–69) LR 4 Ch App 92 (CA)............................................................... 307 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 (HCA)............................................................................................... 109, 110 Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157...................................................................................................... 467 Hounga v Allen [2014] UKSC 47; [2014] ICR 847...................... 18, 440, 443, 445, 446, 448

xxiv Contract in Commercial Law Howard v Shirlstar Ltd [1990] 1 WLR 1292 (CA)............................................................ 443 Howe v Teefy (1927) 27 SR (NSW) 301 (SC)............................................................ 334, 341 Hoyl Group Ltd v Cromer Town Council [2015] EWCA Civ 782; [2015] HLR 43...................................................................................................... 362, 378 Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 (HCA)........................................................ 367 Hudson’s Bay Co v OMERS Realty Corp [2015] ONSC 4671; [2015] OJ No 4098 ....... 242 Huggons v Tweed (1879) 10 Ch D 359 (CA)..................................................................... 307 Hughes v Metropolitan Railway Company (1877) 2 App Cas 439............................367-369 Hunt v Bate (1567) 3 Dy 272a; 73 ER 605........................................................................... 66 Hunter Engineering Company Inc v Syncrude Canada Limited [1989] 1 SCR 426.......................................................................................................413-415, 417 Hunter v Moss [1994] 1 WLR 452 (CA)............................................................................ 309 IBM United Kingdom Pensions Trust Ltd v IBM United Kingdom Holdings Ltd [2012] EWHC 2766 (Ch)...................................................................... 183 Iceland Foods Ltd v Aldi Stores Ltd (6 May 2016, ChD).................................................. 129 Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611 (Ch D)........... 181 International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151........................................................................................ 130 Internet Broadcasting Corporation Limited (trading as NETTV) v MAR LLC (trading as MARHedge) [2009] EWHC 844 (Ch); [2010] 1 All ER (Comm) 112................................................................................424-426 Internet Trading Clubs Ltd v Freeserve (Investments) Ltd [2001] EBLR 142................. 277 Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd [2008] NSWCA 310; (2008) 257 ALR 292....................................................................... 459, 462 Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL).......................................................9, 17, 126, 146, 174-177, 181 Inwards v Baker [1965] 2 QB 29 (CA)....................................................................... 368, 377 Ireland v Higgins (1587) Cro Eliz 125; 78 ER 383............................................................... 65 Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61.......................................................... 292 Jacobs v Batavia & General Plantations Trust Ltd [1924] 2 Ch 329 (CA)........................ 180 JC Williamson Ltd v Lukey [1931] HCA 15; (1931) 45 CLR 282..................................... 470 Je Maintiendrai v Quaglia (1980) 26 SASR 101................................................................ 369 Jeancharm Ltd v Barnet Football Club [2003] EWCA Civ 58.......................................... 470 Jennings v Rice [2002] EWCA Civ 159; [2003] 1 FCR 501............................................... 374 Jenyns v Public Curator (1953) 90 CLR 113 (HCA)......................................................... 112 Jerome Francis v The Municipal Councillors of Kuala Lumpur [1962] 1 WLR 1411............................................................................................280, 281, 283, 284 Jervis v Harris [1996] Ch 195 (CA)................................................................................... 305 Jet Holding Ltd v Cooper Cameron (Singapore) Pte Ltd [2006] SGCA 20; [2006] 3 SLR(R).................................................................................................... 275, 278 Jetivia SA v Bilta (UK) Ltd [2015] UKSC 23; [2015] 2 WLR 1168............ 437, 440, 444-446 Jeune v Queens Cross Properties Ltd [1974] Ch 97 (Ch D)............................................. 320 Jobson v Johnson [1989] 1 WLR 1026 (CA)....................................................................... 21 John v James [1991] FSR 397 (Ch D)................................................................................ 306 John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1.................................................................................. 109, 110 Johnson v City of New York, 191 App Div 205, affd 231 NY 564..................................... 412 Johnson v Unisys Ltd [2001] UKHL 13; [2003] 1 AC 518.......................................... 37, 289 Jones, Re (1881) 18 Ch D 109 (CA)................................................................................... 307 Jones v Dowle (1841) 9 M & W 19; 152 ER 9.................................................................... 311 Jorden v Money (1854) 5 HL Cas 185................................................................................ 364 Jorian Properties Ltd v Zellenrath (1984) 46 OR (2d) 775............................................... 273



Table of Cases xxv

Joscelin v Sheltons Case (1557) 3 Leo 4; 74 ER 503............................................................ 65 Joscelyne v Nissen [1970] 2 QB 86 (CA)............................................197, 204, 213, 224, 225 Joseph v Law Integrity Insurance Co Ltd [1912] 2 Ch 581 (CA)..................................... 115 JS Bloor Ltd v Pavilion Developments Ltd [2008] EWHC 724 (TCC); [2008] 2 EGLR 85......................................................................................................... 379 Kalisch-Jarcho, Inc v City of New York, 58 NY 2d 377; 448 NE 2d 413 (1983)............... 412 Karp, Matter of v Hults, 12 AD 2d 718, affd 9 NY 2d 857................................................ 412 Kation Pty Ltd v Lamru Pty Ltd [2009] NSWCA 145; (2009) 257 ALR 336................... 311 K D Morris & Sons Pty Ltd (in Liq) v Bank of Queensland Ltd (1980) 146 CLR 165....... 486 Kekewich v Manning (1851) 1 De G M&G 176; 42 ER 519.......................................391-396 Kellaway v Johnson (1842) 5 Beav 319; 49 ER 601 324..................................................... 300 Kelly v Solari (1841) 9 M & W 54; 152 ER 24...................................................................... 93 Kennedy v Panama, New Zealand, and Australian Royal Mail Co (1867) LR 2 QB 580.................................................................................................................. 122 Kham and Nate’s Shoes No 2 Inc v First Bank of Whiting 908 F (2d) 1351 (7th Cir 1990)............................................................................................................... 243 Khan v Tyne & Wear Passenger Transport Executive [2015] UKUT 43 (LC).......... 304, 309 Kinane v Mackie-Conteh [2005] EWCA Civ 45; [2005] WTLR 345................................ 370 Knights v Wiffen (1869-70) LR 5 QB 660 (QBD)..................................................... 365, 366 Knott v Cottee (1852) 16 Beav 77; 51 ER 705.................................................................... 300 Kookmin Bank v Rainy Sky SA [2011] UKSC 50; [2011] 1 WLR 2900........................... 178 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115.......................................................................116, 117, 272 Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6........................................ 138 Krawchuk v Ulrychova (1996) 40 Alta LR (3d) 196.......................................................... 273 Kudos Catering (UK) Limited v Manchester Central Convention Complex Limited [2013] EWCA (Civ) 38; [2013] 2 Lloyd’s Rep 270...................................................... 426 L Albert & Son v Armstrong Rubber Co (1949) 178 F 2d 182 (2d Cir)................... 338, 340 Lady Shelburne v Earl of Inchiquin (1784) 1 BCC 338; 28 ER 1166................................ 124 Lahoud v Lahoud [2009] NSWSC 623.............................................................................. 341 Lake River v Carborundum Co 769 F2d 1284 (1985)....................................................... 474 Lampleigh v Brathwait (1615) Hob 105; 80 ER 255.......................................................... 100 Lancelot Shadwell v Cayley Shadwell [1860] 142 ER 62..................................................... 95 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 (HCA)..................................................................................................... 120 Leading Edge Events Australia Pty Ltd v Kiri Te Kanawa [2007] NSWSC 228................ 363 Leda Holding Pty Ltd v Oraka Pty Ltd [1998] ANZ ConvR 582; (1998) ATPR 41-601..................................................................................................... 432 Legione v Hateley (1983) 152 CLR 406 (HCA)........................................................... 73, 368 Lehndorff Canadian Pension Properties Ltd v Davis Management Ltd (1989) 59 DLR (4th) 1.............................................................................................................. 273 Les Laboratoires Servier v Apotex Inc [2014] UKSC 55; [2015] AC 430.................437, 442, 443, 445, 446 L’Estrange v F Graucob Ltd [1934] 2 KB 394 (KB)....................................408, 410, 418, 429 Leung Yee v Ng Yiu Ming [2001] 1 HKC 342.................................................................... 273 Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69....................................... 411 Lewis v Kation Pty Ltd [2006] NSWSC 480...................................................................... 311 Libertarian Investments Ltd v Hall [2013] HKCFA 93; (2013) 16 HKCFAR 681....... 300, 303 Lidl UK GmbH v Hertford Foods Ltd [2001] EWCA Civ 938......................................... 275 Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 (HCA).......................... 107 Lion Nathan Australia Pty Ltd v Cooper Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1.............................................................................................................. 6 Lister & Co v Stubbs (1890) 45 Ch D 1 (CA).................................................................... 306

xxvi Contract in Commercial Law Liverpool City Council v Irwin [1977] AC 239 (HL)................................................ 158, 159 Lloyd’s Bank plc v Carrick [1996] 4 All ER 630 (CA)....................................................... 375 London & Birmingham Flint Glass & Alkali Co Ltd, Re (1859) 1 De G, F & J 257; 45 ER 357...................................................................................................................... 307 London and North Western Railway Co v Neilson [1922] 2 AC 263............................... 410 London Drugs v Kuehne & Nagel International Ltd [1992] 3 SCR 299...................... 4, 234 London Transport Executive v Clarke [1981] ICR 355..................................................... 281 Lord Abinger v Ashton (1873) LR 17 Eq 358.................................................................... 320 Lord Carteret v Paschal (1733) 3 P Wms 197; 24 ER 1028................................385, 389, 390 LSREF III Wight Ltd v Millvalley Ltd [2016] EWHC 466 (Comm)................................. 212 Lumbers v W Cook Builders Pty Ltd (in liquidation) [2008] HCA 27; (2008) 232 CLR 635...................................................................................................... 375 Luxor (Eastborne) Ltd v Cooper [1941] AC 108 (HL)..................................................... 147 M & J Polymers Ltd v Imerys Minerals Ltd [2008] EWHC 344 (Comm); [2008] 1 Lloyd’s Rep 541...................................................................................... 272, 485 McCracken v Smith [2015] EWCA Civ 380; [2015] PIQR P19........................................ 446 McGreavy, Re [1950] Ch 269 (CA).................................................................................... 305 McGuinness v Norwich & Peterborough Building Society [2011] EWCA Civ 1286; [2012] 2 All ER (Comm).............................................................................................. 305 McInerney v MacDonald [1992] 2 SCR 138...................................................................... 252 Mackay v Dick (1881) 6 App Cas 251 (HL)......................................................................... 11 Mackenzie v Coulson (1869) LR 8 EQ 368 (Ch)............................................................... 181 Mackenzie v Rees (1941) 65 CLR 1.................................................................................... 294 McKercher v The Renovation Store Ltd [2015] ABQB 748................................................ 23 Macquarie International Health Clinic Pty Ltd v Sydney South West Area Heath Service [2010] NSWCA 268................................................................................ 11 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (HCA)......................................................................................................338, 344, 353 Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181............. 130 Magnum Photo Supplies Ltd v Viko New Zealand Ltd [1999] 1 NZLR 395 (CA).......... 228 Magnus v Queensland National Bank (1888) 37 Ch D 466 (CA).................................... 300 Mahmoud and Ispahani, Re [1921] 2 KB 716 (CA).......................................................... 440 Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633..............................................................................6, 133, 168, 176 Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 (Comm); [2014] 2 All ER 125....................................................................................................... 465 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 (HCA)........... 334, 342, 344, 347, 352, 357 Malik v Bank of Credit and Commerce International SA [1998] AC 20 (HL).......................................................................................................42, 288-290 Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd [1997] AC 749 (HL).......................................................................................................... 149, 170 Manning v English [2010] EWHC 153 (Ch); [2010] Bus LR D89................................... 306 Manor Asset Ltd v Demolition Services Ltd (Rev 1) [2016] EWHC 222 (QB TCC)..................................................................................................................... 129 Manwood and Burston’s Case (1587) 2 Leo 203; 74 ER 479.............................................. 66 Marac Life Assurance v Comr of Inland Revenue [1986] 1 NZLR 694 (CA).................. 115 Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1............................... 273 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2014] EWCA Civ 603; [2014] 2 P & CR DG 16..........144, 148, 149, 151, 156, 157, 159, 164, 166 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72; [2015] 3 WLR 1843............. 128, 129, 144, 148, 149, 151, 156, 157, 159, 164, 166 Marley v Rawlings [2014] UKSC 2; [2015] AC 129.................................................. 189, 190



Table of Cases xxvii

Marussia Communications Ireland Ltd v Manor Grand Prix Racing Ltd [2016] EWHC 809 (Ch)........................................................................................................... 129 Massingberd’s Settlement, Re (1890) 63 LT 296 (CA)...................................................... 300 Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; (2009) 261 ALR 382.......................................................................................................... 6 MBF Investments Pty Ltd v Nolan [2011] VSCA 114........................................................... 6 Melanson v Dominion of Canada General Insurance Co [1934] 2 DLR 459.................. 294 Mendelssohn v Normand [1970] 1 QB 177 (CA)............................................................... 96 Mercantile Bank of Sydney v Taylor [1893] AC 317 (PC)................................................ 179 Mersey Steel & Iron Co Ltd v Naylor Benzon & Co (1884) 9 App Cas 434 (HL)............ 116 Metro-Goldwyn Mayer Pty Ltd v Greenham [1966] 2 NSWLR 717................................ 489 Metropolitan Bank v Heiron (1880) 5 Ex D 319 (CA)..................................................... 306 Metropolitan Electric Supply Co Ltd v Ginder [1901] 2 Ch 799 (Ch D)........................ 153 Metropolitan Salvage and Towage Ltd v Seamar Trading and Commerce Inc [2009] EWCA Civ 531; [2010] 1 All ER (Comm) 1................................................................ 157 Micklethwait v Micklethwait (1857) 1 De G & J 504; 44 ER 818...................................... 307 Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200...............................................................41, 53, 250 Miller v Miller [2011] HCA 9; (2011) 242 CLR 446....................................19, 435, 443, 448 Miller v Race (1758) 1 Burr 452; 97 ER 398........................................................................ 93 Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825..............360, 462, 476, 484 Minister of Health v Bellotti [1944] 1 KB 298 (CA)......................................................... 368 M’Intyre v Belcher (1863) 14 CBNS 654; 143 ER 602...................................................... 154 Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475.............. 374 Moncrieff v Jamieson [2007] UKHL 42; [2007] 1 WLR 2620.......................................... 325 Moorgate Mercantile Co Ltd v Twitchings [1976] QB 225 (CA)..................................... 365 Morse v Tucker (1846) 5 Hare 79; 67 ER 835.................................................................... 304 Mortimer v Shortall (1842) 2 Dr & War 363..................................................................... 124 Moschi v Lep Air Services Ltd [1973] AC 331................................................................... 294 Mosely v Virgin (1796) 3 Ves Jun 184; 30 ER 959.............................................................. 124 Mosvolds Rederi A/S v Food Corp of India (The “Damodar General TJ Park” and “King Theras”) [1986] 2 Lloyd’s Rep 68 (Comm Ct)...........................159-161, 163 Motivate Publishing v Hello Ltd [2015] EWHC 1554 (Ch)............................................. 360 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2014] NSWCA 323............. 6 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104...........................................................................................6, 176, 416 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2015] EWHC 283 (Comm); [2015] 1 Lloyd’s Rep 359...........................................292, 306, 486 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789............ 11 Murray v Earl of Stair (1823) 2 B & C 82.......................................................................... 460 Murray v Leisureplay Plc [2005] EWCA Civ 963; [2005] IRLR 946................................. 465 MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553.........................................................................................................98-100 Nant-y-Glo & Blaina Ironworks Co v Grave (1878) 12 Ch D 738 (Ch D)...................... 310 National Bank of New Zealand Ltd v Walpole & Patterson Ltd [1975] 2 NZLR 7.......... 303 National Mutual Life Association of Australasia Ltd v Federal Comr of Taxation (Cth) (1959) 102 CLR 29 (HCA)................................................................. 115 National Westminster Bank Plc v Utrecht-America Finance Co [2001] EWCA Civ 658; [2001] 3 All ER 733............................................................................ 421 Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358; [2008] 1 EGLR 59......................................................................................................... 384 Nelson v Nelson (1995) 184 CLR 538 (HCA).............................. 19, 438, 439, 446, 447, 452 New Zealand Shipping Co Ltd v AM Satterthwaite Co Ltd (The Eurymedon) [1975] AC 154 (PC)......................................................................... 95

xxviii Contract in Commercial Law Newey v Westpac Banking Corporation [2014] NSWCA 319...............................6, 202, 224 Nichols and Raynbred (1614) Hob 88; 80 ER 238.............................................................. 66 968703 Ontario Ltd v Vernon (2002) 58 OR (3d) 215...................................................... 273 NM Superannuation Pty Ltd v Young [1993] FCA 138; (1993) 41 FCR 182................... 115 Nocton v Lord Ashburton [1914] AC 932 (HL)................................................................ 308 Norglen Ltd (In Liquidation) v Reeds Rains Prudential Ltd [1999] 2 AC 1 (HL)........... 305 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 (HCA)......................... 17 NRAM Plc v McAdam [2015] EWCA Civ 751; [2015] ECC 30....................................... 144 Oak Mall Greenock Ltd v McDonald’s Restaurants Ltd [2003] ScotCS 135 (OH)......... 329 Obee v Bishop (1859) 1 De G, F & J 137; 45 ER 311......................................................... 307 Ocean Pride Maritime Limited Partnership v Qingdao Ocean Shipping Co [2007] EWHC 2796; [2008] 2 All ER 330.................................................................................. 31 O’Connor v S P Bray Ltd (1936) 36 SR (NSW) 248 (Full Ct)............................................ 34 Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2005] 3 HKC 408................... 273 Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2006] HKCU 1932................. 273 Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] HKCU 1942................. 273 Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd [2010] EWHC 2026 (Comm); [2011] Bus LR 212................................................................................ 336, 375 Omega Air Inc v CAE Australia Pty Ltd [2015] NSWSC 802........................................... 417 Oriental Steamship Co v Taylor [1893] 2 QB 518 (CA)........................................... 146, 150 Osbaston v Garton (1587) Cro Eliz 91; 78 ER 350.............................................................. 66 OV v Members of the Board of Wesley Mission Council [2010] NSWCA 155; (2010) 79 NSWLR 606................................................................................................. 108 Overgate Centre Ltd v William Low Supermarkets Ltd 1995 SLT 1181 (OH)........ 327, 328 Owners SP 62930 v Kell & Rigby Pty Ltd [2009] NSWSC 1342....................................... 417 Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854 (HL)............................................................................................................... 277 Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395........................................................................................................ 17 Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35; (2014) 309 ALR 249.............................................................................................. 461, 462 Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50; (2015) 321 ALR 584........................................... 458, 461, 462, 465, 466, 475, 476, 484, 485, 488-490 Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28; (2016) 90 ALJR 835................................................................................. 21, 113 Packer v Wyndham (1715) Prec Cha 412; 24 ER 184........................................................ 386 Paget v Marshall (1884) LR 28 Ch D 255.................................................................. 184, 228 Pan Ah Ba v Nanyang Construction Sdn Bhd [1969] 2 MLJ 181....................................... 35 Pao On v Lau Yiu Long [1980] AC 614 (PC)..................................................................... 100 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26; [2007] 3 NZLR 169............................................................................................... 281, 282 Parker v South Eastern Rly Co (1877) 2 CPD 416 (CA)................................................... 180 Parkin v Thorold (1851) 2 Sim NS 1; 61 ER 239............................................................... 484 ParkingEye Ltd v Beavis [2015] UKSC 67; [2015] 3 WLR 1373.......................363, 459, 466, 472, 490, 491 ParkingEye Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338; [2013] QB 840.............................................................................442, 443, 444, 446, 448, 452 Paschall v Thurston (1734) 2 Bro PC 10; 1 ER 759........................................................... 389 Patel v Mirza [2016] UKSC 42; [2016] 3 WLR 399..........................................2, 18, 435, 439 Patrick Stevedores v MUA (1998) 195 CLR 1 (HCA)......................................................... 15 Peachy v Duke of Somerset (1721) 1 Str 447; 93 ER 626.................................................. 481 Peckham Rd Co v State of New York, 32 AD 2d 139; affd 28 NY 2d 734......................... 412



Table of Cases xxix

Pepper v Hart [1993] AC 593 (HL)............................................................................ 185, 186 Pettkus v Becker [1980] 2 SCR 834.................................................................................... 232 Philips Electronique Grand Public SA v British Sky Broadcasting [1995] EMLR 472 (CA).................................................................................................... 149, 161 Phillips & Co v Bath Housing Co-operative Ltd [2012] EWCA Civ 1591; [2013] 1 WLR 1479....................................................................................................... 304 Phillips Hong Kong v A-G of Hong Kong (1993) 61 BLR 41 (PC).................................. 464 Phipps v Boardman [1967] 2 AC 46 (HL)......................................................................... 114 Phoenix Commercial Enterprises v City of Canada Bay [2010] NSWCA 64.................. 137 Phoenix Developments (JPJ) Ltd v Lancashire CC [2016] UKUT 38 (LC)..................... 129 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827....................261, 406, 416, 424-426, 471 Pickard v Sears (1837) 6 A&E 469; 112 ER 179................................................................. 364 Pickering v Smoothpool Nominees Pty Ltd (2001) 81 SASR 175 (Full Ct)..................... 310 Pilcher v Rawlins (1871–1872) LR 7 Ch App 259 (CA)...................................................... 93 Pillans v Van Mierop (1765) 3 Burr 1663; 97 ER 1035 (KB)............................................ 125 Pillans & Rose v Van Mierop & Hopkins (1765) 3 Burr 1663; 97 ER 1035.................... 4, 68 Pinnel’s case [1602] 5 Co Rep 117........................................................................................ 99 Pitt v Holt [2013] UKSC 26; [2013] 2 AC 108................................................................... 139 Planche v Colburn (1831) 8 Bing 14; 131 ER 305............................................................. 375 Plevin v Paragon Personal Finance Ltd [2014] UKSC 61; [2014] 1 WLR 4222................. 23 PM Law Ltd v Motorplus Ltd [2016] EWHC 193 (QB)................................................... 129 Port Kennedy Resorts Pty Ltd v Huat [2000] WASCA 328................................................. 15 Port Swettenham Authority v TW Wu & Co Sdn Bhd [1979] AC 580 (PC).................... 309 Postel Properties Ltd v Miller and Santhouse plc 1993 SLT 353 (OH).................... 327, 328 Potter v Minahan [1908] HCA 63, (1908) 7 CLR 277...................................................... 487 Powell v Benney [2007] EWCA Civ 1283.......................................................................... 372 Powell Duffryn Steam Coal Co v Taff Vale Railway Co (1874) LR 9 Ch App 331........... 320 Prenn v Simmonds [1971] 1 WLR 1381 (HL)................................................................... 131 President of India v Lips Maritime Corp [1988] AC 395 (HL)........................................ 304 Priebe & Sons Inc v United States 332 US 407 (1947)...................................................... 468 Printing and Numerical and Registering Co v Sampson (1875) LR 19 Eq 462 (Ch D).......................................................................................23, 407, 408 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17......................... 294 Protector Endowment Loan and Annuity Company v Grice (1880) 5 QBD 592 (CA)............................................................................................464, 468, 481 Prudential Insurance Co v Inland Revenue Comrs [1904] 2 KB 658 (KBD).................. 114 PT Berlian Laju Tanker TBK v Nuse Shipping Ltd (The Aktor) [2008] EWHC 1330 (Comm); [2008] 2 Lloyd’s Rep 246........................................................ 212 PW & Co v Milton Gate Investments Ltd [2003] EWHC 1994 (Ch), [2004] Ch 142...........................................................................................................373 Qantas Airways Ltd v Rolls-Royce plc [2010] FCA 1481...................................407, 432, 433 QBE Insurance (Australia) Ltd v SLE Worldwide Australia Pty [2005] NSWSC 776; 13 ANZ Ins Cas 61–654......................................................................... 307 R (Best) v Chief Land Registrar [2015] EWCA Civ 17; [2016] QB 23............................. 443 R (on the application of Menston Action Group) v Bradford MDC [2016] EWHC 127 (QB)........................................................................................................... 129 Raffles v Wichelhaus (1864) 2 H & C 906; 159 ER 375 (Ex).................................... 122, 371 Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900.................7, 56, 127, 128, 427 Ramrod Investments Ltd v Matsumoto Shipyards Ltd (1990) 47 BCLR (2d) 86............ 273 Rann v Hughes (1778) 7 TR 350; 101 ER 1014................................................................... 68 RCR Tomlinson Ltd v Russell [2015] WASCA 154....................................................... 9, 133

xxx Contract in Commercial Law RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] SGCA 39; [2007] 4 SLR 413...................................................................... 14, 262, 267, 269, 270-274 Reading v R [1949] 2 KB 232 (CA).................................................................................... 306 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL)............................................................................................130-133, 138 Redman v Permanent Trustee Company of New South Wales Ltd (1916) 22 CLR 84 (HCA)......................................................................................................... 384 Reeve v Palmer (1858) 5 CB (NS) 84; 141 ER 33...................................................... 309, 311 Regency Villas Title Ltd v Diamond Resorts (Europe) Ltd [2015] EWHC 3564 (Ch)......................................................................................................... 129 Regreen Asset Holdings Pty Ltd v Castricum Brothers Australia Pty Ltd [2015] VSCA 286.......................................................................................................146, 150, 162 Reichman v Beveridge [2006] EWCA Civ 1659; [2007] Bus LR 412................................ 292 Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 (CA)............. 162 Reinsurance Australia Corporation Limited v HIH Casualty & General Insurance Limited (in liq) [2003] FCA 56; (2003) 254 ALR 29........................................... 430, 432 Repatriation Commission v Tsourounakis [2007] FCAFC 29......................................... 376 Retail Park Investments Ltd v The Royal Bank of Scotland (No 2) 1996 SC 227....................................................................................317, 327, 328, 329, 330 Reversion Fund & Insurance Co Ltd v Maison Cosway Ltd [1913] 1 KB 364 (CA)............................................................................................................... 307 Reynell v Sprye (1852) 1 De GM & G 660; 42 ER 710...................................................... 147 Reynette-James decd , In re [1976] 1 WLR 161 (Ch D).................................................... 189 Richardson v Richardson (1867) LR 3 Eq 686................................................................... 396 Riches v Hobgen [1985] 2 Qd R 292...........................................................371, 372, 374, 375 Ringrow Pty Ltd v BP Australia Pty Limited [2005] HCA 71; (2005) 224 CLR 656.......................................................................418, 464, 468, 469, 488 Riverlate Properties Ltd v Paul [1975] Ch 133 (CA)................................................. 185, 228 Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver and Manager Appointed (1997) 42 NSWLR 462........................................................ 277 Robb v James [2014] NZCA 42.......................................................................................... 203 Roberts v Gill & Co [2010] UKSC 22; [2011] 1 AC 240................................................... 385 Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555 (Ch D)............ 184, 185 Robinson v Harman (1848) 1 Ex Rep 850; 154 ER 363...................... 14, 334, 336, 337, 346, 349, 350, 355, 357, 471 Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 (CA)..................................... 22, 463 Rose v Pim [1953] 2 QB 450 (CA)...............................168, 194-198, 204, 213, 223, 224, 225 Rosenblatt (A Firm) v Man Oil Group SA (13 April 2016, QBD).................................... 129 Ross v Ratcliff (1988) 91 FLR 66 (HCA)........................................................................... 438 Rowena Nominees Pty Ltd, Re; Ex p Conlan [2006] WASC 69; (2006) 199 FLR 415.............................................................................................. 302, 306 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45.......................................................................................... 130 Royal Brunei Airlines Sdn v Tan [1995] 2 AC 378 (PC)..................................................... 41 Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217......................................................................................... 289 Russo v Westpac Banking Corporation [2015] FCCA 1086............................................. 289 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603............................................... 6, 131, 133-135, 168, 202-204, 224 S Pearson & Son Ltd v Dublin Corporation [1907] AC 351............................................. 431 Saeed v Minister for Immigration and Citizenship [2010] HCA 23; (2010) 241 CLR 252...................................................................................................... 487 Saleh v Romanous [2010] NSWCA 274; (2010) 79 NSWLR 453............................. 367, 369 Salmon, Re (1889) 42 Ch D 351 (CA)............................................................................... 300



Table of Cases xxxi

Salvation Army Trustee Co Ltd v West Yorkshire Metropolitan CC (1981) 41 P & CR 149 (QBD).................................................................................................. 360 Samsung Hong Kong Ltd v Keen Time Trading Ltd [1998] HKLRD 341....................... 273 Sanders v Ernest A Neale Ltd [1974] ICR 565................................................................... 281 Sargent v ASI Developments Limited (1974) 131 CLR 634 (HCA)................................... 34 Sathiaval a/l Maruthamuthu v Shell Malaysia Trading Sdn Bhd [1998] 1 MLJ 740........ 283 Saunders v Edwards [1987] 1 WLR 1116 (CA)................................................................. 442 Saunders v Vautier (1841) 4 Beav 115; 49 ER 282............................................................. 388 Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 (SC).................................................................................................................. 421 Schonk Atonius Martinus Mattheus v Enholco Pte Ltd [2015] SGCA 65....................... 283 Scottish Equitable v Derby plc [2001] EWCA Civ 369; [2001] 3 All ER 818................... 375 Schuler v Wickman Machine Tools Sales Ltd [1974] AC 235 (HL).......................... 171, 271 Schweppe v Harper [2008] EWCA Civ 442; [2008] BPIR 1090........................................ 374 Secretary for Justice v Yu’s Tin Sing Enterprises Co Ltd [2008] HKCU 1391.................. 273 Secretary of State for Employment v ASLEF (No 2) [1972] 2 QB 455 (CA)..................... 58 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 (HCA)............................................................................................... 11, 155 Selectmove Ltd, Re [1995] 1 WLR 474 (CA)............................................................95, 97, 99 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 (HCA)..........................334, 342, 357 Semana Bachicha v Poon Shiu Man [2000] 2 HKLRD 833.............................................. 291 Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43; [2013] 4 SLR 193....................................................................................144, 152, 155, 163 Seven Eleven Corporation of SA Pty Ltd v Cancun Trading No 150 CC, Case No 108/2004, 24 March 2005................................................................................ 58 Shared Network Services Limited v Nextiraone UK Limited [2012] EWCA Civ 1171............................................................................................................ 426 Sharma v Top Brands [2015] EWCA Civ 1140; [2016] PNLR 12............................. 445, 446 Shaw v Groom [1970] 2 QB 504 (CA)............................................................................... 453 Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187 (CA)................................... 58, 155 Shepherd v Mouls (1845) 4 Hare 500; 67 ER 746.............................................................. 300 Shevill v Builders Licensing Board (1982) 149 CLR 620 (HCA).............................. 339, 352 Shiloh Spinners Ltd v Harding [1973] AC 691 (HL)........................................................ 320 Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 (CA).................................... 161 Shogun Finance Ltd v Hudson [2003] UKHL 62; [2004] 1 AC 919................................. 228 Sidenham and Worlington’s Case (1584) 2 Leo 224; 74 ER 497......................................... 66 Sidhu v van Dyke [2014] HCA 19; (2014) 251 CLR 505.......................... 360, 366, 367-370, 372-376, 378, 379, 380 Simmons v Simmons (NSWCA, 14 November 1994)......................................................... 73 Simpson v Vaughan (1739) 2 Atk 31; 26 ER 415 (LC)...................................................... 124 Sirius International Insurance Co (Publ) v FAI General Insurance Ltd [2004] UKHL 54, [2004] 1 WLR 3251..................................................................................... 153 Slipper v Berry Buddle Wilkins Lawyers [2015] NSWSC 810............................................ 32 Sloane v Cadogan (1808).............................................................................................390-392 Sloman v Walter (1783) 1 Bro CC 418; 28 ER 1213.......................................................... 481 Smith v Hughes (1871) LR 6 QB 597..................................................122, 126, 172, 205, 222 Smith v Jenkins (1970) 119 CLR 397 (HCA)...................................................................... 67 Smith Fleming & Co, Ex p; Kelly & Co, Re (1879) 11 Ch D 306 (CA)..................... 303, 307 Société Générale de Paris v Tramways Union Co (1884–85) 14 QBD 424 (CA)............. 387 Société Générale de Paris v Walker (1885) 11 App Cas 20 (HL)...................................... 387 Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s Rep 558..................................................................... 48 Solle v Butcher [1950] 1 KB 671 (CA)............................................................................... 205 Solomons v Halloran (1906) 7 SR (NSW) 32.................................................................... 484 Sons of Thunder Inc v Borden Inc 690 A (2d) 575 (NJ 1997).......................................... 244

xxxii Contract in Commercial Law Sotiros Shipping Inc and Aeco Maritime SA v Sameiet Solholt (“The Solholt”) [1983] 1 Lloyd’s Rep 605.......................................................................................................... 292 Soulsbury v Soulsbury [2007] EWCA Civ 969; [2008] 2 WLR 874.................................. 102 South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541; (2000) 177 ALR 611...................................................................................................... 110 Spark’s Trusts, Re [1904] 1 Ch 451 (Ch).................................................................... 395, 396 Specialist Diagnostic Services Pty Ltd (formerly Symbion Pathology Pty Ltd) v Healthscope Pty Ltd [2012] VSCA 175; (2012) 41 VR 1............................................. 156 Spectrum v Digital Plus [2005] UKHL 41; [2005] 2 AC 680.................................... 172, 485 Sports Connection Private Limited v Deuter Sports GmbH [2009] SGCA 22; [2009] 3 SLR(R)............................................................................................................ 272 Squib v Wyn (1717) 1 P Wms 378; 24 ER 432................................................................... 385 St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267 (QBD).......................440, 442, 447, 453 St Maximus Shipping Co Ltd v AP Moller-Maersk A/S [2014] EWHC 1643 (Comm)........................................................................................................................ 211 Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535 (HCA)................................ 28 Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382; [2015] 1 Lloyd’s Rep 97................................................................................................ 304 State Trading Corp of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277.........274, 275, 276, 278 Steel Wing Company, Ltd, Re [1921] 1 Ch 349 (Ch)........................................................ 385 Stevensdrake Ltd v Hunt [2016] EWHC 342 (Ch)............................................................ 129 Stewart v Kennedy (1890) 17 R 1............................................................................... 314, 324 Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168............................................................ 4, 71 Stones v Cooke (1834) 7 Sim 22; 58 ER 745...................................................................... 307 Stratton Finance Pty Limited v Webb [2014] FCAFC 110; (2014) 314 ALR 166...........................................................................................6, 176, 484 Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2; (2013) 85 NSWLR 196................................................................................................. 111 Strover v Strover [2005] EWHC 860 (Ch); [2005] WTLR 1245....................................... 360 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222; (2010) 41 WAR 318......................................................................................................... 11 Suisse-Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 (HL)..........................................................406, 426, 427 Sullivan v Moody [2001] HCA 59; (2001) 207 CLR 562.................................................. 443 Sullivan v Sullivan [2006] NSWCA 312............................................................................. 374 Sunny Metal & Engineering Pte Ltd v Ng Khim Ming Eric [2006] SGHC 222; [2007] 1 SLR (R) 853...................................................................................................... 77 Sutcliffe v Lloyd [2007] EWCA Civ 153; [2007] 2 EGLR 13......................360, 363, 366, 367 Sutherland v Jatkar [2014] FCA 532; (2014) 222 FCR 601............................................... 305 Suzlon Energy Ltd v Bangad [2014] FCA 1105................................................................. 306 Symonds, Ex p (1786) 1 Cox’s Eq Cas 200; 29 ER 1128 (LC)........................................... 124 Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited [2009] NSWCA 140...................................................................................................................... 6 Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576...................................... 411 Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315................... 477 Target Holdings Ltd v Redferns [1996] AC 421 (HL).........................................14, 297, 298, 302-304, 306, 308, 311 Tartsinis v Navona Management Company [2015] EWHC 57 (Comm).................168, 204, 211, 212, 218 Taylor v Johnson (1983) 151 CLR 422 (HCA).......................................................... 185, 205 Taylor v Oakes, Roncoroni & Co (1922) 127 LT 267 (CA)................................................. 13 Taylor v Taylor (1875) LR 20 Eq 155.................................................................................. 307



Table of Cases xxxiii

TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130 (HCA)..................................................................................................... 336 Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164................................................................................................................... 6, 9 Tercon Contractors Limited v British Columbia (Transportation and Highways) 2010 SCC 4; [2010] 1 SCR 69........................................................................413, 415, 416 Terrell v Hutton (1854) 4 HLC 1091; 10 ER 790............................................................... 306 The Antaios Compania Neviera SA v Salen Rederierna AB [1985] AC 191 (HL)........... 177 The Earl of Oxford’s Case (1615) Chan Rep 1; 21 ER 485................................................ 377 The Jag Shakti [1986] AC 337 (PC)................................................................................... 308 The Moorcock (1889) 14 PD 64 (CA)......................................................................... 55, 165 The Northern Pioneer [2003] 1 WLR 1015 (CA)............................................................. 368 The Potoi Chau [1984] AC 226 (PC)................................................................................. 304 The STX Mumbai [2015] SGCA 35; [2015] 5 SLR 1................................................. 262, 294 The Trident [1939] 1 KB 748 (CA).................................................................................... 308 The Wasp (1867) LR 1 A&E 367 (High Court of Admiralty)........................................... 385 The Winkfield [1902] P 42 (CA)........................................................................................ 308 Then Khek Koon v Arjun Permanand Samtani [2012] SGHC 17; [2014] 1 SLR 245......................................................................................................301 Thomas v Thomas (1842) 2 QB 851 (QBD)......................................................................... 4 Thomas Bates & Son v Wyndhams Lingeries Ltd [1981] 1 WLR 505 (CA).................... 185 Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227 (Ch)................................ 279, 282 Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41....................... 410 Thompson v Norris (1852) 5 De G & Sm 686; 64 ER 1299.............................................. 306 Thompson v Thompson (1821) 9 Price 464; 147 ER 152................................................. 307 Thorner v Major [2009] UKHL 18; [2009] 1 WLR 776.............................359-362, 365-376, 378-380 Tilden Rent-A-Car Co v Clendenning (1978) 83 DLR (3d) 400...................................... 418 Tilley v Thomas (1867) LR 3 Ch App 61........................................................................... 484 Tinn v Hoffmann (1879) 29 LT 271................................................................................... 173 Tinsley v Milligan to Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184......... 446 Tinsley v Milligan [1994] 1 AC 340 (HL)..............................18, 438, 442-445, 447, 449, 451 Tipperary Developments Pty Ltd v State of Western Australia [2009] WASCA 126; (2009) 38 WAR 488............................................................................ 9, 371 TMA Australia Pty Ltd v Indect Electronics & Distribution GmbH [2015] NSWCA 343.................................................................................................................. 163 TOC Investments Corporation v Beppler & Jacobson Ltd [2016] EWHC 20 (Ch Comp).................................................................................................. 129 Todd v Alterra at Lloyds Ltd [2016] FCAFC 15................................................................. 133 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165.............................................136, 405, 408, 417, 418, 423, 429, 484 Tony Lee Motors Ltd v M S Macdonald & Son (1974) Ltd [1981] 2 NZLR 281............. 307 Torvald Klaveness A/S v Arni Maritime Corporations (The “Gregos”) [1994] 1 WLR 1465 (HL)......................................................................................................... 118 Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 (QB)..................... 45 Townshend v Stangroom (1801) 6 Ves Jun 328; 31 ER 1076 (LC)................................... 124 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 (SC)........................................................................................................................ 115 Transfield Shipping Inc v Mercator Shipping Inc (The “Achilleas”) [2008] UKHL 48; [2009] 1 AC 61.................................................................................... 118, 119 Transocean Drilling UK Limited v Providence Resources plc [2014] EWHC 4260 (Comm); [2015] 2 All ER (Comm)............................................................................. 428 Trendtex Trading Corp v Crédit Suisse AG [1982] AC 679 (HL)..................................... 305 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 (HCA)....................................................................................................4, 72

xxxiv Contract in Commercial Law Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 (HL)........................................................................................................... 161 Truex v Toll [2009] EWHC 396 (Ch); [2009] 1 WLR 2121.............................................. 304 Trump International Golf Club Scotland Ltd v The Scottish Ministers (Scotland) [2015] UKSC 74; [2016] WLR 85................................................................................ 128 TSB Bank Plc v Camfield [1995] 1 WLR 430 (CA)............................................................. 22 Tullett Prebon (Singapore) v Chua Leong Chuan Simon [2005] SGHC 150; [2005] 4 SLR(R) 344..................................................................................................... 283 Tweddle v Atkinson (1861) 1 B & S 393; 121 ER 762.......................................................... 72 Uglow v Uglow [2004] EWCA Civ 987; [2004] WTLR 1183............................................ 373 Union Pacific Railway Co v Chicago, Rock Island and Pacific Railway Co 163 US 564 (1896)........................................................................................................ 320 United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 (HL)......... 330 United States of America v Motor Trucks Ltd [1924] AC 196 (PC)................................. 190 Universal Management, Re [1983] NZLR 462................................................................... 485 Upton-on-Severn RDC v Powell [1942] 1 All ER 220 (CA)............................................... 95 Uvedale v Halfpenny (1723) 2 P Wms 151; 24 ER 677; 2 Eq Cas Abr 718 pl 4; 22 ER 604 (Ch, MR)..................................................................................................... 134 Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 (HCA).............................. 22 Vandepitte v Preferred Accident Insurance Corpn of New York [1933] AC 70............... 401 Vandervell’s Trusts (No 2), Re [1974] Ch 269 (CA)............................................................ 93 Vantage Navigation Corp v Suhail and Saud Bahwan Building Materials (The Alev) [1989] 1 Lloyd’s Rep 138 (QB).................................................................... 79 Vassis, Re; Ex p Leung (1986) 9 FCR 518............................................305, 306, 307, 309, 310 Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31; [2013] 1 WLR 1556....................................................................................................... 156 Vine v National Dock Labour Board [1956] 1 QB 658..............................280, 283, 248, 286 Vine v National Dock Labour Board [1957] AC 488.................................280, 283, 284, 286 Visionhire Ltd v Britel Fund Trustees 1997 SLT 883 (IH)................................................ 330 Vizcaya Partners Ltd v Picard [2016] UKPC 5.................................................................. 129 Vodafone Pacific Ltd & Ors v Mobile Innovations Ltd [2004] NSWCA 15..................... 486 Voyle v Hughes (1854) 2 Sm&G 18; 65 ER 283................................................................. 393 W v G (1996) 20 Fam LR 49............................................................................................... 279 Walden v Atkins [2013] EWHC 1387 (Ch); [2013] BPIR 943.......................................... 376 Walford v Miles [1992] 2 AC 128 (HL)...................................................................... 102, 250 Wallace v United Grain Growers Ltd [1997] 3 SCR 701...................... 12, 246-248, 251, 253 Wallis v Smith (1882) 21 Ch D 243 (CA).......................................................................... 408 Walter & Sullivan Ld v J Murphy & Sons Ld [1955] 2 QB 584 (CA)............................... 398 Walter Lilly & Co Ltd v Clin [2016] EWHC 357 (QB TCC)............................................ 129 Walton v Walton (CA, 14 April 1994).................................................................371, 372, 376 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (HCA).........73, 91, 239, 359, 362, 364, 365, 367, 369-372, 375, 378 Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326; (2014) 290 FLR 18............................................................................................................ 6 Ward v Byham [1956] 1 WLR 496 (CA)........................................................................ 73, 95 Warner Bros Records Inc v Rollgreen Ltd [1976] 1 QB 430 (CA).................................... 385 Waterways Authority of New South Wales v Coal & Allies (Operations) Pty Limited [2007] NSWCA 276........................................................................................................ 15 Watts v Watts [2014] EWHC 3056 (Ch)............................................................................ 446 Webb v Stenton (1883) 11 QBD 518 (CA)........................................................................ 307 Webster v Mackay [2013] EWHC 2571 (Ch); [2013] All ER (D) 193.............................. 305



Table of Cases xxxv

Wee Kim San Lawrence Bernard v Robinson & Co (Singapore) Pte Ltd [2014] SGCA 43; [2014] 4 SLR 357......................................................................................... 290 Wentworth v Rogers [2003] NSWSC 472.......................................................................... 307 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL)................. 93 Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1................................................................................................6, 175, 484 Westerton, Re [1919] 2 Ch 104 (Ch D)................................................................................ 18 Westland Savings Bank v Hancock [1987] 2 NZLR 21 (HC)........................................... 203 Whistler International Ltd v Kawasaki Kisen Kaisha Ltd (The “Hill Harmony”) [2001] 1 AC 638 (HL)................................................................................................... 118 White v Jones [1995] 2 AC 207 (HL)................................................................................... 77 White v Shortall [2006] NSWSC 1379............................................................................... 309 White and Carter (Councils) Ltd v McGregor [1962] AC 413 (HL)................285, 286, 292, 306, 426 Whiten v Pilot Insurance Co 2002 SCC 18; [2002] 1 SCR 595................................... 12, 248 Wickstead v Browne (1992) 30 NSWLR 1......................................................................... 307 Wilkinson v Lloyd (1845) 7 QB 27; 115 ER 398................................................................ 299 William Banes’s Case (1611) 9 Co Rep 93b; 77 ER 869...................................................... 66 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 2 WLR 1153 (CA)............. 95 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA)......... 4, 32, 71-75, 79, 96, 97 Williams Bros v Ed T Agius Ltd [1914] AC 510 (HL);.............................................. 374, 473 Wills v Trustees Executers & Agency Co Ltd (1900) 25 VLR 391..................................... 300 Wilson v Amerada Hess Corp 773 A 2d 1121 (NJ 2001).................................................. 244 Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43 (HCA)........................................................................................................... 72 Wilson (Paal) & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Bluementhal) [1983] 1 AC 854 (HL)........................................................................... 228 Winter v Commonwealth of Australia (1992) 112 ACTR 10 (SC)..................................... 18 Woolwich Equitable Building Society v Inland Revenue Commissioners [1991] 3 WLR 790 (CA)........................................................................................................... 305 Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 (HL).................................................................................................................... 436 Xenos v Wickham (1867) LR 2 HL 296............................................................................... 88 Yam Seng Pte v International Trade Corporation Ltd [2013] EWHC 111 (QB); [2013] 1 All ER (Comm) 1321..................................................11, 38-41, 51, 55, 58, 239, 240, 241, 245, 249, 250 Yanez v Canac Kitchens (2004) 45 CCEL (3d) 7 (Ont Sup Ct)................................ 246, 253 Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 (HCA)......................................................................................439, 441, 447 Yarrabee Chicken Company Pty Ltd v Steggles Ltd [2010] FCA 394............................... 362 Yaxley v Gotts [2000] Ch 162 (CA).................................................................................... 370 Yearworth v North Bristol NHS Trust [2009] EWCA Civ 37; [2010] QB 1..................... 373 Young v Lalic [2006] NSWSC 18........................................................................................ 372 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484................................................................................................ 15, 302 Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530........... 130, 132

Table of Statutes COMMONWEALTH Australian Consumer Law s 21: 111 s 22: 111 s 23: 470 s 25: 419 Pt 3-5: 185

New South Wales Civil Liability Act 2002: 419 s 5N: 419 Contracts Review Act 1980: 406, 411, 417 Conveyancing Act 1919: 371 s 12: 381 s 23C: 385 54A: 371

Australian Securities and Investments Commission Act 2001 s 12BG: 470 ss 12CB: 111 s 12CC: 111

Law Reform (Miscellaneous Provisions) Act 1965 s 9(1): 356

Bankruptcy Act 1966 s 44: 307

Limitation Act 1969 s 54: 305

Competition and Consumer Act 2010 Sch 2: 112, 419, 470

Sale of Goods Act 1923 s 21: 366

Corporations Act 2001 s 140: 471 Pts 7.7–7.7A: 2 Pt 7.9: 2

Succession Act 2006 s 27: 190 s 32: 189

Bankruptcy Act 1966 s 44(1)(b)(ii): 305 Insurance Contracts Act 1984: 433 s 8: 433 s 52(1): 433, 434 Interpretation Act 1901 s 15AB: 186 Trade Practices Act 1974: 406, 407, 411, 416, 417, 432-434 Pt VA: 185 Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015: 418 Australian Capital Territory Civil Law (Property) Act 2006 s 201: 385 s 205: 381

Northern Territory Law of Property Act s 10: 385 s 182: 381 Queensland Property Law Act 1974 s 11(1)(c): 385 s 199: 381 South Australia Law of Property Act 1936 s 15: 381 s 29: 385 Tasmania Conveyancing and Law of Property Act 1884 s 6(2): 385 s 86: 381

xxxviii Contract in Commercial Law Victoria Property Law Act 1958 s 134: 381 Western Australia Property Law Act 1969 s 20: 381 s 34: 385 CANADA Civil Code of Québec: 245 Art 1375: 246 FRANCE French Civil Code Art 931: 82 Art 953: 82 Art 955: 82 Art 1102: 82 Art 1131: 69 GERMANY German Civil Code: 70 paras 320-326: 82 para 518: 82 para 519: 82 para 530(1): 82 HONG KONG Sale of Goods Ordinance (Cap 26) s 15: 273 INDIA Indian Contracts Act 1872 s 63: 35 MALAYSIA Contracts Act 1950 s 64: 35 UNITED KINGDOM Administration of Justice Act 1696 (8 & 9 Will 3 c 11): 460 Administration of Justice Act 1705 (4 & 5 Anne c 16): 460

Administration of Justice Act 1982 s 20: 190 s 21: 189 s 21(1): 189 Bankruptcy Act 1869 (32 & 33 Vict, cap 71) s 31: 307 Carriage of Goods by Sea Act 1924: 408 Commercial Agents (Council Directive) Regulations 1993 SI 1993/3053 reg 17: 436 reg 18: 436 reg 19: 436 Companies Act 2006 s 33: 306 Consumer Rights Act 2015: 94, 437 Court of Session Act 1988 s 46: 315 Courts Reform (Scotland) Act 2014 (asp 18) s 117: 329 Criminal Justice Act 1993 s 52: 19 Equality Act 2010 s 142(1): 441 Evidence Act 1851 (14 & 15 Vict c 99): 482 Financial Services and Markets Act 2000 ss 26–30: 441 Gambling Act 2005: 436 Gaming Act 1845 s 18: 436 Human Tissue Act 2004 s 32: 440 Immigration Act 1971 s 24: 440 Insolvency Act 1986 s 238(4)(a): 93 s 267(2)(b): 305 Judicature Act 1873 s 25(6): 394, 395 Land Charges Act 1972: 375 Land Registration Act 2002 s 91: 88 116(a): 376

Law of Property Act 1925 s 53(1)(c): 385 s 136: 17, 381 s 136(1)(c): 395 Law of Property (Miscellaneous Provisions) Act 1989 s 2: 370, 371 s 2(1): 370 Limitation Act 1980: 306 s 29(5)(a): 305 s 33: 455 Misrepresentation Act 1967: 411, 432, 434

Table of Statutes xxxix Statute of Anne: 460 Statute of William: 460 Supply of Goods and Services Act 1982 s 15(1): 100 Supreme Court of Judicature Act 1873 s 25(6): 381 Torts (Interference with Goods) Act 1977 s 2: 310 Unfair Contract Terms Act 1977: 94, 406, 411, 415, 434, 437, 470

Proceeds of Crime Act 2002: 19

Unfair Terms in Consumer Contracts Regulations 1999: 470

Sale of Goods Act 1893: 264, 266

Wills Act 1837: 190

Sale of Goods Act 1979: 473 s 2(1): 38 s 6: 178 s 8(2): 100 s 11(2): 368 s 11(4): 368 ss 12–15: 38 s 16: 366 s 35(4): 368

UNITED STATES Uniform Commercial Code: 35, 74, 244, 412 s 1-203: 412 s 1-302(b): 241, 243 s 1-304: 412 s 2-209 (1): 35 s 2-302: 412

Table of Conventions UNIDROIT Principles of International Commercial Contracts: 428, 429 Art 1.1: 428 Art 2.1.20: 429 Art 3.2.7: 429 Art 5.2.3: 428 Art 7.1.6: 428, 429

United Nations Convention on Contracts for the International Sale of Goods: 74 Art 29(1): 74

1

Introduction James Edelman, James Goudkamp, and Simone Degeling Some time ago, a conference of extraordinary jurists and scholars was held in order to discuss issues concerning contracts. Those issues included termination, the duties of buyers and sellers, formalities and good faith. There was vigorous debate. A book was written that addressed these issues at a high level of principle. That book was not the present volume. It was Justinian’s Institutes. However, a millennia and a half later, many of the same deep, structural issues concerning contract law remain. The chapters in this volume, which derive from a conference held in 2015, therefore reflect significant thought on foundational issues that have been debated for hundreds of years. Although the Roman jurists debated and considered many issues of contract law that remain difficult today, they did not take the most significant step in rationalising the law of contract as a unitary body. Roman law had a law of contracts with different principles applying to different categories of contract. Thus, Justinian’s Institutes provides that contracts “fall into four species, for contract is concluded either by delivery, by a form of words, by writing or by consent …”.1 Towards the end of the Empire, the Romans came close to developing a unified law of contract. But the goal was never quite realised. In England, the goal was achieved in the 19th century. One significant step was the reforming legislation which curtailed, and then abolished, the forms of action. Another was the decisions by judges to remove important contract issues from juries, which allowed the law of contract to be specified by legal rules to a greater extent than was previously the case. The emergence of a unified law of contract was not solely the product of legislative and judicial reforms. The judicial development of the law was heavily influenced by jurists, although often without attribution. These jurists were not just the English writers such as Addison, Anson, Chitty, Mayne, and Pollock. There was also a strong influence from Continental writers, particularly Pothier whose work had been translated in 1806 by Evans,2 and United States authors such as Benjamin, Story and Kent. The structure of this book remains true to the existence of a law of contract, not contracts. The concern is with principles and rules that inform contract as a whole. But there are pressures on this unitary understanding. Some of those 1 J.3.13.2. 2 Robert Pothier, A Treatise on the Law of Obligations, or Contracts (tr by William Evans, A Strahan 1806).

1

2 Contract in Commercial Law

pressures come from the increasing specialisation of the practising profession. Legal scholars are increasingly writing texts on particular contracts such as insurance contracts,3 contracts for the sale of goods,4 and consumer contracts.5 Even Chitty’s great work on contract has a second volume entitled “Specific Contracts”.6 The pressure on the common law also comes from statute. Legislation increasingly deals with contract law in silos such as consumer contracts7 and contracts for financial services,8 where the contractual terms are often in standard form and largely mandated by legislation. Contracts and statutes, like all language, generally require context to be understood. The particular area or silo can supply important context for a contract. But if the law is to remain coherent the context cannot govern the underlying principles. It is these principles which provide the road map through the difficult issues that recur across different contexts. They are the focus of this book. For a time in English legal history, there was an apparent sharp separation between the writing of judges and the works of scholars whom the judges would often read but would rarely cite. Happily, that time has largely faded from memory. As Lord Neuberger said in Patel v Mirza,9 “judges can look to legal academics not only to identify what they think are judicial inconsistencies and errors, but also to develop and modify their analyses of legal principles when we consider it necessary to change, develop or clarify the law”. Consistently with this approach, Contract in Commercial Law, like the other books in this series,10 deliberately straddles professional boundaries. It also adopts a transjurisdictional outlook. Many of the contributors are drawn from a range of overseas jurisdictions indicating our view as editors that the search for answers to the most persistent problems in the law of contract should not be confined by national borders. Developments in other jurisdictions may constitute models for reform. They may also constitute retrograde steps and serve as warnings of the danger of setting the law down a given path.

General Principles and Theoretical Foundations The book begins, in Part B, by addressing the general principles and theoretical foundations of the law of contract. The two chapters in this Part direct attention 3

See eg Peter McDonald Eggers, Simon Picken and Patrick Foss, Good Faith and Insurance Contracts (3rd ed, Lloyd’s List 2010); Malcolm Clarke, The Law of Insurance Contracts (6th ed, Informa Law 2009). 4 See eg Michael Bridge, Sale of Goods (3rd ed, OUP 2014); John Adams and Hector Macqueen, Atiyah’s Sale of Goods (12th ed, OUP 2010). 5 Chris Willett, Fairness in Consumer Contracts: The Case of Unfair Terms (Ashgate Publishing 2007). 6 Hugh Beale (ed), Chitty on Contracts (32nd ed, Sweet & Maxwell 2015). 7 Influenced, for example, by the requirements of the Australian Consumer Law. See Competition and Consumer Act 2010 (Cth) Sch 2. 8 Corporations Act 2001 (Cth) Pts 7.7–7.7A and 7.9. 9 [2016] UKSC 42; [2016] 3 WLR 399 [170]. 10 Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook Co 2005); Simone Degeling and James Edelman (eds), Unjust Enrichment in Commercial Law (Lawbook Co 2008); Simone Degeling, James Edelman and James Goudkamp (eds), Torts in Commercial Law (Lawbook Co 2011).



Ch 1  Introduction 3

to the nature of the law of contract. The first chapter focuses on the relational contract and directs attention to the matter we have discussed above concerning the fragmentation of contract and the role of context. The second focuses upon when contractual rights can be waived. Part B commences with an analysis by Professor Hugh Collins of the relational contract. He considers two main questions. First, what does the idea of a relational contract mean? Second, if the notion of relational contract applies to a contract, does it have particular legal implications for the transaction, such as an expansion of mandatory or supplementary duties of disclosure and obligations to perform in good faith? Collins proposes a concept of relational contracts that emphasises the economic significance of indeterminate implicit obligations and which supports the development of a contextual approach to interpretation and the insertion of implied obligations of co-operation and mutual trust and confidence. Chief Justice Bathurst then directs attention to the doctrine of waiver as explained by the High Court in Agricultural and Rural Finance Pty Ltd v Gardiner.11 The question in that case was whether a party to a contract of indemnity had waived a punctual payment condition. Bathurst begins his analysis by observing the difficulty created by the tendency to use the language of “waiver” to mean a variety of different things. Bathurst then makes a series of claims regarding Gardiner. First, he contends that there is now some doubt as to whether waiver, in the sense of forbearance, exists as an independent principle. The Chief Justice observes that waiver in this sense might have been subsumed within the doctrines of estoppel, election or variation. Second, his Honour argues that waiver, in the sense of a unilateral release, has been extinguished or fundamentally altered to such an extent that it is indistinguishable from election.12 Third, the Chief Justice asserts that, pursuant to Gardiner, “the law of election and unilateral release will not recognise the modification of terms that can be exercised indefinitely.”13 Fourth, and following from his three previous claims, the Chief Justice suggests that the law may have arrived at an overly restrictive understanding of the concept of waiver. More expansive regimes have been embraced in a number of other common law jurisdictions. His conclusion is that there may be:14 “good reasons why, when contracts are modified by unilateral release in regards to rights that can be exercised indefinitely, and election is incapable of operating, courts should either: find consideration in the form of a ‘practical benefit’ more easily, or deem evidence of consensus of the modification, absent duress or fraud, as sufficient.”

Formation Part C of this book turns to questions regarding formation. In many instances these questions of formation are routine and simply assumed by the parties. 11 12 13 14

[2008] HCA 57; (2008) 238 CLR 570. Bathurst, p 30. Bathurst, p 34. Bathurst, p 36.

4 Contract in Commercial Law

But deep questions lurk below the surface. For instance, the basic contractual agreement is bilateral. It is the engine of commerce involving the acceptance by one party of an offer made by the other. But deeds can be unilateral, and binding even without the promisee’s knowledge of the promise. Are deeds contracts? Letters of credit are binding without any reciprocal promise. Are they contracts? Can contracts therefore be formed unilaterally without conduct by the promisee? The doctrine of consideration lies at the heart of this issue. That doctrine is founded on some notion of reciprocity such that in order to attract contractual enforceability, the promisee should have given “something of value in the eye of the law”15 in exchange for the promise. Long ago, Lord Mansfield deprecated the concept.16 Although judicial doubts about the doctrine of consideration lay dormant for some time in Australia, question marks have hovered over it, at least since Trident General Insurance Co Ltd v McNiece Bros Pty Ltd17 was decided nearly 30 years. The developments in relation to estoppel since Lord Denning’s stunning extempore decision in Central London Property Trust Ltd v High Trees House Ltd18 have led many scholars to question the purpose of a doctrine that can be evaded so easily. In England and Canada, questions surrounding consideration are further complicated by its emasculation by (in the case of England) the Contracts (Rights of Third Parties) Act 1999 and (in the case of Canada) the Supreme Court’s decisions in cases such as London Drugs v Kuehne & Nagel International Ltd19 and Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd.20 Consideration is addressed by Justice Kiefel in her chapter in this volume. Her Honour focuses on understanding its historical origins. In her excursus, Kiefel traces the doctrine’s origins to the Roman law principle ex nudo pacto non oritur actio (“no right of action arises out of a naked promise”). She then tracks its development in medieval law noting the influences in this regard of civilian law, especially the latter’s concept of causa, that is, the notion that for an agreement to be enforceable it must be based on a lawful cause. Kiefel emphasises that a proper appreciation of the doctrine of consideration requires that attention be given to related rules and their history. She singles out for special mention in this regard the principle that an agreement will be enforceable only if there was an intention to create legal relations. Her Honour observes that that rule is allied with the doctrine of consideration in so far as both doctrines express anxiety regarding gratuitous promises. Kiefel then addresses the authorities concerned with variation of prior agreements. She canvasses the retreat, exemplified by the English Court of Appeal’s judgment in Williams v Roffey Bros & Nicholls (Contractors) Ltd,21 from the strictures of the decision in Stilk v Myrick.22 Finally, Kiefel traces the 15 16 17 18 19 20 21 22

Thomas v Thomas (1842) 2 QB 851 (QBD) 859. Pillans & Rose v Van Mierop & Hopkins (1765) 3 Burr 1663, 1669; 97 ER 1035, 1038. (1988) 165 CLR 107 (HCA). [1947] KB 130 (KBD). [1992] 3 SCR 299. [1999] 3 SCR 108. [1991] 1 QB 1 (CA). (1809) 2 Camp 317; 170 ER 1168.



Ch 1  Introduction 5

rise of the doctrine of promissory estoppel and explains how that doctrine intersects with the law governing consideration. Her Honour regards the rules regarding promissory estoppel as one of the reasons for the apparent decline in the number of cases in which the absence of consideration is alleged. The doctrine of consideration is also addressed by Professor Chen-Wishart. She explores the ongoing controversy in this area through the lens of the report of the 1937 Law Revision Committee.23 The Committee proposed the “prun[ing] away from the doctrine those aspects of it which can create hardship or cause unnecessary inconvenience”24 thus recommending partial repeal rather than wholesale abolition of the doctrine. The focus of the Committee was to identify the following types of promise, which it argued should be binding without consideration: (i) promises in writing; (ii) promises that induce foreseeable reliance; (iii) promises to do what one is already bound to do; (iv) promises to accept part payments in discharge of the whole debt; (v) promises for past consideration; and (vi) promises to keep offers open for a definite period. Emphasising the need for a temporal connection between one party’s performance and the other’s later promise to pay,25 Chen-Wishart suggests that rather than dispensing with the doctrine of consideration, the common law should accommodate past consideration on a principled basis. If a promise is later made, there is, she argues, no difficulty in finding that the performance and the promise are sufficiently linked for the performance to constitute consideration for that promise.

Construction and Characterisation Part D of this book, concerning construction and characterisation, moves from the foundations of the law of contract to its engine-room. In 2011, Chief Justice Bathurst suggested that there was once a time when a book on contract interpretation would have appeared on a list of “the shortest books ever written”.26 That is no longer the case.27 Books on the subject sometimes run to over a thousand pages. In Australia, there has been heated controversy about a basic question of principle in this area: the extent to which recourse to evidence of surrounding circumstances is permissible in the process of interpreting a contract. It has been suggested that, unlike statutory interpretation, the interpretation of a contract requires ambiguity before it is permissible to have 23 Law Revision Committee, Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) (Cmd 5499, 1937). 24 Law Revision Committee (n 25) para 27. 25 Referring to Pao On v Lau Yiu Long [1980] AC 614 (PC) 630. 26 Thomas Bathurst, “Book Launch: The Interpretation of Contracts in Australia”, 29 November 2011, http://www.austlii.edu.au/au/journals/NSWJSchol/2011/41.pdf. 27 See eg Kim Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell 2013); Kim Lewison and David Hughes, The Interpretation of Contracts in Australia (Thomson Reuters 2011); Gerard McMeel, The Construction of Contracts (2nd ed, OUP 2011); Joshua Thomson, Leigh Warnick and Kenneth Martin, Commercial Contract Clauses: Principles and Interpretation (Thomson Reuters 2012); JW Carter, The Construction of Commercial Contracts (Hart Publishing 2013).

6 Contract in Commercial Law

recourse to evidence of surrounding circumstances. This view, which Professor Getzler describes in his chapter as the notion of a ‘“gateway requirement” of “patent ambiguity … before contextual evidence [is admissible]”,28 was recently expressed by three Justices of the High Court of Australia in the course of refusing an application for special leave to appeal.29 (It was also applied by the Court of Appeal in Western Australia.30) The hurdle was said by the special leave panel to be based on a judgment of Mason J, with which Stephen and Wilson JJ had concurred.31 However, extra judicially, Mason J denied that he had intended to introduce any such obstacle.32 The broader view of admissibility has been taken by intermediate appellate courts including the New South Wales Court of Appeal,33 the Victorian Court of Appeal,34 and the Full Federal Court.35 The obstacle now may have been removed by the unanimous decision of the High Court of Australia in Electricity Generation Corporation t/as Verve Energy v Woodside.36 Powerful subsequent judgments of the New South Wales Court of Appeal37 and the Full Federal Court,38 which were rapidly followed,39 have construed Woodside in this way.40 Professor Stevens in his chapter commends these judgments, which he describes as “unanswerable”.41 However, Getzler observes that “It is not yet clear where Australian law will settle”.42 Professor Robertson in his chapter addresses the related question of the proper approach to the implication of terms in fact. He observes that two approaches compete for acceptance. According to one way of analysing things, the process of implication operates by way of the courts filling gaps by applying a set of rules. The rival way of proceeding, exemplified by the 28 Getzler, p 130. 29 Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1. 30 Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 [107]. See also Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164. 31 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (HCA) 352. 32 Anthony Mason, “Opening Address” (2009) 25 JCL 1, 3. 33 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [107]–[109] (Tobias JA, with whom Mason P and Campbell JA agreed); Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited [2009] NSWCA 140 [22] (Allsop P, with whom Tobias and Basten JJA agreed); Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; (2009) 261 ALR 382 [1]–[3] (Allsop P, with whom Basten JA agreed), [113] (Campbell JA). 34 MBF Investments Pty Ltd v Nolan [2011] VSCA 114 [198]–[203] (the Court). 35 Lion Nathan Australia Pty Ltd v Cooper Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1 [45]–[52] (Weinberg J), 22 [100] (Kenny J), 48 [238] (Lander J). 36 Electricity Generation Corporation t/as Verve Energy v Woodside [2014] HCA 9; (2014) 88 ALJR 473. 37 Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633. 38 Stratton Finance Pty Limited v Webb [2014] FCAFC 110; (2014) 314 ALR 166. 39 Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326; (2014) 290 FLR 18; Newey v Westpac Banking Corporation [2014] NSWCA 319; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2014] NSWCA 323; CPSU, the Community and Public Sector Union v State of Victoria (Department of Justice) [2014] FWCFB 6153. Cf Technomin Australia Pty Ltd v XStrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164. 40 The issue was not decided in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104. 41 Stevens, p 176. 42 Getzler, p 133.



Ch 1  Introduction 7

advice of the Privy Council delivered by Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd,43 understands the issue as one of interpretation. No gaps exist on this alternative account “because the answers are there to be found”. This approach is more discretionary. Robertson argues that the two seemingly divergent strategies are in fact reconcilable, and that the key to this reconciliation is latent in the law. Beyond formal interpretation, Chief Justice Allsop argues that a related, but less precise and sometimes opaque, process also occurs when contracts are “interpreted”. He describes this process as “construction” or “construction in a broad sense”. It involves a value judgement being made “by reference to ascribed meaning, found facts, and expressed principle or rule”. Drawing on examples such as the fiduciary relationship, the notion of unconscionability in commerce, the doctrine of penalties and the nature of insurance, Allsop argues that the use, boundaries and structure of language of the particular commercial field in question carry with them particular ideas and values. Thus, the process of construction of the contract, and the process involved in determining whether or not there has been a breach of that contract or assessing the essentiality or otherwise of terms, is necessarily framed by an understanding of the context and imperatives of a given type of contract. The values inherent in that context therefore inform what the parties meant by the words of the contract and are thus essential to any proper interpretation and construction of the contract. Despite noting that this process of characterisation is perhaps latent, Allsop argues that it is not a process detached from an ordered legal framework and method. He calls for it to be made explicit. In this way, characterisation, as distinct legal process, will take its place in the legal framework of relevant and related rules of contractual analysis. Professor Getzler, in his chapter focuses on associations that he detects between construction and a range of other doctrines. His analysis forces us to question what, specifically, is distinctive about construction. We address in some detail below one of the associations to which Getzler draws attention, namely, that between construction and rectification. One important theme of Getzler’s treatment is the extent to which it is permissible for judges to take account of commercial common sense in the course of construing contractual terms. This theme merits special mention here given the prominence that it has recently enjoyed at the ultimate appellate level, especially in the United Kingdom. Getzler refers to Lord Clarke’s well-known remark in the United Kingdom Supreme Court’s decision in Rainy Sky SA v Kookmin Bank that “If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and reject the other”.44 Getzler then traces some of the decisions in which this remark has been received and draws attention to an apparent retreat from this position by the Supreme Court in Arnold v Britton.45 He observes that Lord Neuberger (with whom Lords Sumption and Hughes concurred) stressed that the necessity of giving business efficacy to a contract involves only a search for the parties’ 43 [2009] UKPC 10; [2009] 1 WLR 1988. 44 [2011] UKSC 50; [2011] 1 WLR 2900 [21]. 45 [2015] UKSC 36; [2015] AC 1619.

8 Contract in Commercial Law

intentions. There are two difficulties which must be confronted. The first is the concept of intention and the second is the notion of common sense. As for intention, this word has caused numerous problems in the law of contract. The language of “intention” in the law of contract became prominent in the modern law as a result of Pothier’s treatise on The Law of Contracts.46 Prior to the end of the 18th century the operation of contract, within the highly formal structure of the forms of action, was objective. But Pothier, influenced by Rousseau, propounded a Will theory of contract. He saw contract as concerned with the true (ie subjective) intentions of the parties. The will theory of contract had powerful supporters. Aside from Pothier, another version of it was adopted in post-Napoleonic Germany by von Savigny, who was strongly influenced by Kant. The work of Pothier crossed the channel when his treatise was translated into English by Sir William Evans in 1806. The Will theory very nearly caught on in English law. There remain traces of it in the law relating to mistake in contract. But unlike in France, it did not generally prevail in England. Neither did it take root in Australia or the United States. The second difficulty with Lord Neuberger’s formulation in Arnold v Britton is the use of “common sense”. His Lordship emphasised that commercial common sense “is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties …”.47 Lord Neuberger cautioned against undervaluing “the importance of the language of the provision which is to be constructed”48 and invoking “commercial common sense retrospectively”.49 These objective approaches are laudable, but it is questionable whether the use of “common sense” or “commercial common sense” is likely to assist. Many of the cases where “commercial common sense” is invoked are cases where the “sense” is far from common. Different judges reach different conclusions. No expert evidence about commercial expectations is given. The judges are not law merchants. There are also difficult questions that arise in relation to judicial methodology as well as contract theory. The application of commercial common sense, in the absence of a law merchant, arguably involves a controversial judicial deploy­ment of public policy or a submersion of articulated principle by reference to the apparently attractive call for common sense. The issue has been raised particularly acutely in the context of the United Kingdom Supreme Court’s recent jurisprudence on the illegality doctrine, to which we return below.50 Closely associated with issues of interpretation are questions of rectification. The broader the operation of interpretation principles, the less scope there is for the doctrine of rectification. In other words, the greater the amount of red ink that can be spilled in the interpretation of an agreement, the less will be the need to resort to the technique of rectifying the agreement. Professor Burrows has suggested that there may be no role left for rectification in England following Lord Hoffmann’s exposition of the principles governing construction 46 47 48 49 50

Pothier (n 2). Arnold (n 45) [19]. Arnold (n 45) [17]. Arnold (n 45) [19]. See the text accompanying nn 108–31.



Ch 1  Introduction 9

in the leading decision in Investors Compensation Scheme v West Bromwich Building Society.51 Burrows argued that “in the context of the rectification of contracts for mistakes of fact, rectification has not merely been rendered less important by modern developments in the law of construction but is on the point of being rendered largely superfluous.”52 But this was not the approach taken by Lord Hoffmann, who later expounded rules for rectification in one of his final decisions.53 Getzler observes that the authorities establish that “the equitable doctrine of rectification sits separately from the doctrine … of construction”.54 While the doctrine of rectification continues to enjoy a role in England, the rules by which it is governed have become deeply unsettled in that jurisdiction. Judges of the High Court, Court of Appeal, and Supreme Court have published numerous, contrasting articles articulating different views of rectification.55 Lord Hoffmann responded extra-judicially,56 arguing that for more than half a century no-one has doubted the views of Denning LJ in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ld that “[r]ectification is concerned with contracts and documents, not with intentions”.57 Australian law has not fared better. One approach taken by the Court of Appeal in New South Wales58 saw rectification as concerned with “subjective” common intentions. The court said that those intentions must be disclosed in some way although it was said to be unnecessary for there to be an outward expression of accord between the parties. A different approach was taken in the Court of Appeal in Western Australia. That court suggested that in order to obtain an order for rectification, an objectively determined common intention must persist until the time of the execution of the relevant document and there must be a disconformity between the common continuing intention and the terms of the document.59 More recently, the same court suggested that the approach was subjective, although without referring to its earlier decision.60 This area is another example of the difficulty caused by the language of “intention” in contract law. Rectification is one of the clearest areas of contract law where the subjective theory has its strongest supporters as a limited exception to the dominance of the objective theory of contract. One of those supporters is Professor McLauchlan. He gives a series of examples in an attempt 51 [1998] 1 WLR 896 (HL). 52 Andrew Burrows, “Construction and Rectification” in Andrew Burrows and Edwin Peel (eds), Contract Terms (OUP 2007) 77, 99 (emphasis in original) (footnote omitted). 53 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101. 54 Getzler, p 133. 55 See eg the sources mentioned by David McLauchlan in his chapter, n 2. 56 Leonard Hoffmann, “Rectification and other Mistakes”, Lecture to the Commercial Bar Association on 3 November 2015, https://app.pelorous.com/media_manager/public/260/Lord% 20Hoffmann%20Lecture%203.11.15.pdf. 57 [1953] 2 QB 450 (CA) 461. 58 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [273]–[316], esp [281], [316]. 59 Tipperary Developments Pty Ltd v Western Australia [2009] WASCA 126; (2009) 38 WAR 488 [281] (McLure JA). 60 Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 [134], McLure P (Newnes JA agreeing). Compare RCR Tomlinson Ltd v Russell [2015] WASCA 154 [53].

10 Contract in Commercial Law

to illustrate the need for a subjective approach. One example that he gives is as follows:61 “C leases a building to D. The executed lease places the obligation to pay rates on C. The actual intention of each party was that D was to pay the rates. This is verified by internal company minutes and memoranda, but there were no communications between the parties prior to execution of the lease to show that there was an outward expression of accord on the point. D pays the first two instalments of rates but then realises that the lease obliges C to pay. C seeks rectification of the lease.”

English and Australian law, for different reasons, would deny rectification in this example. McLauchlan sees this result, which is a contract that neither party intended, as unjust. He also argues that the decision in Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd62 might have to be justified on a more limited basis: that the mistake of the parties was concerned with assumptions that they had made: it was a mistake about the contract not a mistake in the contract. He observes that even those jurists, such as Lord Hoffmann, who favour an objective approach to rectification, are forced to concede that “unilateral mistake rectification” is solely concerned with the subjective intentions of the parties. A different approach is supported by Professor Stevens. He begins by setting out the three competing views of rectification. The first is that the courts rectify instruments that are suggested to have been made in pursuance of a contract. This understanding, Stevens argues, involves taking one’s eye off the ball. What matters, he argues, are the parties’ rights, and they are unaffected by whatever the courts say that they are doing to instruments, which “are merely pieces of paper.” The second is the view, exemplified by McLauchlan’s argument, that courts rectify the parties’ objective agreement so that it conforms to their subjective intentions. Stevens rejects this view as an unjustified departure of the objective theory of contract which is based upon the nature of language. The approach to rectification that Stevens embraces is one that is subjective but only in the sense that it involves partial rescission of an express or implied contract term. The term rescinded, Stevens claims, is the term of the parties’ agreement that their written terms are the entire agreement. What we are left with, when the doctrine of rectification is enlivened, he argues, is the agreement that the parties have entered by their (objective) words or conduct, absent their reduction of it to a single written document. The account illuminates potentially close connections between the law of rectification and that governing vitiating factors. The idea is that defects in intention that permit a contract to be set aside ought also to permit rectification. A controversial aspect of the law of contract is the operation of the principle of good faith. In this area of contract law, as in many others, much may depend upon terminology. On one view, the phrase “good faith” might not describe a single positive duty at all but, instead, is a principle seen in various manifestations of particular duties. That view is apparent in the decision of the New South Wales Court of Appeal in Macquarie International Health Clinic 61 McLauchlan, p 202. 62 [1953] 2 QB 450 (CA).



Ch 1  Introduction 11

Pty Ltd v Sydney South West Area Heath Service.63 On this way of understanding the concept of good faith, a duty of good faith cannot sensibly be implied indiscriminately into commercial contracts. Another view is that a duty of good faith is not merely a principle but a rule which requires that powers that affect another contracting party be exercised in a manner that is both honest and reasonable in all the circumstances. Such implications concerning both honesty and reasonableness in the exercise of powers permeate many areas of law in addition to contract law, including property law, administrative law, the law of trusts, and insolvency law. Such an approach already exists in various areas of contract discretion including the well-recognised example of the obligation to co-operate to achieve contractual objectives.64 Jurisdictions are also divided about whether good faith is an obligation imposed by law or as a matter of construction of the parties’ intention. In England, in Yam Seng Pte v International Trade Corporation Ltd65 Leggatt J held that “there is nothing novel or foreign to English law in recognising an implied duty of good faith in the performance of contracts”.66 On the other hand, a more recent decision of the Court of Appeal saw good faith as a threat to the express or implied terms agreed by the parties suggesting that there is a “real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement”.67 Another way of expressing the difference in approach might be to say that those who see good faith as a genuine implication from the terms of the parties’ agreement often use the label as a principle to describe a number of different specific implied rules. In contrast, those who see good faith as an imposed term are concerned to avoid imposing upon the parties any term other than those to which they have manifested their agreement. For instance, the view that good faith is a general principle derived from the terms which the parties have agreed led to the New South Wales Court of Appeal in the leading Australian decision in Macquarie International Health Clinic68 to treat the obligation of good faith as encompassing at least the three rules: namely, (i) an obligation on the parties to co-operate in achieving the contractual objects; (ii) compliance with honest standards of conduct; and (iii) compliance with standards of conduct that are reasonable having regard to the interests of the parties. On the other hand, the view that good faith is an imposed rule might have led Pullin JA (with whom Newnes JA agreed) in the Western Australian Court of Appeal in Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd69 to suggest that the natural and ordinary meaning of good faith required only that parties deal with each other honestly. 63 [2010] NSWCA 268. 64 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 (HCA) 607. Relying upon Mackay v Dick (1881) 6 App Cas 251 (HL) 263. See also Byrne v Australian Airlines Ltd (1995) 185 CLR 410 (HCA) 448–49 (McHugh and Gummow JJ); Commonwealth Bank of Australia v Barker [2014] HCA 32; (2014) 312 ALR 356 [25]. 65 [2013] EWHC 111 (QB); [2013] 1 All ER (Comm) 1321. 66 Yam Seng (n 65) [146]. 67 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789 [45] (MooreBick LJ). 68 Macquarie International (n 63). 69 [2010] WASCA 222; (2010) 41 WAR 318 [61].

12 Contract in Commercial Law

In Canada, and following the practice of most jurisdictions in the United States, the Supreme Court in Bhasin v Hrynew unanimously seemed to take the approach of recognising the duty of good faith as a general principle but, unusually for this approach, divorcing it from the terms of the parties’ agreement and treating it as imposed as a matter of law. The court endorsed a general implication of a duty of good faith requiring “that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”.70 Professor Percy critically analyses Bhasin.71 In Bhasin, the court adopted a top-down approach,72 articulating “good faith contractual performance” as a general organising principle of the common law of contract: (i) where the parties must co-operate in order to achieve the objectives of the contract; (ii) where one party exercises a discretionary power under the contract; and (iii) where one party seeks to evade contractual duties.73 Thus, the court found that existing categories of the liability were examples of an underlying organising principle of good faith, which requires that parties “generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.”74 The principle of good faith was also said to apply beyond these three categories “where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.”75 Percy argues that the court’s attempt to ameliorate any perceived harshness by recognising that the parties may to a limited extent define the scope of honest performance and thus relax the requirements of good faith is of limited effect. He observes that the court still expects a minimal content to the obligation of honest performance.76 However, beyond this minimal content, Percy notes that the judgment in Bhasin does little to guide contractual drafters and future litigants. In evaluating the impact of Bhasin, Percy argues that the case may do little to change the outcome in decided cases but it might have the following practical impacts. First, since the duty of good faith is imposed as a matter of law, it will be more difficult for parties to exclude or limit this term by agreement. Second, it may lead courts to treat long-term relational contracts differently from discrete bargains. Finally, the case allows courts to expand the reach of good faith arguments beyond traditional categories. Even taking into account the foothold of good faith in parallel cases such as Wallace v United Grain Growers Ltd 77 and Whiten v Pilot Insurance Co,78 Percy makes the point 70 Bhasin v Hrynew [2014] SCC 71; [2014] 3 SCR 494 [63]. 71 Bhasin (n 70). 72 As to this approach, see Carmine Conte, “From Only the ‘Bottom-up’? Legitimate Forms of Judicial Reasoning in Private Law” (2014) 35 OJLS 1. 73 The court at [40] attributed these categories to JD McCamus, The Law of Contracts (2nd ed, Irwin Law Inc 2012) 840–56. 74 Bhasin (n 70) [30]. 75 Bhasin (n 70) [66]. 76 Bhasin (n 70) [76]–[77], referring to American Uniform Commercial Code §1-302(b). 77 [1997] 3 SCR 701, in which the Supreme Court imposed an obligation of good faith in an employment contract setting without any suggestion that the obligation arose from the parties’ intentions. 78 2002 SCC 18; [2002] 1 SCR 595, in which the Supreme Court relied on the absence of good faith in the award of punitive contractual damages against an insurer.



Ch 1  Introduction 13

that there will be incremental development of the common law of contract, as contemplated in Bhasin.79

Breach, Termination and Remedies The circumstances in which a contract can be terminated for a repudiatory breach is of great commercial significance. As is well known, termination cases often present contracting parties with agonising choices. A party who mistakenly believes that he has a right to terminate and purports to exercise that right will ordinarily commit a repudiatory breach of contract himself. The “termination gun” will be turned back on him. Conversely, if a right to terminate has accrued on account of a repudiatory breach and the innocent party, wary of himself being guilty of a repudiatory breach, chooses not to terminate, the option of terminating the contract in respect of that breach might be lost through the doctrines of waiver and estoppel. Despite its great importance, the law in this field poses innumerable questions that await resolution. For example, to what is extent is the motive of the party that claims a right to terminate relevant to whether the party concerned can avail himself of that right?80 It is well established that a person who terminates for the wrong reason is not in breach if he had a sufficient reason for terminating that he did not invoke.81 But what are the limits to this principle? Can a party after terminating a contract for an insufficient reason point to a sufficient reason if the latter reason was one that, had it been drawn to the attention of the other party at the relevant time, could have been addressed satisfactorily by that party?82 Is it possible negligently to repudiate a contract? Perhaps most fundamentally, what is the theoretical basis for allowing one party a power to “terminate” and bring binding rights to an end where that power is neither expressly nor impliedly contained in the agreement of the parties?83 Justice Phang and Associate Professor Goh in their chapter engage with a series of unresolved questions in the law in this troublesome area. They consider the contrast between the Hongkong Fir approach84 and the “condition-warranty approach” to determining whether a contract has been repudiated. The Hongkong Fir approach asks whether the breach concerned would “frustrate the commercial purpose of the venture”.85 Nothing falling 79 Bhasin (n 70) [66]. 80 For engagement with this question, see WE Peel, Treitel on the Law of Contract (14th ed, Sweet & Maxwell 2015) para 18.036. 81 “It is a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of justification which in fact existed, whether he was aware of it or not” (Taylor v Oakes, Roncoroni & Co (1922) 127 LT 267 (CA) 269 (Greer J), cited with approval in Heisler v Anglo-Dal Ltd [1954] 1 WLR 1273 (CA) 1278 (Somervell LJ with whom Birkett and Romer LJJ concurred)). 82 Consider Heisler (n 81) 1278 (Somervell LJ); André et Cie v Cook Industries Ltd [1987] 2 Lloyd’s Law Reports 463 (CA) 468–69 (Parker LJ); Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 4 All ER 514 (CA) 527 (Evans LJ). 83 See James Edelman and Elise Bant, Unjust Enrichment (2nd ed, Hart Publishing 2006) 45–46. 84 Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA). 85 Beale (n 6) para 24.041.

14 Contract in Commercial Law

short of destruction of the parties’ commercial purpose will suffice given that a breach, in order to be repudiatory, must deprive the innocent party “of substantially the whole benefit”86 for which it had contracted. In contrast, the “condition-warranty approach” asks whether the parties intended a promise to be “a warranty sounding only in damages [or] as a condition precedent by the failure to perform which the other party is relieved of his liability.”87 This approach is often understood as presenting a less demanding test. Both approaches have been applied on countless occasions. They vie for supremacy. Phang and Goh argue that the two approaches are indeed conceptually distinct and they canvass reasons why two parallel tests of whether a breach is repudiatory have been developed. They explore a third approach developed by the Singaporean courts.88 One might expect that the principles of remedies in contract law, which is the subject of Part E of this book, would have been settled long ago given that more than 150 years has passed since Robinson v Harman was decided.89 In Robinson, Parke B famously articulated the measure of compensatory damages in an action in contract. But there remains significant controversy about even the most basic principles of remedies in contract law. One example is a recent decision of the United Kingdom Supreme Court in proceedings that had been brought as a case involving both breach of contract and breach of trust. The case raised the most fundamental of questions concerning the difference between debt and damages. This decision, AIB Group (UK) Plc v Mark Redler & Co Solicitors,90 is addressed by Professor Tettenborn, along with its progenitor, Target Holdings Ltd v Redferns.91 In AIB Group, a lender paid £3.3 million to solicitors for a conveyancing transaction. The lender and the solicitors contracted with a term which provided: “You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you”. The Court of Appeal found, in a holding that was not challenged in the Supreme Court, that the transaction had not completed.92 This was because the lender paid out the money without obtaining a discharge of a prior charge (as it was required to obtain). The prior charge was not obtained because some of the money needed for that discharge was paid to the borrower. The borrower defaulted, the property was sold and the proceeds received after payment of the prior charge holder were less than £1 million. Bizarrely, the lender failed to bring a contractual claim for debt. The lender did not contend that since completion had not occurred it was entitled to a debt under the contract term for the return of the loan money “when and how we tell you”. Instead, the lender claimed for an “equitable debt”. Relying upon principles of 18th and 19th century trust accounting, the lender argued that trustees were subject to a debt-like obligation to reconstitute the trust 86 87 88 89 90 91 92

Hongkong Fir (n 84) 66 (Diplock LJ). Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274 (CA) 281 (Bowen LJ). Especially in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] SGCA 39; [2007] 4 SLR 413. (1848) 1 Ex Rep 850; 154 ER 363. AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58; [2015] AC 1503. [1996] AC 421 (HL). AIB Group (UK) Plc v Mark Redler & Co Solicitors [2013] EWCA Civ 45; [2013] PNLR 19, esp at [41].



Ch 1  Introduction 15

where money had been paid out from it without authority. In contrast, the solicitors argued that they should be liable to compensate the lender only for the loss it suffered in a damages-like measure for breach of trust. That loss was considerably less than the amount paid out because the lender had obtained hopelessly inadequate security and the borrower was bankrupt. The Supreme Court found in favour of the solicitors. Tettenborn supports this conclusion, arguing that to allow the lender to recover more than it lost is neither legally correct nor a just result. It is likely, however, that Australian courts would take a different approach.93 Most importantly, the decision illustrates the importance of a clear understanding of the difference between debt and damages. A primary remedy in the contract law setting is that of specific performance. In Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd,94 a decision of the House of Lords that has been relied upon many times in Australia,95 Lord Hoffmann considered some of the most basic principles concerning the award of specific relief following a threatened breach of contract. He observed that the principles in common law and civilian systems might not be so different from each other despite the civilian position in countries like France or Germany that a plaintiff is prima facie entitled to specific performance. Delivering the decision of the House of Lords, Lord Hoffmann refused to order specific performance to require a business to continue to be run via a so-called “keep open” clause. However, very shortly after that decision was delivered, the Inner House of the Scottish Court of Session took a civilian approach to a similar case and reached the opposite conclusion.96 Lord Penrose granted a decree of specific implement (the Scottish equivalent of specific performance) of the “keep open” clause.97 Lord Hope of Craighead, in Chapter 14, considers the Scottish remedy of specific implement. He does so alongside the common law remedy of specific performance. The basic rule in the Scots law of obligations is that a party has a right to sue for implement of the contract, and that party cannot be compelled to resort to the alternative action in damages. By contrast, the starting point in the common law is that the remedy to which a plaintiff is entitled as of right is that of damages. Specific performance, an equitable remedy, depends upon the adequacy of common law remedies.98 The availability of specific performance is subject to further discretionary considerations grouped by Hope as follows: (i) the difficulty, waste of time and expense of litigation that would result from supervision of the order for specific performance by the court; (ii) the 93 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484. See WMC Gummow, “Three Cases of Misapplication of a Solicitor’s Trust Account” (2015) 41 ABR 5. 94 [1998] AC 1 (HL). 95 See eg Patrick Stevedores v MUA (1998) 195 CLR 1 (HCA); Waterways Authority of New South Wales v Coal & Allies (Operations) Pty Limited [2007] NSWCA 276; Port Kennedy Resorts Pty Ltd v Huat [2000] WASCA 328. 96 Highland and Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297. 97 Lord Hope notes that the judgement of Lord Penrose is not reported, but that the case went on appeal to the Inner House of the Court of Session. For reasons were given for its decision on 1 February 2000 to affirm the decision of the Lord Ordinary, subject only to a minor change to the wording of his order: Highland and Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297; 2000 SLT 414. 98 Dougan v Ley (1946) 71 CLR 142 (HCA) 150 (Dixon J), 153 (Williams J).

16 Contract in Commercial Law

undesirable effect of the order on the party against whom it was made; and (iii) the public interest in bringing litigation to an end and the undesirability of judges being required to make an order which lacks precision under the threat of imprisonment. Given its nature as the ordinary remedy to which a party to the contract is entitled, specific implement does not have to accommodate itself to these concerns. It is informed by the normative position that there is no difficulty in a defendant being held to his contract if the performance of the obligation is what he has undertaken to do. Therefore, these discretionary considerations that are necessary in the implementation of specific performance are irrelevant. Given the different starting points of the civilian Scots law and English common law, Hope suggests that the differences between these two remedies of performance are likely to grow. Moving from specific performance to damages for breach, Dr Winterton addresses the question of whether a promisee who is unable to prove that he or she would have made a net profit from the contract’s performance can nevertheless recover reasonable expenditure incurred, but not recouped, in preparing for such performance. In Australia, the leading decision on this issue is Commonwealth v Amann Aviation Pty Ltd.99 Winterton considers this decision in detail. He concludes that some reasoning in the decision is difficult to justify. He argues that there should not be any “legal presumption” that an innocent party would recoup expenditure incurred prior to a repudiation and that in calculating damages there should be a discount to reflect countervailing contingencies which are proved. Winterton also contends that if the promisee cannot establish with sufficient certainty that he or she would have recouped its reasonably wasted expenditure, then the law might develop rules of contribution to attribute to the wrongdoer responsibility for a proportionate share of some or all of the wasted expenditure. As to the result of the case, he argues that the dissent of McHugh J should be preferred.

The Boundaries of Contract Part F of the book considers the boundaries of the law of contract. The first issue that is addressed is equitable estoppel which is considered by Professor McFarlane. Etymologically, “estoppel” derives from the (obsolete) French word “estoppe” or “estoupail”, meaning “stopper” or “bung”. It has connotations of stopping or precluding something. Some estoppels, like evidential estoppels and estoppel by representation, are aptly described in this way. They preclude particular action in litigation or reliance upon a particular representation. But, unlike these estoppels, in some jurisdictions the language of equitable estoppel is used as a means of enforcing promises. This led Professor Atiyah to argue that equitable estoppel was just a type of contract that required detriment instead of consideration.100 He argued that if justice requires a certain result then it is a “childish fiction to pretend that the result is permissible because one mouths

99 (1992) 174 CLR 64 (HCA). 100 PS Atiyah, “When is an Enforceable Agreement not a Contract? Answer: When it is an Equity” (1976) 92 LQR 174.



Ch 1  Introduction 17

the incantation ‘estoppel’ rather than ‘contract’”.101 Similarly, in §90 of the American Law Institute’s Restatement (Second) of Contracts, these estoppels are treated under a heading “Contracts without Consideration”. McFarlane argues that although this mislabelled estoppel is a legitimate development, it is not a contract. He argues that it operates with different requirements from a contract. The contractual requirements which are abandoned or modified in equitable estoppel include formalities, intention to create legal relations, and certainty. Most fundamentally, unlike the immediate duty to perform a contractual promise there is no immediate duty to perform an estoppel-promise. There is only a liability that the promisor might be ordered to perform the promise, or compensate for loss, if detriment is suffered. Importantly, McFarlane explains that once the rationale of this type of estoppel is identified, it cannot justifiably be confined to enforcing only promises in relation to “property”. A second issue considered in Part F is the law of equitable assignment. One of the most ubiquitous types of contract is the contract between a bank or commercial lender and its customers. These contracts generally provide for assignment clauses permitting the lender to assign the benefit of loans that it makes to the customer. But, despite the ubiquity of assignment in commercial law, until recently there had been very little attention given to the nature and effect of assignment. Recently, the leading texts that have considered this issue have generally explained that assignment of contractual rights involves “a transfer of a contractual right from the owner (assignor) to the transferee (assignee)”.102 The same language of transfer can be seen in many modern judicial decisions.103 Even the word “assignment” itself connotes a transfer of rights.104 As an explanation of a statutory assignment, under provisions such as s  136 of the Law of Property Act 1925 (UK), this conclusion is undoubtedly correct. That section provides that if the assignor complies with its requirements the assignment will be effective “to pass and transfer” the relevant right. But if there is no compliance with the statutory provisions, or if the statutory provisions do not apply, then the assigning party must rely upon the principles of equitable assignment. There has long been authority that where one of these legal failures occurs an equitable assignment operates as a trust. This would seem to have the commercially inconvenient result that intermediaries must all be joined to an action based upon an assignment in equity. On one view, the very reason why Parliament enacted the Judicature provisions which became s 136 was because, in equity, the right had not been transferred and the assignor needed to be a party to any suit.105 Yet, oddly, courts have since concluded that the assignor 101 Atiyah (n 100) 179. 102 Gregory Tolhurst, The Assignment of Contractual Rights (Hart Publishing 2006) para 1.01. See also Marcus Smith and Nico Leslie, The Law of Assignment (2nd ed, OUP 2013) para 11.43: “assignment is concerned with the transfer of property” (emphasis in original). 103 Some examples include Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 (HCA) 26 (Windeyer J); Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) 915 (Lord Hoffmann); Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395 [31] (Finn and Sundberg JJ), [188] (Emmett J). 104 “Assign”: transfer or make over formally (esp personal property, to); “Assignment”: legal or other formal transference of a right or property; a document that effects or authorizes this: Shorter Oxford Dictionary (5th ed, OUP 2002) vol 1, 134. 105 Re Westerton [1919] 2 Ch 104 (Ch D) 133 (Sargant J).

18 Contract in Commercial Law

does not need to be a party to a suit based on equitable assignment. Associate Professor Tham’s chapter addresses this issue. He argues that the trust conception of equitable assignment is incomplete because it fails to explain the agency aspects of an equitable assignment. The agency mechanism explains why an equitable assignee may deal directly with the obligor and can bring judicial proceedings in equity against a defaulting obligor in the assignee’s own name and without having to join the assignor to the proceedings. This approach is not merely commercially expedient but it provides a close fit with the language of “transfer”. A third issue considered in Part F of the book is the doctrine of illegality.106 The uncertainty that infected the doctrine in the United Kingdom was, until recently, particularly pronounced.107 A diversity of approaches had been developed, none of which commanded general acceptance. Tests for determining the effect of a plaintiff ’s illegal conduct included a causal test,108 an ‘inextricable link’ test,109 a test that asks whether the plaintiff needs to rely on his or her illegality110 and an analysis that weighs the competing policy considerations.111 The lack of clarity arising from these tests prompted Lord Hughes to write in Hounga v Allen that “a generalised statement of the conceptual basis for the doctrine under which illegality may bar a civil claim has always proved elusive.”112 Many similar remarks can be found in the authorities. Two members of the Supreme Court, Lord Mance113 and Lord Sumption,114 called extrajudicially for the English Law Commission to re-examine the law in this area.115 In Bilta (UK) Ltd (in liq) v Nazir (No 2) Lord Neuberger remarked that “the proper approach to the defence of illegality needs to be addressed by this court (certainly with a panel of seven and conceivably with a panel of nine Justices) as soon as appropriately possible”.116 The opportunity of which Lord Neuberger spoke presented itself in Patel v Mirza.117 Judgment in that case was handed down as this book was going to press. In it, a majority of the Supreme Court opted for the policy-based approach. 106 The doctrine has been described as posing an “intractable” problem (Jane Swanton, “Plaintiff a Wrongdoer: Joint Complicity in an Illegal Enterprise as a Defence to Negligence” (1981) 9 Syd LR 304, 331); a “vexed issue” (Winter v Commonwealth of Australia (1992) 112 ACTR 10 (SC) 22); and a “conundrum” (Charles Debattista, “Ex Turpi Causa Returns to the English Law of Torts: Taking Advantage of a Wrong Way Out” (1984) 13 Anglo-American LR 15, 27). 107 For contemporaneous conspectuses of the law in this regard, see James Goudkamp, “A Long, Hard Look at Gray v Thames Trains Ltd” in Paul Davies and Justine Pila (eds), The Jurisprudence of Lord Hoffmann (Hart Publishing 2015) ch 4; James Goudkamp, “The Doctrine of Illegality: A Private Law Hydra” (2015) 6 UKSCY 254. 108 Gray v Thames Trains Ltd [2009] UKHL 33; [2009] AC 1339. 109 Cross v Kirkby, The Times, 5 April, 2000 (CA). 110 Tinsley v Milligan [1994] 1 AC 340 (HL). 111 Hounga v Allen [2014] UKSC 47; [2014] ICR 847. 112 Hounga (n 111) [54]. 113 Jonathan Mance, “Ex Turpi Causa – When Latin Avoids Liability” (2014) 18 Edin LR 175, 192. 114 Jonathan Sumption, “Reflections on the Law of Illegality” (2012) 20 RLR 1, 8–12. 115 The Law Commission had previously investigated the illegality doctrine extensively: see, especially, Law Commission, The Illegality Defence (No 320, 2010). 116 Bilta (UK) Ltd (in liq) v Nazir (No 2) [2015] UKSC 23; [2016] AC 1 [15]. 117 Patel (n 9) (discussed in James Goudkamp, “The End of an Era? Illegality in Private Law in the Supreme Court” (2017) 133 LQR 14).



Ch 1  Introduction 19

The case concerned a payment of £620,000 from Mr Patel to Mr Mirza for the purpose of betting on movements in the price of shares. Mr Mirza was expected to do so using inside information. However, Mr Mirza did not obtain the inside information and the intended bet did not take place. Mr Mirza refused to repay the money. The Supreme Court unanimously allowed Mr Patel’s claim. Although Patel clarifies the legal position to a degree, uncertainty remains in the United Kingdom. Several shades of approach were taken even within the majority discretionary approach in Patel.118 Furthermore, there may be doubt about whether the decision extends beyond the context of unjust enrichment. In contrast with the position in the United Kingdom, a détente appears to have been reached in Australia. Whereas it is unclear whether the approach preferred in Patel applies across private law, at common law a uniform approach to illegality across the law of trusts,119 the law of torts,120 the law of unjust enrichment121 as well as the law of contract122 has been developed.123 The Australian rule, in essence, is that the application of the illegality doctrine depends upon the “policy” of the statutory or common law rule that the plaintiff violated. The concern is one of coherence of the law and the doctrine will apply if an intention to render private law rights of the plaintiff ineffective can be discerned. As Deane and Gummow JJ put it in Nelson v Nelson, which is the decision that pioneered this approach, “if the illegality consists in the violation of a statute, courts will give or refuse relief depending upon the fundamental purpose of the statute.”124 The High Court’s understanding of the law of illegality has been supported by some writers125 but criticised by others.126 It might be doubted whether the Australian approach would have produced the same conclusion reached by the unanimous Supreme Court on the facts in Patel. A conspiracy to commit insider dealing, the turpitude in issue in Patel, was an offence under s 52 of the Criminal Justice Act 1993 (UK). The state had wide powers to confiscate, under the Proceeds of Crime Act 2002 (UK), the benefit obtained from that offence, which would include the payment to Mr Mirza. A different result might have been reached by application of the Australian approach based on a stultification of the statutory confiscation scheme if the proceeds were repaid to Mr Patel. Burrows argues in his chapter for the policy-based approach embraced by the majority in Patel. He contrasts it with the rule-based reliance approach, with which it vied for supremacy, the latter test having been passionately argued for 118 Most notably, between Lord Neuberger and Lord Toulson. 119 Nelson v Nelson (1995) 184 CLR 538 (HCA). 120 Miller v Miller [2011] HCA 9; (2011) 242 CLR 446. For discussion, see James Goudkamp, “The Defence of Joint Illegal Enterprise” (2010) 34 MULR 425. 121 Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 798. 122 See Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 (HCA) 229–30. 123 Cf the patchwork legislation regarding illegality that was enacted in the wake of the 2001–2002 insurance crisis. This legislation is treated in James Goudkamp, “A Revival of the Doctrine of Attainder? The Statutory Illegality Defences to Liability in Tort” (2007) 29 Syd LR 445. 124 Nelson (n 119) 559. 125 Ben Kremer, “An ‘Unruly Horse’ in a ‘Shadowy World’?: The Law of Illegality after Nelson v Nelson” (1997) 19 Syd LR 240. 126 Andrew Stewart and JW Carter, “The High Court and Contract Law in the New Millennium” (2003) 6 FJLR 185, 208.

20 Contract in Commercial Law

by, in particular, Lord Sumption in a series of cases, including in Patel. Burrows’ work in this regard clearly made a significant impact on the Supreme Court.127 He prefers the public policy test principally because he regards it as being more sensitive to the salient considerations of each individual case. Burrows considers that it is more likely to dispense justice than the reliance test. Two points merit attention at this point. First, there is the fallacy of the excluded middle. Even if the policy-based test is preferable to the reliance test, it does not follow that the public policy test must be embraced. Other options are available (such as the approach endorsed by the Supreme Court of Canada in Hall v Hebert128), and one of those might be preferable. Secondly, one objection to the public policy test, which was not canvassed in any of the United Kingdom Supreme Court decisions in which the illegality doctrine was recently considered but which was robustly advanced in the conference, was that the policy-based test requires judges to weigh incommensurable factors. A reply to this is that judges do not seem to have any particular difficulty in balancing the considerations to which the policy-based test is sensitive (such as a concern to deter wrongdoing, to prevent wrongful profiting, to prevent the goals of the criminal law from being undermined, and to ensure that law responds proportionality to the plaintiff ’s wrongdoing) in routine areas like sentencing. The objection might be based upon misconceptions arising from the inappropriate verb “balancing” which suggests a weighing by a common metric. Rather, the approach is one of synthesis of different incommensurables. That synthesis is well known to the common law’s reasonable person. Before leaving the issue of illegality, we observe that the collision between a rule-based approach and a more discretionary approach that came to a head in Patel manifests itself in many other areas of contract law. As we noted above,129 Professor Robertson drew attention to the same tension in his chapter on implied terms. In that context, a more rule-based analysis has prevailed, in contrast with the position in relation to the law of illegality, which raises questions regarding consistency in approach. Professor Virgo has recently pointed out that this fundamental clash of judicial methodologies – between judges who prefer a more discretionary and flexible set of rules and judges who favour a more rule-based approach – is not confined to the law of contract or even to private law.130 A fourth area treated in Part F of this book that is concerned with the boundaries of the law of contract is the penalties doctrine. This is one of the most topical questions in Australia and the United Kingdom. Recently, the United Kingdom Supreme Court held in Cavendish Square Holdings BV v Makdessi131 that the doctrine should not be abolished. It instead affirmed earlier authority that the doctrine should be confined to instances of terms that apply upon breach of contract although the court held that a clause could require a payment beyond that which was expected to compensate if there was 127 128 129 130 131

See also Andrew Burrows, A Restatement of the English Law of Unjust Enrichment (OUP 2012) s 28. [1993] 2 SCR 159. See pp 6–7. Graham Virgo, “Judicial Discretion in the UK Supreme Court” (2015) 6 UKSCY 233. [2015] UKSC 67; [2015] 3 WLR 1373, on appeal from [2013] EWCA Civ 1539; [2014] 2 All ER (Comm) 125.



Ch 1  Introduction 21

a legitimate interest in doing so. In contrast, only a few years earlier, the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd132 held that the doctrine applied even in cases where no breach of contract had occurred. In view of the decisions in Makdessi and Andrews, at least three major distinctions exist between English and Australian law concerning penalties. The first is that Australian law, unlike English law, does not insist upon a breach of contract before a clause will be struck down as penal. Second, in Australia a clause will be struck down as penal only to the extent that it is extravagant or unconscionable. Conversely, a majority of the court in Makdessi who addressed this issue flatly denied this possibility (and rejected the contrary Court of Appeal authority in Jobson v Johnson133). Third, it appeared that Australian law did not recognise the “legitimate interest” test, preferring instead the more traditional dichotomy in the context of contractual clauses between a clause which is penal because it is disproportionate to any actual loss that could be suffered and extravagant and unconscionable, and one which is compensatory. However, as this book was going to press, the High Court of Australia handed down another decision on the law of penalties. In that case, Paciocco v Australia and New Zealand Banking Group Limited,134 a majority held that late fees which were payable by customers to banks were not penalties. A heavy focus of the court, like the decision below in the Full Federal Court in the same case,135 was upon the legitimate interests that the bank sought to protect. The first of these differences (whether the penalty doctrine is subject to a breach limitation), despite the force of the English denial of the Australian approach, may prove to be insubstantial. The Australian approach means that a clause in a unilateral undertaking, such as a performance bond or letter of credit, can be scrutinised to determine whether it is a penalty. But it would seem unlikely that the English approach would uphold a clause which, in form, was not conditional upon breach but in substance had that effect. For instance, imagine a clause which provided that a builder was entitled to payment of $5 million for minor works if completion occurred by 1 December 2016 but only $250,000 if completion occurred after that date and by 1 January 2017. If there were no real loss to the owner if completion were delayed until 1 January 2017, it is very unlikely that the $5 million payment clause would be upheld. Although Lords Neuberger and Sumption (with whom Lord Carnwath agreed) said that the application of the penalty rule can still turn on questions of drafting,136 they also said that “the classification of terms for the purpose of the penalty rule depends on the substance of the term and not on its form or on the label which the parties have chosen to attach to it” and that the intention as expressed in the agreement is never conclusive and may be overruled or ignored if the court considers that even its clear expression does not represent “the real nature of the transaction” or what “in truth” it is taken to be.137 132 133 134 135 136 137

[2012] HCA 30; (2012) 247 CLR 205. [1989] 1 WLR 1026 (CA). [2016] HCA 28; (2016) 90 ALJR 835. [2015] FCAFC 50; (2015) 236 FCR 199. Cavendish Square (131) [43]. Cavendish Square (131) [15].

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The second difference may run deeper. The Justices of the United Kingdom Supreme Court who denied the possibility of a penalty being only partially unenforceable did so on the ground that to proceed otherwise would involve rewriting the terms of the contract. Although the Supreme Court did not say so, this conclusion is also consistent with the refusal of English courts (but not Australian courts) to allow partial rescission.138 But there may be much more to be said in a dialogue between these courts about the notion of partial unenforceability or partial rescission. After all, many well-established remedies could be characterised as partial enforcement: almost every case of specific performance involves partial enforcement of a bargain, that is to say, performance of obligations other than the obligation concerning the date of performance. Any difference in approach of these courts to the law of penalties, as well as the potential difference in application, will (or should) depend upon the rationale for the doctrine. Identification of that rationale has proved elusive. Diplock LJ remarked in one leading penalties cases that he had made “no attempt, where so many others have failed, to rationalise this common law rule”.139 The chapter by Mr Tiverios seeks to fill this extremely significant gap. Tiverios argues that the penalties doctrine serves the purpose of ensuring that where the purpose of one right is to provide security for the performance of a primary stipulation, it would be a penalty if the right were formulated to go beyond that purpose. This construction-based approach has a close fit with Australian law. It explains why the doctrine is not limited to clauses that operate upon breach. It explains why the doctrine only strikes down clauses to the extent to which they go beyond their purpose. And it explains the “legitimate interest” criterion as one which is concerned with the extent to which security is legitimate. However, there remains deeper questions of why the doctrine of penalties should have this rationale and why the law should control the provision of monetary security for performance in this way. Tiverios sees the answer to these questions as lying in the function of damages as a monetised form of the primary right. A competing view of damages, which might explain the English but not the Australian approach, is that remedies for breach of contract are a legally imposed regime designed, as far as is reasonable, to eradicate the consequences of the breach. Parties can agree to restrict or waive their rights to damages under that regime but they cannot agree to increase them. Hence, if contractual terms attempt to increase the damages by providing for an extravagant amount, rather than to quantify it (by liquidated damages or, in cases such as a fiduciary contract, profit stripping clauses), then the clause must be void. Another instance, like the doctrine of penalties, where the law restrains the extent to which a law of contract can represent the manifested agreement of the parties is the rules concerning exclusion clauses. These rules are addressed in the chapter by Dr Bell, and comprise the fifth issue addressed in Part F of the book. Bell’s analysis begins with the law as it stood 140 years ago with the 138 Compare the decisions in TSB Bank Plc v Camfield [1995] 1 WLR 430 (CA) with Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 (HCA). 139 Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 (CA) 1446.



Ch 1  Introduction 23

following siren call for freedom of contract sounded by Sir George Jessel as Master of the Rolls:140 “If there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice …”

Bell explains the struggle that ensued in the courts over the next century concerning exclusion clauses. On one side were those judges who adhered to the principle of freedom of contract. On the other were those, for whom Lord Denning became their leader, who saw the principle as a fiction, disguising terms which were imposed by the “big man” upon the “little man” who had no choice but to accept them. Bell traces the rise of post-war consumer legislation and explains how the common law and statute developed together as the erosion of freedom of contract occurred in Australia, Canada, England, and transnationally. Bell’s chapter will be a useful reminder as all of these jurisdictions enter the next stage in this evolution. The statutes in issue are open-textured legislation which create boundaries of permissible agreement but which leave those boundaries undefined, other than in the most general terms such as “unfair”, “unconscionable”, or “unjust”. The next era in the courts will involve techniques for interpreting these open-textured provisions.141

Conclusion In 2012, the Australian Federal Attorney General introduced a project to consider the codification of contract law.142 In one respect, this project was laudable. A codified law of contract would provide a neat, and potentially principled, antidote to the increased contextual fragmentation of contract law.143 But many Australian scholars saw the project as a threat to the tradition of careful evolution of underlying principle that has been the power of the common law. Impassioned pleas of festina lente were made.144 Some English scholars, too, expressed similar remarks in response to suggestions that English contract law should be codified.145 Whether or not a principled foundation 140 Printing and Numerical and Registering Co v Sampson (1875) LR 19 Eq 462 (Ch D) 465. 141 Plevin v Paragon Personal Finance Ltd [2014] UKSC 61; [2014] 1 WLR 4222; Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204; McKercher v The Renovation Store Ltd [2015] ABQB 748. 142 Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework: A Discussion Paper Exploring the Scope for Reforming Australian Contract Law (2012). 143 Hugh Collins, The European Civil Code: The Way Forward (CUP 2008). 144 See eg Warren Swain, “Contract Codification in Australia: Is it Necessary, Desirable and Possible?” (2014) 36 Syd LR 131; cf Luke Nottage, “The Government’s Proposed Review of Australia’s Contract Law: An Interim Positive Response” in Mary Keyes and Therese Wilson (eds), Codifying Contract Law: International and Consumer Law Perspectives (Ashgate Publishing 2014) ch 7. 145 Andrew Burrows, “Legislative Reform of Remedies for Breach of Contract: The English Perspective” (1997) 1 Edin LR 155, 156.

24 Contract in Commercial Law

for the law of contract is to be attempted, by forceful codification or by slow evolution, the goal is to move towards a uniform, transboundary law of contract. That goal requires consideration, and understanding, of the fundamental principles concerning the law of contract and the way those principles dictate the approach to be taken to contemporary issues in the law of contract. That is the raison d’etre of this book.

2

Getting Your Sold Soul Back: The Limitations and Justifications of Waiver Tom Bathurst* On April Fools’ Day in 2010 the British online retailer, GameStation, added a new clause to its standard terms and conditions for customers. The clause read:1 “By placing an order via this Web site on the first day of the fourth month of the year 2010 Anno Domini, you agree to grant Us a non transferable option to claim, for now and for ever more, your immortal soul. Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification from gamestation.co.uk or one of its duly authorised minions.”

Luckily, customers were given the option of clicking a link to nullify that particular sub-clause. Worryingly, although unsurprisingly, 7,500 customers nonetheless voluntarily surrendered their souls.2 Only 12% of customers opted to nullify the sub-clause.3 Fortunately for those thousands, GameStation later notified its customers that it had been informed by its HR department that the clause was “not playing fair” and so it was releasing them from their part of the soul bargain.4 The question posed in this chapter is whether such a release was effective. Have the customers of GameStation, according to Australian contract law, as it currently stands, got their sold souls back? Of course, in posing such a question, the reader must ignore the obvious, although impractical, possibility of customers and GameStation entering into a deed. My chapter will instead focus on whether a solution can be found within the bounds of mainstream contractual principles. Existential thoughts like “you cannot sell what does not exist” must also be suspended. Additionally, * 1 2

3 4

I express my thanks to my researcher, Miss Madeline Hall, for her assistance in the preparation of this chapter. Steven Rares, “Striking the Modern Balance Between Freedom of Contract and Consumer Rights” (2014) 28 CLQ 7. Catharine Smith, “7,500 Online Shoppers Accidentally Sold Their Souls to GameStation” Huffington Post (17 June 2010) www.huffingtonpost.com/2010/04/17/gamestation-grabs-soulso_n_541549.html. Smith (n 2). Shane Richmond, ‘“GameStation Collects Customers” Souls in April Fools Gag” The Telegraph (17 April 2010).

25

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any legal arguments that may prevent the contract from ever validly having been formed must temporarily be ignored; for instance, due to arguments of unconscionability, issues of public policy or proper notice of the terms.5 Ignoring these and assuming the contract was validly formed, the question is: What general law principles will successfully operate here, as an exception to the rule of contract, that usually you are bound to what you bargained for? What rules will allow those poor unassuming customers to get their sold souls back? This chapter will specifically focus on the doctrine of waiver and how it was analysed in the High Court’s 2008 decision of Agricultural and Rural Finance v Gardiner.6 It will be shown that although the principles that led to the outcome in Gardiner may not always be what is desirable in each individual circumstance, the High Court’s limitations on the doctrine of waiver are justified in the current conceptual framework of considerationbased contractual theory.

Agricultural and Rural Finance v Gardiner To recap briefly the facts in Gardiner, Bruce Gardiner borrowed money from ARF to be part of a managed investment scheme. OAL undertook to indemnify Mr Gardiner’s liability to ARF if certain conditions were satisfied. These included that certain (re)payments from Mr Gardiner to ARF had been punctually made. Unfortunately, Mr Gardiner made several late payments. However, ARF nonetheless accepted the late payments and did not accelerate the obligation to repay the full amount, as it was contractually entitled to do. It was alleged in Mr Gardiner’s pleadings before the High Court that OAL, through its employees, was aware of this and had contributed to the representations that the late payments would not cause problems. When the managed investment scheme eventually collapsed ARF sought to recover the lent money from Mr Gardiner. Mr Gardiner resisted on the ground that OAL was liable under the indemnity. The dispute before the High Court relevantly focused on whether OAL’s conduct waived the need for the punctual payment condition to be satisfied in order for the indemnity to apply.

5

6

Note that these arguments may not be as easy to make out as appears. For instance the doctrine of frustration is not applicable, as the impossibility of the contract is not relevant where the promisor assumed the risk of the event in question, see N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot Law of Contract (10th ed, LexisNexis Butterworths 2012) para 19.11 and the cases quoted therein. Claims of unconscionability (whether at common law or statute) would also require some work, given the absence of factors affecting the formation of the contract (such as duress). It is the content of the contract alone which would have to be relied upon to make out unconscionability. As unreasonable as the term is, depending on the manner of acceptance (by hyperlink or scroll box) a court may easily consider reasonably conspicuous notice of the term to have been given. For an interesting discussion of international case law on such an issue, see Simon Blount, Electronic Contracts (2nd ed, LexisNexis Butterworths 2015) para 7.9. Agricultural and Rural Finance Pty Limited v Bruce Walter Gardiner [2008] HCA 57; (2008) 238 CLR 570 (“Gardiner”).



Ch 2  Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 27

Waiver in the High Court Turning to the doctrine of waiver and how that was treated by the majority (Gummow, Hayne and Kiefel JJ) in their joint judgment (the Judgment). As the majority was quick to point out, waiver is somewhat of a mutating beast. It is used in many different senses and often “as no more than a conclusionary word stating the consequences of the operation of … [election or estoppel], rather than as indicating the application of any distinct and independent principle”.7 Mr Gardiner had pleaded waiver in three senses, to mean election, forbearance or abandonment. He expressly eschewed a broad independent principle of waiver based on a general doctrine of “unfairness” or “approbation and reprobation”.8 Admittedly, this did not stop Kirby J from advocating for such a principle.9 To be brief and blunt about the outcome, the majority rejected all three arguments of waiver.

“Waiver” meaning election When waiver is used to mean election, the majority emphasised the need for the election to be one between competing rights held by the person making the election.10 As Mr Gardiner identified the relevant competing rights as between “continuing the loan agreement” or “calling upon full repayment”, and these were rights held, not by OAL but ARF, the election argument failed. The majority summed the situation up by saying Mr Gardiner’s “failure to pay punctually gave OAL no choice between terminating the indemnity agreements for breach and insisting upon future performance”.11 This was because there was no obligation in the indemnity agreement for Mr Gardiner to make punctual performance. While this legal analysis with respect appears to be correct, arguably a wrong turn was taken in the application to the facts. Although there was no obligation for punctual payment in the indemnity agreement, it did form an essential precondition, the failure of which rendered liability under the indemnity unenforceable. This is significant because, as was identified earlier in the Judgment, OAL had a direct financial interest in whether it remained potentially liable under the indemnity. As long as it remained potentially liable, or as long as it was possible for all the preconditions to the indemnity to be satisfied, OAL “had a contingent liability which would be reflected in its balance sheet; if it was no longer liable, its balance sheet was to be altered accordingly.”12 In this light, it is difficult to see why Mr Gardiner’s failure to make punctual payments to ARF, as an essential precondition to liability under the indemnity, 7

Gardiner (n 6) [51]. For an old but pithy summary of the different sense of the word “waiver” and the reason for so much confusion, see John Ewart, Waiver Distributed among the Departments: Election, Estoppel, Contract, Release (Harvard University Press 1917) 23. 8 Gardiner (n 6) [46]. 9 Gardiner (n 6) [145]. 10 Gardiner (n 6) [58]–[59]. 11 Gardiner (n 6) [65]. 12 Gardiner (n 6) [37].

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did not trigger an election by OAL. Arguably, whenever it learned of a late payment, OAL had to decide whether it would continue to assume future liability under the indemnity. Why was the ongoing listing of the contract as a contingent liability not an intentional act by OAL, done with knowledge, to ignore the failure of an essential precondition which would otherwise have rendered future liability under the indemnity as unenforceable? Indeed, this would have entitled OAL to remove the contingent liability from its accounts.13 Why was it that the occurrence of one precondition (Mr Gardiner ceasing to be a farmer) enlivened the possibility of an election, but the earlier failure of another precondition did not also? Leaving this inconsistency in the treatment of the preconditions aside, the majority’s statement of waiver as election is relatively uncontroversial. Of note was the emphasis made between making an election and foreshadowing one.14 The majority indicated that an election can only be made at the time the right in question is to be insisted upon.15 What the consequences of this emphasis are in the sold soul scenario will be discussed later on.

“Waiver” meaning forbearance Mr Gardiner’s second argument was that a waiver had occurred in the sense of forbearance. At first Mr Gardiner’s expression of the principle was dismissed by the majority as indistinguishable from estoppel, an argument Mr Gardiner had not pleaded.16 However, a second reformulation of the principle by Mr Gardiner was that forbearance operated in the circumstances where a party voluntarily accedes to a request by the other party to forbear from insisting on a mode of performance fixed by the contract, but that such accession did not lead to a permanent change in the rights of the parties and could be withdrawn upon the giving of reasonable notice.17 Upon reviewing the relevant authorities that were relied upon to establish this specific formulation of forbearance, the majority identified that the cases either did not stand for the relevant proposition or have been subsumed within the principles of estoppel, election or variation of a contract by consideration.18 This pronouncement leaves one wondering: if forbearance still exists as a separate principle, what is it?

“Waiver” meaning abandonment or unilateral release Finally, Mr Gardiner’s third argument framed waiver as meaning abandon­ ment; however the submission will be referred to as a question of unilateral 13 Consider Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535 (HCA), where the presence of a debt on the balance sheet was held to be acknowledgement of the debt. 14 Gardiner (n 6) [59] 15 Gardiner (n 6) [59]. 16 Gardiner (n 6) [71], [164]. 17 Gardiner (n 6) [77]. 18 Gardiner (n 6) [80]–[87].



Ch 2  Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 29

release.19 This is for two reasons. First, Mr Gardiner’s submissions on this type of waiver focused on the hallmark of unilateral release – the fact that the term waived was wholly to the benefit of one party.20 Second, the primary case relied upon by Mr Gardiner appeared to be The Commonwealth v Verwayen,21 which may be described as an instance of unilateral release.22 So how did the majority deal with the submission of unilateral release?23 Significantly, the majority sought to confine the outcome in Verwayen to the unique adversarial litigious circumstances that had operated there.24 The majority emphasised that for any doctrine of waiver to operate there had to be an underlying, reason or justification for its operation, otherwise the rule would do nothing more than state a conclusion. Thus, although the Judgment does not expressly say waiver can only ever be in the form of an estoppel, election or variation by consideration, and acknowledged that there were cases where the term was historically used in some other sense,25 it is hard to imagine a situation where waiver in any other sense (such as unilateral release) would be accepted by the court. As the Judgment makes clear, absent the forgoing of a right, consideration, or detrimental reliance, what reason is there to bind someone to a representation of modifying a contract?26 Until a litigant can identify an additional reason, it would appear therefore that waiver has essentially been limited in Gardiner to those three formulations. Even more notably however, is the fact that in the Judgment the majority emphasised that even if a principle of unilateral release were allowed to exist and operate beyond the context of adversarial litigation, then the relevant 19 By referring to “unilateral” release or waiver throughout this chapter, I intend to include within it instances of “pure waiver”. According to Sean Wilken and Karim Ghaly, The Law of Waiver, Variation and Estoppel (3rd ed, OUP 2012) para 4.36 the distinction between the two is: “The [unilateral] waiver of a term wholly for X’s benefit cannot affect Y’s performance of the contract. … [Whereas an instance of] pure waiver releases Y from future performance under the contract and does have such an effect.” Arguably this distinction is specious. The waiver of a term wholly in X’s benefit, may easily affect some aspect of Y’s performance of the contract. For example, in the sold soul scenario, the alleged waiver of the option to claim the soul affects customers’ future performance – they no longer are required to give up their soul. This is part of Y’s (the consumer’s) performance of the contract as much as any other term. Another illustration would be where X waives a condition precedent to Y’s performance, where the condition is wholly within X’s favour. The waiver of the condition precedent in a very real sense affects Y’s performance of the contract. Moreover, even if the distinction is valid, it is so slight that drawing such distinctions could be accused of amounting to the unnecessary (and unhelpful) splitting of hairs. Quite whether the High Court intended references to unilateral release to be interpreted as including or excluding instances of pure waiver is not clear as they expressly eschewed such distinctions, see Gardiner (n 6) [54]. It is relatively clear however, for the reasons explained below, that the type of waiver the High Court was dealing with when discussing the submissions of waiver as “abandonment or renunciation” did mean (as this chapter has taken it to mean) unilateral release at least in the limited form (not including pure waiver). 20 Gardiner (n 6) [88], [92]–[93]. 21 The Commonwealth v Verwayen (1990) 170 CLR 394 (HCA). 22 Verwayen (n 21) 423 (Brennan J). 23 Compare cases such as DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 where there was abandonment in the true sense. 24 Gardiner (n 6) [62], [89]. 25 Gardiner (n 6) [52]. A similar conclusion was reached almost a hundred years earlier, where Ewart stated that waiver “is, in itself not a department”: Ewart (n 7) 4–5. 26 Gardiner (n 6) [95].

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abandonment can only occur at the time the right in question can be insisted upon.27 This statement is of some moment because academics generally consider that the defining conceptual distinction between unilateral waiver and election is the fact that election is reactive, in that it occurs after a breach of a contract, whilst unilateral release is proactive, encompassing pre-emptive releases before any breach has occurred.28 By erasing this distinction and requiring unilateral release, like election, to only occur at the time the right can be insisted upon, the Judgment for all intents and purposes has morphed unilateral release into the doctrine of election.29 Accordingly, if it has survived Gardiner, unilateral release may become a type of election, where the inconsistency is between choosing to have or not have a right solely within one party’s benefit. Such a categorisation, while fundamentally changing the nature of unilateral release, would tidy up the conceptual messiness of waiver, without butchering the historical cases in which, as the majority had to admit, unilateral release was recognised as a separate instance of waiver.30 However, it is not at all clear that this is what the majority intended, given how eager they seemed to be to quell unilateral release altogether.31 Either way, it would appear two things are clear from the Judgment in Gardiner. First, either the Judgment has had the effect of removing the doctrine altogether or severely limiting it to aspects similar to the doctrine of election. To that extent, the court’s judgment, on a conceptual level, further entrenches the consideration theory of our contract law. Contractual variations will only be recognised if supported by consideration or, absent consideration, by the operation of the doctrine of estoppel or election. In such a schema, there is little room for instances of unilateral release, which are fundamentally uncommercial actions where a party generously releases someone from performance of a term for nothing. Unsurprisingly, a doctrine predicated on tit-for-tat will not readily accommodate that. The second thing that is clear in Gardiner is stated expressly at the end of the Judgment. That is, whatever the other reasons are, that people may dream up to justify binding someone to a modified contract, a general principle of unfairness is insufficient.32

Waiver as a residual category Counsel for Mr Gardiner expressly eschewed a residual category of waiver. The majority’s comments on the topic are therefore strictly obiter. In the Judgment, 27 Gardiner (n 6) [91] (see the hypothetical reference, “If an analysis … were to be made …”), [93]. 28 Wilken and Ghaly (n 19) para 4.36. 29 It is interesting to note that Wilken and Ghaly identify pure waiver as a prospective version of waiver by election which operates retrospectively following a breach, see Wilken and Ghaly (n 19) para 4.28 (note above at n 19 I have subsumed pure waiver within my conception of unilateral waiver). See also Qiao Liu, “Rethinking Election: A General Theory” (2013) 35 Syd LR 599, 606, where the author notes “A unilateral waiver seems to bear a high degree of resemblance to an election …”. 30 Gardiner (n 6) [52] 32. 31 Gardiner (n 6) [89]–[90]. 32 Gardiner (n 6) [98]–[100].



Ch 2  Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 31

the majority expressed the view that a principle of unfairness should not be adopted as sufficient to justify the doctrine of waiver. This was considered necessary in order to maintain “coherence of legal principle” and ensure that the exceptions to the general rule of contract and consideration are not expanded to the point of disproving, rather than proving the rule.33 As alluded to earlier, Kirby J, in dissent, was prepared to accept a residual category of waiver where it would otherwise be “manifestly unfair” to the beneficiary of the wavier to not grant relief.34 He referred to such a doctrine as “unilateral ‘waiver’” and cited cases from around the world, in support of it.35 In proposing such a framework for waiver, Kirby J rejected that this was postulating a “residual category” of the doctrine. He stated instead it was an attempt to identify “the unifying features of earlier instances or examples where courts have accepted [unilateral release] …”.36 He rejected the possibility that cases on statutes of limitations like Verwayen could form a “special legal category”.37 Rather he considered such a decision must be “an example, or occasion, of the application of a broader principle of law still awaiting expression”.38 For now, he couched such a broader principle in terms of “manifest unfairness”.39 Kirby J’s comments do appear to be sparring with what appears to be the effect of the majority’s reasoning. That is, a confining of unilateral release cases to the pages of history or the highly unusual and unique circumstances seen in Verwayen. It is noticeable that the cases of unilateral release referred to by Kirby J from the United Kingdom, New Zealand, Canada, the United States and South Africa are somewhat avoided and glossed over in the majority’s decision.40 However, there may not be as much of a difference between Kirby J and the majority as first seems. Noticeably, Kirby J describes the cases from around the world as showing that waiver would operate where, without any relevant disability or disqualification, a party consciously waives a breach so as to preclude a later change of mind. There is something about this that again sounds familiar with the doctrine of election. Perhaps, like the majority, Kirby J is moulding instances of unilateral release into a subgroup of election. In this light, it is noteworthy that one of the leading cases cited by Kirby J from the United Kingdom speaks about unilateral waiver but was ultimately determined by the doctrine of election.41

33 34 35 36 37 38 39 40 41

Gardiner (n 6) [95]–[96], [100]. Gardiner (n 6) [145]. Gardiner (n 6) [136] and the cases cited therein. Gardiner (n 6) [137]. Gardiner (n 6) [143(4)]. Gardiner (n 6) [143(4)]. Gardiner (n 6) [145]. Compare the cases referred to in Gardiner (n 6) [136] with the majority’s comment at [99]. See Gardiner (n 6) [142]; Richard Siberry QC’s comments on Glencore Grain Ltd v Flacker Shipping Ltd (The “Happy Day”) [2002] EWCA Civ 1068; [2002] 2 Lloyd’s Rep 487 in Ocean Pride Maritime Limited Partnership v Qingdao Ocean Shipping Co [2007] EWHC 2796; [2008] 2 All ER 330 [106], [111] where the term “waiver” is clearly meant in the sense of “election”.

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Getting Your Sold Soul Back? Having outlined the state of the law on waiver as set out in Gardiner, the question arises as to how the law would apply in GameStation’s sold soul scenario. Under Australian law, have the customers been released from GameStation’s transferable option to claim their souls? Have they have got their sold souls back? In applying the law some unsatisfactory characteristics arising from the Judgment in Gardiner will be revealed, which may not have been immediately apparent at first glance. The first thing to note about the peculiar situation the GameStation customers have found themselves in is that the alleged waiver did not involve any consideration passing from the customers to GameStation.42 If there had been a mutual variation or discharge of terms, by both GameStation and a customer, then each variation could arguably have acted as consideration for the other.43 However, as the actions of GameStation were unilateral in nature, there is nothing to support the contract having been varied with consideration. The second thing to note is that it is not at all obvious that an argument of estoppel would work for GameStation’s customers. As seemed to be the problem in Gardiner, there is no detrimental reliance. How can a customer show that they have relied, to their detriment, upon the representation that GameStation will not exercise its right to claim the customer’s soul? What would the customer say? “In reliance on GameStation’s representation I continued to make plans for the future of my soul”? But then, given the option to claim the soul could be exercised at any time in the future (near or distant), would that not have been the case for the individual anyway? It appears, therefore, that estoppel would not particularly aid GameStation’s customers. On first glance, this may appear a fanciful dilemma. However, take a real world example of an option, for consideration, to acquire property in the 42 Even the more contentious conceptions of consideration as extending to “practical” rather than just legal benefits would be of little assistance in this scenario, particularly given its unilateral nature. At present the scope of Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA), the source of the idea that “practical” benefits can act as consideration, appears limited to circumstances where performance of an existing duty for something more than contractually agreed to is said to be in return for avoiding the problems associated with nonperformance of what had been contractually agreed to, see Slipper v Berry Buddle Wilkins Lawyers [2015] NSWSC 810 [45]; the variation may be described as “a bargain stimulating the promise to complete performance”, Kevin Teeven, “Consensual Path to Abolition of Preexisting Duty Rule” (1999) 34 Val U L Rev 43, 56. However, it is difficult to apply this reasoning to a unilateral term (where an option to a soul is given for nothing) and when the effect of the variation is not performance for something more but non-performance for nothing. Would the benefit of keeping a good relationship with customers (because GameStation had given up the option over customers’ souls, which may endear customers to GameStation), be a sufficient “practical” benefit to GameStation to make the variation giving up the option to customers souls as binding? For an example of how far consideration can be stretched, see the Canadian case of Delaney v Cascade River Holidays Ltd (1983) 44 BCLR 24 (CA). In that case it was held that the consideration for waiving liability of a rafting trip was permission to enter the van taking the person to the rafting venture. For an overview of the application and limitations placed on Roffey in the UK, see Wilken and Ghaly (n 19) paras 2.24–2.25. 43 Seddon, Bigwood and Ellinghaus (n 5) para 22.8; John Cartwright, Formation and Variation of Contracts: the Agreement, Formalities, Consideration and Promissory Estoppel (Sweet & Maxwell 2014) para 9.09.



Ch 2  Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 33

future. Plainly, if in reliance on a representation that the option would not be exercised, the grantor acts to his or her detriment (by selling the property), then the doctrine of estoppel may provide relief. However, unless and until such detrimental reliance is shown, any release will be unenforceable and could be withdrawn. Finally, would waiver, in the sense of election or unilateral release, let the customers get their souls back? Ostensibly this would depend on two things. First, whether GameStation deciding to release the customers from the option can be described in the framework of electing between “inconsistent rights”. On the one hand, this could be done by describing the release as an election between having the right to the option as opposed to the inconsistent right of not having the option and giving it up. This analysis could however be considered as bordering on fictional. The reality is that GameStation has the benefit of a right and unilaterally has given it up.44 In this sense there is not really an election between “the existence of two alternative rights”.45 Rather it is the election between the existence or non-existence of one right in the alternative.46 If the courts are not prepared to accept such a description as an election, then we are forced to return to the question of to what extent, if any, Gardiner has preserved the ability for waiver, as unilateral release, to operate outside a Verwayen situation. However, even if unilateral release has survived Gardiner, as the majority stressed, there is in fact an even larger stumbling block common to both an argument of election or unilateral release for the GameStation customers. This is the fact that, according to the Judgment, both doctrines can only ever occur at the time the right may be insisted upon.47 Otherwise there will be no election or release, only a foreshadowing of such. Yet because GameStation’s right to the option is granted for now and ever more, there will never come a definitive time when it can be said the right had to be insisted upon. A customer may say, “GameStation failed to insist upon their right at this time and have thereby elected or unilaterally waived the right”. Yet GameStation will always be able to counter: “our failure to insist upon the right at one time cannot be construed as inconsistent or waiving our right to insist upon it in the future”. GameStation’s representations therefore, will only ever amount to foreshadowing its intentions for future conduct, due to the indefinite right it holds to exercise the option. Essentially, this means under existing Australian law it does not appear the general law principles concerning waiver, in the sense of election or unilateral release, will allow the customers of GameStation to get their sold souls back. Whether you consider this outcome as desirable or not, either way the scenario 44 Jeremy Stoljar, “The Categories of Waiver” (2013) 87 ALJ 482, 488; Liu (n 29) 606, “It might be said that, unlike an election, such a waiver does not have to be effected in the face of inconsistent options. But the waiving party does have a choice between waiving and not waiving, two evidently inconsistent courses of action”. 45 Gardiner (n 6) [58]. 46 A similar distinction between waiver in the sense of abandoning a right and election was made by Ewart (n 7) 13. 47 Gardiner (n 6) [93].

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does identify the remaining confusion and limitations of our current law on waiver, particularly in the sense of election and unilateral release.

The Limitations and Justifications of Waiver It appears from the Judgment in Gardiner that, whether the doctrines of election and unilateral release may be combined or not, both of them are now fundamentally geared for rights that have set times to be exercised, as opposed to indefinite times. At present it seems the law of election and unilateral release will not recognise the modification of terms that can be exercised indefinitely. As unpalatable as this exposed limitation may be, it must be conceded that for election it is at least consistent with the doctrines’ underlying justification. As the Judgment in Gardiner stated, there needs to be a reason why general law principles should impact the enforcement of contractual rights and why a person who makes a representation modifying a contract should be held to that representation.48 Detrimental reliance and consideration are the reasons we allow the principles of estoppel and formal variation of contract to operate. Presumably the absence of any justification in the case of unilateral release is the precise reason why the majority sought to confine its operation to Verwayen. In the case of election however, the justification is the fact that usually the act of choosing one right will cause the inconsistent right to be inherently extinguished. In such cases the justification for the doctrine is that it simply reflects what the party has in fact done.49 But when, as in the case of the sold souls scenario, the right may be exercised indefinitely, the other right cannot be inherently extinguished. In those situations therefore it cannot be said that the party has, as a fact, done what the effect of the doctrine would hold to have been done. It makes sense therefore that in that case the doctrine of election does not apply.50 The underlying basis of the doctrine ceases to justify and support its operation. Until some justification can be articulated as to why, in those situations, someone should be held to their representation of altering their contracted rights, it seems likely that the law will not recognise the doctrine of election as operating. The upshot of all of this is that even if unilateral release has survived the majority judgment in Gardiner it will not solve the existing law’s inability to acknowledge contractual modification regarding rights that can be exercised indefinitely or, for that matter, well into the future. To accommodate such situations, something else in the law must give. Readers may not be too disturbed by this specific end result. This is particularly so, given the unlikelihood that GameStation would ever actually try and exercise its option to claim customers’ souls. But it is quite believable that even in a commercial contract a party may wish to act in what is strictly speaking an uncommercial way. Or, that a term, once solely beneficial to a 48 Gardiner (n 6) [95]. 49 Sargent v ASI Developments Limited (1974) 131 CLR 634 (HCA) 647 quoting Jordan CJ in O’Connor v S P Bray Ltd (1936) 36 SR (NSW) 248 (Full Ct) 260–01. 50 See Wilken and Ghaly (n 19) paras 5.03–5.05 which supports the notion that waiver by election is conceptually geared to past performance, whilst the doctrine of unilateral waiver concerns future performance.



Ch 2  Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 35

party, ceases to be so. In such situations, why can’t one party unilaterally release the other from a term in a contract which has no definitive time period for being exercised? Imagine shareholders to a company that undertake they will subscribe to shares in proportion to the number they currently hold in the company for any future capital raising. Can that term of the contract be informally waived before any capital raising? Or what about the software licensing agreements you blindly agree to as you set up a new computer? What if they include an ongoing subscription to all future updates, which may encompass whole new services, or breaches of the customer’s perceived right to privacy? Can subscription for future updates be waived? In fact, imagine any contract concerning long term options or that bestows an unfettered discretion on one party. In any of these scenarios, waiver, in the sense of unilateral release as formulated by the majority in Gardiner, will struggle to handle the situation where one party wishes to release the other from a term with no expiry date on it. Problems could also arise in the ongoing administration of long term contracts. It is common in such contracts, particularly export contracts for primary products such as minerals, for parties to seek, from time to time, a variation of their contractual obligations for delivery or relief from pricing provisions having regard to economic circumstances not envisaged at the time the contract was entered into. Absent estoppel or a variation involving consideration, the contractual status of such variations, as a matter of Australian law, may well be productive of uncertainty. This limitation on the rules of election is understandable given the basis of that doctrine. Yet, is there something wrong with our rules of unilateral release that in those cases the law is incapable of reflecting reality? Or is it acceptable to demand technical and formal consideration changes hands before acknowledging the fact that one party has changed its mind? Should we adopt more relaxed notions of consideration so this requirement is more easily satisfied? Or should we do away with consideration as a formality for varying or modifying contracts altogether? Before dismissing these questions out of hand, it is important to remember that many common law jurisdictions have totally abolished the requirement of consideration for waiver to effect contractual variations. In India and Malaysia, provided there is a voluntary, conscious and affirmative act, a promisee may dispense with the performance of a promise by the promisor without consideration.51 This has been possible in India since 1872, which makes it difficult to argue that changing our rules of waiver would lead to the erosion of civilisation as we know it. Similarly, the United States’ Uniform Commercial Code also stipulates that an agreement modifying a contract needs no consideration to be binding.52 Significantly enough, these jurisdictions also constitute some of our important trading partners. 51 Indian Contracts Act 1872 (Ind) s 63; Contracts Act 1950 (Malaysia) s 64; Pan Ah Ba v Nanyang Construction Sdn Bhd [1969] 2 MLJ 181, 183 (Federal Court of Malaysia); Associated Pan Malaysia Cement Sdn Bhd v Syarikat Teknikal and Kejuruteraan Sdn Bhd [1990] 3 MLJ 287 (Federal Court of Malaysia); Chunna Mal-Ram v Mool Chand (1928) 55 IA 154 (PC). 52 Uniform Commercial Code (US) s 2-209 (1). This section has been enacted in many states including Arizona, California, Florida, Idaho, Illinois, Kansas, Kentucky, Maine, Michigan, North Carolina, North Dakota, Ohio, Rhode Island and Washington.

36 Contract in Commercial Law

Given the above, is the majority in Gardiner right to so insistently demand upon a “reason” before recognising the modification of a contract? Is it not that these “reasons”, like consideration, are really markers, from which courts can quickly and safely assume that the parties had intended to agree to a change? Perhaps, we should not be so reliant on short cuts and markers and instead renew our focus on the underlying question of what did the parties in fact agree to, both at the time the contract was formed and later on when it was allegedly modified. There are several policy arguments in favour of adopting such reform. First, modifying rights is not equivalent to creating them. Arguably therefore “the release of a right does not require the degree of formality and caution as that bestowed by consideration”.53 Second, today’s economy operates very differently to that of pre-industrial times when the requirement for consideration was created. The subject matter of commercial contracts is increasingly fast-paced and uncertain. This is accentuated by the “tendency toward longer term and more complex contractual relations undertaken by corporations with perpetual life”.54 In such a context, arguably the status quo’s static and predictable nature is outweighed by the prevalent need for flexibility. There is the third fact that the status quo, whilst providing courts “with an easy method of disposing of alleged contract modifications”, results in unfairness to “economic underdogs”.55 Consensual modifications to a contract may be made on the run, as a better appreciation for the magnitude or intricacies of performance are appreciated. Yet the status quo requires either the promisor to be inadequately compensated for such work or be forced to breach.56 Arguably modern courts should “not hide behind [an] … absolutist rule in light of the resultant unfairness and inefficiencies generated …” by its static nature.57 It may be therefore that there are good reasons why, when contracts are modified by unilateral release in regards to rights that can be exercised indefinitely, and election is incapable of operating, courts should either: find consideration in the form of a “practical benefit” more easily, or deem evidence of consensus of the modification, absent duress or fraud, as sufficient. Such an approach would admittedly mark a symbolic shift in our law’s stance on the broader issue of consideration-based theories of contract.58 Yet, unless courts adopt such a stance, it is clear that there will continue to be some contracts where the law refuses to give effect to a modification that is, at heart, uncommercial in nature. If we are willing to accept this as the status quo, then the only thing the sold soul scenario really stands for and reminds us of is, at the end of the day, you really should read all the terms and conditions of what you agree to. In this day and age, you never know what you might be giving up.

53 54 55 56 57 58

Teeven (n 42) 59. Teeven (n 42) 115–16. Teeven (n 42) 103. Teeven (n 42) 103. Teeven (n 42) 103. It is ironic that a problem presented by a standard form contract could be solved by adopting the consensual model of contract, which is generally considered to be its antithesis, PS Atiyah, The Rise and Fall of Freedom of Contract (Clarendon Press 1979) 731.

3

Is a Relational Contract a Legal Concept? Hugh Collins* A Legal Concept of a Relational Contract In the common law world, legal scholars and judges occasionally invoke the idea of a “relational contract”. The term “relational contract” has been applied frequently to the contract of employment.1 Lord Steyn accepted this description when he said: “it is no longer right to equate a contract of employment with commercial contracts”. One possible way of describing a contract of employment in modern terms is as a “relational contract”.2 The idea of a relational contract has also been used in scholarly literature in connection with certain kinds of commercial agreements such as franchises, distributorships, and other kinds of long-term business relationships.3 Judicial references to relational contract in connection with commercial transactions have, however, been sparser in the common law world.4 Recently, in three cases concerning commercial contracts, * 1

2 3

4

I am grateful to David Campbell, Mindy Chen-Wishart, George Leggatt, Jim Malcomson, Stuart Macaulay and Bill Whitford for comments on earlier drafts of this chapter. RC Bird, “Employment as a Relational Contract” (2005) 8 U Pa J of Lab & Emp L 149; M Boyle, “The Relational Principle of Trust and Confidence” (2007) 27 OJLS 633; M Freedland, The Personal Employment Contract (OUP 2003) 88; D Brodie, “How Relational is the Employment Contract?” (2011) 40 ILJ 232; J Levin, “Multilateral Contracting and the Employment Relationship” (2002) 117 Q J Econ 1075. Johnson v Unisys Ltd [2001] UKHL 13; [2003] 1 AC 518 [20]; approved in Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 4 All ER 639 [54], [61] (Lords Hodge and Kerr). See eg VP Goldberg, “Relational Exchange: Economics and Complex Contracts” (1980) 23 Am Behav Sci 337; CJ Goetz and RE Scott, “Principles of Relational Contracts” (1981) 67 Va L Rev 1089; RE Speidel, “Relational Contract Theory: The Characteristics and Challenges of Relational Contracts” (2000) 94 Nw U L Rev 823; L Mulcahy and C Andrews, “Baird Textile Holdings v Marks & Spencer plc Judgment” in R Hunter, C McGlynn and E Rackley (eds), Feminist Judgments: From Theory to Practice (Hart Publishing 2010) 193; C Mitchell, Contract Law and Contract Practice: Bridging the Gap Between Legal Reasoning and Commercial Expectation (Hart Publishing 2013) ch 6; D Campbell, “Good Faith and the Ubiquity of the ‘Relational’ Contract” (2014) 77 MLR 475. Scattered examples include: Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612 [236] (Hammond J) (retail business format franchise; New Zealand High Court applying the law of New South Wales affirmed on other grounds in Dymocks Franchise Systems (NSW) Pty Ltd v John Todd and Alicia B Todd Bilgola Enterprises Ltd and Lambton Quay Books Ltd [2002] UKPC 50; [2002] 2 All ER (Comm) 849; Flyn v Breccia [2015] IEHC 547 (agreement between shareholders for acquisition of shares in a business); Bobux Marketing Ltd v Raynor Marketing Ltd [2001] NZCA 348; [2002] 1 NZLR 506 [42]–[45] (Thomas J dissenting) (distribution agreement); GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50 [351] (Finn J) (software development).

37

38 Contract in Commercial Law

the English High Court has adopted the label of “relational contract” in its reasoning. The types of commercial contracts concerned a distributorship for a product,5 a joint venture to exploit the digital form of educational materials,6 and a long-term service contract made by a private business to provide a county police authority with a car disposal and destruction service.7 What significance should be attached to this recent development in the judicial use of the phrase “relational contract”? It is possible that this usage of the label of “relational contract” is a passing fad that will soon be forgotten. Even if it persists, it may turn out that the label has little practical significance. But what importance might it have? What would be the consequence of recognising the idea of a relational contract as a legal concept? It might become a tight legal category of nominate contracts, like a sale of goods or a contract of employment, to which automatic legal consequences will be attached whenever the category is applicable to a particular transaction. In the case of the sale of goods, for instance, it is a legal concept because it offers a description of a determinate class of transactions,8 and applies particular and specialised legal rules to transactions within that class such as implied terms regarding title and quality of the goods.9 But the label of a relational contract might merely supply a looser concept that steers legal reasoning in particular directions, such as encouraging a more contextual approach to interpretation or a greater disposition to accept the existence of obligations to perform in good faith, without actually mandating any particular rules that should be applicable to the contract. In this looser form of legal concept, it may be hard to identify whether the label of relational contract directs legal reasoning or merely summarises a result. No doubt there are good reasons to be sceptical about the prospects for the creation of a new legal concept. Leaving aside the tendency of lawyers the world over to prefer to recycle old concepts rather than to invent new ones to deal with novel social and economic phenomena, there are some more immediate difficulties that this proposed new legal concept needs to address. The two most obvious problems are the lack of a clear definition or paradigm of a relational contract and considerable uncertainty about what legal consequences might flow from the application of the classification to a particular contract. With respect to the descriptive paradigm of a relational contract, though there is widespread agreement that it involves a long-term business relationship, it is unclear for instance whether such a relationship requires a long-term contract that binds the parties together over a substantial period of time. There is also scepticism about whether it makes sense to speak of a class of relational contracts as opposed to recognising that ‘relationality’ or perhaps more precisely “trust” is a feature of all contracts, though this dimension may vary between types 5 6 7 8

9

Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111; [2013] All ER (Comm) 1321 (QB). Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014] EWHC 2145 (Ch). D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB). Sale of Goods Act 1979, s 2(1): A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. Sale of Goods Act 1979, ss 12–15.



Ch 3  Is a Relational Contract a Legal Concept? 39

of transactions in its extent and significance.10 Assuming that a paradigm of a relational contract can be devised, many questions persist regarding the possible legal effects of the application of that classification, including the question whether there is or should be any legal effect at all. In particular, the frequent suggestion that relational contracts require the imposition of an implied legal duty of fair dealing and performance in good faith is likely to provoke controversy. Before tackling those questions directly, it is helpful to examine briefly the three recent cases in the English High Court where the phrase “relational contract” has apparently been used as a legal concept. Having considered that trilogy, we can then explore further these issues concerning the paradigm of relational contract and the legal consequences attached to the paradigm, before reaching a conclusion as to whether relational contract is now a legal concept. That exploration will draw heavily on research in sociology and economics, where the concept of a relational contract has been widely employed.

The Trilogy of Relational Contracts Yam Seng Pte Ltd v International Trade Corporation Ltd11 Yam Seng concerned a contract for the distribution of bottles of fragrances and other toiletries primarily through duty free shops in airports in south east Asia. The brand of the fragrances was “Manchester United” and the packaging used the insignia of the soccer team. Given the worldwide popularity of the brand name, presumably it was expected that consumers would purchase the products as a way of identifying with their heroes. (I can imagine the advertising catchphrase: “I go all swooney when you smell like Wayne Rooney”; or perhaps “Man U smell good”.) The contract between the two businessmen, trading as small companies, was brief and relatively informal, but it described how the defendant had a worldwide license to manufacture and sell fragrances under the Manchester United brand name and that the claimant would have exclusive rights to market the fragrances in particular locations including some duty-free shops in airports in south east Asia. As well as complaining about misrepresentations made by the defendant prior to entry into the contract, the claimant argued that the defendant had committed a breach of contract when it permitted sales of the branded fragrances in ordinary shopping outlets in Singapore at prices as much as 20% below those specified for sales in the duty free airport outlets where the claimant was marketing the products. Leggatt J found that although the defendant had not deliberately permitted this under-cutting of the prices charged in the duty free shops by other distributors, he had failed to co-operate either by stopping the undercutting or by alerting the claimant to his inability to prevent it. This 10

D Campbell, “Arcos v Ronaasen as a Relational Contract” in D Campbell, L Mulcahy and S Wheeler (eds), Changing Concepts of Contract: Essays in Honour of Ian Macneil (Palgrave Macmillan 2013) 138; D Campbell, “The Relational Constitution of the Discrete Contract” in D Campbell and P Vincent-Jones (eds), Contract and Economic Organisation: Socio-Legal Initiatives (Dartmouth Publishing Co Ltd 1996); H Collins, Regulating Contracts (OUP 1999) 141. 11 Yam Seng (n 5).

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failure undermined the business model of this particular distributorship under which the claimant would be able to market the goods in duty-free outlets at slightly discounted prices and it also put him in breach of contract with the duty-free retailers. Although the case was decided in favour of the claimant on the ground of misrepresentation, Leggatt J also held that there was a repudiatory breach of contract based on breach of an implied term requiring honest conduct because “the nature of the dishonesty, on a matter of commercial importance …, was … such as to strike at the heart of the trust which is vital to any long term commercial relationship, particularly one which is dependent as this relationship was on the mutual trust of two individuals.”12 The reasoning in this case seems to proceed from a finding that the distribution agreement was a relational contract, to the insertion of an implied term requiring good faith in the sense of honest disclosure of material information needed for the success of the commercial enterprise by maintaining trust. Leggatt J described a relational contract as “a longer-term relationship between the parties to which they make a substantial commitment”.13 In addition, Leggatt J pointed to an implicit understanding of the parties founded on a perception of what is necessary to give business efficacy to their transaction: they will communicate, co-operate, not act in a way to destroy mutual trust and confidence, and be loyal. The particular implied legal obligation that Leggatt J envisaged as arising from this relational contract seems to have been a duty to disclose information that was vital to the success of the business operation, breach of which harmed the interests of the claimant without any compensating advantage to the defendant, since he did not benefit from the higher retail sales price in the high street, and so the defendant’s conduct failed to defend this distributorship against its competitors. In other words, there had been a clear breach of an implied term requiring loyalty to the purpose of the contract and co-operation through being honest and keeping the other party properly informed.

12 Yam Seng (n 5) [171]. 13 Yam Seng (n 5) [142]. “In some contractual contexts the relevant background expectations may extend further to an expectation that the parties will share information relevant to the performance of the contract such that a deliberate omission to disclose such information may amount to bad faith. English law has traditionally drawn a sharp distinction between certain relationships – such as partnership, trusteeship and other fiduciary relationships – on the one hand, in which the parties owe onerous obligations of disclosure to each other, and other contractual relationships in which no duty of disclosure is supposed to operate. Arguably at least, that dichotomy is too simplistic. While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer-term relationship between the parties which they make a substantial commitment. Such ‘relational’ contracts, as they are sometimes called, may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long term distributorship agreements.”



Ch 3  Is a Relational Contract a Legal Concept? 41

Bristol Groundschool Ltd v Intelligent Data Capture Ltd 14 The phrase “relational contract” was next applied in Bristol Groundschool to a contract that may best be described as a kind of joint venture. The claimant had developed a business of writing and publishing training manuals for pilots. To create and exploit a digital version of the product, the claimant contracted with the defendant, who turned the manuals into digital form with some added functionality. The parties published the digital manuals jointly and agreed to share the costs of production equally. The defendant received a royalty fee of £200 on every copy sold. As the relationship slowly soured, in anticipation of termination of the joint venture, the claimant secretly accessed the defendant’s database via a VPN network link, which had been provided for other purposes, in order to download digital materials. A year later, after the relationship became extremely acrimonious, the joint venture fell apart. The claimant used the downloaded files to link up with another supplier to continue the digital side of the business. One issue before the court was whether the secret download was a breach of contract. There was no express term that covered this question. Richard Spearman QC sitting as a Deputy High Court Judge, cited the decision and description of relational contract in Yam Seng with approval, and concluded that this joint venture was also a relational contract. It fell within the description of a relational contract because the joint venture was a long-term relationship, to which the parties had both made financial commitments, and in the evidence of the parties during the trial it was acknowledged that they needed to act towards each other in a trustworthy and honest way. The judge held that, as the contract was a relational contract, there was an implied term requiring good faith in performance. In this context, the requirement of good faith was higher than honesty in the sense of the avoidance of fraud. The relevant test was that of conduct that would be regarded as “commercially unacceptable” by reasonable and honest people in the particular context involved,15 a standard that the defendant had breached.

D&G Cars Ltd v Essex Police Authority 16 The third recent decision in which the label of “relational contract” was attached to a commercial contract was D&G Cars Ltd v Essex Police Authority. This contract was a five-year franchise or exclusive license under which the police authority granted a private contractor the right to dispose of cars in accordance with the police authority’s instructions. These cars might have been stolen, involved in an accident, owned by someone without insurance, used in evidence in a case, or else come into the possession of the police in some other way. Instead of crushing one car completely, as instructed by the police authority, the contractor used the vehicle as a “ringer” to demonstrate to staff 14 Bristol Groundschool (n 6). 15 Bristol Groundschool (n 6) [196], citing Royal Brunei Airlines Sdn v Tan [1995] 2 AC 378 (PC); Yam Seng (n 5) [144]; Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200 [150] (Beatson LJ). 16 D&G Cars (n 7).

42 Contract in Commercial Law

how the chassis and parts of vehicles could be exchanged without detection so that an apparently almost new car could be created out of older parts. As a result of a tip-off, it was discovered that the car that had been sent to be crushed was a different one, albeit with the correct transferred registration and chassis numbers, and that the claimant was using the condemned car for its own business. On discovering this disobedience or carelessness in carrying out instructions, the police authority removed the franchise and excluded the contractor from bidding for a new one. The claimant argued that this termination was a fundamental breach of contract and sought damages of about £1 million. Conversely, the defendant insisted that it had merely accepted the claimant’s repudiatory breach of contract. Dove J described this contract as “a relational contract par excellence”.17 It was a long-term contract and relationship; the court stressed the need for the contractor to act with integrity and honesty in carrying out the instructions of the police authority, which itself was acting on behalf of the public in dealing with these cars. In addition, the cars were never the property of the contractor, but were owned by the registered owner or had been confiscated by a legal process, so the contractor had to take care of the cars, especially if it was required eventually to return a vehicle to its owner. In this case, the implied term was described not as one of good faith but rather as a term that the parties would act with honesty and integrity in operating the contract.18 Dove J explained his use of different language as setting a standard that was not merely about dishonest behaviour but concerned conduct that was inconsistent with the maintenance of the long-term relationship.19 It is noticeable that some of the language used to describe the implied term in this case invoked the implied term found in contracts of employment, namely the obligation on employers (and employees) not to act, without good reason, in a manner likely to destroy mutual trust and confidence between the parties.20 The court concluded on the facts that there had been a serious breach of the express term in relation to following the disposal instructions of the defendant and a breach of the implied term of honesty and integrity, even if it were the case that the conduct of the contractor had not been deliberately dishonest and fraudulent.21

17 D&G Cars (n 7) [176]. 18 D&G Cars (n 7) [176]. 19 D&G Cars (n 7) [175]. “By the use of the term ‘integrity’, rather as Leggatt J uses the term ‘good faith’, the intention is to capture the requirements of fair dealing and transparency which are no doubt required (and would, to the parties, go without saying) in a contract which creates a long-standing relationship between the parties lasting some years and which has the qualities and features to which I shall turn shortly. There may well be acts which breach the requirement of undertaking the contract with integrity which it would be difficult to characterise definitively as dishonest. Such acts would compromise the mutual trust and confidence between the parties in this long-term relationship without necessarily amounting to the telling of lies, stealing or other definitive examples of dishonest behaviour. They would amount to behaviour which the parties would, had they been asked, have identified as obvious acts which were inconsistent with the maintenance of their intended long-term relationship of fair and open dealing and therefore would amount to a breach of their contract.” 20 Malik v Bank of Credit and Commerce International SA [1998] AC 20 (HL). 21 D&G Cars (n 7) [203]–[205].



Ch 3  Is a Relational Contract a Legal Concept? 43

The emerging legal concept of a relational contract This trilogy of cases suggests that the idea of a relational contract is a legal concept in the sense that the judges have in mind a descriptive paradigm of a relational contract and, having identified the existence of a relational contract, they are prepared for that reason to imply contractual obligations such as duties of fair dealing, good faith, and mutual trust and confidence. But much remains unclear. A relational contract is still an incipient legal concept, for which the details need to be fleshed out rather more. What are the elements of the descriptive paradigm of a relational contract that are being used in these cases? Drawing together the threads of the definition used in these cases, we can observe that emphasis is placed on the following four features of the transaction which draw it into the paradigm of a relational contract. (1) A long-term business relationship; (2) investment of substantial resources by both parties; (3) implicit expectations of co-operation and loyalty that shape performance obligations in order to give business efficacy to the project; and (4) implicit expectations of mutual trust and confidence going beyond the avoidance of dishonesty. These elements in the paradigm provide a useful start, though they require further refinement and elaboration before they can provide us with a workable paradigm of a relational contract. With respect to the legal rules that arise from the application of the concept of a relational contract, in these cases the legal consequence has been the development of an implied term, breach of which is treated as a repudiatory breach of contract. The terms implied into these relational contracts concerning good faith, fair dealing, and mutual trust and confidence are certainly not regarded by the High Court as being the same as fiduciary duties, but nor are they merely a rudimentary requirement of honest conduct, such as a duty to refrain from fraud, which in any event is likely to be applied as a bare minimum standard to every contract.22 The precise content of the duties inserted by implied terms into relational contracts will evidently depend on the context and purpose of the transaction, the express undertakings made by the parties, and the acknowledged implicit expectations of the parties. But two elements of these implicit obligations stand out: expectations of co-operation and loyalty in order to give business efficacy to this kind of transaction, and the avoidance of actions likely to destroy mutual trust and confidence between the parties. Although Leggatt J fairly described these implied terms as terms implied in fact or ad hoc terms suitable for a particular contract, in the long run this characterisation may turn out to be inaccurate. If it becomes the practice of the courts to insert such terms routinely into particular types of contracts that have been labelled as relational contracts, it seems that the terms would 22 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6; [2003] 2 Lloyd’s Rep 61; Bhasin v Hyrnew 2014 SCC 71; 2014 3 SCR 494.

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be more properly classified as ones that are implied by law into all contracts of this type.23

Lessons from Social Sciences? Although more instruction can be derived from these cases, at this point it is helpful to consider the insights of the scholarly literature regarding relational contracts in the social sciences. Unlike legal scholars, sociologists and economists tend not to be much interested in the normative implications of their analyses or what legal rules should apply to a particular case. But their interest in the empirical practices of transactions has the potential to offer insights regarding the special characteristics of relational contracts beyond those mentioned in the above trilogy of cases. These insights should assist in constructing a legal paradigm for relational contracts and may offer indirect guidance on the issue of the appropriate legal and regulatory framework to govern relational contracts. In pursuit of that purpose, we will consider briefly three strands in that literature: the sociology of embedded exchange; the economics of selfenforcing contracts or relational contracts; and the institutional economics theory of quasi-integration.

The sociology of embedded exchange Ian Macneil launched the concept of a relational contract.24 Although he was a professor of law, his perspective on contracts was thoroughly sociological. Macneil’s views evolved during the course of his career,25 but a consistent central proposition of his work maintains that any proper understanding of contracts as a social phenomenon needs to appreciate that they are embedded in social structures and norms.26 Macneil contrasted this contextual approach towards understanding contracts with the approach of classical contract law, which was said to look merely at the terms of the express contractual agreement and not at the full context of their exchange relationship. He labelled a thoroughly contextual approach that took into account all the implicit normative understandings between the parties the “relational contract” approach. He further insisted that for the purpose of understanding contracts, both sociologically and in law, there were some kinds of deeply embedded contracts, somewhat confusingly described as “relational contracts”, as opposed to discrete contracts, for which it 23 For the contrast between terms implied in fact and terms implied by law and how these classifications can be manipulated see: E Peden, “Policy Concerns Behind Implications of Terms in Law” (2001) 117 LQR 459; H Collins, “Implied Terms: The Foundation in Good Faith and Fair Dealing” (2014) 67 CLP 297, 301–09. 24 IR Macneil, “Contracts: Adjustment of Long-term Economic Relations under Classical, Neoclassical, and Relational Contract Law” (1978) 72 Nw U L Rev 854. 25 The variations are expertly charted in D Campbell, “Ian Macneil and the Relational Theory of Contract” in D Campbell (ed), The Relational Theory of Contract: Selected Works of Ian Macneil (Sweet & Maxwell 2001) 3. 26 IR Macneil, The New Social Contract (Yale UP 1980); similar views can be found in earlier sociological studies of contracts: S Macaulay, “Non-Contractual Relations in Business: A Preliminary Study” (1963) 28 Am Soc Rev 45; M Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness” (1985) 91 Am J Soc 481.



Ch 3  Is a Relational Contract a Legal Concept? 45

was essential to investigate the whole context and the implicit norms extremely thoroughly in order to understand properly all the normative dimensions of the transaction.27 In contrast, such an extensive contextual exercise was mostly unnecessary for a complete understanding of simple discrete transactions such as the purchase of a newspaper at a kiosk.28 Those points created the impression that in Macneil’s view, there exists an identifiable category of contracts that could be described as “relational contracts”, in which the appropriate legal method, unlike the normal method applicable for discrete contracts, should involve extensive examination of the implicit expectations of the parties. But eventually, in response to criticism,29 it became apparent that such a sharp conceptual distinction was not what Macneil intended to say: he argued that the context of an exchange matters for an understanding of all contracts, because they are normally embedded in prior social relations. His claim was rather that the focus of traditional contract law on the original express agreement between the parties might function reasonably successfully when applied to relatively short-term, discrete transactions, but in more complex, long-term, transactions that require co-operation and perhaps flexibility, to understand the expectations of the parties and how the transaction was supposed to function, the focus must be much broader and embrace the entire relationship between the parties as it has developed.30 Although Macneil does not ultimately support the claim that there is a class of contracts that can properly be described as relational, he does suggest that at the relational end of a spectrum of types of contractual relationships, the classical approach to the analysis of contracts will prove defective, because it fails to examine the unexpressed expectations of the parties and their implicit undertakings. Macneil frequently offers the example of a contract of employment as one that usually lies at the relational end, because both employer and employee will have expectations that go beyond the formal exchange of work for wages, such as the expectation that the employee will work hard and be loyal to the interests of the employer. Those expectations will usually be protected by terms implied by law in the contract of employment.31 It seems that Macneil would favour interpretative techniques or implied terms that protect implicit expectations of this kind in other types of commercial transactions at the relational end of the spectrum. Macneil does not automatically classify long-term contracts as relational contracts, though the two categories overlap and are frequently confused.32 It is certainly more likely in long-term contracts such as employment and business franchises that the formal agreement will prove incomplete in its planning for future 27 IR MacNeil, “Relational Contract Theory: Challenges and Queries” (2000) 94 Nw U L Rev 877, 881; IR Macneil, quoted in Campbell (ed), The Relational Theory of Contract (n 25) 368. 28 IR Macneil, “Relational Contract: What We Do and Do Not Know” (1985) Wis L Rev 483. 29 See eg D Campbell, “The Relational Constitution of the Discrete Contract” in D Campbell and P Vincent-Jones (eds), Contract and Economic Organisation: Socio-Legal Initiatives (Dartmouth Publishing Co Ltd 1996) 40. 30 Macneil (n 24) 890. 31 British Telecommunications plc v Ticehurst [1992] ICR 383 (CA). 32 See eg Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 (QB) (Lord Steyn); E McKendrick, “The Regulation of Long-Term Contracts in English Law” in J Beatson and D Friedman (eds), Good Faith and Fault in Contract Law (OUP 1995) 305.

46 Contract in Commercial Law

contingencies and that it will be appropriate for a court to flesh out the agreement by reference to implicit understandings and expectations. Ultimately, however, Macneil fails to provide a description or paradigm of relational contracts: the category consists rather of those kinds of transactions where it is appropriate to embark upon a deeper investigation of the context in order to ascertain properly the implicit obligations and understandings that inform the contractual undertakings.

Relational contracts in economic theory The idea of relational contracts also appears in economic analysis of transactions. “The literature on relational contracts is concerned with the impact of the ongoing nature of the relationship on trade between the parties, on their payoffs, on the nature of any legally enforceable contract used to supplement the relational contract, and on the design of organizations.”33 The core insight of this analysis is that some transactions will be “self-enforcing” in the sense that the pay-offs for both parties will usually be greater if the contract or business relationship is continued rather than discontinued, so they tend to perform their contracts as best they can and maintain their business relationship.34 An example of this type of relational contract might be a “requirements contract”, under which a supplier agrees to meet all the customer’s needs for a product or service over a period of time if and when the purchaser chooses to place an order. Under the common law, owing to the absence of consideration in the form of a promise to buy something, such requirements contracts are unlikely to be legally enforceable. Even so, most suppliers regard requirements contracts as extremely beneficial,35 because in practice the agreement is likely to channel a lot of business between the firms. This is favoured not because there is anything that is legally binding in the long-term relationship, but because of the long-term economic incentives for both parties in nurturing and staying loyal to the business relationship. It is the long-term economic interest of both parties in sharing the surplus arising from the relationship that binds the parties together and provides the crucial incentive to perform satisfactorily. A similar analysis can be applied to casual workers, including those working under “zero hours contracts”, where strictly speaking there may not be a binding umbrella or long-term contract between the parties owing to the lack of consideration.36 In practice, despite the absence of legal sanctions, the casual worker is likely to enjoy stable employment because both parties have incentives to continue the relationship: the employer wants to keep a regular pool of staff on which to draw and the worker needs a regular income each week. This kind of legally unenforceable relational contract that is nevertheless a crucial and almost permanent business relationship was also at the heart of the dispute 33 JM Malcomson, “Relational Incentive Contracts” in R Gibbons and J Roberts (eds), The Handbook of Organizational Economics (Princeton UP 2012) 1014, 1015; J Levin, “Relational Incentive Contracts” (2003) 93 Am Econ Rev 835. 34 LG Telser, “A Theory of Self-enforcing Agreements” (1980) 53 J Bus 27. 35 S Macaulay, “Non-Contractual Relations in Business: A Preliminary Study” (1963) 28 Am Soc Rev 45. 36 Carmichael v National Power plc [1999] ICR 1226 (HL).



Ch 3  Is a Relational Contract a Legal Concept? 47

between a preferred supplier and a retail chain in Baird Textile Holdings Ltd v Marks & Spencer plc,37 a case to which we will return in a moment. The importance of the pay-offs from long-term business relationships as a self-enforcing mechanism may also explain why, in the event of defective or tardy delivery of goods, businesses typically prefer to grant a discount on future orders from the injured party rather than offer immediate compensation.38 This behaviour fits into a more general observed pattern of the avoidance of litigation whenever a long-term business relation needs to be preserved,39 because the long-term pay-offs from future business deals are greater than any short-term gain from an insistence on contractual rights. The economic model of relational incentive contracts stresses the special importance of these contracts as a business framework in those instances where it may not be possible to measure and verify accurately whether the performance of the parties reaches the expected standards under the contract. If the contract requires “best efforts”, “good faith”, or “innovation” in performance, or confers a discretionary power to address future contingencies or reward good performance, it is not easy for the parties or a court to assess whether the expected standard has been met or the power exercised appropriately. Where there are long-term pay-offs from meeting expectations as far as possible, either in the form of anticipated future business deals or perhaps in receipt of a discretionary bonus payment, this relational incentive quality of the agreement is likely to avoid the need to litigate.40 Where a legal dispute does arise, this economic theory might be interpreted as suggesting that a court should strive to ensure that the pay-offs are preserved in order to serve the goal of the reduction of litigation and the maintenance of the expected benefits from continuation of the business relationship. A court might seek to imply terms that will sustain a relational contract even when the long-term pay-offs are relatively small and may not invariably be enough to provide a sufficient incentive to perform according to expectations. For instance, a legal analysis might need to interpret the obligations of the parties under a binding contract in such a way that the legal duties do not permit one party to frustrate that logic of long-term pay-offs. That analysis applies neatly to Yam Seng: by permitting stores in ordinary shopping malls to sell the product for less than the price in the duty free outlets, the action was bound to frustrate the commercial operation of the distributorship in duty-free shops before long by disrupting the pay-offs for the distributor. In cases where the performance expectation has probably been satisfied but the other party has declined to 37 [2001] EWCA Civ 274; [2002] 1 All ER (Comm) 737. 38 Levin (n 33) 836; H Beale and T Dugdale, “Contracts between Businessmen: Planning and the Use of Contractual Remedies” (1975) 2 Brit J Law & Soc 45, 59; Comment, “The Statute of Frauds and the Business Community: A Re-Appraisal in Light of Prevailing Practices” (1957) 66 Yale LJ 1038, 1061. 39 S Macaulay, “An Empirical View of Contract” (1985) Wis L Rev 465; Collins, Regulating Contracts (n 10) 323–30. 40 WB MacLeod and JM Malcomson “Motivation and Markets” (1998) 88 Am Econ Rev 388; cf S Helper and R Henderson, “Management Practices, Relational Contracts, and the Decline of General Motors” (2014) 28 J Econ Perspectives 49, 55: relational contracts defined as “agreements based on subjective measures of performance that could neither be fully specified in advance nor verified after the fact and were thus enforced by the shadow of the future”.

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reward it by conferral of a discretionary bonus, it would be appropriate for a court to intervene, as they do, to prevent such an irrational exercise of a discretionary power.41 A more puzzling situation for legal regulation concerns those long-term business relationships, such as a preferred supplier under a requirements arrangement, where there is arguably no binding long-term contract at all. Economic relational contract theory tells us that these arrangements are self-enforcing because of the pay-offs arising from the business relationship in the long run. But litigation will occur presumably, as in Baird Textile Holdings Ltd v Marks & Spencer plc,42 when one party decides that the payoffs arising from continuation of the business relationship are insufficient in comparison with alternative market opportunities and so walks away from the relationship. Economic relational contract theory explains why it is perfectly sensible not to bother with a binding long-term contract when the pay-offs from the relationship are high, so it makes commercial sense to reach the legal conclusion that Marks & Spencer plc were not legally bound to a long-term contract. On the other hand, it might be argued that Baird Textile was under a misapprehension, fostered by the conduct of Marks & Spencer, that those pay-offs that sustained this long-term business relationship were still in place. And so Marks & Spencer, if aware of this misapprehension, should perhaps have been under a duty to inform Baird Textile of the change of circumstances and their imminent exit from the supplier relationship; a failure to do so at the earliest opportunity might justify a legal claim for compensation for wasted expenditure or missed opportunities to avoid loss that occurred whilst labouring under this misapprehension.43 Alternatively, this economic perspective might be used to justify an award of compensation to mimic what the parties already believed was present in their transaction,44 namely economic incentives to continue the relationship such as the profits that would have been made by the sale of products made by Baird Textile in the next season in the retail outlets of Marks & Spencer. In this context, the economic theory of relational contracts provides a reason for thinking that there was no long-term binding contract between the parties, as the English Court of Appeal decided, but the theory does raise questions about whether the law, in providing support for relational transactions of this type, should require disclosure as soon as possible of the vital information that pay-offs that sustain the long-term business relationship are no longer believed to be present.

41 See eg Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL); Abu Dhabi National Tanker Co v Product Star Shipping Company Ltd (The “Product Star”) (No 2) [1993] 1 Lloyd’s LR 397 (CA); Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287; [2005] ICR 402; Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s Rep 558; cf H Collins, “Discretionary Powers in Contracts” in D Campbell, H Collins and J Wightman (eds), Implicit Dimensions of Contract: Discrete, Relational, and Network Contracts (Hart Publishing 2003) 219. 42 [2001] EWCA Civ 274; [2002] 1 All ER (Comm) 737. 43 This seems to have been the gist of the claim for breach of an implied duty of good faith in Bhasin v Hyrnew (n 22). 44 D Charney, “Non-legal Sanctions in Commercial Relationships” (1990) 104 Harv L Rev 373; Collins, Regulating Contracts (n 10) 120.



Ch 3  Is a Relational Contract a Legal Concept? 49

Institutional economics and quasi-integration Institutional economics argues that relational contracts provide a particular institutional structure for the organisation of production and the division of labour, which occupies a middle ground between markets and organisations (or firms).45 In markets, contracts for goods and services are made between parties with somewhat antagonistic interests in the sense that although both expect to be better off as a result of the exchange, their pay-offs from a particular transaction will depend to a considerable extent on reducing the benefit to the other party by, for example, paying a lower price for the goods and services provided by the other party. Within organisations, however, although there is a network of contracts that bind the parties together, such as contracts of employment, share ownership, and directorships, some of these contracts are supplemented by a mechanism that requires co-operation from everyone to maximise the profits of the organisation itself, the profits then being distributed according to the remuneration formula set by the contracts.46 In the case of employees, for instance, though the level of their remuneration is in part determined by antagonistic bargaining with the employer, the opportunity for the worker to earn higher pay is determined also, in part, in the long run, by the efficiency and profitability of the organisation as a whole, which in turn may depend to some extent on the contribution and effort of the worker. The law reflects the economic logic of the organisation by imposing duties of loyalty on its productive members: the directors of a company owe fiduciary duties, whilst employees and managers owe duties of loyalty and good faith. The crucial variable that determines the incidence of legal obligations of loyalty and co-operation is the point at which the contract falls on the spectrum between market and organisation. International commodity sales are at the extreme market end of the spectrum and so give rise to no duties of loyalty and cooperation other than those explicitly agreed; business partnerships lie at the other organisational end and require a close approximation to fiduciary duties. Institutional economics is mostly focussed on the reasons for selecting a market or organisational framework. Considerable emphasis is placed on the point that the costs of writing contracts or the inability to write complete contracts that deal adequately with every future contingency drive parties towards an institutional or organisational framework. Given those problems, however, the parties may not need to or wish to integrate fully within a single organisation, but may prefer and be able to construct an intermediate position that might be described as a relational contract. Goetz and Scott suggest how that problem of writing contracts to deal with contingencies explains the incidence of relational contracts,47 45 RH Coase, “The Nature of the Firm” (1937) 4 Economica, New Series 386; OE Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (Free Press: A Division of Macmillan Inc 1985). 46 See eg D Campbell and D Harris, “Flexibility in Long-term Contractual Relationships: The Role of Co-operation” (1993) 20 JLS 166, 167: “The parties are not aiming at utility-maximization directly through performance of specified obligations; rather, they are aiming at utilitymaximization indirectly through long-term co-operative behaviour manifested in trust and not in reliance on obligations specified in advance”. 47 Goetz and Scott (n 3) 1091.

50 Contract in Commercial Law “A contract is relational to the extent that the parties are incapable of reducing important terms of the arrangement to well-defined obligations. Such definitive obligations may be impractical because of inability to identify uncertain future conditions or because of inability to characterize complex adaptations adequately even when the contingencies themselves can be identified in advance.”

This description of a relational contract emphasises two problems. The first concerns the task of addressing all future contingencies, which is a standard problem for any long-term transaction. What makes relational contracts special is the second problem, which is the inability to plan completely through the express terms of the contract how to manage and adapt to even clearly foreseeable contingencies. This second problem concerns the recognition that in an on-going relationship, co-operative changes will be required, though it is hard to say anything more specific than that. As a possible solution to both problems, the contract might confer power on one party to determine all the necessary interstitial adjustments, as in the case of the employer’s power to direct labour and the employee’s duty to comply with those instructions. Where such a dictatorial power or vertical integration is unacceptable, the parties to a contract must accept some kind of duty of cooperation or flexibility in order to secure the adaptations to the contract that are necessary for the success of the enterprise. Such a contract that requires cooperation and loyalty as an implicit obligation might be labelled as a hybrid or an instance of quasi-integration, for it borrows some elements of an integrated organisation in the form of obligations of loyalty and co-operation, whilst preserving most other features of standard market transactions.48 In business format franchise agreements such as fast food restaurants, for instance, the franchisor and franchisee remain separate business entities, but they cooperate for the purpose of marketing a product or service. Both parties have an interest in maximising retail sales, for which purpose they will need to cooperate intensively, yet both parties have an interest in maximising their own returns on their investment by securing a greater share of the profits in the franchise agreement. The underlying economic logic in these quasi-integration arrangements is driven both by the market and the organisation: parties must both compete and co-operate.49 48 Other labels for these instances of quasi-integration include “symbiotic contracts”: E Schanze, “Symbiotic Contracts: Exploring Long-Term Agency Structures Between Contract and Corporation” in C Joerges (ed), Franchising and the Law: Theoretical and Comparative Approaches in Europe and the United States (Nomos Verlagsges MBH & Co 1991) 67; and “networks”: WW Powell, “Neither Market nor Hierarchy: Network Forms of Organisation” (1990) 12 Research in Organizational Behavior 295; G Thompson, J Frances, R Levacic and J Mitchell, Markets, Hierarchies & Networks: The Coordination of Social Life (Sage Publishing 1991); A Grandori and G Soda, ‘Inter-firm Networks: Antecedents, Mechanisms and Forms’ (1995) 16 Organization Studies 183; RM Buxbaum, ‘Is “Network” a Legal Concept?’ (1993) 149 JITE 698; M Amstutz and G Teubner (eds), Networks: Legal Issues of Multilateral Co-operation (Hart Publishing 2009); G Teubner, Networks as Connected Contracts (H Collins ed, Hart Publishing 2011). 49 Collins, “Introduction”, to Teubner, Networks as Connected Contracts (n 48) 21–25; G Teubner, “Coincidentia Oppositorum: Hybrid Networks Beyond Contract and Organization” in Amstutz and Teubner (n 48) 3.



Ch 3  Is a Relational Contract a Legal Concept? 51

In Yam Seng Pte Ltd v International Trade Corporation Ltd,50 Leggatt J identified franchises, joint ventures, and distributorships as examples of contracts where greater duties of co-operation and good faith arise. Commercial agents should be added to the list.51 From the perspective of institutional economics, the reason why these contracts require as normal incidents greater duties of loyalty and co-operation than normal commercial contracts is not because they are long-term and not because the parties may have invested substantially in the project, though both of these features are likely to be present, but because the contract establishes a quasi-integrated system of relations of production with intensified contradictory pressures simultaneously both to co-operate and to compete in order to overcome problems of adaptation to foreseen and unforeseen contingencies. The economic logic of the relational contract is that both parties will be better off if they co-operate to maximise the size of the pie, such as sales in a franchise or distribution network, but simultaneously they still need to compete to obtain a greater slice of the profits arising from their labours. Each party needs to be co-operative and loyal to the general aim of the networked business enterprise, whilst ensuring that it obtains a fair share of the rewards. These expectations of loyalty and co-operation within relational contracts must fall short of those applicable to organisations, however, for both parties to remain residual profit-takers with antagonistic interests. Loyalty is owed, not each other, but rather to the relational contract itself as the embodiment of an independent business operation.52 This concept of a relational contract arguably fits the transactions in the trilogy of cases. The distribution agreement in Yam Seng53 made no attempt to specify all the details of the performance required from both parties, so they would have to adjust the relationship according to the circumstances pertaining in the different retail locations. As well as the problem of greater discounts in ordinary shopping malls than those available at the airports, the supplier also discovered to its surprise that it required a special license to sell the fragrances in China and that it, as the manufacturer rather than the distributor, would have to acquire that license at considerable cost, an unexpressed obligation that it failed to fulfil. Similarly, the joint venture in the Bristol Groundschool54 case could not specify exactly what was required to turn the product into a digital form successfully, though clearly the parties would have to co-operate and disclose relevant information. In D&G Cars v Essex Police,55 in some respects there is almost vertical integration arising from the contractor’s strict obligation to comply with the instructions of the police authority, breach of which on even a single occasion might destroy the mutual 50 Yam Seng (n 5). 51 Legislation provides the core implied term in this case, though framed as a remedy on termination: Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents [1986] OJ L 382/17 (Council Directive 86/653/EEC); implemented in the UK by The Commercial Agents (Council Directive) Regulations 1993, SI 3053 1993. 52 Teubner, Networks as Connected Contracts (n 48) ch 4, III; cf R Bohner, “Asset-sharing in Franchise Networks: The Obligation to Pass on Network Benefits” in Amstutz and Teubner (n 48) 153. 53 Yam Seng (n 5). 54 Bristol Groundschool (n 6). 55 D&G Cars (n 7).

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trust and confidence that was necessary for that relationship to continue. At the same time, however, the contractor earned its remuneration by disposing of the cars at a profit or by making insurance claims, so that it was acting primarily on its own account.

The Paradigm of a Relational Contract These examinations of the trilogy of cases in the English High Court and the social science theories of relational contracts may enable us now to give greater precision to a legal concept of a relational contract and its likely legal consequences. To mine this social science material is complex both because it does not address normative questions about the appropriate kind of legal regulation and because different branches of the social sciences produce different paradigms of relational contracts or at least descriptions with very different emphases. Even so, there seems to me to be sufficient overlap to create a productive synthesis.

Indeterminate performance obligations Many descriptions of the concept of a relational contract commence with a statement that they are long-term contracts. A reference to a long-term business relationship is central to the consideration of long-term pay-offs in the economic model and seems to figure strongly in the other analyses. For Macneil, the need in relational contracts to examine the context of a contract and how its performance obligations evolved is only likely to arise in the context of a long-term contract. Similarly, many of the co-ordination problems that relational contracts as a form of quasi-integration are designed to address arise from the inability to specify in advance contract terms that deal with unforeseen contingencies or contingencies that will require adaptation. The contracts involved in the trilogy of cases where the concept of relational contracts was employed by the High Court were all expected to last over many years. However, in the social science literature, a long-term contract is neither necessary nor sufficient for the presence of a relational contract. The necessary long-term business relationship could be constructed from an unenforceable business relationship such as a requirements agreement or an umbrella agreement for casual work, or it could comprise a succession of almost identical short-term contracts such as repeated orders for goods of a particular type from a specified seller. Conversely, it is quite possible that a long-term supply contract could have hardly any relational qualities, but be regarded instead as creating at arm’s length limited and determinate obligations between the producer and the customer.56 Similarly, a syndicated loan agreement with a term of 20 years or a mobile phone service contract for three years could have none of the features of a relational contract. What does seem to be important in the social science description of relational contracts is that the terms of the contract use indeterminate descriptions of the 56 See eg Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd [2013] EWHC 3251 (Pat).



Ch 3  Is a Relational Contract a Legal Concept? 53

expected performance obligations, in part because contingencies cannot always be foreseen, but more importantly because the precise needs for co-operation cannot be described clearly in advance, but will necessarily emerge during performance of the contract. The presence of vague terms in a contract does not, of course, make it necessarily a relational contract: it could simply be a poorly drafted one. But indeterminacy with respect to performance obligations is a necessary feature of relational contracts. This indeterminacy may be discovered in vague terms, general expressions of intention, gaps regarding important matters, statements of the kind that the parties will use best endeavours to achieve a goal or deal with contingencies, and explicit references to good faith in performance. This important distinction between determinate and indeterminate longterm contracts lay at the heart of the decision of the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest).57 In this contract for the provision by a private contractor of cleaning services to a public hospital, the express terms of the long-term contract specified detailed regulation of the contractor’s duties and how defects in performance should be treated through a penalty points system, though the contract did require good faith from one of the parties in respect of some aspects of performance. The Court of Appeal rejected any suggestion of a general duty to perform the contract in good faith. The court held that the contract provided a complete and measurable set of requirements for performance by the contractor, so that additional obligations of co-operation and good faith were unnecessary for business efficacy except where the parties had expressly provided for them. This rejection of the application of the concept of a relational contract or the legal standards associated with that concept seems to have been appropriate, for the contract, though involving some integration into the functioning of the hospital, was not an instance of quasi-integration that depended upon duties of co-operation and loyalty, but remained an arm’s length market contract. There was no lack of specificity in the terms of the contract in dealing with contingencies, so the court could eventually without much difficulty secure to each party their determinate entitlements under the contract. Thus this contract could not be classified as a relational contract from the perspective of the social science literature, and that view was followed implicitly by the Court of Appeal. Whether or not it makes sense to try to deliver public services through discrete contracts is, of course, another question.58 In addition, the Court of Appeal appears to have attached no significance to the point that there had been a breakdown of mutual trust and confidence between the parties, a matter that was regarded as crucial in D&G Cars because it was a public service contract.

Commitment Another factor often used to describe a relational contract is what Leggatt J referred to as a “substantial commitment” by both parties to the contract. However, this feature does not figure significantly in the social science literature 57 Mid Essex Hospital Services (n 15). 58 P Vincent-Jones, “The Limits of Contractual Order in Public Sector Transacting” (1994) 14 LS 364.

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regarding the concept of relational contracts and may be misleading. It is true that some economic theories predict that at a certain point the level of investments sunk irretrievably into a project will become so great that the parties will prefer the security and control of a single corporate organisation,59 but until that point is reached, the contractual framework of a joint venture or another type of relational contract should provide adequate protection for those investments.60 At the core of the idea of quasi-integration is certainly an idea that both parties will have to make a contribution to the successful outcome and in that sense make a commitment. It also seems to be the case that usually, if the parties commit to this relationship, either expressly or by implication, they are not supposed to commit to a rival business relationship such as a competing franchise. Yet the commitment may not have to be in the form of an investment that might be lost by premature termination of the contract, but may rather take the form of investments in skills and know-how. After a period of time in a successful relationship, it may become tempting to the parties to seek to improve their share of the rewards of their co-operation by threatening to exit the business relationship. That kind of strategic behaviour does not appear to be unique to relational contracts and indeed may be rarer given the potential pay-offs for both parties from continuing the business relationship. Although it may be correct to say that parties to relational contracts often make substantial commitments, that element does not seem to be an essential feature of these transactions. The entrepreneur in Yam Seng had spent time and effort establishing a distribution network at the airports, but had not made significant financial investments. There was a substantial investment by the defendant IT company in the development of a software programme in Bristol Groundschool and once the joint venture was established successfully, there was certainly a risk of strategic behaviour, which may have been the reason why the defendant surreptitiously seized the software platform as a kind of anticipatory retaliation. That kind of risk of behaviour that destroys mutual trust and confidence can be addressed by vertical integration,61 though at the cost of losing the incentive structures of a market transaction. The private contractor in D&G Cars seems not to have made significant new investments to take on the disposal work for the police. For these reasons, the proposed feature for relational contracts of a “substantial commitment” may not be a useful descriptive criterion, since it probably applies more broadly to long-term contracts, though in so far as it indicates a commitment to the success of the business relationship itself, it is likely to be a feature of relational contracts.

Indeterminacy and expectations That last remark brings us to the most puzzling aspect of constructing a paradigm for a relational contract, which concerns the dimension of 59 B Klein, “Fisher – General Motors and the Nature of the Firm” (2000) 43 JLE 105. 60 Goetz and Scott ((n 3) 1102) illustrate the kinds of protections available by reference to restrictive covenants not to compete and guarantees to buy back investments in plant and machinery. This problem of strategic behaviour is addressed in the EU by Council Directive 86/653/EEC. 61 G Baker, R Gibbons and KJ Murphy, “Relational Contracts and the Theory of the Firm” (2002) 117 Q J Econ 39.



Ch 3  Is a Relational Contract a Legal Concept? 55

psychological attitude or expectations. A hallmark of relational contracts is that the parties do not regard their written contract as a more or less complete statement of their rights and obligations, but expect that these obligations will evolve and be refined as the project develops. These expectations, though implicit, are nevertheless essential for business efficacy and the success of the project in the long run. Indeed, as Macaulay suggested, the parties may regard these commercial expectations as the central governing norms of their business relationship and will conform to those standards even when the written contractual obligations appear to point in a different direction.62 Where Macneil seems to have gone wrong in his analysis of relational contracts is that he argued that the source of legal rules to govern relational contracts should be general norms of reciprocal exchange behaviour.63 Whilst it may be true that implicit obligations in relational contracts may include generally shared values such as honesty and reciprocity, that is not a special feature of relational contracts. The distinctive expectations or implicit obligations of relational contracts will arise from the crevices and dynamics of a particular contractual relationship, and, as Leggatt J suggests in Yam Seng, 64 will typically be justified in accordance with the ‘business necessity’ test used for the ad hoc insertion of terms implied in fact.65 We should accept, therefore, that it will be a distinctive feature of the paradigm of a relational contract that these implicit undertakings or expectations will play a pivotal role in shaping the business relationship and guiding performance of the contract. While some implicit obligations will be present in all transactions, in relational contracts, where it is not possible to specify in verifiable detail in advance all aspects of performance during the productive activity, the parties will rely more heavily on these implicit expectations of co-operation, honesty, and loyalty to shape performance obligations. To sum up this analysis of the paradigm of a relational contract for the purpose of developing a legal concept, we have identified three key aspects. First, there is a long-term business relationship that will provide sufficient pay-offs to both parties to continue with the relationship even through periods of considerable adversity. Second, obtaining the benefits of the business relationship will require adaptation, co-operation, and evolution of performance obligations, so that indeterminate implicit obligations of this kind must be central to the deal. Third, these implicit indeterminate obligations must be understood as arising not from general moral standards or norms of reciprocity such as honesty, but will be tailored to achieve what is necessary to secure the success of the venture. Business necessity in this context requires the acceptance of obligations derived from the general concepts of co-operation and loyalty or commitment to the project.

62 S Macaulay, “The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules” in Campbell, Collins and Wightman (n 41) 51. 63 Macneil, The New Social Contract (n 26). 64 Yam Seng (n 5) [134]; cf Mitchell (n 3) ch 2. 65 The Moorcock (1889) 14 PD 64 (CA); cf Collins (n 23) 304–06.

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Legal Consequences of Relational Contracts Assuming we have constructed from the legal and social science materials a workable paradigm for relational contracts, it remains to identify the key legal consequences that will flow from the application of the legal concept of a relational contract. The most important legal consequence is that the approach to the interpretation of relational contracts must be relatively contextual. Given that implicit obligations regarding co-operation and trustworthiness are central to the economic dynamic of these transactions, when a court encounters such a transaction it should be appropriate to examine the whole context with a view to identifying not only the explicit obligations in any written documents but also the implicit expectations that were formed at the commencement of the contract and during its performance. To ignore those implicit obligations that form the life-blood of relational contracts and to adopt a purely formal approach that only examines the written contract would not be even close to an interpretation of the intentions and expectations of the parties. Such an interpretation would not match up to a “business common sense” interpretation of the contract.66 Most lawyers accept today that it is necessary to have regard to the context of a transaction in order to understand the meaning of the express terms.67 But the proposal advanced here is to go further and search the context for additional obligations that the parties recognise implicitly in their dealings but have not included in their contract. This proposed method is much more controversial, because it weakens the privileged position of the written text of the contract under classical contract law and as a consequence may render litigation more protracted.68 Advocates of traditional formalist interpretations of contracts argue that judges should stick to the written text of the contract, even in relational contracts, because courts lack the skills and information to go much beyond it, and that any such adventures will make the law less predictable and increase the costs of litigation.69 Such fidelity to the written text will also encourage the parties to address foreseeable problems explicitly in their contracts, which will in turn reduce the need for litigation. In response to these points, we must remember firstly that a defining feature of relational contracts is the necessary indeterminacy of performance obligations, even for foreseeable risks, so that the option of more comprehensive explicit contracts is not available. Secondly, given that the long-term business relationship relies for its existence and success on the acceptance by the parties of indeterminate obligations of co-operation and trustworthiness, unless the law insists on incorporating these implicit expectations in any interpretation 66 Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 [21] (Lord Clarke). 67 R Brownsword, “After Investors: Interpretation, Expectation and the Implicit Dimension of the ‘New Contextualism’” in Campbell, Collins and Wightman (n 41) 103. 68 For a survey and critique of this approach see eg H Beale, “Relational Values in English Contract Law” in D Campbell, L Mulcahy and S Wheeler (eds), Changing Concepts of Contract: Essays in Honour of Ian Macneil (Palgrave Macmillan 2013) 116. 69 RE Scott, “The Case for Formalism in Relational Contract” (2000) 94 Nw U L Rev 847; Morgan, “In Defence of Baird Textiles” in Campbell, Mulcahy and Wheeler (eds) (n 68) 166.



Ch 3  Is a Relational Contract a Legal Concept? 57

of the obligations arising from a contract, it will become a rogue’s charter by permitting opportunists and the unscrupulous to act in ways that fall below the reasonable expectations of the parties and the normal standards of commercial propriety. Thirdly, although there is some force in the objection that the precise formulation of the implicit obligations will prove difficult, in practice, as in the trilogy of cases discussed above, what a court will usually be asked to do is to approve one party’s use of the self-help remedy of acceptance of a repudiatory breach in response to conduct that violates those implicit obligations. This is a task that can be performed by reference to general standards such as good faith, co-operation, and mutual trust and confidence. In trying to describe this contextual approach to the interpretation of relational contracts in another paper on contracts of employment,70 my suggestion was that a court should view a relational contract, such as a contract of employment, in three dimensions. The first dimension that a court should consider is the express terms in a written contract, to which could be added any interpretations or implied terms that can be regarded as necessary additional implications to make sense of the explicit terms. Then, secondly, the court should enquire whether there might be additional implicit obligations that arise from the employment relationship if it was expected to last for a period of time or indefinitely. This second enquiry tries to match the obligations of the contract with the long-term pay-offs that were anticipated from the long-term contract or relationship. That dimension of the employment relationship might be exemplified by deferred expectations of remuneration such as bonuses, a pension entitlement, or promotions. The third dimension concerns trust or the preservation of the relationship itself, or what is sometimes called in connection with employment, the “psychological contract”.71 An implied term of mutual trust and confidence or a duty to perform in good faith is the normal legal mechanism that tries to articulate in the contract of employment and other relational contracts expectations of fair and equitable treatment, respect for human rights and difference, and obligations of loyalty to the relationship on both sides. Although it is a challenging process of legal reasoning for a court to take into account all three dimensions of the interpretation of contracts of employment at the same time, failure to do so is likely to produce a result that is perceived to be unjust to one of the parties because it deviates too much from their multi-dimensional expectations. Once that three dimensional approach to the interpretation of relational contracts is accepted, it suggests further that we should expect in relational contracts the development of implied or perhaps sometimes mandatory terms that try to articulate and defend the second and third dimensions of relational contracts that comprise implicit expectations about long-term pay-offs and trustworthy behaviour. 70 Collins, “The Contract of Employment in 3D” (n 10) 65. 71 DM Rousseau, “Psychological and Implied Contracts in Organizations” (1989) 2 Employ Respons Rights J 121; KVW Stone, “The New Psychological Contract: Implications of the Changing Workplace for Labor and Employment Law” (2001) 48 UCLA L Rev 519; JAM CoyleShapiro, LM Shore, MS Taylor and LE Tetrick (eds), The Employment Relationship: Examining Psychological and Contextual Perspectives (OUP 2004).

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For the second dimension, the relevant implied obligations can be loosely gathered together under the heading of a duty of co-operation for the purpose of achieving the long-term goals of the business relationship. Each project or type of relational contract may require particular instances of this general implied obligation for the purpose of supporting the co-operative goal. In contracts of employment, this duty to co-operate is described as an obligation “to serve the employer faithfully with a view to promoting those commercial interests for which he is employed”.72 In a distributorship such as the one involved in Yam Seng, in the view of the court, co-operation required honesty in communications, some disclosure of vital information, and a degree of loyalty to the project in the sense of avoiding actions that would defeat its business objectives. In a franchise operation, the duty of loyalty might comprise a duty not to undermine the business reputation of the franchise business or, as in Shell UK Ltd v Lostock Garage Ltd,73 a duty not to favour in-house retail outlets and large franchisees with large rebates whilst refusing them to small independent franchisees with little bargaining power, thereby forcing them to run their businesses at a loss, though only Bridge LJ accepted the existence of an implied duty of loyalty in that case. For the third dimension of interpretation of a relational contract, which tries to protect the trust on which the long-term relationship must be based, the appropriate implied term will include honesty in communications, but beyond that it is likely to include a duty of fair dealing and the avoidance of actions that are calculated to destroy mutual trust and confidence. As we have already noted, such obligations are not designed to impose moral standards on the parties to relational contracts. The aim is rather to provide support for what is a business necessity in these contracts, which is a measure of trust and fair dealing. In the employment context, it is evident that once there has been a complete breakdown of mutual trust and confidence, there is no way back to an efficient and effective employment relationship. Where successful performance of a commercial contract requires intense co-operation to a degree analogous with employment within a business, it is understandable that once suspicions of dishonesty, cheating, and opportunism begin to poison a relationship, there may be no way of retrieving the situation and proceeding with the project together. Even a single act of misconduct that has no adverse financial or reputational consequences for the other party may be sufficient to destroy mutual trust and confidence and prevent any workable continuation of the relational contract. In both Bristol Groundschool and D&G Cars, once the trickery had been exposed, the other party was not prepared to continue the relationship even though the long-term pay-offs might have been unaffected. Sometimes this breach of trust may be described as an act of disloyalty, not really meaning disloyalty to the other party, but rather disloyalty to the project by conduct such as helping a competitor that is almost certainly bound to frustrate the objectives of the long-term business relationship. 72 Secretary of State for Employment v ASLEF (No 2) [1972] 2 QB 455 (CA) (Buckley LJ). 73 [1976] 1 WLR 1187 (CA). For other examples of obligations of loyalty in networks see eg Seven Eleven Corporation of SA (PTY)Ltd v Cancun Trading No 150 CC, Case No 108/2004, 24 March 2005; Dymocks (n 4); Bohner (n 52).



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Conclusion Is the phrase “relational contract” now a legal concept? Although it is at an incipient stage, the building blocks of a legal concept of a relational contract seem to be in place. I have proposed a paradigm description of the three principal features of a relational contract that include a long-term business relationship in which indeterminate implicit expectations and obligations are essential to its successful performance. With respect to the legal consequences that flow from the application of the concept, my analysis supports what was described at the outset as a loose legal concept that points towards an approach rather than dictating particular rules. Under this looser legal concept, for relational contracts courts should pursue a more contextual approach towards interpretation. This approach should, in addition to taking full account of the express terms of the contract, give equal weight to the dimensions of supporting the long-term payoffs of the business relationship and preserving the necessary trust within the relationship. That task should usually be accomplished by implied terms that seek to articulate obligations of co-operation in support of the long-term payoffs and obligations of mutual trust and confidence to preserve the necessary trust between the parties. Notice that these legal consequences do not include necessarily a requirement of good faith in performance, whether optional or mandatory, though certainly conduct that may be described as bad faith might be challenged as behaviour that undermines co-operation or is calculated to destroy mutual trust and confidence.

4

The Doctrine of Consideration in Contract: Some Historical and Comparative Perspectives Susan Kiefel* The title of this chapter might suggest that it will be very short. On one view, no more need be said than that the requirement that consideration, in the sense of a quid pro quo,1 be given for an informal promise before that promise will be enforced is one known only to the common law. No true comparison with the requirements for enforceability of a contract found in other legal systems is therefore possible. Consideration has been described as “one of the central and most characteristic features of the English law of contract; and also one of its most problematic”.2 The continental lawyer is said to usually perceive it as “one of the strange and idiosyncratic features which have the effect of turning the English common law into such an ungodly and impenetrable jumble”.3 Criticism of consideration is not confined to continental lawyers. Many common law lawyers have even foretold its demise, yet it remains today. It is not my purpose to discuss the vexed question of whether the doctrine of consideration is necessary to our law of contract. I will not be looking to a future with or without the doctrine. The comparative perspectives to which I wish to draw attention require, in the first instance, an examination of the past. History allows a comparison with continental law ideas. When consideration made its first appearance in the common law, as a requirement of the action of assumpsit, it reflected continental ideas relating to the enforceability of promises. In the development of the law of contract, the common law continued to borrow ideas from the continent. If it had taken the path of civilian law, and focused on, as a singular requirement, the intention of the promisor to be bound, which was an entirely possible path of development at one point, the doctrine of consideration might have been relegated to being a matter

* 1 2 3

Justice of the High Court of Australia. My thanks to Professor Horst Lücke and Dr Birke Häcker for their most helpful suggestions. Any errors are entirely mine. Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 (HCA) 456–57, 461. Reinhard Zimmermann, The Law of Obligations – Roman Foundations of the Civilian Tradition (Clarendon Press 1996) 554. Zimmermann (n 2) 505.

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of evidence. The common law’s “flirtation” with civilian ideas4 in respect of agreements is generally regarded as having come to an end by the early 19th century. But did it? Later, the common law also developed, or borrowed, the doctrine allied to that of consideration; namely, that there be an intention to be bound. In doing so, the common law once again aligned itself with civilian law. Nevertheless, the primacy afforded to the doctrine of consideration means that there remain differences in the approaches of the common law and civilian law to the enforcement of promises. The common law’s refusal to recognise past consideration as sufficient, or to permit enforcement by third parties of promises made for their benefit, are examples of those differences. After tracing these developments and differences, I conclude by referring to the modern action which has been thought to undermine consideration – the action based on promissory estoppel. On one view this is merely a reflection of notions which inhered in the action of assumpsit. If that is so, we have returned to where it all began.

Concerns about Informal Promises The common law and the civil law have in common a concern to determine which promises should or should not be enforced. Four general, interrelated concerns may be identified in each of French, German and the common law which lead to treating transactions or arrangements as unenforceable.5 There is an unwillingness to enforce transactions considered to be suspect or of marginal value. There is a need to safeguard the individual against his or her own rashness and the importuning of others, and there is a need to ensure that the individual is aware that his or her actions have legal significance. The final concern, which affects courts most directly, is the need for evidentiary security, to safeguard against the manufacture of evidence and mitigate difficulties of proof. The civil law and the common law also have in common a requirement of formality in the case of entirely gratuitous promises. This is consistent, in particular, with the last two of the concerns just noted; reliable evidence is required to prove that the promisor of a gift intended to be bound by the promise. The common law requires that the necessary intention be evidenced by deed; civilian law requires that the promise be in writing, witnessed by a notary. Although the requisite evidence is thereby provided, these are actually substantive requirements of the common law.6 In civilian law, such formality will only be required when the promise is made out of pure generosity. There are many gratuitous promises which will be enforced as a valid contract despite a lack of formality. Civilian law distinguishes donations from other kinds of gifts, given for other reasons. Perhaps it recognises, as Marcel Mauss famously observed,7 that 4 5 6 7

KCT Sutton, “Promises and Consideration” in PD Finn (ed), Essays on Contract (Law Book Company of Australasia 1987) 50. Arthur T von Mehren, “Civil-Law Analogues to Consideration: An Exercise in Comparative Analysis” (1959) 72 Harv LR 1009, 1016–17. Cochrane v Moore (1890) 25 QBD 57 (CA) 75. Marcel Mauss, The Gift: The Form and Reason for Exchange in Archaic Societies (WD Halls tr, Routledge 1990) 4.



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the idea of a truly free gift is unreal; usually obligation and self-interest are involved and both the giver and the recipient understand this to be the case. This may be seen as reflected in 19th century decisions of French courts8 in which subscribers of money to a public cause were held to their word on the ground that their purpose was not to make a gift but a contractual promise. This was to be inferred from the advantage that they sought to gain in the increase in their social standing by their display of ostentatious generosity. Civilian courts will enforce a promise which appears to be in the nature of a gift if the promise was made for a reasonable purpose, the promisor intended to be bound by it and it would be unfair to permit reliance on a lack of form.

Early Notions of Consideration There has been concern about the enforcement of bare promises since Roman times. The principle of Roman law which is the starting point of the dilemma, ex nudo pacto non oritur actio (“no right of action arises out of a naked promise”), is said to have penetrated the English common law almost three centuries before the action in assumpsit was developed.9 Professor Scrutton explained that in Sir Henry Bracton’s view, nuda pacta were contracts which had not been partly performed or were not under seal and could therefore not be enforced in the King’s Court (Curia Regis). He continued, “[t]wo hundred years later it had come to mean, ‘a promise where nothing is assigned why it should be made’, an agreement without consideration”.10 In St German’s Doctor and Student, published in 1530, the doctor says (paraphrased in modern language), “[b]ut if his promise be so naked that there is no manner of consideration why it should be made, then I think him not bound to perform it”.11 Consideration is generally regarded as having developed as a means of limiting the action of assumpsit,12 but it is instead likely to have been an extension of an earlier doctrine developed in connection with conveyancing and the law of uses. Professor Simpson13 pointed out that if a lawyer of King Henry VIII’s time had been asked in an examination to “[w]rite an account of the doctrine of consideration and discuss its merits”, he would have written about the equitable doctrine relating to the law of uses, not about the law of assumpsit. Kevin Ryan, a scholar before (and after) his appointment to the Supreme Court of Queensland, explained14 that there was no place for consideration in the oldest and simplest form of use, in which a legal estate was conveyed to one or more feoffees upon uses declared at the time of the conveyance or by 8 9 10 11 12 13 14

Referred to in K Zweigert and H Kötz, An Introduction to Comparative Law (Tony Weir tr 3rd ed, OUP 1998) 395–96. Zimmermann (n 2) 555. Thomas Edward Scrutton, The Influence of the Roman Law on the Law of England (CUP 1885) 100. TFT Plucknett and JL Barton (eds), St German’s Doctor and Student (Selden Society 1974) 229. See eg Zimmerman (n 2) 554. AWB Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit (2nd ed, Clarendon Press 1987) 327. KW Ryan, “Equity and the Doctrine of Consideration” (1964) 2 Adel LR 189, 190–91.

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the feoffor’s testament. A major change occurred with the emergence of the doctrine of implied uses. In the 15th century, it became common for a feoffor to convey land to feoffees to be held to the feoffor’s use until he gave them further directions. In the meantime the feoffor could remain in possession and enjoy the profits of the land. This practice led to the law implying a use in the feoffor’s favour. Initially, under this rule of implied uses, the presumption of a resulting use arose in clear and determinable circumstances, but a shift occurred when it was decided that whenever a man conveyed land to feoffees without an express declaration of a use, the use resulted to the feoffor. As the existence of a resulting use was thus no longer ascertainable merely by examining who was in possession and who derived economic benefit from the land, this made it necessary to have some test by which it could be determined whether a feoffment to uses was intended in the absence of a declaration of uses. The test which was applied was whether or not consideration existed for the feoffment. If the feoffees gave no consideration for the feoffment, there was a presumption of a resulting use to the feoffor. The term “consideration” was an expression for any reason which was deemed sufficient to rebut the presumption that a resulting use was intended. It has been suggested that the later extension of this notion of consideration into the action of assumpsit may have been encouraged by the publication of St German’s Doctor and Student, which helped familiarise common law lawyers with canonist theories of promissory liability of alien origin.15 One of the promises which was there said to be binding in conscience was a promise “upon consideration”. Consideration there was used in two senses.16 “Upon consideration” was used in the sense of “after deliberation”, which conveys that a promise deliberately made is morally binding. “Consideration” also meant the presupposition of the transaction, the reason for it. A promise made for a reason is also morally binding. In the action of assumpsit, the undertaking or promise was the assumpsit, and the trespass was the breach of the undertaking or promise. The action permitted the enforcement of an undertaking or promise where there was no debt involved. In Golding’s Case, the Solicitor General stated the requirements of the action as being, “[i]n every action upon the case upon a promise, there are three things considerable, consideration, promise and breach of promise …”.17 The last two matters were matters for the jury, but judges sometimes reserved the question concerning consideration – whether the promise was worthy of enforcement – for themselves as a means of control over the action.18 The meaning of consideration at this time may be understood, in part, by the way in which an action was pleaded. The consideration for the promise appears in that part of the pleading which contained “the matter of inducement”. It preceded the averment (or proof) of the promise. It was the factual background to, and the explanation of, the reasons for the promise.19 15 16 17 18 19

Simpson (n 13) 405. Roscoe Pound, “Consideration in Equity” (1918-1919) 13 Illinois LR 667, 684. (1586) 2 Leo 71, 71; 74 ER 367, 367. Val D Ricks, “The Sophisticated Doctrine of Consideration” (2000) 9 George Mason LR 99, 101. Simpson (n 13) 320–21.



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The promise or undertaking was at the heart of the action. The defence to such an action was pleaded as “non-assumpsit”. The idea of the common law at this time, then, was that the legal effect of the promise should depend upon the factors which motivated the making of it. Consideration meant any good reason for making the promise.20 The promise was legally enforceable because it was itself regarded as intrinsically valid to create an obligation and a breach of it as morally reprehensible.21 This reflected the philosophies of the natural law of the continent and canon law. In the 16th century, references to principles of common sense morality were explicit.22 Lord Mansfield attempted to retain morality as a basis for the enforcement of promises during the 18th century. In Hawkes v Saunders his Lordship said: “Where a man is under a moral obligation, which no Court of Law or Equity can inforce, and promises, the honesty and rectitude of the thing is a consideration. … [T]he ties of conscience upon an upright mind are a sufficient consideration.”23

The rejection of such notions in the 19th century decision of Eastwood v Kenyon24 has been regarded as pivotal to consideration remaining as doctrine.25 Such rejection may also have retarded the development of doctrines such as that of good faith. Notions of quid pro quo were not a strong influence in the development of the action of assumpsit.26 The influence of commerce was not yet apparent. The law merchant had not required consideration for enforceable contracts and in 16th century England commercial matters were dealt with by courts mainly through an action on the bond, not an action on an informal promise.27 Consideration might be found not only in the payment of money or other benefit as a quid pro quo, but also in a promise to return lost property or a promise made on account of marriage. For example, there would be good reason for promising to return a dog which had been found, because it would be the defendant’s duty to do so.28 The first reported case to mention consideration29 was in 1557 and involved a promise made in the expectation of marriage. It may be that if 16th century notions of consideration had still been applied in the 20th century, Mrs Cohen might have succeeded in her action in the High Court of Australia in 1929.30 Mrs Cohen brought an action against her husband claiming the sum of £275, being the arrears of a dress allowance which she alleged he had promised, before 20 See eg Simpson (n 13) 320–21; David Ibbetson, A Historical Introduction to the Law of Obligations (OUP 1999) 142. 21 Hein Kötz and Axel Flessner, European Contract Law (Tony Weir tr, Clarendon Press 1997) vol 1, 53. 22 Simpson (n 13) 444–45. 23 Hawkes v Saunders (1782) 1 Cowp 289, 290; 98 ER 1091, 1091. 24 Eastwood v Kenyon (1840) 11 Ad & E 438, 450; 113 ER 482, 486. 25 AWB Simpson, “Innovation in Nineteenth Century Contract Law” (1975) 91 LQR 247, 262–63. 26 Simpson (n 13) 424–26. 27 Simpson (n 13) 487. 28 Simpson (n 13) 439, referring to Ireland v Higgins (1587) Cro Eliz 125; 78 ER 383. 29 Joscelin v Sheltons Case (1557) 3 Leo 4; 74 ER 503. 30 Cohen v Cohen (1929) 42 CLR 91 (HCA).

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their marriage, to pay her. Dixon J held the statement of claim to be deficient, for it did not allege consideration.31 The anticipated marriage was insufficient to support an enforceable agreement (the other basis upon which Mrs Cohen failed was that there was no intention to be legally bound by the promise, a requirement about which more will be said later). From the early days of assumpsit to the present, “consideration” has been the crucial test of enforceability for informal contracts. In the words of a 16th century common law judge, it was sufficient to maintain an action upon an assumpsit that there be “a moving cause or consideration precedent; for which cause or consideration the promise was made …”.32 However, the concept was not originally conceived of as a single principle but as a kind of list of a number of generalised factual circumstances which had prompted the promisor to make the promise. Some were sufficient, others were not. A service performed in the past (a past consideration) did not support a promise to pay for it, leaving the promise unenforceable.33 When such a past service had been performed at the promisor’s request (requested consideration) the promisor had to pay.34 Professor Simpson mentions examples: marriage (which supported a promise of financial support), money paid (or other recompense) and natural love and affection (less fully recognised in assumpsit than in the law of uses).35 Other sufficient considerations were benefits bestowed on third parties (rather than the promisor themself) which supported a promise to pay for them,36 delivery of goods sold which supported a promise to pay,37 granting an extension of time to a debtor in exchange for another’s (the promisor’s) guarantee (forbearance).38 Mutual promises exchanged at the same time were enforceable even if, as in wagers, the element of bargain was lacking.39 The list is long and there would be no point in trying to give a complete account. Some of the examples may strike a 21st century reader as strange; they had their origin in evasive efforts made by pleaders to avoid the objection that an older action, like debt or covenant, rather than the then modern assumpsit, was the appropriate remedy. The 19th century saw many attempts to encapsulate all forms of consideration in just one formula.40 In Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd, Lord Dunedin adopted a formula which had been proposed by Sir Frederick 31 32 33 34 35 36 37 38 39 40

Cohen (n 30) 96. Sidenham and Worlington’s Case (1584) 2 Leo 224, 225; 74 ER 497, 498. Hunt v Bate (1567) 3 Dy 272a; 73 ER 605. Sidenham (n 32). Simpson (n 13) 367–68, 373. See also HK Lücke, “Slade’s Case and the Origin of the Common Counts” (1965) 81 LQR 422, 434–42. Manwood and Burston’s Case (1587) 2 Leo 203, 204; 74 ER 479, 480. Osbaston v Garton (1587) Cro Eliz 91; 78 ER 350. William Banes’s Case (1611) 9 Co Rep 93b; 77 ER 869. Nichols and Raynbred (1614) Hob 88; 80 ER 238. Perhaps the best-known of these is the statement by Lush J in Currie v Misa (1875) LR 10 Ex 153, 162: “A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other …”. The element of bargain is emphasised in §75 of the US Restatement on Contract 2d: “Consideration for a promise is an act other than a promise, or a forbearance, or the creation, modification, or destruction of a legal relation, or a return promise, bargained for and given in exchange for the promise”.



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Pollock, “[a]n 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.”41 This was an attempt to bring unilateral and bilateral contracts under the one formula. Pollock himself expressed doubt about the inclusion in the formula of the latter (after all the most common type). In a letter to Holmes of 16 October 1908 he stated, “[h]ave you ever found any logical reason why mutual promises are sufficient consideration for one another…? I have not.”42 This issue has in fact generated much controversy. Even the tightest definition of consideration still leaves a good deal of uncertainty.

Consideration and Causa In the early reports of cases involving the action of assumpsit the terms “cause” or “consideration” were used interchangeably. In Calthorpe’s Case it was said that “[a] consideration is a cause or meritorious occasion, requiring a mutual recompense, in fact or in law.”43 The civilian conception of cause or causa is very similar to consideration as it was then understood in the common law. In order to be enforceable under the civil law, an agreement must be shown to be based on a (lawful) cause, which was generally regarded as the purpose for which a promise was made. Natural law philosophers distinguished between promises to give out of liberality and promises to exchange,44 but according to the theory of causa, both were binding. The common law courts of the 16th century may have been able to enforce both kinds of promises because they were not hindered by the later, more narrow, view of consideration, which required an exchange. Neither the old common law conception of consideration nor the conception of causa in civilian law can be equated with the modern doctrine of consideration. As Windeyer J observed in Smith v Jenkins,45 the “varieties and dimensions” of causa are more generous. There has been debate about whether causa provided the germ of the common law doctrine of consideration.46 The debate as to whether the common law judges who originally developed the doctrine of consideration did so under the influence of causa has been described as “famous” but “inconclusive”.47 Professor Simpson thought it to be at least conceivable that the ultimate source of consideration included the doctrine of causa which had earlier been adopted by the medieval chancellors.48 Regardless of the extent of the influence of continental philosophy on 16th century common law, it seems plain enough that the common law developed a 41 42 43 44 45 46

[1915] AC 847 (HL) 855. Mark DeWolfe Howe (ed), Holmes – Pollock Letters (Harvard UP 1941) vol 1, 146. (1573) 3 Dy 334b, 336b; 73 ER 756, 759. James Gordley, The Philosophical Origins of Modern Contract Doctrine (OUP 1991) 137. Smith v Jenkins (1970) 119 CLR 397 (HCA) 411. Ernest G Lorenzen, “Causa and Consideration in the Law of Contracts” (1919) 28 Yale LJ 621, 636. 47 Gordley (n 44) 137. 48 Simpson (n 13) 404–05.

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rule comparable to causa in the action of assumpsit49 and that for a long time the common law explained consideration by reference to a formula borrowed from natural law lawyers of the continent.50 As with causa, consideration was the motive or reason for a promise and it rendered the promise enforceable. A promisor’s subjective motive becomes the objective reason for enforcing the promise.

Cause as Evidence of Serious Intention –  German Law In German law, one of the requirements which arose as a result of the principle of causa, and other philosophical doctrines, influenced by the theory of the intrinsic moral force of promises, was the need to look for intention. The question became whether there was an intention to enter into a legal transaction. This may sound familiar to common law lawyers. The common law requirement of an intention to create legal obligations is discussed further below. Once this was accepted as the correct question, the question whether there was a cause was shifted to the field of evidence and procedure.51 The question of cause later came to assume relevance in the law of unjust enrichment.52 The courts may look to the reason or motive for a person’s promise, but will do so only to see whether it supports a serious intention. Lord Mansfield also conceived of consideration as essentially a matter of evidence, at least with respect to mercantile contracts. In Pillans v Van Mierop his Lordship said: “[T]he ancient notion about the want of consideration was for the sake of evidence only: for when it is reduced into writing, as in covenants, specialties, bonds, [etc] there was no objection to the want of consideration. And the Statute of Frauds proceeded upon the same principle.”53

This view failed to gain the acceptance of the Exchequer Chamber, whose advice in Rann v Hughes was accepted by the House of Lords. Skynner CB said that whilst “it is undoubtedly true that every man is by the law of nature, bound to fulfil his engagements …”,54 the law of England will not compel the performance of a parol agreement made without sufficient consideration. Professor Simpson considers that Lord Mansfield may have been historically correct to say that consideration was a matter of evidence if consideration is understood in this sense: “The jury, before holding the defendant liable, need something more to go on than merely a parole promise, inadequately perhaps proved, but if 49 50 51 52 53 54

Zimmermann (n 2) 554; Kötz and Flessner (n 21) 53–54. Gordley (n 44) 171. Zimmermann (n 2) 553. Barry Nicholas, The French Law of Contract (2nd ed, Clarendon Press 1992) 127. (1765) 3 Burr 1663, 1669; 97 ER 1035, 1038 (footnotes omitted). Rann v Hughes (1778) 7 TR 350, 350; 101 ER 1014, 1014. This was accepted by the House of Lords: Simpson (n 13) 617 n 2.



Ch 4  The Doctrine of Consideration in Contract 69 they find that there was a good reason for the making of the promise which is also a good reason for holding the defendant liable then they can with more confidence award damages for breach, the consideration making it more plausible to say both that there was a promise and that it was seriously intended.”55

Cause in French Law In French law, the requirement of causa came to be entrenched in Art 1131 of the French Civil Code,56 which provides that an agreement without a cause, or an agreement with a cause illicite, is without legal effect. Article 1133 provides that a cause illicite is one which is either illegal or contrary to l’ordre public. In other respects, in modern times “cause” has come to mean different things in different contexts. Although its exact meaning is said to have “aroused passionate controversy”,57 the requirement of cause is said to be often dispensable and contributing nothing.58 French law, like German law, came to accept as the true basis for enforceability of promises that there be a serious intention in the meaning of the promise. Generally speaking, in French law any lawful agreement which is seriously intended is an enforceable contract, provided that in the case of a donation it satisfies or circumvents the requirement of a notary.59

Serious Intention to Create a Legal Obligation Allied to the common law doctrine of consideration is the doctrine which requires that an “intention to create legal relations” be capable of being discerned, objectively, from the circumstances surrounding an arrangement.60 The civilian requirement that the promisor may be taken to have seriously intended to be bound is also assessed objectively. Just as there was a debate about the source of early notions of consideration, there may be a basis for another debate about the provenance of the doctrine of an intention to create a legal obligation in the common law. It is generally accepted that English text writers in the 19th century, when the doctrine was adopted, continued freely to “plunder” the ideas and the terminology of the natural law lawyers of the continent.61 Although the historical pedigree of 55 Simpson (n 13) 407. 56 It also appears in the Italian and Spanish Codes, Kötz and Flessner (n 21) 54; Lorenzen (n 46) 623 n 11. 57 FH Lawson, AE Anton and L Neville Brown, Amos and Walton’s Introduction to French Law (3rd ed, Clarendon Press 1967) 166. 58 Kötz and Flessner (n 21) 55. Since writing this chapter, the French government has published the final text of revisions to the French Civil Code (which is currently subject to parliamentary approval). Draft Art 1128 would appear to have omitted any requirement of “cause”, although there may be future debate about whether this is the case. 59 Nicholas (n 52) 149. 60 As to this requirement, see Australian Woollen Mills (n 1) 456–57; Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 [24]–[25]. 61 Ibbetson (n 20) 219.

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the doctrine has been regarded as “peculiarly obscure”, it is said that it may be found in the texts of Pufendorf and Pothier.62 Professor Williston does not seem to have been in any doubt. He said63 that it is a concept of civilian jurisprudence and should be excised from the common law as alien and unnecessary, given the requirement of consideration. Another way of looking at the matter might be to ask whether consideration is necessary, given the requirement of intention to be legally bound. It is sometimes the case that what appears to be the same principle adopted by different legal systems may be different in its application, and this holds true here. The common law not only does not accord the same primacy to the intention to be bound as does the civil law, it does not give it the same breadth of operation. A leading case in Germany, referred to by Zweigert and Kötz,64 involved a carrier (A), who had an urgent delivery to make, but no available driver, so A asked another carrier (B) if he could supply a substitute. The driver supplied by B was inexperienced and damaged A’s truck. German law would treat the resulting claim for damages as flowing from a breach of contract, under the law of obligations. B’s defence, that he was only helping out in an emergency out of sympathy and had no intention of assuming a legal obligation, was rejected. B’s subjective intentions were irrelevant. The question was whether A “in all the circumstances must in good faith and in the light of good commercial practice have concluded that such an intention existed” on the part of B. That must be so it was held, because B must have realised that A was relying on the provision of a competent driver for otherwise A would suffer loss. The holding reflects a broad operation of implied intention that would not be seen in the common law.

Differences in Approach Between the Common Law and Civilian Law A difference between the common law and the civilian law arises because of the common law requirement for exchange or counter-performance, through the doctrine of consideration. Civilian law simply gives effect to the intention of the parties. This difference of approach has consequences in a variety of contexts, explored below. Many of the contracts recognised by civilian codes, such as the German BGB, are reciprocal, but there are also many gratuitous promises which are enforced that involve no real counter-performance.65 Gratuitous promises to 62 Simpson (n 25) 263–64. 63 Richard A Lord (ed), Williston On Contracts (4th ed, Lawyers Cooperative Publishing 1990) vol 1, para 3.5, 218–19. 64 Zweigert and Kötz (n 8) 397. 65 Examples are §662 “Typical contractual duties in a mandate: By accepting a mandate, the mandatary agrees to carry out a transaction entrusted to him by the mandator for the mandator gratuitously”, and §598 “Typical contractual duties in the case of a gratuitous loan: By a gratuitous loan agreement, the lender of a thing is obliged to permit the borrower to use the item at no charge”. Translations found at Bundesministerium der Justiz und für Verbraucherschutz, German Civil Code: BGB (2015) www.gesetze-im-internet.de/englisch_ bgb/german_civil_code.pdf.



Ch 4  The Doctrine of Consideration in Contract 71

provide a person with advice or information, to look after another’s property, to manage another’s affairs or to permit him or her to have the use of a car, may all be enforced as valid contracts, although it is a little difficult to discern the strictness with which enforcement is applied. Where something goes wrong, usually in the performance of the arrangement, an action may be brought in contract. Delict would be avoided because of limitations on what is recoverable. Under the common law, resort would be had to the law of torts, for example, a claim in negligence for wrong advice. Options and offers are binding in civilian law; the reduction or release from performance may be agreed without more; payments in addition to what was originally agreed do not create a problem for enforcement.66 Civilian law has thus avoided some of the central problems that have arisen in the common law as a result of the doctrine of consideration. Zweigert and Kötz cite Stilk v Myrick67 as an example of how the common law can achieve surprising results where the required counterpart is something the promisor was already required to do. The facts of the case are well known. The captain of an English ship in a Russian port was unable to find two replacement crew when two sailors jumped ship. He promised the rest of the crew a supplementary wage if they got the vessel back to England safely, but once there, reneged on the promise. The sailors failed in their action against him on the basis that they were already obliged to render their services. Zweigert and Kötz68 ask why, in the absence of duress, would the promise not be held to be valid? From the civilian perspective, it was made for good reason from which, at the time it was made, a serious intention could be discerned. Civilian law would have no difficulty with enforcing the variation of a prior agreement without additional consideration. It seems the common law has been uneasy with this decision as well. Despite what the outcome may suggest, Stilk v Myrick was not overruled by the English Court of Appeal in Williams v Roffey Bros & Nicholls (Contractors) Ltd,69 but was distinguished. In that case, the plaintiff was a subcontractor to the defendant, a building contractor. The plaintiff got into financial difficulty because the price for which he had agreed to carry out his carpentry work was insufficient to enable him to make a profit. The defendant was subject to a time penalty clause and became concerned that the plaintiff would not finish his work on time and offered him an additional payment as an incentive. When he sued for that sum, Stilk v Myrick was raised by way of defence. The Court of Appeal distinguished that case on the basis that it involved an entirely gratuitous promise, whereas this case involved an undertaking to make a payment because an advantage would be gained. The advantage arose out of the practical benefit gained from the continuing relationship with the promisee.70 It has been said of common law judges that they are renowned for overcom­ ing problems caused by consideration by “sniffing out … detriment”71 in order 66 67 68 69 70 71

PDV Marsh, Comparative Contract Law: England, France, Germany (Gower 1994) 104–06. Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168. Zweigert and Kötz (n 8) 393. [1991] 1 QB 1 (CA). Williams (n 69) 19. Zweigert and Kötz (n 8) 391.

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to find promises enforceable. The same may be said about advantages. The observation has not been restricted to modern common law judges. It has been suggested that the requirements of consideration in the action of assumpsit were not always viewed strictly and that sometimes they were dispensed with altogether.72 The approach in Williams v Roffey invites comparison with civilian law. The finding implicit in it was that there was a perfectly understandable reason for the extra payment, much as the old action of assumpsit would have approached the matter of consideration. It may be taken to be accepted by the Court of Appeal that there was clearly a serious intention on the part of the defendant in making the promise. In circumstances such as these, where a party had, to his detriment, under-quoted, civilian law would probably regard the offer of further payment as an expression of good faith and fair dealing in the performance of the contract. The consequences of the difference in approach to consideration are also evident in the context of the common law doctrine of privity. Civilian lawyers would also ask why a promise benefiting a third party should not be enforced.73 It may be understandable why a contract should not burden a third party, but why should a benefit to a third party offend?74 In German law, third parties may claim performance of a contract which is said to have a “protective effect” for them. In Australia, some statutes provide a general exception to the privity rule.75 Otherwise, it is necessary to resort to equity to provide a trust for the third party of the benefit of the contractual promise. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,76 it was observed that the early common law permitted third parties to enforce contracts made for their benefit. However, the law became unsettled and remained so for nearly 200 years before 1861, when Tweddle v Atkinson77 settled the matter.78 The two rules which came to be accepted were that only a party to a contract can sue upon it and consideration must move from the promisor.79 These principles were invoked in Trident v McNiece against a subcontractor who sought the benefit of a definition of “the insured” as including subcontractors of the principal insured. After reviewing the history and policy behind the principles, the question was stated by Mason CJ and Wilson J as “[s]hould it be a sufficient foundation for the existence of a third party entitlement to sue on the contract that there is a contractual intention to benefit a third party?”80 It was held that it was.81 This is conformable with the general approach of civilian law to contracts. 72 73 74 75 76 77 78 79 80 81

Ricks (n 18) 103, 121–23. Although this is a relatively recent development in civilian law, see Zimmermann (n 2) 41–45. Zweigert and Kötz (n 8) 465. See specific exceptions referred to in Michael Furmston and GJ Tolhurst, Privity of Contract (OUP 2015) 288–89. (1988) 165 CLR 107 (HCA) 113–14. (1861) 1 B & S 393; 121 ER 762. As discussed in Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 (HCA) 495. Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43 (HCA). Trident (n 76) 122. Trident (n 76) 123–24 (Mason CJ and Wilson J), 173 (Gaudron J agreeing).



Ch 4  The Doctrine of Consideration in Contract 73

Consideration and Estoppel In Williams v Roffey, Russell LJ82 said that he would have welcomed an argument based on estoppel. In The Commonwealth v Verwayen,83 Mason CJ said that promissory estoppel, recognised in Legione v Hateley,84 had undermined the idea that voluntary promises cannot be enforced in the absence of consideration. The application of promissory estoppel is not confined to commerce. In its application to familial and other relationships we see the kinds of promises which were often the subject of the action of assumpsit. For example, a mother’s promise to her son – that he would be made a joint owner of the grazing property held in her name – was enforced, when the son managed the grazing business, effectively as a partner, and cared for his mother in her old age.85 But estoppel requires detrimental reliance on the part of a promisee and views may differ about the strictness with which this requirement should be applied. In Ashton v Pratt,86 the New South Wales Court of Appeal declined to enforce a promise by a client of an escort to maintain her as his mistress so long as she renounced her profession. The court declined to do so on the basis that the mistress had suffered no detriment in renouncing her profession. This case may be compared with one cited by Zweigert and Kötz87 as an example of the civilian approach to such arrangements. A cavalry officer promised his longterm mistress, by whom he had three children, a considerable sum of money if he married a woman of his own class instead of her (this is an old case). He was held to his promise. Unlike common law cases, where it is often difficult to detect the influence of social mores on judicial views, civilian law is quite explicit in its consideration of such questions. In the case just mentioned it was first determined that the agreement was not contrary to good morals, nor was it an act of pure generosity. The promise was regarded as fulfilling an obligation, albeit not a legal one. The promisor did not intend it as a gift and the promisee did not intend to receive it as such. A similar promise was enforced in an English case brought in contract, showing that the common law, too, can be influenced by social mores. In Ward v Byham,88 the father of a child pleaded lack of consideration for the promise he had made to pay maintenance of the child. Unsurprisingly, for it was Lord Denning who wrote the leading judgment, it was held that the consideration lay in the benefit the father received in having the child cared for. The observations of Zweigert and Kötz about common law judges, and their good noses for detriments and advantages, come to mind once again. The doctrine of promissory estoppel is generally considered to have evolved in the late 19th century from principles of equity and was later given impetus 82 Williams (n 69) 17. 83 (1990) 170 CLR 394 (HCA) 410. 84 Legione v Hateley (1983) 152 CLR 406 (HCA). See also Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (HCA) 399–402. 85 Simmons v Simmons (NSWCA, 14 November 1994). 86 [2015] NSWCA 12; (2015) 88 NSWLR 281. 87 Zweigert and Kötz (n 8) 396. 88 [1956] 1 WLR 496 (CA).

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by Lord Denning in Central London Property Trust Ltd v High Trees House Ltd.89 However, Professor Sutton submitted90 that it is of greater antiquity. He said that promises which were not bargained for, but which induced action in reliance on them by the promise, were the original basis for the action in assumpsit. If this is so, it would provide a most satisfactory conclusion to this chapter. I could conclude by saying that, in seeking to deal with the problems created by the modern notion of consideration, common law courts have gone back to where it all began. However, there is another viewpoint. Professor Simpson91 accepted that a theory of induced reliance, with its different implications, is to be found in St German’s Doctor and Student alongside the theory of consideration, but he did not consider that it was reflected in what came to be applied as consideration. He said that what is done on the strength of the promise is induced by the promise, but it is not the motive for it. Induced injurious reliance as a ground for actionability would have been presented not as an aspect of the doctrine of consideration in assumpsit, but as an alternative to it.

Future Prospects A number of courts have taken the decision of the English Court of Appeal in Williams v Roffey to mean that agreements which purport to modify the terms of already existing contracts may be valid even if they fail the consideration test, a view which seems to have found favour with text writers. Legislative measures such as the American Uniform Commercial Code have adopted a similar approach and do not require consideration for an agreement modifying an existing contract. The United Nations Convention on Contracts for the International Sale of Goods,92 which has been enacted in Australian States and Territories, has been regarded as dispensing with consideration in this context.93 The doctrine of consideration is of such ancient origin that it is almost part of the common law lawyer’s sense of identity. As Windeyer J observed in Coulls v Bagot’s Executor and Trustee Co Ltd, “[w]hether we like them or not, the rules relating to consideration seem to me a stubborn part of our law. They cannot be displaced by courts by head-on collision.”94 Even Lord Denning said “[t]he doctrine of consideration is too firmly fixed to be overthrown by a side-wind”.95 Nevertheless, the number of cases relying upon an absence of consideration appears to be in decline, perhaps because of the emergence of 89 90 91 92

[1947] KB 130 (KBD). Sutton (n 4) 54. Simpson (n 13) 324-25. (Vienna, 11 April 1980) 1489 UNTS 3, entered into force 1 Jan 1988. See Art 29 (1): “A contract may be modified or terminated by the mere agreement of the parties.” 93 As Professor Honnold has said in respect of Art 29, “Paragraph (1) is addressed to a problem presented by the traditional common-law doctrine of ‘consideration’. … This restriction on the parties’ ability to adapt their transaction to new circumstances has generated pressure for modifications of the traditional rule”: John O Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (3rd ed, Kluwer Law International 1999) 201–02. 94 Coulls v Bagot’s Executor and Trustee Co Ltd (n 78) 499. 95 Combe v Combe [1951] 2 KB 215 (CA) 220.



Ch 4  The Doctrine of Consideration in Contract 75

the doctrine of promissory estoppel. There are even echoes of Lord Mansfield’s idea that consideration is really a matter of evidence – for example, in cases such as Antons Trawling Co Ltd v Smith it was said that “[t]he importance of consideration is as a valuable signal that the parties intend to be bound by their agreement, rather than an end in itself ”.96 And it has been suggested that the Williams v Roffey approach might be applied beyond contracts of variation.97 International bodies in which civilian thinking predominates hardly favour a doctrine such as consideration. The members of the Commission on European Contract Law 1994 (the Lando Commission),98 proposed that the intention to create legal relations should become the sole test of liability and that both causa (French law) and consideration (common law) should be abolished.99 However, neither the UNIDROIT Principles nor the Principles of European Contract Law, which do not require consideration, enact law but rather provide guidance (“soft law”) to what might become law in the future. Like the American Restatements, though probably to a lesser extent, they may have some influence on court decisions. An observer who looks at the doctrine of consideration from a comparative perspective cannot help but think that its future cannot be assured, but then of course this has been said before.

96 [2003] 2 NZLR 23 (CA) 45–46 (Baragwanath J). 97 Attorney-General for England and Wales v R [2002] 2 NZLR 91 (CA) 109 (Tipping J). 98 Ole Lando and Hugh Beale (eds), Principles of European Contract Law, Parts I and II (Kluwer Law International, 2000) 137–41. 99 The head of the Commission later stated, under the heading “The Unilateral Promise Should Be Binding”, “An agreement only becomes a binding contract if the parties have intended to become legally bound. … The functions which French law and other Romanist legal systems have attributed to cause by invalidating contracts due to absence of legal basis, illegality or immorality, absent or insufficient quid pro quo, etc, are better taken care of by specific rules governing these matters. … [T]he English and American courts have had problems with the doctrine of consideration and have tempered it by relaying on commercial usages, estoppel and ‘invented consideration’ to avoid some of the hardship which the doctrine creates. For these reasons the PECL [Principles of European Contract Law] and UPICC [UNIDROIT Principles of International Commercial Contracts] follow the continental rule, which does not require consideration”, Ole Lando, “CISG and Its Followers: A Proposal to Adopt Some International Principles of Contract Law” (2005) 53 Am J Comp L 379, 388–91. See also Lando and Beale (n 98).

5

Reforming Consideration: No Greener Pastures Mindy Chen-Wishart

Introduction The most basic proposition of the common law of contract is that contractual liability is only incurred when a promise forms part of an interlocking exchange in which each party’s promise or performance is the agreed equivalent and inducing cause of the other’s. This is the doctrine of consideration and its pedigree is impeccable.1 And yet, the literature on the consideration doctrine is conspicuous in the depth and intensity of the hostility towards it.2 Professor Cartwright observes that: “[w]ithin the law of contract, consideration is probably the most criticised doctrine”.3 Lawyers are critical by nurture (and perhaps by nature); it is more difficult to respond constructively to an identified problem. The report of the 1937 1

2

3

Peter Benson, “The Idea of Consideration”’ (2011) 61 U Tor LJ 241; see also Arthur T von Mehren, “Civil-Law Analogues to Consideration: An Exercise in Comparative Analysis” (1959) 72 Harv LR 1009; JH Baker, The Reports of Sir John Spelman, (Selden Society 1978) vol 2, 94 SS ch 9; JH Baker, “Origins of the ‘Doctrine’ of Consideration, 1535–1585” in Morris S Arnold et al (eds), On the Laws and Customs of England (University of North Carolina Press 1981) 336– 58; AW Brian Simpson, A History of the Common Law of Contract: The Rise in the Action of Assumpsit (Clarendon 1987) 319; David J Ibbetson, “Consideration and the Theory of Contract in the Sixteenth Century Common Law” in John Barton (ed), Towards a General Law of Contract (Duncker & Humblot 1990) 67–124; David J Ibbetson, A Historical Introduction to the Law of Obligations (Oxford University Press 1999) chs 2, 7, 11–12; Daniel Markovits, “Contract and Collaboration” (2004) 113 Yale LJ 1417. See eg White v Jones [1995] 2 AC 207 (HL) 262–63; PS Atiyah, Essays on Contract (Clarendon Press, 1986) ch 8; see also Gay Choon Ing v Loh Sze Ti Terence Peter [2009] SGCA 3; [2009] 2 SLR(R) 332 (Singapore Court of Appeal (SCA)) [92]–[118] whereof Phang JA, obiter, appended a “coda on the doctrine of consideration” in the nature of an essay on the need for reform and the potential use of doctrines such as promissory estoppel, economic duress, undue influence and unconscionability in filling the gap that would be left by abolishing the doctrine of consideration; see commentary in Mindy Chen-Wishart, “Consideration and Serious Intention” (2009) Sing J Legal Stud 434; Phang JA had also been a critic of the consideration doctrine sitting in the High Court in Sunny Metal & Engineering Pte Ltd v Ng Khim Ming Eric [2006] SGHC 222; [2007] 1 SLR (R) 853 (Singapore High Court (SHC)) [28]–[30] (again obiter). John Cartwright, Formation and Variation of Contract (Sweet and Maxwell, 2014) para [8.40]; see eg Lord Wright, “Ought the Doctrine of Consideration to be Abolished from the Common Law?” (1936) 49 Harv LR 1225.

77

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Law Revision Committee4 (henceforth “LRC”) on consideration is the obvious place to start since consideration reformers standardly refer to it as some sort of panacea. The LRC regards the abolition of consideration as unrealistic because it is “too entrenched”, but recommends that we “prune away from the doctrine those aspects of it which can create hardship or cause unnecessary inconvenience”.5 In particular, the LRC recommends that the following six types of promises should be binding without consideration:6 (i) promises in writing, (ii) promises that induce foreseeable reliance, (iii) promising to do what one is already bound to do, (iv) promises to accept part payments in discharge of the whole debt, (v) promises for past consideration, and (vi) promise to keep offers open for a definite period (“firm offers”). The laudable aim is “to remove certain obstacles which have accumulated in the course of our history and are impeding our Courts in the task of developing a rule of practice in the manner most likely to serve the needs of our modern community”.7 But, do they move the doctrine of consideration from troubled waters to greener pastures (to mix metaphors)? My conclusion is in the negative. The rationales for these reforms are variously based on: (a) the belief that all seriously intended promises should be enforced, (b) the belief that induced reliance should be protected, or (c) the flawed implementations of (rather than any flaw in the basis for) the consideration doctrine. In response, I make three main arguments. In section 1 of this chapter, I argue that while a seriously intended promise is necessary, it has (for very good reasons) never been the sufficient condition of contractual liability at common law; the LRC’s recommendation that a writing requirement be added does not adequately protect the parties’ freedom from contract. Hence recommendation (i) above should be rejected and the higher thresholds of the deed retained. In section 2, I argue that one party’s foreseeable reliance on another’s promise cannot justify imposing contractual liability on the promisor; moreover, recommendation (ii) above fails to give sufficient weight to the promisor’s interests as the existing promissory estoppel doctrine currently does; it should also be rejected. In section 3, I argue that the enforceability of seriously intended exchanges has (for very good reasons) not been questioned, and was not questioned by the LRC. Rather, it is the implementation of the consideration doctrine that is rightly criticised for being too rigid and for failing to track common sense or business expediency. This logically points to the adjustment of the scope of 4

5 6 7

Law Revision Committee, Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) (1937, Cmd 5449) [26]–[40], [50] (Sixth Interim Report); see also Ontario Law Reform Committee, Report on Amendment of the Law of Contract (Ministry of the Attorney General 1987) ch 2. Sixth Interim Report (n 4) [27]. Sixth Interim Report (n 4) [50]. Sixth Interim Report (n 4) [28].



Ch 5  Reforming Consideration: No Greener Pastures 79

valuable consideration and not its dispensation as recommendations (iii)–(vi) suggest. They should, therefore, also be rejected.

1. The Enforcement of Seriously Intended Promises The LRC’s recommendation (i) is that promises made in writing should be enforceable.8 It is based on two assumptions. First, that promises intended to be binding should be legally enforced; hence, the LRC criticises the consideration doctrine because it “frequently affords a man a loophole for escape from a promise which he has deliberately given with intent to create a binding obligation”.9 The second assumption is that it follows that all we need is evidence of an intention to be legally bound, which “can be satisfied equally well either by consideration regarded as evidence of that intention or by some other evidence of that intention.”10 It is true that courts have sometimes sought to find consideration where it will give effect to the intention of the promisor,11 and consideration may provide evidence of serious intention to be bound. Nevertheless, the two assumptions are erroneous and provide an unstable basis for the recommendation to enforce written promises. These and other problems are elaborated below.

1.1 Consideration is not just evidence of serious intention Fuller’s widely accepted12 primary explanation for the consideration requirement is that a promise is a more secure candidate for enforcement if it is validated by the “evidentiary”, “cautionary”, and “channelling” functions of a formality such as a deed. This would ensure that: a promise was actually made (evidentiary), the promisor took care in making it (cautionary) and the parties and third parties understood its legal status (channelling). Fuller reasons that consideration functions as an efficient indicator of the promises that satisfy these concerns, while promises unsupported by consideration are likely to fall foul of them. Consistently, in Antons Trawling Co Ltd v Smith, Baragwanath J said that:13 “[t]he importance of consideration is as a valuable signal that the parties intend to be bound by their agreement, rather than an end in itself.” Likewise, the LRC states: “The only justification for the doctrine of consideration … is that it furnishes persuasive evidence of the intention of the parties concerned to create a 8 9 10 11

Sixth Interim Report (n 4) [50(2)]. Sixth Interim Report (n 4) [25]. Sixth Interim Report (n 4) [28]–[29]. See eg Vantage Navigation Corp v Suhail and Saud Bahwan Building Materials (The Alev) [1989] 1 Lloyd’s Rep 138 (QB) 147; Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA) 18, 21. 12 Lon L Fuller, “Consideration and Form” (1941) 41 Col LR 799; see also Richard A Posner, “Gratuitous Promises in Economics and Law” (1977) 6 J Legal Stud 411; Melvin Aron Eisenberg “Donative Promises” (1979) 47 U Chi L Rev 1; Charles J Goetz and Robert E Scott, “Enforcing Promises: An Examination of the Basis of Contract” (1980) 89 Yale LJ 1261; Sir Jack Beatson, Andrew Burrows and John Cartwright, Anson’s Law of Contract (29th ed, OUP 2010) 91. 13 [2003] 2 NZLR 23 (CA) [93].

80 Contract in Commercial Law binding obligation, but it does not follow from this that consideration should be accepted as the sole test of such intention. This intention ought to be provable by other and equally persuasive evidence such as, for example, the fact that the promisor has put his promise in writing. We agree with this view, and we therefore recommend that consideration should not be required in those cases in which the promise is in writing.” 14

The idea that consideration merely functions as evidence of serious intention is clearly wrong as a matter of law and of fact. While the presence of consideration may coincidentally perform evidentiary, cautionary and channelling functions, it may also contradict them in spectacular fashion. Absent consideration, the law will not enforce a promise even if the promisor solemnly declares in front of witnesses and in writing that she intends to be bound. Gratuitous promises are not necessarily more difficult to prove or more likely to be fabricated than bargains. Conversely, bargains made orally may be very difficult to prove and nominal consideration is easily denied. Further, the limitations on human rationality apply to both gratuitous and bargain promises; bargains may be rashly made, or made on standard forms, without negotiation and with only the most cursory understanding of their content, while gifts may be calculated and heavily negotiated. Further, Fuller’s thesis is based on a flawed understanding of the historical evolution of the consideration doctrine. The enforcement of sealed promises in a debt action long predates and rests on different theoretical foundations from the writ of assumpsit (from which the modern contract action evolved): “Before the law attained the sophistication of enforcing executory contracts, it enforced promises by interpreting them as symbolic transfers when accompanied by formalities signifying the crossing of a boundary between promise and ‘deed’”.15

In short, promises plus formalities are enforced as executed transfers of things, and can tell us nothing about the function of consideration, which enforces promises as promise.

1.2 Vitiating factors are not just evidence of serious intention Just as flawed as the idea that consideration merely evinces serious intention (and so can be replaced by writing) is the recent suggestion that vitiating factors such as economic duress, undue influence, and even unconscionability can also substitute for the consideration requirement because they all simply interrogate serious intention to be bound.16 I have argued elsewhere,17 that vitiating factors are not generally aimed at negating the consent basis of contractual liability. Rather, they express the force of other important values that trump the presence 14 Sixth Interim Report (n 4) [29]. 15 See Alan Brudner, “Reconstructing Contracts” (1993) 43 U Tor LJ 1, 35; see also Peter Benson, “The Idea of Consideration” (2011) 61 U Tor LJ 241, 245–46. 16 See Gay Choon Ing v Loh Sze Ti Terence Peter [2009] SGCA 3; [2009] 2 SLR(R) 332 (CA). 17 Mindy Chen-Wishart, “Consideration and Serious Intention” (2009) Sing J Legal Stud 434, 446–49; Mindy Chen-Wishart, “The Nature of Vitiating Factors in Contract Law” in Gregory Klass, George Letsas and Prince Saprai (eds), Philosophical Foundations of Contract Law (OUP 2014) 294.



Ch 5  Reforming Consideration: No Greener Pastures 81

of consent (such as responsibility in contract formation, non-exploitation and protection of vulnerable parties against harsh outcomes). It is not a case of “no consent” but rather “consent but”. For example, it is impossible to generate a coherent theory of duress by sole reference to the complainant’s internal will (objectively ascertained);18 the law must appeal to external factors such as the legitimacy of the defendant’s threat and the fairness of the demand. In undue influence cases, typically, the more severe the case, the more willing (objectively determined) the claimant is to enter the contract. Yet, this is outweighed by the other party’s advantage-taking that seriously jeopardises the claimant’s future autonomy.19 Again, unconscionable bargain cases have less to do with the claimant’s lack of intention to be bound than with the improvidence of the transaction that “shocks the conscience of the court”20 and threatens the claimant’s future freedom.

1.3 Common law does not enforce all seriously intended promises The common law of contract has never sought to enforce all serious promises. As Professor Cartwright states:21 “it is unreasonable to criticise the doctrine of consideration for failing to give effect simply to the parties’ intentions even where the promisee has not been asked to do anything in return for the promise he seeks to enforce, since that would be to change fundamentally the legal basis of the promissory obligation.”

Rather, the claimant’s entitlement to enforce the defendant’s promise depends on her having done something, in return for the promise, to earn the right to sue. Without consideration, promises are only binding in honour. Laypersons who expect promises to be binding may find the law surprising but morality and law, while overlapping, have never been coterminous, for good reasons.

1.4 The civil law does not enforce all seriously intended promises The oft-made claim is that abolishing consideration would bring English law into line with continental European civilian legal systems.22 In truth, civil law draws essentially the same line between gratuitous and reciprocal undertakings.23 18 PS Atiyah, “Economic Duress and the Overborne Will” (1982) 98 LQR 197. 19 Mindy Chen-Wishart, “Undue Influence: Beyond Impaired Consent and Wrong-Doing, Towards a Relational Analysis” in A Burrows and A Rodger (eds), Mapping the Law: Essays in Honour of Peter Birks (Oxford 2006) 201; Mindy Chen-Wishart, “Undue Influence: Vindicating Relationships of Influence” (2006) 59 CLP 231. 20 Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd [1983] 1 WLR 87 (CA) 94–95. 21 Cartwright (n 3) [8.42]. 22 Lord Wright (n 3) 1226; AG Chloros, “The Doctrine of Consideration and the Reform of the Law of Contract” (1968) 17 ICLQ 137, 164ff; Andrew Burrows, Understanding the Law of Obligations (OUP 1998) 196–98; Beatson, Burrows, Cartwright (n 12) 129. 23 See von Mehren (n 1); John P Dawson, Gifts and Promises: Continental and American Law Compared (Yale University Press 1980); Hein Kötz, European Contract Law: Volume One (Tony Wier (tr), OUP 1997) ch 4.

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Civil law imposes a stringent formality requirement, unless the transaction is “synallagmatic” (ie consists of bilateral reciprocal undertakings).24 This is simply the mirror image of the common law position that consideration is necessary unless it is accompanied by the requisite formality.25 Indeed, if anything, civilian law is even more hostile to gratuitous transactions in some respects. First, its requirement of notarisation is stricter than the common law requirement of deed. For example, under French law a donative promise relating to wealth that is “giveable”,26 is normally enforceable to its full extent only if both parties execute the promise in writing before a notary,27 who must warn and advise the parties of their rights and duties under the instrument.28 Second, civil law recognises special excuses for the nonperformance of gratuitous promises and even completed transfers, including: the donee’s “gross ingratitude”,29 the donor’s deterioration of circumstances such that he would not be able to fulfil the promise without endangering his own reasonable maintenance or the fulfilment of his legal obligations to maintain others,30 and the “subsequent acquisition of a child by a previously childless donor”.31 Lastly, with mixed (gift and exchange) transactions, German courts have undertaken the extraordinarily difficult task of dissecting the fused transaction so that the gift part does not escape control.32 French and German law do enforce certain informal gratuitous non-gifts that would be unenforceable at Common Law; namely, gratuitous promises to: (a) modify existing contracts, (b) keep an offer open for a specific period (options), and (c) lend goods or provide a service. However, the end result is not so different. English law can enforce (a) via the concept of “practical benefit” as consideration and via promissory estoppel. With (b) consideration may sometimes be found.33 With (c), French and German courts will often conclude that the parties did not intend to be legally bound and so deny enforcement.34 Even where such promises are enforced, a lender is only liable for malice or gross negligence, or deceitful concealment of the loss-causing defect.35 English law can reach the same result through the tort of negligence. Dawson concludes that the civil law’s enforcement of gratuitous promises is “fragile”: “[I]t is seldom that much is invested in such arrangements … ordinarily such arrangements are readily dissolved at the will of either party and the care and 24 §§ 320–326 German Civil Code (BGB); Art 1102 French Civil Code (Code civil). 25 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (OUP 1996) 504–05. 26 Meaning some interest (tangible or intangible) that has already been reduced to an ownership that the gift can divest and transfer; gratuitous services are excluded: see Dawson (n 22) 54–68. This is due to the need to prevent frustration of relatives’ inalienable right to succeed by depletion of the estate by lifetime gifts. 27 See Dawson (n 23) 69. 28 Art 931 French Civil Code (Code civil); § 518 German Civil Code (BGB). 29 § 530(1) German Civil Code (BGB); Arts 953, 955 French Civil Code (Code civil). 30 § 519 German Civil Code (BGB). 31 See further Dawson (n 23) 53. 32 Dawson (n 23) 196. 33 See below 4.2.5. 34 Kötz (n 23) 58, 71–73, 77. 35 Kötz (n 23) 66.



Ch 5  Reforming Consideration: No Greener Pastures 83 diligence required of the promisor in his own performance are much reduced. In most of the situations that have led to litigation (promises to supply free transportation or medical care), a promise would usually add little to the duties that the enterprise itself would generate. So I conclude that our law has suffered no real loss by withholding from ties that bind so lightly the descriptive title contract …”36

1.5 Serious promises should not be enforceable per se The idea that contract law should enforce all seriously intended promises is not only descriptively inaccurate, it is also normatively flawed. Promises do not enforce themselves; parties need the support of the law.37 Why should the state subsidise private arrangements in this way? When is the state justified in empowering individuals to coerce others to perform for their benefit? The starting point in answering these questions is the moral, political and economic importance of personal autonomy in modern liberal societies.38 Its core idea is that of self-authorship; that there is something intrinsically valuable in pursuing freely chosen goals and relationships. Its preservation is a ready justification for state action. But, personal autonomy goes beyond the simplistic immature idea of being free to do “whatever I want” – of being free from interference, of negative liberty. Professor Raz’s39 influential work outlines a liberalism that does not require or justify upholding all promises. He posits a positive conception of autonomy that emphasises the freedom to pursue “acceptable and valuable projects and relationships”.40 Since people derive wellbeing only from ways of life which are valuable, the state need not facilitate worthless options that one is better off without;41 it has no duty of neutrality as between all options. Hence, “the autonomy principle is a perfectionist principle … [it] permits and even requires governments [read law] to create [and support] morally valuable opportunities, and to eliminate [or discourage] repugnant ones”.42 1.5.1 Making space for change of mind One valuable option is the freedom to change one’s mind. Breach of contract occurs because the defendant either can no longer perform or no longer wants to perform. If contract law values freedom of choice in support of individual autonomy, the question is why it should prioritise an individual’s past choice over her present change of mind, when both are equally valid expressions of her 36 Dawson (n 23) 55, 222–23. 37 HLA Hart, The Concept of Law (Clarendon Press 1961) 27–38; BC Zipursky, “Philosophy of Private Law” in Jules L Coleman and Scott Shapiro (eds), The Oxford Handbook of Jurisprudence and Philosophy of Law (OUP 2002) 623, 655. 38 See JS Mill, On Liberty (JW Parker and Son 1859); FA von Hayek, The Road to Serfdom (Routledge 1944); FA von Hayek, Individualism and Economic Order (Routledge 1949); FA von Hayek, The Constitution of Liberty (Routledge 1960); Milton Friedman, Capitalism and Freedom (University of Chicago Press 1962); Robert Nozick, Anarchy, State and Utopia (Basic Books 1974); Charles Fried, Contract as Promise: A Theory of Contractual Obligation (Harvard University Press 1981). 39 Joseph Raz, The Morality of Freedom (OUP 1987). 40 Raz (n 39) 417. 41 Raz (n 39) 338ff. 42 Raz (n 39) 417.

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freedom.43 It is not obvious that we enhance an individual’s freedom by forcing her to do what she no longer wants to do. Indeed, the individualistic premise points in the opposite direction. Fried’s answer is that restricting one’s ability to change one’s mind “increase[s] one’s options in the long run”44 and is thus autonomyrespecting. This is premised on “the continuity of the self and the possibility of maintaining complex projects over time”, without which, “not only the morality of promising but also any coherent picture of the person becomes impossible”.45 But, this claim cannot be ascertained by abstract deduction from the basic autonomy principle, but only by examining particular circumstances in their historical context.46 It is always vulnerable to the challenge that in particular circumstances the claimed increase in autonomy does not, or will not, occur. Moreover, while the self may be continuous, it also evolves over time. An integral part of our autonomous life is our ability to learn, mature and recreate ourselves. Over time, our assumptions, knowledge, attitudes, values, priorities, or passions change. This may entail the alteration or rejection of previous beliefs, commitments or goals that are now, no longer authentically ours: “a person who remains unwaveringly true to past commitments which no longer meaningfully relate to her present vision of how she ought to live [i]s anything but a model of personal autonomy in action”.47 Professor Cohen recognised something amiss in a concept of autonomy that renders individuals “bound by every promise, no matter how foolish, without any chance of letting increased wisdom undo past foolishness. Certainly, some freedom to change one’s mind is necessary for free intercourse between those who lack omniscience”.48 This is the crucial point: the common law of contract allows a promisor to change her mind unless she has received consideration from the promisee, triggering the promisee’s legitimate interest. 1.5.2 Keeping out of private domain One option that the law discourages is bringing the force of the state into the private domain of family and friends. Human beings are social creatures and trust has intrinsic value in facilitating valuable relationships. Trust allows us to depend on others (for love, advice, help, information and so on) especially when we know that they are not compelled to give us these things and when it is difficult or impossible to verify the authenticity of what is given. Trust enhances co-operation and reduces the incentive or need to check up on other 43 Brudner (n 15) 22: “the decision of the autonomous will to commit itself to a course of action can enjoy no moral privilege over its subsequent decision to change its mind, for both decisions are particular and equally valid expressions of the will”. 44 Fried (n 38) 14. 45 Fried (n 38) 14. 46 Ian R Macneil, “Values in Contract: Internal and External” (1983) 78 Nw UL Rev 340, 356–58, 395. 47 Dori Kimel, “Personal Autonomy and Change of Mind in Promise and in Contract” in Gregory Klass, George Letsas and Prince Saprai (eds), Philosophical Foundations of Contract Law (OUP 2014) 96, 100. 48 Morris R Cohen, “The Basis of Contract” (1933) 46 Harv LR 553, 573.



Ch 5  Reforming Consideration: No Greener Pastures 85

people.49 The private domain is the natural home of gratuitous promises and transfers; they are particularly good at building valuable trusting relationships by engendering feelings of personal obligation and gratitude.50 Their value is primarily as tangible expressions of the parties’ relationship (friendship, love, comradeship, gratitude, respect, benevolence or generosity), and only secondarily in the commodity promised. They create and consolidate ties between individuals, and among members of society more broadly and create the sort of society in which human beings thrive and sensibly want to live. In this context, the enforceability of gratuitous promises by an outside force could undermine their valuable trust building function. The risk that trust will be betrayed is constitutive of the attitude of trust. The elimination of risk (by resorting to law) can undermine trust or prevent it from occurring at all. Unenforceability allows promisors to demonstrate their trustworthiness and promisees to demonstrate their trust. Conversely, enforceability introduces a new motive, which masks the signalling function of performance, and changes its personal, social, and cultural significance.51 It could become unclear to both parties whether an undertaking made in a spirit of love, friendship, affection, or the like, is also performed for those reasons, or only to discharge a legal obligation under the threat of legal sanction. We need to preserve a private sphere where the law does not intrude – where we do not have to be on guard, can experiment, act aspirationally and spontaneously, and make or break gratuitous promises as expressions of our commitments.52 The unenforceability of gratuitous promises “helps to define and construct the legal understanding of intimacy, and to mark the dignity and specialness of intimate relations”53 that distinguishes them from the economic transactions between strangers. Preserving the expressive functions of gratuitous undertakings and maintaining a private sphere free from legal involvement also helps to explain why gratuitous promises, which are typically made in the private domain, are ordinarily unenforceable. Moreover, enforcement against an unwilling gratuitous promisor will normally contradict the constitutive nature of the parties’ relationship. That is, even if the promisor is morally obliged to perform, the promisee is morally obliged (for example, as a friend, family member, romantic partner, work colleague) to release, forgive or otherwise accommodate the repenting promisor.54 To take account of this, we would need to recalibrate the excuses for breach if gratuitous promises were to be enforceable. We saw that continental 49 Niklas Luhmann, Trust and Power: Two Works (Wiley 1979). 50 H Lorne Carmichael and W Bentley MacLeod, “Gift Giving and the Evolution of Cooperation” (1997) 38 IER 485. 51 Dori Kimel, “Remedial Rights and Substantive Rights in Contract Law” (2002) 8 Leg Th 313, 327. 52 See eg Robert E Scott, “A Relational Theory of Default Rules for Commercial Contracts” (1990) 19 J Legal Stud 597, 615, warning that “any effort to judiciali[s]e these social rules will destroy the very informality that makes them so effective in the first instance”; Frank B Cross, “Law and Trust” (2005) 93 Geo LJ 1457. 53 Jill Elaine Hasday, “Intimacy and Economic Exchange” (2005) 119 Harv LR 491, 493; see also Jeanne L Schroeder, “Pandora’s Amphora: the Ambiguity of Gifts” (1998) 46 UCLA LR 815, 837. 54 Melvin Aron Eisenberg, “The World of Contract and the World of Gift” (1997) 85 Calif L Rev 821, 849–50.

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European contract laws55 recognises additional excuses in respect of informal gratuitous promises. Ingratitude of the promisee and material reverses in the promisor’s economic circumstances rendering performance improvident are extremely fluid concepts that will be difficult and costly to adjudicate. In addition, if gratuitous promises are to be enforced, to what extent should they be enforced? Since the promisee has not “purchased” the promise (via consideration) there seems no reason to award more than the promisee’s reasonable reliance. Consistently, the US Restatement on Contract 2d, § 90(1) provides that a promise unsupported by consideration “is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires”. This is not the contractual enforcement of a gratuitous promise. Atiyah,56 a critic of the consideration doctrine, concedes that the issues arising from the enforcement of gratuitous promises are too complex and difficult “to generali[s]e about in advance, because so much depends on the context”.57 He concludes that they should not be enforceable to the same extent as ordinary commercial promises; that they should attract a much wider defence of frustration and a shorter limitation period, that the promisee’s conduct may bar her enforcement, and “perhaps after all some gratuitous promises may be better treated as merely giving rise to a defence [presumably via promissory estoppel] rather than a cause of action”.58 Further, legal enforcement of gratuitous promises would generally convert them into their cash equivalent as damages awarded by the courts. The social domain would be impoverished if gratuitous promises out of love, friendship, affection, camaraderie and gratitude were translatable into money’s worth. It would demean the relationship by valuing it on a metric that applies to the market domain, driven by relatively impersonal considerations, focused on commodities, prices, and legal duties. Gratuitous promises are and should be unenforceable, not because they are less important than bargain promises, but because the values they promote (such as trust) would be undermined by enforcement. It is just because these values are usually absent from the market domain that the law is required to (and can safely) play a central role there. It could be countered that the consideration requirement is unnecessary since the private realm is already ring-fenced by the presumption that promises within that realm lack the necessary intention to create legal relations. One answer is that the consideration requirement reinforces that boundary. Another is that the consideration requirement would also insulate gratuitous transactions outside the private domain from legal coercion. It is true that gratuitous undertakings in the market domain will be primarily aimed at creating an environment conducive to future exchange (for example, hospitality from prospective employers,59 or gifts from pharmaceutical companies to

55 56 57 58 59

See above at 1.4. Atiyah (n 2) 178, 241–42. Atiyah (n 2) 242. Atiyah (n 2) 242. Rachel E Kranton, “The Formation of Cooperative Relationships” (1996) 12 J L Econ & Org 214; noting that co-operation among self-interested individuals is often achieved by giving a bond at the beginning of a relationship.



Ch 5  Reforming Consideration: No Greener Pastures 87

prescribing doctors).60 Even so, the law should treat as gratuitous (and so unenforceable) that which purports to be a gratuitous promise. It is autonomy enhancing to allow individuals to mimic the valuable social form of gratuitous promise in the private domain. This creates or reinforces relationships that bring out the best in human interactions, such as good will, concern, flexibility, accommodation, and common purpose. Moreover, legal enforcement in this area may be too heavy-handed an approach for micromanaging the fine lines between geniality and commercial inducement, and may compromise the valuable social relations yielded by gratuitous undertakings.

1.6 Problems with enforcing written promises In addition to the above reasons against the LRC’s first recommendation to enforce written gratuitous promises without requiring consideration, the following reasons weigh against this recommendation. 1.6.1 The function of the stipulated writing is unclear The LRC said: “If the view is accepted that all that is necessary in order to render an agreement enforceable is that there should be evidence that the parties intend to create a relationship binding in law, then it seems to follow that this requirement can be satisfied equally well either by consideration regarded as evidence of that intention or by some other evidence of that intention.”61

The problem is twofold. First, the LRC seems to regard writing as more than just evidence of serious intention because it later adds that “the entire promise should be in writing to bring it within the rule, and that no other evidence of the promise, whether in writing or partly in writing and partly oral, should be considered sufficient”.62 Not only is this badly expressed, it is also curious. Given that the written promise need not be signed, how should a court determine which evidence of “the whole promise” is acceptable? Moreover, if writing is merely evidentiary, why should other evidence not be admitted? The LRC seems to be saying that writing is necessary to the validity of a contract without consideration, by analogy to a deed; it is not only evidence of a contract. Second, while writing seems necessary to the validity of a contract without consideration, it is not sufficient to render the contract enforceable since the LRC adds that: “[i]t will still be necessary for the Court to find that the parties intended to create a binding obligation”.63 This is also curious. If writing and consideration were really evidence of animus contrahendi further evidence would be superfluous. In practice, this recommendation would make the inquiry into intention to create legal relations more frequent and more important, particularly where consideration is absent. In its substantive sense (as opposed to its sense of keeping contract law out of the private domain) it 60 Dana Katz, Arthur L Caplan, Jon F Merz, “All Gifts Large and Small: Toward an Understanding of the Ethics of Pharmaceutical Industry Gift-Giving” (2003) 3 Am J Bioeth 39. 61 Sixth Interim Report (n 4) [28]. 62 Sixth Interim Report (n 4) [30]. 63 Sixth Interim Report (n 4).

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will be no easier to determine than consideration. Parties will often have given the matter no thought and there will be neither discernible (ie objective) nor concordant intentions on whether the arrangement entered is legally binding. That leaves courts to imply or deem such an intention. On the other hand, a clear finding of intention to be legally bound will be insufficient in the absence of both writing and consideration; the intention of the parties will still be frustrated. 1.6.2 Writing is insufficient to perform the cautionary function The greater concern is that even if writing satisfies the evidentiary function, it may be insufficient to satisfy the cautionary or channelling functions. Writing is such a common means of communication that it may not make the parties stop and think much more than any other communication, nor mark it out as inviting legal liability. The charge seems conclusive when we include electronic communications such as text messages, email and internet-based messaging from everyday electronic devices such as mobile telephones. Compare this with the deed, which is enforceable without consideration, but which must be: written (on any substance, but not in electronic form);64 signed by the individual; in the presence of one attesting witness (or two witnesses if signed by the promisor’s agent); “delivered”;65 and, in a form which makes clear on its face that it is intended to be a deed and legally binding on the promisor. Hence, it must always be a conscious choice to make a deed; it will not generally be possible to find oneself accidentally bound by a deed; one’s freedom from contract is preserved. The same cannot be said of the LRC recommendation that mere writing is enough; the risk that a promisor may enter a binding transaction without intending or realising it is significant. This recommendation should therefore be rejected. In the commercial domain, parties are generally well-advised and can always use nominal consideration or execute a deed.

2. The Protection of Induced Reliance The LRC also recommends that “a promise which the promisor knows, or reasonably should know, will be relied on by the promisee, shall be enforceable if the promisee has altered his position to his detriment in reliance on the promise”.66 Consideration would be unnecessary. The assumption is that we should not let people down whom we have induced to rely on us, even when we have not asked them to do so. Rather, we should be liable to such people in contract. This raises three problems.

64 Although the Land Registration Act 2002 (UK) s 91 provides that a document in electronic form which purports to effect certain dispositions relating to registered land for which a deed would otherwise be required is to be regarded as a deed if it fulfils certain requirements. 65 This happens “as soon as there are acts or words sufficient to shew that it is intended by the party to be executed as his deed”: Xenos v Wickham (1867) LR 2 HL 296, 312 (Blackburn J); reaffirmed in Alan Estates Ltd v WG Stores Ltd [1982] Ch 511 (CA) 526. 66 Sixth Interim Report (n 4) [40], [50(8)].



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2.1 Incoherence of contractual liability for induced reliance The logical response to a reliance-based obligation is to reimburse the claimant for the losses she has suffered; this is backward-looking. It is inconsistent with the forward-looking contract duty to perform the contract and the correlative remedy for breach – either to perform the contract or, more commonly, to pay expectation damages. Fuller and Perdue try to square the circle. They argue that expectation damages are merely a proxy for the real concern to negate detrimental reliance.67 First, they explain that commercial parties rely on contracts both positively (by expenditure which would be wasted if the defendant’s promise is not performed), and negatively (by not entering alternative contract with other parties which could generate similar profits labelled “lost opportunities”).68 Hence, reliance loss in the negative form of foregone opportunities is practically indistinguishable from expectation loss.69 However, this explanation cannot account for the remedy of specific performance which is typically awarded in contracts for unique goods where, by definition, equivalent alternatives are not available (ie there are no readily available opportunities foregone). Moreover, Fuller and Perdue’s account cannot explain why the defendant should ever be ordered to do something that, on reliance reasoning, she had no duty to do. Second, Fuller and Perdue argue that awarding the expectation measure overcomes the difficulties of proving and quantifying reliance.70 The problem here is that, even where reliance can be proved and quantified, the claimant is shut out from it if it would exceed her expectation and she would thereby circumvent a bad bargain.71 Thus, reliance is not of the essence of contractual liability, but rather, is subordinated to the expectation. In practice, it only comes into play when the expectation is speculative and the promisor cannot prove that the promisee has made a bad bargain. It is merely a backstop operating on the assumption that the promisee is likely, at least, to have broken even (and not made a loss).

2.2 The essence of liability is promise and not reliance The LRC recommendation is limited to reliance on a promise. This is puzzling. If an aim of contract law is really to protect foreseeably induced reliance, why should reliance induced by other statements (notably ones of intention) not count? The reasons why the reliance must be on a promise shows that it is promise and not reliance that lies at the root of this recommendation. First, it is clear that something more than foreseeable reliance is necessary to support a reliance-based duty. Otherwise, the weather forecaster’s potential liability would be boundless. Even the tortious duty not to make negligent 67 Lon L Fuller and William R Perdue, “The Reliance Interest in Contract Damages: 1” (1936) 46 Yale LJ 52, 60, 70 68 Fuller and Perdue (n 67) 55, 74. 69 Fuller and Perdue (n 67) 62, 74. 70 Fuller and Perdue (n 67) 62. 71 C & P Haulage v Middleton [1983] 1 WLR 1461 (CA).

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misrepresentations only arises in limited circumstances variously circumscribed by reference to “reasonableness”, “proximity”, “special relationship”, or “assumption of responsibility”. Such concepts indicate that a claimant must have adequate reasons to treat another’s statements as credible, trustworthy and stable on the one hand. And, there must be a justification for imposing liability on the defendant on the other. Using non-promissory language to express an intention implies that the speaker is not bound to do what she said she would do; it implicitly preserves her ability to change her mind, and calls into question the reasonableness of the representee’s reliance and its worthiness for protection (absent “special relationship” and so on between the parties). Second, if a duty is to be imposed by the law, it cannot be a duty to avoid making the statement (unless it is false at the time), or a duty to act consistently with the statement (since one is entitled to change one’s intention). Rather, it must be a duty to reimburse another for her reliance. Where the defendant has not made a promise, it seems unfair to hold her liable for the consequences of her change of mind when the claimant’s loss is at least partly due to her own choice to rely. To impose liability on the defendant is inconsistent with the harm principle;72 it is more like a charitable duty to benefit another. As Fried asks: “why should my liberty be constrained by the harm you would suffer from the disappointment of the expectations you choose to entertain about my choices?”73 Your choice to rely is not my problem. Only a promise really signifies the promisor’s undertaking not to change his mind and, hence, the worthiness of the promisee’s reliance for protection. It is telling that reliance theories assume the necessity of a promise for the imposition of contractual obligations.74 But then, if the defendant has made a promise to the claimant, then that (and not the claimant’s reliance) is the source of the claimant’s enforceable right and we must return to the serious intention basis and its weaknesses already discussed in section 1.

2.3 Failure to take due account of the promisor’s interest The position of the promisor must also be considered. The promisee’s reliance on the promise is a weaker justification to bind the promisor to her promise than where the promisor has requested the promisee to rely as the price for her own promise. The LRC’s recommendation to enforce foreseeable reliance weighs the balance too heavily against the promisor. It predates Central London Property Trust Ltd v High Trees House Ltd75 and the subsequent development of the doctrine of promissory estoppel.76 By virtue of it, English law gives force to a promise by reason of the claimant’s reliance on it. But it does so in a far more limited way than that recommended by the LRC – one that achieves a better balance between the equities of the parties. 72 Stephen A Smith, Contract Theory (Clarendon Press, 2004) 85–87. 73 Fried (n 38) 10. 74 Indeed, reliance theorists assume this; see Fuller and Perdue (n 67); Atiyah’s work refers throughout to promisors and promisees; and see Neil MacCormick, “Voluntary Obligations and Normative Powers: Part I” (1972) 46 Proceedings of the Aristotelian Society Supp Vol 59. 75 [1956] 1 All ER 256 (KB). 76 Hugh G Beale, Chitty on Contracts (32nd ed, Sweet and Maxwell 2015) [4.086]–[4-107].



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Accordingly, even if the promisee’s reliance on the promisor’s promise is foreseeable, the reneging promisor can still escape liability if it would not be inequitable to do so, or if she can77 give the promisee adequate notice of her intention to renege (since the effect of promissory estoppel is suspensory and not extinctive). Moreover, the remedy is not expectation but only “as justice requires”78 – in practice, this means reliance but with an expectation ceiling.79 In Collier v P&MJ Wright (Holdings) Ltd80 Arden LJ sought to realise the LRC recommendation by effectively eliminating these three limitations. But, the judgment has been subject to trenchant criticisms81 and has yet to be followed or applied. The higher threshold of the orthodox promissory estoppel doctrine82 should be preferred over the LRC recommendation.

3. The Enforcement of Seriously Intended Exchanges The enforceability of seriously intended exchanges has not been questioned, and was not questioned by the LRC. There are good reasons for this, which I will briefly discuss before addressing the LRC’s criticisms of workings of the doctrine.

3.1 Justifications for the doctrine of consideration I have written elsewhere in defence of consideration.83 I emphasised a neglected perspective in the debate on consideration, namely, that of the state, of which law is an emanation. To succeed in enforcing a promise, parties need the support of the law.84 The question can be asked again: why should the state subsidise such private arrangements by empowering individuals to coerce others to act for their benefit? 77 He may not be able to because the claimant cannot resume his original position. 78 Waltons Stores (Interstate) v Maher (1988) 164 CLR 387 (HCA) stresses that the aim is not to enforce the promise, but, rather, to avoid the detriment occasioned by the promisee’s reliance on the promise, although sometimes this will result in the full enforcement of the promise as in Walton Stores itself. 79 Andrew Robertson, “Reliance and Expectation in the Estoppel Remedies” (1998) 18 LS 360, argues that the expectation was awarded in Walton Stores v Maher because that is the only way of fully protecting the promisee’s reliance interest (which includes the loss of opportunity to make other contracts) where the reliance comprises demolishing one’s own building and erecting another to the promisor’s specifications. 80 [2007] EWCA Civ 1329; [2008] 1 WLR 643 (CA), holding that a claimant’s “reliance” can be satisfied by making part-payment, that reliance makes it inequitable for the defendant to resile from his promise, and the effect is to extinguish the defendant’s original rights. See further below at 3.2.3.2. 81 See eg Alexander Trukhtanov, “Foakes v Beer: Reform at Common Law at the Expense of Equity” (2008) 124 LQR 364; Luke Pearce, “Foakes v Beer and Promissory Estoppel: A Step Too Far” (2008) 19 King’s LJ 630; David Capper, “The Extinctive Effect of Promissory Estoppel” (2008) 37 CLWR 105. And see below 3.2.3.2. 82 Although there is room to expand the operation of promissory estoppel from a shield to a sword (ie from relieving promises to adding promises) so long as the remedy is distinguishable from that purchased by the giving of consideration. 83 Mindy Chen-Wishart, “In Defence of Consideration” (2013) 13 OUCLJ 209. 84 See text corresponding to nn 37–42.

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3.1.1 Respectful dealing in the market domain While it is relatively easy for people to transact (and so co-operate and coordinate) with those they trust and against whom they can exercise non-legal sanctions in the private domain, it is much more difficult to transact with strangers where trust and sanctions are more doubtful or absent. The state’s interest in enhancing the autonomy and welfare of its citizens is furthered by increasing their ability to co-operate, co-ordinate and otherwise create their own arrangements with people beyond their private circle. The state fills the gap in trust and sanctions by being prepared to enforce promises in this domain.85 This allows individuals to project their intentions into the future and plan actions that require concrete pre-commitments. It enables self-interested relations that stand apart from status, custom, habits, and other thicker, more contextual forms of sharing.86 However, to justify state enforcement of promises in the market domain is not to commit to it in an unlimited way. The state must set out the acceptable terms of engagement between the parties. Here, we can immediately refer to vitiating factors such as duress, misrepresentation, and undue influence as impermissible ways of deriving enforceable expectations. But even beyond these, the idea that comes to the fore is Kant’s insistence that persons are ends in themselves with an absolute dignity that must always be respected. This has become a core ideal of modern humanism and political liberalism and the foundation of all other moral duties and obligations. One formulation of the Categorical Imperative – the supreme principle of morality – states: “Act in such a way that you treat humanity, whether in your own person or the person of any other, never simply as a means but always at the same time as an end”.87 It is not wrong to treat others as means to advance our ends; what we must not do is to treat persons merely as if their only value is derived from their usefulness to us. We must always treat them at the same time as ends; to consider their interests and help them to promote, protect and pursue their ends. A concrete expression of this attitude of mutual respect in contracting is the requirement of consideration. Each party treats the other, not only as a means of enhancing her own self-interest, but also as an end whom she simultaneously serves. Moreover, reciprocity is a generalised moral norm, a deep intuition, the foundation of human interactions, and one of the “principal components” of a universal moral code.88 Evolutionary biologists, social biologists, evolutionary psychologists, and Darwinian anthropologists agree that “humans have developed an innate sense of fairness” expressed by the internalised norm of

85 Joseph Raz, “Promises in Morality and Law” (1982) 95 Harv LR 916, 934. 86 Contract therefore presents a much sparer and more formal conception of community than is common to many promises in the private domain, prompting Dori Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Hart Publishing Limited 2003) to draw the distinction between “promise” and “contract”, and Daniel Markovits, “Contract and Collaboration” (2004) 113 Yale LJ 1417 to do so between “co-operation” and mere “collaboration”. 87 Immanuel Kant, Ground Work of the Metaphysics of Morals, (H J Paton tr, Harper 1991) 427–30. 88 Alvin W Gouldner, “The Norm of Reciprocity: A Preliminary Statement” (1960) 25 Am Sociol Rev 161.



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reciprocity,89 both positive (people help those who have helped them) and negative (people take revenge taken on those who have injured them).90 Even Fried concedes that contract law’s central concern “is the situation where we facilitate each other’s projects, where the gain is reciprocal”.91 Conversely, lack of reciprocity (unless it is explicable by altruism, generosity or beneficence) generates tensions that threaten social stability, a core concern of state action. Given power disparities, natural egoistic motivations will seek benefits without returning them. The reciprocity norm facilitates a pattern of interaction that inhibits exploitative relations and resulting social instability.92 Thus, explicit reciprocity describes the basic structure of what counts as just and prescribes the basic rule of engagement that justifies state support between parties in the market domain where trust and social sanctions cannot be assumed. The justice of exchange is embedded in other private law rules. Less than full expectation remedies are available via a deed or promissory estoppel where consideration may be absent. A third party who acquires contested property is protected only if she is a bone fide purchaser for value, rather than a donee.93 A causative mistake is enough to trigger the restitution of a non-contractual enrichment, but much higher thresholds must be crossed for the return of (or to set aside) reciprocated (contractual) transfers.94 The transactions of a bankrupt can be set aside if it is not part of an exchange.95 Restitution for total failure of consideration96 allows a transferor to escape a bad bargain because the transferee should not get something for nothing. Lastly, where one party pays for or contributes to the purchase of property in the name of another, the law presumes that the contributor did not intend a gift and raises a resulting trust in her favour.97 At the core of all these rules is the idea of reciprocity, that one is presumed not to give away something for nothing. Dismantling the requirement of consideration would grate against these rules and trigger potentially radical but uncertain knock-on effects. 3.1.2 Justification of expectation damages Loss of expectation is among the least serious in the scale of harms.98 Even if the promisor should keep his promise as a matter of self-consistency, this does not explain why the promisee should profit from it as a matter of justice and not, say, the state. English law focuses on why a promisee should be entitled 89 See eg Vincy Fon and Francesco Parisi, “Revenge and Retaliation” in Francesco Parisi and Vernon L Smith (eds), The Law and Economics of Irrational Behavior (Stanford University Press 2005) 141, 143; Robert A Prentice, “Law & Gratuitous Promises” (2007) U Ill L Rev 881. 90 Ernst Fehr and Simon Gächter, “Fairness and Retaliation: The Economics of Reciprocity” (2000) 14 J Econ Perspect 159. 91 Fried (n 38) 13. 92 Gouldner (n 88) 174. 93 Miller v Race (1758) 1 Burr 452; 97 ER 398; Pilcher v Rawlins (1871–1872) LR 7 Ch App 259 (CA). 94 cf Kelly v Solari (1841) 9 M & W 54; 152 ER 24; Bell v Lever Brothers [1932] AC 161 (HL). 95 Insolvency Act 1986 (UK) s 238(4)(a). 96 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL). 97 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL); Re Vandervell’s Trusts (No 2) [1974] Ch 269 (CA). 98 See Fuller and Perdue (n 67) 56–57; Eisenberg, “Donative Promises” (n 12) 3.

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to enforce it, what she has done to earn it. It is the reciprocity manifest in the consideration requirement that provides the best justification for the claimant’s right to enforce the promise. Correlatively, the defendant should be liable to perform her promise because she has received the consideration she asked of the claimant. The doctrine of consideration looks at both sides and explains the expectation measure of contractual remedies.

3.2 Criticisms of consideration If exchanges should be enforced, then what is the LRC’s problem? Its criticisms99 boil down to three strands. All can be met to a very significant degree without abandoning the consideration doctrine. 3.2.1 Not requiring genuine bargains The first charge is that the reciprocity entailed by consideration is fatally diluted since consideration need not be adequate.100 The validity of even nominal consideration101 is said to represent the triumph of form over substance and, indeed, effectively makes gratuitous promises binding. It is true that the reciprocity underlying the justifications of the consideration doctrine advanced above is a juridical rather than an economic concept; its value is in “the eye of the law”. As long as there is some possible value given or promised, the law is indifferent to any apparent disparity in the values exchanged. Deference to freedom of contract and the subjectivity of values demand such indifference, at least in the first instance. It is important to recognise that the consideration doctrine does not shoulder the whole responsibility for determining the enforceability of a promise. It operates at stage one to ensure compliance with the basic rule of engagement (agreement and reciprocity). This yields a presumptively enforceable agreement that is, nevertheless, defeasible at stage two by the recognised vitiating factors (such as duress, undue influence and unconscionable bargain), the presence of which depend, inter alia, directly or indirectly on the degree of imbalance in the proposed exchange.102 Contractual imbalance may also be “corrected” by contractual interpretation, implied terms, and other common law doctrines103 or statutory instruments.104 A final observation should be offered on the usual case cited for this criticism. In Chappell & Co Ltd v Nestlé Co Ltd,105 the promisor stipulated three wrappers from its chocolate bars in exchange for a gramophone record. Atiyah’s claim that the case instances enforceability without consideration106 takes a myopic view of 99 Sixth Interim Report (n 4) [25]. 100 See also Clare Dalton, “An Essay in the Deconstruction of Contract Doctrine” (1985) 94 Yale LJ 997, 1039–65, 1066ff; Atiyah (n 2) 194. 101 Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 (HL) 114. 102 See Chen-Wishart, “The Nature of Vitiating Factors in Contract Law” (n 17) 294. 103 Eg the penalty rule, restraint of trade, forfeitures, salvage, and rescission on terms. 104 Eg the Unfair Contract Terms Act 1977 (UK) or the Consumer Rights Act 2015 (UK). 105 [1960] AC 87 (HL). 106 Atiyah (n 2) 179, 193.



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the facts. The real and substantive value of the wrappers emerges if we see it as residing in Nestlé’s overall marketing strategy, rather in the wrappers themselves. 3.2.2 Inconsistent or backwards reasoning The second criticism of the consideration doctrine is the looseness of the definitions of value that qualify as valid consideration. This led Fried to dismiss the consideration doctrine as “too internally inconsistent to offer an alternative at all”107 to his promise principle. Inconsistencies are generated by the different conceptions of “value” applied from time to time by the courts, such as “benefit”, “detriment” and “request”; “legal” and “practical” benefit; value in the eyes of the parties and in the “eye of the law”; tangible and intangible consideration; nominal and illusory consideration. No definition seems immune from incursions by an alternative definition, and those broad enough to encompass the contradictions lack critical bite. This invites the further charge of backwards reasoning – that courts manipulate these unstable conceptions of value to reach results considered desirable on other grounds.108 Thus, courts have extended the doctrine of consideration (sometimes “inventing” it)109 to enforce a promise for policy reasons,110 or to protect a party’s reliance.111 Other times the reasoning is simply incoherent. The most notable example is that, while the court has recognised “practical benefit” as good consideration for a promise to pay more,112 it has refused to do the same for a promise to accept less than was previously due.113 One answer is that examples of the stretching of an existing rule to reach desirable results are ubiquitous in law. Another is that some of the older “hard cases” can be explained by the courts filling gaps in the law of tort114 or unjust enrichment115 that are now unnecessary in the light of recent developments. These do not mean that the consideration doctrine lacks substance or justification. For, there is an enormous difference between exceptional deviations from the consideration requirement, and a free-for-all that would ensue if consideration were abolished. 3.2.3 Failure to find consideration consistent with common sense and business expediency The last problem arises from a too rigid conception of value in certain circumstances so that judicial conclusions may fail to track common sense 107 Fried (n 38) 35. 108 Atiyah (n 2). 109 Treitel defines this as “treating some act or forbearance as consideration quite irrespective of the question whether the parties have so regarded it”: GH Treitel, “Consideration: A Critical Analysis of Professor Atiyah’s Fundamental Restatement” (1976) 50 ALJ 439, 440; see also New Zealand Shipping Co Ltd v AM Satterthwaite Co Ltd (The Eurymedon) [1975] AC 154 (PC) 167 (Lord Wilberforce). 110 Eg Ward v Byham [1956] 2 All ER 318 (CA); Lancelot Shadwell v Cayley Shadwell [1860] 142 ER 62. 111 Eg Clarke v Earl of Dunraven (The Santanita) [1897] AC 59 (HL); Bainbridge v Firmstone (1838) 112 ER 1019; Blackpool and Fylde Aero Club v Blackpool BC [1990] 1 WLR 1195 (CA). 112 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 2 WLR 1153 (CA). 113 Re Selectmove Ltd [1995] 1 WLR 474 (CA), affirming Foakes v Beer (1884) 9 App Cas 605 (HL). 114 Eg De la Bere v Pearson Ltd [1908] 1 KB 280 (CA). 115 Eg Upton-on-Severn RDC v Powell [1942] 1 All ER 220 (CA).

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or business expediency. The LRC’s solution is to abolish consideration in four such situations.116 But this is far too quick. The rational response to a failure to recognise the quid pro quo (exchange) in line with common sense and business expediency is to expand the scope of valuable consideration accordingly, within the traditional framework. It is not to take a radical departure from hundreds of years of legal development. This is to throw the baby out with the bathwater. 3.2.3.1 More for the same The LRC’s third recommendation is that “an agreement in which one party makes a promise in consideration of the other party doing or promising to do something which he is already bound to do by law, or by a contract made either with the other party or with a third party, shall be deemed to have been made for valuable consideration”.117 The controversy is located in one-sided contract variations where a party promises to pay more but the other merely promises to perform her pre-existing contractual duty. Williams v Roffey Bros & Nicholls (Contractors) Ltd118 has gone some way in implementing the LRC’s recommendation by recognising additional consideration in the promisee’s repromise to perform where “the promisor obtains in practice a benefit, or obviates a disbenefit”.119 The main problem is that the “practical benefit” of a repromise is illusory.120 The promisor has the same right to performance and to sue for non-performance as she had before promising to pay more. This has led detractors of consideration to conclude that the Roffey case has abolished consideration for contract variations of the more for the same variety. This need not be conceded. I have argued elsewhere that the solution is to supplement the original bilateral contract with a collateral unilateral contract to pay more only if the stipulated performance is rendered.121 This is not inconsistent with the main contract insofar as it merely adds to one party’s rights.122 It accurately reflects the promisor’s motivation (to get actual performance and not just the right to sue again, which she already had). At the same time, it would protect the promisor if the promisee fails to complete the stipulated performance, since the unilateral contract will then not eventuate and the original contract retains full force. The extra sum promised will not

116 Sixth Interim Report (n 4) [29]–[35], [37]. 117 Sixth Interim Report (n 4) [50(4)]; [36] adds “provided that in other respects such as legality and compatibility with public policy it is free from objection”. 118 [1991] 1 QB 1 (CA). 119 Williams v Roffey (n 118) 16. 120 See Mindy Chen-Wishart, “Consideration, Practical Benefit and the Emperor’s New Clothes” in Jack Beatson and Daniel Friedmann (eds), Good Faith and Fault in Contract Law (OUP 1995) 123. 121 See Mindy Chen-Wishart, “A Bird in the Hand: Consideration and One-Sided Contract Modifications” in Andrew S Burrows and Edwin Peel (eds), Contract Formation and Parties (OUP 2010) 89. 122 Although a collateral contract can prevail over an inconsistent term in the main written contract; City and Westminster Properties (1934) Ltd v Mudd [1959] Ch 129 (Ch); Brikom Investments Ltd v Carr [1979] QB 467 (CA); Harling v Eddy [1951] 2 KB 739 (CA); Mendelssohn v Normand [1970] 1 QB 177 (CA).



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be deducted from the promisor’s damages as costs saved;123 the promisor will not end up worse off as a result of promising more and still not getting performance. This is entirely consistent with the outcome of Williams v Roffey (although not its reasoning).124 It is also consistent with the LRC’s reasoning that there is “no reason in general why A [the promisor], having got what he wanted, should be allowed to evade his promise”.125 The implication is that if the promisee does not complete performance, the promisor should not have to pay the extra sum promised. 3.2.3.2 The same for less The LRC’s fourth recommendation is that “an agreement to accept a lesser sum in discharge of an enforceable obligation to pay a larger sum shall be deemed to have been made for valuable consideration”.126 In the context of promises to accept less for the same performance, Re Selectmove127 has refused to recognise “practical benefit” as good consideration in deference to the House of Lords decision in Foakes v Beer.128 With this route closed, Arden LJ restated the promissory estoppel doctrine in Collier v P&MJ Wright (Holdings) Ltd129 to achieve “in practical terms the recommendation of the Law Revision Committee”. Her Ladyship said that where: “(1) a debtor offers to pay part only of the amount he owes; (2) the creditor voluntarily accepts that offer, and (3) in reliance on the creditor’s acceptance the debtor pays that part of the amount he owes in full, the creditor will, by virtue of the doctrine of promissory estoppel, be bound to accept that sum in full and final satisfaction of the whole debt. For him to resile will of itself be inequitable. In addition, in these circumstances, promissory estoppel has the effect of extinguishing the creditor’s right to the balance of the debt.”130

This distorts the promissory estoppel doctrine beyond recognition. First, treating part payment as “reliance” does violence to the concept of “reliance”. As the lower court found131 and Arden LJ concedes, the promisee’s position after part-payment was not “in any material respect different from that immediately before the agreement was made”.132 Second, this phantom “reliance” makes it automatically inequitable for the promisor to resile. Third, it automatically extinguishes the promisor’s original rights. Arden LJ appeals 123 The cost saved deducted from the promisor’s expectation would then be the lower amount of the original contract. 124 Chen-Wishart (n 120). 125 Sixth Interim Report (n 4) [36] (emphasis added). 126 Sixth Interim Report (n 4) [50(3)], [33]–[35]. 127 [1995] 1 WLR 474 (CA). 128 (1884) 9 App Cas 605 (HL). 129 [2007] EWCA Civ 1329; [2008] 1 WLR 643 [42]. 130 Collier (n 129) [42]. 131 Collier (n 129) [19]. Neither Collier’s continuing to make the payments that he was already making, nor his “wild speculation” that he could otherwise have pursued the other creditors amounted “to anything rendering it unconscionable on the part of the creditor now to pursue Mr Collier for the full amount of the debt”. 132 Collier (n 129) [36].

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to D&C Builders Ltd v Rees133 yet all three judges there applied Foakes v Beer rather than promissory estoppel. Moreover, actual part-payment in Rees did not extinguish the original debt; the pressure that Mrs Rees brought to bear on the builders to induce their agreement to accept part payment meant that it would not have been inequitable for them to go back on their promise. In Collier v P&MJ Wright (Holdings) Ltd, Longmore LJ gave less than enthusiastic support for Arden LJ’s position. His Lordship said that if this position were sustained, courts should be slow to find a promise to forgo rights in the first place.134 The preferable solution is to deploy the same collateral unilateral device that I have already proposed to deal with promises of “more for the same”. Accordingly, the promisor makes a unilateral offer to discharge the whole debt only if the promisee makes the stipulated part-performance.135 The “practical benefit” to the promisor is in actually receiving part-payment over the mere right to sue; “a bird in the hand is worth two in the bush”.136 Again, this accurately reflects the promisor’s motivation in promising to accept part payment. Again, it would protect the promisor’s position; if the promisee fails to make the partpayment, the new promise is not binding and the full amount remains due. This is entirely consistent with the result if not the reasoning of Arden LJ’s position. It is also consistent with the LRC’s recommendation. For, despite its declaration that it is “more logical and more convenient to recommend that the greater obligation can be discharged either by a promise to pay a lesser sum or by actual payment of it”,137 the LRC adds that “if the new agreement is not performed then the original obligation shall revive”.138 Applying the collateral unilateral approach suggested above to enforce both (i) promises to pay more and (ii) promises to accept less would eliminate the incoherence of a divergent approach in the current law. It would also avoid the distortions that Collier v P&MJ Wright (Holdings) Ltd brings to the doctrine of promissory estoppel, and the assault that the LRC’s recommendation would wrought on the consideration doctrine. Indeed, this analysis was adopted in MWB Business Exchange Centres Ltd v Rock Advertising Ltd.139 In that case, MWB operated and managed office space where Rock was a licensee. Rock incurred arrears of license fees and other charges, whereupon the parties agreed an oral variation to re-schedule the debt and Rock paid £3,500 on the same day in accordance with the revised schedule. MWB’s argument that the variation lacked consideration was rejected. The Court of Appeal held that Williams v Roffey’s acceptance of ‘practical benefit’ as good consideration for promises to pay more, must logically also be good consideration for promises to accept less,140 as in this case. There were several practical benefits to MWB from its agreement to re-schedule Rock’s debt. First, 133 134 135 136 137 138 139 140

[1966] QB 617 (CA). Collier v P&MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329; [2008] 1 WLR 643 [47]–[48]. Chen-Wishart (n 121). See Foakes v Beer (1884) 9 App Cas 605 (HL) 622. Sixth Interim Report (n 4) [35]. Sixth Interim Report (n 4) [35]. [2016] EWCA Civ 553. MWB Business Exchange Centres (n 139) [79].



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MWB would retain Rock as a licensee beyond the contractual term.141 This would clearly amount to legal benefit. More significantly, the second recognized benefit to MWB was that it would recover £3,500 immediately and have a greater chance of recovering the rest of the arrears.142 If this part payment of debt counts as practical benefit, then it must be sufficient on its own to support the promise to accept later repayment. This is difficult to square with the Court’s insistence143 that the case is distinguishable from Pinnel’s case,144 Foakes v Beer145 and In re Selectmove.146 In reaching the conclusion that part payment may be consideration for a promise to accept it in discharge of the whole debt, Mary Arden LJ adopted the terminology of “collateral unilateral contract” argued in this article.147 Her Ladyship said:148 “my provisional view (in the absence of argument) is that Rock’s acceptance of MWB’s promise gave rise to a “collateral unilateral contract,” meaning that, collaterally to the licence, for so long as Rock was entitled to and did occupy the unit and paid the licence fee as renegotiated, MWB would be bound on payment of the initial £3,500 to accept the deferral of the arrears in accordance with the variation agreement…. [I]t was not suggested by either party that Rock could take the benefit of the variation agreement without performing its side of the bargain, or that MWB could withdraw from the variation agreement so long as Rock was complying with it.”

While McCombe LJ preferred not to base his concurrence with the outcome on this basis,149 and Kitchin LJ preferred to express no view on it,150 the latter nevertheless added that the “variation agreement thereupon became binding 141 MWB Business Exchange Centres (n 139) [47], [75], [80]. 142 MWB Business Exchange Centres (n 139) [47], [48], [75]. 143 MWB Business Exchange Centres (n 139) [48]: “this is not a case in which the only benefits conferred on MWB by the oral variation agreement were benefits of a kind contemplated by Lord Blackburn in Foakes v Beer and by this court in In re Selectmove”; at [74]: “the reference to “some consideration in this situation” is a reference to consideration over and above that of simply accommodating Rock, and refers to the possible commercial benefit of having Rock continue in occupation for the reason stated at the start of the citation; at [84]: Selectmove is distinguishable from the present case and decides only that the benefit which a creditor obtains from a promise to pay an existing debt by instalments is not good consideration in law”; at [85] the “conclusion that Selectmove can be distinguished in this case is not inconsistent with Foakes v Beer, where the only suggested consideration was the debtor’s promise to pay part of his existing debt. Nor is it inconsistent with the dictum of Lord Coke LC in Pinnel’s case itself ”; at [87]: “agreements to pay a lesser sum than was due under a previous contract will be held to be enforceable because there has been shown to have been consideration in the form of a practical benefit to the creditor which he sought and which is an identifiable benefit over and above the mere fact of accommodating the debtor and not having to enforce payment of the debt.” 144 [1602] 5 Co Rep 117. 145 [1993] EWCA Civ 8. 146 [1884] UKHL 1. 147 Selectmove (n 147) [90]. Also citing “A Bird in the Hand: Consideration and Contract Modifications” in Andrew S Burrows and Edwin Peel (eds) Contract Formation and parties (OUP, 2010) 89–113. Kitchin and McCombe LJJ agreed with the result but reserved their position on the terminology, at [49], [67]. 148 MWB Business Exchange Centres (n 139) [89]. 149 MWB Business Exchange Centres (n 139) [67]. 150 MWB Business Exchange Centres (n 139) [49].

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upon MWB and it would remain binding for so long as Rock continued to make payments in accordance with the revised payment schedule.”151 3.2.3.3 Past consideration The fact that the consideration provided by the promisee must be “in return for” the promise, implies that her performance must be linked not only causally but also temporally to the promise. Hence past consideration is not good consideration. The LRC advocates the abolition of this rule by recommending that “an agreement shall be enforceable … if it be supported by valuable consideration past or present”.152 The LRC explains that: “The inconvenience of this [past consideration] rule is frequently evaded by means of the fiction that the promise made subsequent to the consideration merely fixes the amount due under an earlier promise deemed to exist contemporaneously with the consideration … The fact that the promisor has already received consideration for his promise before he makes it, so far from enabling him to break his promise seems to us to form an additional reason for making him keep it.” 153

The first response is that what the LRC calls a “fiction” is simply the construction of the parties’ acts and promises. It is perfectly acceptable for parties expressly to agree that the machinery for resolving the price to be paid for the performance shall reside with one party.154 If no promise is later made, the recipient of the performance may still be required to pay a reasonable price on the basis that this was impliedly agreed,155 or on a non-contractual basis (a quantum meruit or quantum valebat) because otherwise she would be unjustly enriched by receiving a benefit that she requested and understood not to have been rendered gratuitously.156 If a promise is later made, there is no difficulty in finding that the performance and the later promise are sufficiently linked for the former to constitute consideration for the latter. Now if the parties can expressly agree for one of them to fix the price for the other’s performance after that performance, then the court can find that they have done so impliedly.157 In such cases, the Privy Council requires that: “The act must have been done at the promisors’ request; the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit; and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.”158

The LRC’s recommendation is not so constrained. Insofar as it severs the temporal connection between one party’s performance and the other’s later promise to pay, the recommendation should be rejected. As the Editorial 151 152 153 154 155 156 157

MWB Business Exchange Centres (n 139) [49]. Sixth Interim Report (n 4) [50(2)]. Sixth Interim Report (n 4) [32]. Beale, Chitty (n 76) [2.132]; see also Sale of Goods Act 1979 (UK) s 8(1). Sale of Goods Act 1979 (UK) s 8(2); Supply of Goods and Services Act 1982 (UK) s 15(1). Beale, Chitty (n 76) [20.071]. Lampleigh v Brathwait (1615) Hob 105, 106; 80 ER 255, 255; Eastwood v Kenyon (1840) 11 Ad & El 438, 451–52; 113 ER 482, 487; Re Casey’s Patents [1892] 1 Ch 104 (CA) 1116. 158 Pao On v Lau Yiu Long [1980] AC 614 (PC) 630.



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Committee of the Modern Law Review recognised: “[p]ast consideration … is a contradiction in terms, for it is not consideration at all”.159 To adopt this recommendation is tantamount to the abolition of consideration, which the LRC has expressly rejected.160 3.2.3.4 Firm offers A firm offer (a promise to keep a particular offer open for a fixed period) can be revoked before the expiry of the period unless there is consideration for it. The LRC recommends that “an agreement to keep an offer open for a definite period of time or until the occurrence of some specified event shall not be unenforceable by reason of the absence of consideration”.161 The LRC’s first reason162 is that the unenforceability of firm offers contravenes business practice. However, doubt was cast on this by the Law Commission when it reported on firm offers;163 it observed that research into business practices in the construction industry in the US (albeit in 1952)164 showed that promisees were neither surprised nor aggrieved by the revocability of firm offers. Second, the LRC says that “if the offeror wants a consideration for keeping it open, he can stipulate for it … Merely because he does not so stipulate, he ought not to be allowed to revoke his offer with impunity”.165 But, it could equally be said that the offeree could have given consideration to enforce the firm offer and that, failing that, she should not be allowed to enforce it. This leaves the third and most persuasive reason put forward by the LRC for reform – the protection of the offeree’s reliance on the offer.166 The problem is that the LRC does not make reliance a requirement of enforcement in its recommendation.167 An analysis is proposed here that responds to the justified concern about protecting the promisee’s reliance while remaining within the orthodox consideration analysis. The model is provided by cases where courts have found a preliminary (and usually unilateral) contract aimed at protecting reliance or the integrity of the negotiating process. For example, where parties have not yet concluded the main contract the court may find that they have made a preliminary or collateral contract to pay a reasonable sum for preliminary work or performance of the main agreement at the other’s request,168 or to sell to the highest bidder where the auction is advertised to be “without reserve”169 (the same applying to tenders).170 Consideration is provided by the bidder or 159 The Editorial Committee of the Modern Law Review, “The Law Revision Committee’s Sixth Interim Report” [1937] 1 MLR 97, 101. 160 Sixth Interim Report (n 4) [27]. 161 Sixth Interim Report (n 4) [50(6)]. 162 Sixth Interim Report (n 4) [38]. 163 Sixth Interim Report (n 4) [38]; see also Law Commission, Working Paper 60: Firm Offers (1975) [20]. 164 Franklin M Schultz, “The Firm Offer Puzzle: A Study of Business Practice in the Construction Industry” (1952) 19 U Chi L Rev 237. 165 Sixth Interim Report (n 4) [38]. 166 Sixth Interim Report (n 4) [6]. 167 Sixth Interim Report (n 4) [50(6)]. 168 Beale, Chitty (n 76) [2.208]–[2.210], [2.212], [2.126]. 169 Beale, Chitty (n 76) [2.020]. 170 Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1986] AC 207 (HL).

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tenderer submitting a bid that satisfies the objectively definable criterion (such as the lowest or highest price) specified by the other party. The same analysis was deployed in Blackpool and Fylde Aero Club Ltd v Blackpool BC171 where an invitation to tender was sent by a local authority to seven selected parties stating that tenders submitted after a specified deadline would not be considered. It was held that the local authority was contractually bound to consider (though not to accept) the claimant’s tender. Consideration was provided when the claimant sent a conforming tender by the specified time. Again, a “lock out” agreement172 was recognised in principle in Walford v Miles173 where the promisee’s consideration was the provision of a letter of comfort from the promisee’s bank sought by the promisor. A “lock out” agreement protects the promisee’s expenditure of money and time to “assess what he is prepared to offer for its purchase or whether he wishes to make any offer at all”, without taking the risk that the promisor “may have already disposed of it or, alternatively, may be so advanced in negotiations with a third party as to be unwilling or for all practical purposes unable, to negotiate with” the promisee.174 By analogy, an enforceable firm offer would protect the promisee from the risk that, having spent time and perhaps money to determine whether to accept the substantive offer or otherwise relied on the availability of the offer, the promisor might revoke the offer within the stipulated time period. But what is the consideration? There is no problem if the promisee has paid a sum of money, or given some promise (such as to apply for a loan to finance the main contract) or completed some stipulated action (as in Walford itself). But, on the current law, the promisee’s reliance on the promise to her detriment does not, by itself, amount to consideration, unless the promisor requested that detriment, expressly or impliedly.175 The answer, then, lies in that proviso. Accordingly, a firm offer would be binding if a court finds that (i) the promisee has relied on the promise and (ii) that reliance was impliedly requested by the promisor. It is entirely realistic to say that a promisor makes a firm offer for a stipulated period to increase its chances of concluding the main contract by encouraging the promisee to invest resources in assessing the offer, or by putting itself in the position to accept the offer. The promisee need not do anything, but if she has acted in reliance on the promise such that her position may, or would be prejudiced if the promisor revokes, then the promisor cannot revoke. This is either because the promisee has given consideration by completing the impliedly requested acts, or because her commencement of performance bars the promisor from revoking its unilateral offer.176

171 172 173 174 175

[1990] 1 WLR 1195 (CA). No decision was reached on the quantum of damages. Beale, Chitty (n 76) [2.122]. Beale, Chitty (n 76) [2.122]. Walford v Miles [1992] 2 AC 128 (HL) 139. Eg Alliance Bank Ltd v Broom (1864) 2 Dr & Sm 289; 62 ER 631 where forbearance to sue was found to have been impliedly requested and hence good consideration. 176 Errington v Errington [1952] 1 KB 290; Soulsbury v Soulsbury [2007] EWCA Civ 969; [2008] 2 WLR 874 [50]; Daulia Ltd v Four Millbank Nominees Ltd [1978] Ch 231.



Ch 5  Reforming Consideration: No Greener Pastures 103

Conclusion Serious intention to be bound is necessary for contractual liability, but it is not sufficient. A party’s reliance cannot justify the imposition of contractual liability on the relied-upon party unless the reliance is on the latter’s promise and is expressly or impliedly requested by the latter as the price of the promise. The basis of contractual liability at common law is a voluntary exchange as the mark of mutually respectful dealing that tracks the reciprocity instinct, keeps the law out of the domain of gratuitous promises, and preserves scope for change of mind as constitutive of valuable autonomy. The problems identified by the LRC (ie not enforcing all seriously intended promises, not protecting all foreseeable reliance) are either not problems; or are already, and better, dealt with by alternative, carefully circumscribed doctrines (ie the deed and promissory estoppel); or can be largely resolved within the orthodox framework by realigning the scope of valuable consideration with reality (ie one-sided contract variations and firm offers). There is no need and no justification for dispensing with consideration or jumping to a different basis of contractual liability. The LRC’s recommendations promise no greener pastures. We are better off tending and refining the patch we have tilled for hundreds of years. Evolution and not revolution has always been the common law way.

6

Characterisation: Its Place in Contractual Analysis and Related Enquiries1 James Allsop Contracts lie at the heart of commercial law. This is not the place to discuss the legitimacy of the notion of a lex mercatoria,2 but to the extent that one can be said to exist, at least by reference to certain fundamental principles, lying at its foundation is the notion of the bargain and its enforcement. How contracts are understood, how they are given meaning and how they are given operation are questions of technique and legal policy of the highest importance. Often those processes of understanding, meaning and operation take place through interpretation and construction, fact-finding, and ruleapplication; but sometimes (and often at points of particular importance) there is something more happening – some evaluation or evaluative process – that has a close relationship with the process of ascription of meaning, and with factfinding, but is something different, something further, something less precise and not amenable to logical expression or definition. It is sometimes hidden or disguised by phrases such as “construction” or “construction in a broad sense”, or by mere assertion with the suppression of any necessary premises, or by constructing a rule of application with a meaningless or concealed circuitous 1 2

Or as the artist Grayson Perry might put it (see Map of Nowhere (blue) 2008): “The sadness of the excessively logical”. The debate as to the existence and nature of a new modern lex mercatoria is a fascinating one, see for example: LY Fortier, “The New, New Lex Mercatoria, or, Back to the Future” (2001) 17 Arbitration Int 121; H van Houtte, The Law of International Trade (2nd ed, Sweet & Maxwell 2002) 24–28; G Petrochilos, Procedural Law in International Arbitration (OUP 2004) chs 1–3; JH Dalhuisen, “Legal Orders and Their Manifestation: The Operation of the International Commercial and Financial Legal Order and Its Lex Mercatoria” (2006) 24 Berkeley J Int’l L 129; R Michaels, “The True Lex Mercatoria: Law Beyond the State” (2007) 14 Ind J Global Legal Stud 447; M Pryles, “Application of the Lex Mercatoria in International Commercial Arbitration” (2008) 31 UNSWLJ 319; S Güçer, “Lex Mercatoria in International Arbitration” (2009) 1 Ankara B Rev 30; KP Berger, The Creeping Codification of the New Lex Mercatoria (2nd ed, Kluwer Law International 2010); LE Trakman, “The Twenty-First-Century Law Merchant” (2011) 48 ABLJ 775; G Cuniberti, “Three Theories of Lex Mercatoria” (2013) 52 Col JTL 369; JH Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law (5th ed, Hart Publishing 2013) vol 1; K Winnick, “International Commercial Arbitration, Anticipatory Repudiation, and the Lex Mercatoria” (2014) 15 Cardozo J Conflict Resol 847; VM Johnson, “Codification of the Lex Mercatoria: Friend or Foe?” (2015) 21 Law & Bus Rev Am 151.

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reference. Generally this process is one where a value judgment is made by reference to ascribed meaning, found facts, an expressed principle or rule and the relevantly organised values that are to be brought to bear for the task. It is those values that are often disguised, hidden and suppressed. I have used and will use the word “characterisation” to describe this process. There is no magic in the word, and the process to which I will make reference will be different in different contexts. It is the same word used by the Hon William Gummow in a paper in 2013 concerned with the not dissimilar issue of the need to identify the major premise in many analyses – that is, to approach the matter at the appropriate level of abstraction.3 The same process attends many concepts, whether deriving from the general law or statute, that closely affect contracts – concepts such as the fiduciary relationship or unconscionability. Thus, in order to explain what I mean, I will go beyond discussing central contractual topics. Let me begin by referring to a joint judgment of Dixon and Evatt JJ in A-G (NSW) v Perpetual Trustee4 dealing with a cy-près scheme. The case concerned a bequest of a particular country property (“Milly Milly”) to be used as a training farm for Australian orphan lads. The bequest failed for impracticability, the farm being too small to generate enough income to support the intended enterprise. The question was whether the intention that the particular property should be the place of training was an essential or indispensable condition, or whether it was simply a general charitable intention, which the particular provision for the training for orphan lads dominated. Justices Dixon and Evatt said this about their task:5 “The truth is that the time-honoured distinction between essential and accidental characteristics is at the root of the test provided by the modern law for ascertaining whether a trust for charitable purposes, found incapable of literal execution according to its tenor, is nevertheless to be administered cy-près. In other departments of the law, however, similar distinctions are in use. Analogies may be seen in the question whether a contractual provision is of the essence; whether a term is a condition or a warranty; in the question whether invalid provisions of a statutory enactment or other instrument are severable or form part of an indivisible whole; in the question whether a law is mandatory or directory, and perhaps in the question whether the substantial purpose of creating a special power of appointment was to ensure a benefit to the objects so that they take in default of its exercise by the donee.”

(One can thus see from the passage the range of subjects where a similar process is undertaken.) “In determining whether a wider charitable intention is the substantial purpose of the express directions by which the trust is constituted, the court is guided by the trust instrument and the conclusion is commonly said to depend on a question of construction. No doubt the terms of the document, together with any extrinsic circumstances admissible in aid of construction, form the materials for ascertaining whether the specific directions were 3 4 5

WMC Gummow, “The Selection of the Major Premise” (2013) 2 CJICL 47, 59. A-G (NSW) v Perpetual Trustee Co (Ltd) (1940) 63 CLR 209 (HCA). A-G (NSW) (n 4) 226–27 (emphasis added).



Ch 6  Characterisation: Its Place in Contractual Analysis and Related Enquiries 107 animated by a wider charitable purpose which amounted to the true or substantial object of the trust. The process of extracting from such materials an intention implicit in the transaction which they evidence is properly called interpretation. But the construction of the language in which the trust is expressed seldom contributes much towards a solution. More is to be gained by an examination of the nature of the charitable trust itself and what is involved in the author’s plan or project. In distinguishing between means and ends, between the dominant and the subsidiary, between the substance and the form, an understanding of the relative importance in fact of the component parts of the plan or purpose expressed in the trust is a first step towards forming an opinion of the respective values they possessed in the view of the testator or settlor. His forms of expression are by no means to be neglected. In the arrangement of his ideas and his use of terms the importance which he attached to the particular and to the general respectively may appear. The decided cases show that slight indications have at times been treated as enough to warrant a conclusion in favour of a wider charitable intention.”

The passage reveals that the ascription of meaning to the words was only part of the process. The balance was taken from an understanding of the whole human context. Embedded within that were the values – the matters of importance which the testator’s context, language and humanity revealed as contributing to a value judgment of essentiality. Their Honours used, amongst other examples, questions of contract to illustrate their point. The identification of the essentiality of a provision or of the character of a breach in a contract is a task beyond (though requiring) an understanding of the meaning of the words in the relevant agreement. It is an evaluation of essence or importance that can only be made once one identifies the values and considerations that attend the evaluation. To use the word “values” does not necessarily imply any high moral task; the values may be the brutally selfish commercial considerations attending the making and operating of the contract. Justice Gummow, writing extra-judicially in 1999, referred to the above judgment in the context of statutory interpretation and the equity of the statute.6 He referred to “a socially directed rule, expressed as an abstraction, to the infinite variety of human conduct revealed by the evidence in one case after another”.7 One might next refer to the sometimes derided distinction between interpretation and construction. In Life Insurance Co of Australia Ltd v Phillips8 Isaacs J, drawing on what Lindley LJ said in Chatenay v Brazilian Submarine Telegraph Co,9 distinguished between “interpretation” involving the identification of meaning (being a factual linguistic exercise) and “construction” involving the identification of the legal effect or effect to be given to them (being a legal question). That distinction, especially as it affects the sometimes elusive distinction between fact and law, has been described by the High Court as “artificial, if

6 7 8 9

WMC Gummow, Change and Continuity: Statute, Equity, and Federalism (OUP 1999) 18–19. Gummow (n 6) 18–19. (1925) 36 CLR 60 (HCA) 78. [1891] 1 QB 79 (CA) 85.

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not illusory”’.10 That criticism, however, was directed to the distinction insofar as it related to the giving of legal effect or legal meaning: the “notions of meaning and construction [being] interdependent”;11 and it was directed in particular towards the over-complexity the distinction caused in the domain of the categorisation of questions of fact or law.12 Yet the conceptual distinction between interpretation and construction may be useful to assist in clarity of thought in legal theory and understanding legal function.13 This is especially so the further construction (being the identification of legal effect) moves from the meaning identified. The distinction does not fully capture what I want to discuss; both “interpretation” and “construction” in this context relate to the ascription of meaning and effect to words. I wish to discuss a wider question that takes as its foundation the ascription of meaning to the contract, but is focused upon the evaluation and categorisation of circumstances or relationships by reference to values. The process was also analysed by Professor Stone in his explanation of the limits of logical deduction in the expression and development of the common law.14 He expressed the strong view that insistence of some to describe the judicial process as the operation solely of syllogistic logic, or as the ascription of meaning (by the synonymous processes of interpretation and construction), is likely to hide what is going on. Stone referred to legal categories of meaningless reference, of concealed circuitous reference and indeterminate reference. Some examples, a few of which I will return to, are: the “substance of the contract” for the purposes of frustration or repudiation (akin to the notion of “jurisdictional error” in public law); the distinction between capital and income15 (all being categories of meaningless reference); and duty of care, causation and the imposition of the conclusion of unjust enrichment or of the obligation to give restitution (categories of concealed circuitous or indeterminate reference). I would like to begin with the fiduciary relationship. It is a key component of the organisation of commercial life. That is because its key ingredients – trust, reliance and joint venture – lie at the heart of many commercial relationships. 10 Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 (HCA) 396–97. 11 Collector of Customs (n 10) 397. 12 See Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (FCA) 287; criticised in OV v Members of the Board of Wesley Mission Council [2010] NSWCA 155; (2010) 79 NSWLR 606 [29]–[31] (Basten JA and Handley AJA). 13 See OV v Members of the Board of Wesley Mission Council [2010] NSWCA 155; (2010) 79 NSWLR 606 [8] (Allsop P); JM Perillo (ed), Corbin on Contracts: Volume 5 Interpretation of Contracts (Lexis Law Publishing 1998) para [24.3]; American Law Institute, Restatement (Second) of Contracts (1979) [2000]; and see EW Patterson, “The Interpretation and Construction of Contracts” (1964) 64 Col LR 833. The language of “construction” and “interpretation” is sometimes used in a way that sees the two words as synonymous and sometimes with construction being the process of ascription of meaning and interpretation as something wider. I will maintain the usage used by Isaacs J in Life Insurance (n 8). 14 J Stone, Legal System and Lawyers’ Reasonings (Stevens & Son 1964) ch 7; J Stone, The Province and Function of Law: A Study in Jurisprudence (Associated General Publications Pty Ltd 1946) ch 7 (see in particular 171–91). 15 AusNet Transmission Group Pty Ltd v Federal Comr of Taxation [2015] HCA 25; (2015) 255 CLR 439 [14]; Hallstroms Pty Ltd v Federal Comr of Taxation (1946) 72 CLR 634 (HCA) 646.



Ch 6  Characterisation: Its Place in Contractual Analysis and Related Enquiries 109

There is nothing antagonistic or awkward in the relationship between contract, fiduciary relationship and commerce. Commerce, of course, has an inherently selfish character: that is, the search for commercial gain. But it is far more than that. Perhaps it reflects one of the great complexities and subtleties of life that, whilst, to a degree, it has this selfish character, it is also the vehicle and the catalyst for far nobler aspirations and themes. This is so because hard-faced greed does not promote long term commercial success; such is built, as often as not, on mutual respect, decency and honesty. Litigation lawyers (including judges and arbitrators) sometimes scoff at this. But they only see the scrapping unpleasantness of failure and the often bad manners of litigation, or “dispute resolution” in whatever form. They often overlook the fact that the vast majority of commercial arrangements do not end in tears, but rest on reciprocity, mutual self-interest and a requisite degree of trust. From the fiduciary relationship, I will move to the notion of unconscion­ ability in commerce, to the doctrine of penalties, to the nature of insurance and how the process of characterisation, and in particular, the values attending the evaluation, should be recognised in both questions. With that background I will move to contractual terms. The fiduciary relationship is not capable of precise definition. The conclusion of its existence is not reached by logical deduction alone. Its existence or presence will, however, lead to certain clear rules being engaged. The existence of the relationship is, of course, bound up with the enquiry as to its scope. The identification of the existence and scope of the relationship is assisted by conclusions drawn from the language and intent of the parties, properly interpreted and construed. It is also assisted by recognising existing and accepted categories: partner, joint venturer, agent, director, solicitor, financial adviser. None of those categories assists with any logical progression of thought; but all assist with understanding the character of the relationship. That character, to use the enduring judgment of Mason J in Hospital Products,16 is one that is based on trust, confidence, and confidential relations in which one person has power over the interests of another who by that is vulnerable; such power giving the fiduciary a special opportunity to exercise the power in a way that will abuse the trust the vulnerable principal has placed in her. The nature of the relationship may be representative; or it and the vulnerability may rest in the control of property of another – in a custodianship sense. The judgment of Mason J is a clear statement of the values that are brought to bear in the evaluation and conclusion as to whether a particular relationship should be characterised as fiduciary. The inter-relationship between, and co-existence of, contract and the fiduciary relationship is axiomatic; further, this relationship often occurs in a commercial context: agency, partnership and joint venture being obvious examples. This relationship and co-existence of contract and the fiduciary relationship provides the focus for the way construction and interpretation 16 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 (HCA) 96–97; accepted by the High Court in John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1 [86]–[87] as the guiding statement of principle.

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and characterisation intersect. Here, I use the phrase “construction and interpretation”, as it is so often used in judgments, as a combined phrase to express the process of ascription of meaning (the “proper construction”) of a contract. I do not use it in the broader way earlier referred to that delineates the ascription of meaning (interpretation) and the giving of legal effect (construction – in this context sometimes being wide enough to include characterisation). In Hospital Products, Mason J said the following about the inter-relationship, where the contract provides the foundation for the relationship:17 “In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

That place for the contract properly interpreted does not, however, sweep away the principal task of characterisation. In John Alexander’s Clubs the High Court referred to the late John Lehane’s extra-judicial paper on “Fiduciaries in a Commercial Context”18 in saying the following:19 “[T]he reason why commercial transactions falling outside the accepted traditional categories of fiduciary relationship often do not give rise to fiduciary duties is not that they are ‘commercial’ in nature, but that they do not meet the criteria for characterisation as fiduciary in nature.”

The process of evaluation as to the nature and character of the relationship by reference to the values and considerations means that parties cannot in their contract (and here construction and interpretation (meaning) and characterisation clash) simply deny by a term the consequences of characterisation by reference to the legal incidents of their relationship. If it is a partnership, a joint venture or an advisory relationship of trust and confidence, a clause denying the fiduciary relationship or responsibility will not avail. As Finn J said in South Sydney v News:20 “It is legitimate for parties to avoid the ‘unwanted consequences’ of a particular category of legal relationship by seeking to cast it in a form that takes it outside that category of relationship:  Colbron v St Bees Island Pty Ltd (1995) 56 FCR 303 at 314. But whether or not they are successful in achieving that end does not depend simply upon whether, in an express provision of their agreement, they attribute or deny to their relationship a particular legal character – be this, for example, employer and employee: Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385; principal and principal or principal and agent:  Board of Trade v Hammond Elevator Co, above; or partners: Ex parte 17 Hospital Products (n 16) 97. 18 JRF Lehane, “Fiduciaries in a Commercial Context” in PD Finn (ed), Essays in Equity (Law Book Company 1985) 104. 19 John Alexander’s (n 16) [90]. 20 South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541; (2000) 177 ALR 611 [134].



Ch 6  Characterisation: Its Place in Contractual Analysis and Related Enquiries 111 Delhasse; In re Megevand (1878) 7 Ch D 511. The parties cannot by the mere device of labelling, no matter how genuinely intentioned, either confer a particular legal character on a relationship that it does not possess or deny it a character that it does possess: Ex parte Delhasse, above, at 532; see 2A Corpus Juris Secundum, ‘Agency’, §7; see also the observations of Lord Denning in Massey v Crown Life Insurance Co quoted in the Australian Mutual Provident Society case, above, at 389.”

This being so, it might be thought debatable that one can exclude a fiduciary relationship (otherwise present by the incidents of the legal relationship that has been created) by a clause that stated the relationship to be non-fiduciary, as in the Citigroup Case.21 Nor, with respect, is it adequate to limit the process of characterisation of the incidents of a relationship to one of adequacy of relief by way of contractual terms, as appears to have been done by the New South Wales Court of Appeal in Streetscape.22 I turn to unconscionability. The notions of conscience and unconscionability pervade Equity; they were the insight and guiding force of Equity acting in personam. They were a basis for setting aside or refusing to enforce certain transactions and contracts. They were also a thematic feature of Equity, reflecting a standard exacted of parties, often in a commercial context: estoppel, mistake, the constructive trust, defences to specific performance. By force of statute in Australia the notion has been directly transposed to business relationships. The Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) both contain provisions which prohibit a person from engaging in unconscionable conduct in trade and commerce in connection with the supply or acquisition, or possible supply or acquisition, of goods or services or financial services.23 The Parliament has set out in those provisions not only a standard, but also the values (or at least some of them) by reference to which courts will be expected to evaluate the conduct in question. For instance, s 22 of the Australian Consumer Law (Sch 2 to the Competition and Consumer Act) identifies the following considerations as relevant to the evaluation: the relative strengths of the bargaining position of the parties, the reasonable necessity of terms for the protection of legitimate interests, the understanding and comprehension of the parties of the documentation, the exertion of pressure or use of unfair tactics, the relative price for equivalent goods or services, comparative behaviour with other parties, requirements of legislative or code standards, undisclosed intended conduct, the extent of negotiation, the right of one side to vary terms, and good faith. All of these are, of course, broad conceptions (and evaluative in themselves) but they conform to a requirement of honest and decent behaviour, and a rejection of taking advantage of vulnerability, in a way that strikes a standard of an Australian business conscience. 21 ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963; (2007) 160 FCR 35. 22 Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2; (2013) 85 NSWLR 196 [100]; see also P Finn, “Fiduciary Reflections” (2014) 88 ALJ 127, 143–44. 23 Competition and Consumer Act 2010 (Cth) sch 2 Australian Consumer Law, ss 21, 22; Australian Securities and Investments Commission Act 2001 (Cth) ss 12CB, 12CC.

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The provisions offer Australian courts a fresh start to develop a coherent body of principle concerned with fair dealing, conscience and commerce. The conceptions are hardly new or foreign to common law or Equity. It will be important to recognise the nature of the judicial task involved in the develop­ ment of the principles guiding, and the content of, the statutory standard. It is, first, a matter of statutory interpretation and application. That process is, however, not one limited to a choice of synonyms and distilled epitomes. It will not be helpful to seek to reduce the judicial method to a catchword, a phrase, a necessary precondition (such as “moral obloquy” or “moral obliquity” or “a predatory state of mind”). The assessment of unconscionability involves characterisation of conduct as against conscience, by reference to the values organised for the task. It is a process of the kind discussed by Dixon and Evatt JJ in A-G (NSW) v Perpetual Trustee24 and by Gummow J25 in the paper earlier referred to. It is the creation of an Australian business conscience. It will necessarily draw from, but is not to be limited by, the equitable roots of the expression. The standards from time to time expected of people in Equity will form part of the system of values against which such value judgment or characterisation is made. The factors in the statute can be summarised by a concern with fairness and equality, prevention of advantage being taken of ignorance or vulnerability, and good faith and fair dealing. The evaluation will not be a formless void of personal intuition. The working through of what a modern Australian commercial, business or trade conscience contains and requires will take its inspiration and direction from our legal heritage in Equity and the common law, and from modern social and commercial legal values identified by Australian Parliaments and courts.26 The evaluation of conduct will be made by the judicial technique referred to by Dixon CJ, McTiernan and Kitto JJ in Jenyns v Public Curator,27 being Equity’s precise examination of all relevant facts and relations to reach a determination of the justice of the case. It does not involve personal intuitive assertion. It is an evaluation which must be reasoned and enunciated by reference to the values and norms recognised by the text, structure and context of the legislation, and by reference to the legal values of the common law and Equity and perceived community values, made against an assessment of all connected circumstances. The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or 24 A-G (NSW) (n 4) 226–27. 25 Gummow, Change and Continuity (n 6). 26 For a recent discussion of the way certain values and principles inform commercial life and commercial law, see: JL Allsop, “Conscience, Fair-dealing and Commerce – Parliaments and the Courts” presented at Finn’s Law: an Australian Justice Conference (Federal Court of Australia, 25 September 2015) www.fedcourt.gov.au/publications/judges-speeches/chief-justice-allsop/ allsop-cj-20150925. 27 (1953) 90 CLR 113 (HCA) 118–19.



Ch 6  Characterisation: Its Place in Contractual Analysis and Related Enquiries 113

take advantage; a recognition that inequality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience, in particular having in mind the explicit and implicit assumptions or impositions of risk attending any transaction and the legitimate business interests of the parties; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of an equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and the exercise of power and discretion based thereon. The variety of considerations that may affect the assessment of unconscionability in this process of characterisation only reflects the variety and richness of commercial life. It should be emphasised, however, that faithfulness or fidelity to a bargain freely and fairly made should be seen as a central aspect of legal policy and commercial law. It binds commerce; it engenders trust; it is a core element of decency in commerce; and it gives life and content to the other considerations that attend the qualifications to it that focus on whether the bargain was free or fair in its making or enforcement. In any given case, the conclusion as to what is, or is not, against conscience may be contestable. That is inevitable given that the standard is based on a broad expression of values and norms. Thus, any agonised search for definition, for distilled epitome or for shorthand of broad social norms and general principles will lead to disappointment, to a sense of futility, and to the likelihood of error. The evaluation is not a process of deductive reasoning predicated upon the presence or absence of fixed elements or fixed rules. It is an evaluation of business behaviour (conduct in trade or commerce) as to whether it warrants the characterisation of unconscionable, in light of the values and norms recognised by the statute. Let me turn to the doctrine of penalties. I should be both brief and careful. Brief because others have directed themselves in more detail to this; careful because I have a judgment going to the High Court on the topic. There is now an unfortunate division of opinion between the Supreme Court of the United Kingdom and the High Court of Australia in both the underlying conception of the penalty and the doctrine’s operation. In Cavendish Square Holdings28 the Supreme Court declined to approach the doctrine otherwise than as based on breach of contract. In so doing, it rejected the approach taken by the High Court in Andrews.29 Given that the High Court will no doubt be considering such questions on the appeal in Paciocco,30 it would not be appropriate for me to venture a view. I would only like to say that whatever framework of analysis is to be preferred, the doctrine must be given 28 Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Limited v Beavis [2015] UKSC 67; [2015] 3 WLR 1373. 29 Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205. 30 Australia and New Zealand Banking Group Ltd v Paciocco [2015] FCAFC 78; (2015) 321 ALR 584; Special Leave to appeal to the High Court was granted on 11 September 2015: [2015] HCATrans 229, with the appeal heard on 4-5 February 2016: [2016] HCATrans 9 and [2016] HCATrans 10 (the appeal was dismissed on 27 July 2016: Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28).

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a modern conceptual justification with coherent attendant values. Central to this is the notion of compensation and how one approaches its assessment in the application of the doctrine. Does the penalties doctrine work on a simple reflex of the computation of damages according to Hadley v Baxendale?31 Is it a notion of being out of all proportion with any legitimate interest of the other party? If the latter, questions of evaluation and assessment (characterisation) arise. Compulsion or threat by a contractual term is surely not necessarily wrong; for instance, a term to discourage fraud or other reprehensible conduct by financial incentive can be seen to be a legal aim worthy of support, not attack. Thus, a contractual provision in a joint venture that required a party to disgorge any profit on an opportunity taken, along the lines of the majority in Phipps v Boardman,32 would surely not be penal. That would be so because it was not out of proportion to any legitimate interest of the other party. But if a penalty is a reflex of compensation, what is the justification for accepting the clause as legitimate? The penalties’ doctrine cannot work as a rule-based paradigm. It is too replete with circularity as a category of circuitous reference. The circularity recedes when one has a clear justification for a modern doctrine and a clear conception of the attendant values to apply in the process of characterisation. Let me turn to insurance briefly. The nature of insurance is a deceptively simple concept. We deal with it every day yet it is a concept that is not easily defined by logical expression; and is said to be “elusive”.33 The “working definition” given over 100 years ago by Channell J in Prudential Insurance Co v Inland Revenue Comrs34 is still of utility. It was a definition given in the context of whether something was life insurance (and stampable as such) or a financial instrument (and stampable as a “Mortgage, Bond, Debenture, Covenant”). The “definition” of the contract of insurance is one whereby, for a monetary consideration (the premium), the person agrees to pay to the other (the insured) a sum of money or some benefit upon the occurrence of one or more specified events. But, so put, one does not need to struggle to be able to identify relationships or commercial transactions that meet the definition, but which one would not call insurance. Each element – premium, promise to pay, sum of money or other benefit, upon a specified event – needs some elaboration, not in terms of further definitions, but in terms of purpose. In particular, the notion of the sharing of risk to spread losses of unhoped for, but possible, contingencies that may or may not happen. This purpose affects the calculation of the premium, which is not intended to be equivalent to the value of performance. So a standing contract to provide a service (repair a machine, for instance) is not insurance, as the repairman is not sharing a risk, but providing a service. But proper characterisation can be elusive, as shown by a series of cases from the early 20th century as to whether legal 31 (1854) 9 Ex 341; 156 ER 145. 32 [1967] 2 AC 46 (HL). 33 M Parkington et al (eds), MacGillivray & Parkington on Insurance Law (8th ed, Sweet & Maxwell 1988) 1 [1]. 34 [1904] 2 KB 658 (KBD) 663.



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relationships were life insurance or investments,35 and cases dealing with whether insurance is one type or another, such as marine or non-marine,36 or trade credit insurance or not.37 The process of characterisation was referred to by Windeyer J in one of those cases in 1959 as follows:38 “Whether or not a particular transaction is denoted by some description is a question which not infrequently arises in connexion with enactments which dictate conditions governing transactions of that description, or which impose fiscal burdens such as stamp duties of different amounts upon instruments of different descriptions. In the absence of express statutory definition these questions necessarily turn upon what is the accepted connotation of the description in question … its meaning in ‘common parlance among such persons as were conversant with insurance’ … and ‘as understood commonly in the business world, by insurance companies, and by other people’.”

Thus, meaning approaches characterisation, but it is something more than definition. It is that which is perceived by those familiar with the activity that implicitly characterises the relationship as falling within the connotation of the word as understood in the commercial milieu in which they work. The boundaries and structure of language carry with them the divisions of ideas and values in the commercial field in question. As Lord Devlin said in Chow Yoong Hong39 the business of buying bills at a discount was distinct in nature and character from money lending. That was so not because of some definitional difference, but because the importance of the differences of form of the activities to the commercial community made it so; notwithstanding the equivalence of the object – the raising of money. I turn now to contractual terms and breach. As Dixon and Evatt JJ said in A-G (NSW) v Perpetual Trustee,40 one of the analogous circumstances to that with which they were dealing was the question whether a contractual provision is “of the essence”. This is exemplified by what Jordan CJ said in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd:41 “The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have 35 Joseph v Law Integrity Insurance Co Ltd [1912] 2 Ch 581 (CA); Gould v Curtis [1913] 3 KB 84 (CA); National Mutual Life Association of Australasia Ltd v Federal Comr of Taxation (Cth) (1959) 102 CLR 29 (HCA); Marac Life Assurance v Comr of Inland Revenue [1986] 1 NZLR 694 (CA); Cutten and Harvey v Sun Alliance Life Assurance Ltd (1986) 4 ANZ Ins Cas 60-742; NM Superannuation Pty Ltd v Young [1993] FCA 138; (1993) 41 FCR 182; see generally JL Allsop, “Some Thoughts on the Notion of Life Insurance” (1992) 5 Ins LJ 123. 36 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 (HCA) 242–43; Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39; (2003) 214 CLR 604 [121]–[131], [185]–[200]. 37 General Reinsurance Australia Ltd v HIH Casualty and General Insurance Ltd (in liq) [2009] NSWCA 22 [73]–[75]; (2009) 15 ANZ Ins Cas 61-796. 38 National Mutual Life Association (n 35) 42. 39 Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209 (PC) 216–17. 40 A-G (NSW) (n 4). 41 (1938) 38 SR (NSW) 632 (SC) 641–42 (emphasis added).

116 Contract in Commercial Law entered into the contract unless he had been assured of strict or substantial performance of the promise … and that this ought to have been apparent to the promisor.”

Again, it looks like construction (that is, ascription of meaning), but there is something more; it is an evaluation of importance based, of course, on what is the meaning of the contract, but in the context of the general nature of the contract as a whole, which inevitably brings a range of contextual values to bear. As the plurality42 said in Koompahtoo,43 in describing the process as one of construction, it is the intention of the parties, expressed in their language understood in the context of the relationship and the commercial purpose it served, that determines essentiality. The leaning of the courts towards construing terms as intermediate rather than as essential is informed by the values of justice and fairness in the avoidance of termination on technical or unmeritorious grounds.44 This illuminates the process of assessing what is serious and what is not as one being based significantly on values. As the plurality recognised in Koompahtoo,45 the sufficiency of seriousness, indicated by metaphor in “going to the root of the contract”, leads to a “conclusory description” that: “takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party. … [T]he adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract.”

It can be accepted that this process rests primarily upon a construction of the contract. But clearly it involves more than ascription of meaning; it involves an assessment of the fairness and commercial justice in what has happened, set against what the parties have agreed, in their commercial milieu.46 As Buckley LJ said in Decro-Wall47 (cited in Koompahtoo48), seeking to capture what great common lawyers49 had been saying for a century: “Will the consequences of the breach be such as it would be unfair to the injured party to hold him to his contract and leave him to his remedy in damages …?” The test has been variously expressed: “root of the contract”, “unfair”, “fair carrying out of the bargain as a whole” and “in a vital respect”. The “tests” thus expressed have been criticised as circular and empty.50 I do not agree. The 42 Gleeson CJ, Gummow, Heydon and Crennan JJ. 43 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 [48]. 44 GH Treitel, The Law of Contract (11th ed, Sweet & Maxwell 2003) 797; see also En Peel, The Law of Contract (12th ed, Sweet & Maxwell 2007) 890; cited in Koompahtoo (n 43) [50]. 45 Koompahtoo (n 43) [54]. 46 Koompahtoo (n 43) [55]. 47 Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 (CA) 380. 48 Koompahtoo (n 43) [55]. 49 Freeth v Burr (1873–74) LR 9 CP 208 (Court of Common Pleas) 213–14 (Lord Coleridge LCJ and Keating J); Mersey Steel & Iron Co Ltd v Naylor Benzon & Co (1884) 9 App Cas 434 (HL) 439, 443 (Lord Selborne LC and Lord Blackburn); Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha [1962] 2 QB 26 (CA) 66 (Diplock LJ). 50 See eg JW Carter, Carter’s Breach of Contract (Hart ed, Hart Publishing 2012) 317.



Ch 6  Characterisation: Its Place in Contractual Analysis and Related Enquiries 117

tests really reduce to one variously expressed concept, which for Australia can be seen in Koompahtoo51 and Ankar.52 However it is expressed, the essential element is the deprivation of a benefit or an entitlement, or the imposition of a burden, sufficiently serious as to change the character of the grant to, or of the obligations or entitlements of, the other party to the contract to such a degree that it can be said to be a commercially different bargain.53 The test is not definitional; it is based on a characterisation of the seriousness of the breach, by understanding the nature and commercial operation of the contract as a whole and coming to an evaluation of the seriousness of the breach by reference to all the circumstances and to commercial fairness. This relevance of commercial fairness or justice is echoed in the cognate enquiry as to frustration. In Hirji Mulji v Cheong Yue Steamship Co Ltd,54 Lord Sumner said that frustration was “a device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands”.55 The following can be seen to be relevant considerations in the assessment of seriousness of breach: the adequacy of damages and the ability to quantify damages; any apparent injustice, including unjust enrichment of the innocent party, should that party terminate; the possibility of forfeiture by the party in breach; the uncertainty or not surrounding future compliance with the contract; the history of the standard of contractual compliance hitherto; the expressed or otherwise evident attitude of the party in breach to its obligations; the ability of either party to cure the breach; and, perhaps, the extent to which the behaviour of the party in breach comports with standards of good faith and fair dealing. These matters may not be exhaustive, but they may, in any given case, assist in an assessment of a breach as whether of sufficient seriousness or not to warrant termination. This is characterisation; a search for some more particularly expressed positive rule is both pointless and likely to engender complexity and confusion. This is what Viscount Haldane was referring to in the context of the related evaluative enquiry concerning frustration when he said in Bank Line Ltd v Arthur Capel & Co, “whether frustration has taken place … depends on the circumstances to which the principle is to be applied, rather than on abstract considerations”.56 The significance and importance of broader considerations, such as the nature of the commerce involved, to the court’s assessment of serious breach may be briefly illustrated by reference to the House of Lords’ decision in The “Nanfri”.57 There, a dispute had arisen between owners and charterers over the permissibility of certain deductions from time charter hire and over the validity of the owners’ actions in declaring that it would not allow certain forms of 51 Koompahtoo (n 43) [54]–[56]. 52 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 (HCA) 561–62. 53 See discussion in Byrnes v Jokona Pty Ltd [2002] FCA 41 [70]–[80]; see also comments of Finn J in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50; (2003) 128 FCR 1 [493]. 54 [1926] AC 497 (PC (Hong Kong)). 55 Hirji Mulji (n 54) 510. 56 [1919] AC 435 (HL) 447. 57 Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The “Nanfri”) [1979] AC 757 (HL).

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bills of lading (freight pre-paid bills) to be signed. The focus of the judgment, as it concerned the owners’ conduct, was upon the assessment of seriousness of breach – a question which was answered by reference to broad commercial considerations such as the nature of the parties’ trading relationship, the commercial purpose of the contract, and the potential impact of the breach upon future commercial relations of the parties. Lord Wilberforce referred directly to the fact that had the threatened breach occurred, “the charters would have become useless for the purpose for which they were granted”, a number of “pending transactions” would be affected which would mean that the charterers “might have lost the whole benefit” of the bargain, there was a likelihood that the charterers would become black-listed from future contracts, and finally that, when viewed as a whole, the owners’ response was “disproportionate to the intended effect”. 58 It was by reference to these assessments that his Lordship concluded that the breach “went to the root of the contract” and was therefore an action amounting to repudiation. This same approach was adopted by Lord Fraser of Tullybelton, who focused upon the fact that the owners’ threat, if carried out, “would have been ruinous to [the charterer’s] trade”59 and their reputation “would be very seriously damaged” such that they would “probably have been unable to obtain business for the vessels”.60 Again, it was because of these considerations that his Honour concluded that the breach went to the “root of the contract” and was repudiatory. Characterisation, and the process involved in evaluating the seriousness of a departure from a contractual standard or in assessing the essentiality or otherwise of terms, is framed by an understanding of the context (including commercial context) and imperatives of a given contract or type of contract. It is from that understanding that the relevant values are drawn. That understanding is also essential to the proper interpretation and construction of the contract (in the sense of ascription of meaning). That is because understanding the values and imperatives is crucial to any decision about what the parties meant by the words they used. Examples of masterly understanding of the commercial nature and imperatives of particular types of contract can be seen in the opening paragraph of Lord Bingham’s speech in The “Hill Harmony”61 describing how time charters work, or by Lord Hobhouse in the same case describing the different commercial imperatives of a time charter and voyage charter,62 or by Lord Mustill in The “Gregos”63 describing the commercial pressures in the business of shipping and how they affect time and voyage charters. Another task, similar in nature, was undertaken by the House of Lords in The “Achilleas”64 in qualifying recovery under Hadley v Baxendale.65 Lord Hoffman 58 59 60 61 62 63 64 65

The Nanfri (n 57) 779–80. The Nanfri (n 57) 783. The Nanfri (n 57) 784. Whistler International Ltd v Kawasaki Kisen Kaisha Ltd (The “Hill Harmony”) [2001] 1 AC 638 (HL) 641. The Hill Harmony (n 61) 652–53. Torvald Klaveness A/S v Arni Maritime Corporations (The “Gregos”) [1994] 1 WLR 1465 (HL) 1468–69. Transfield Shipping Inc v Mercator Shipping Inc (The “Achilleas”) [2008] UKHL 48; [2009] 1 AC 61. Hadley (n 31).



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referred to the “context, surrounding circumstances or general understanding in the relevant market [showing] that a party would not reasonably have been regarded as assuming responsibility for such losses”.66 This involved deciding the “kind” and “type” of loss for which the contract breaker ought fairly to be taken to have accepted responsibility.67 Whilst other members of the House constructed the analysis by reference to the intention of the parties, ultimately the reasoning was common: from an understanding of how the market worked, an evaluation was made of the just and fair assumption of liability. Interestingly, one appellate judge in that case who had a deep understanding of the market (Rix LJ) came to the opposite evaluative conclusion,68 reflecting the contestability of such an evaluation. Dare one say it, but implicit in many of these evaluations is not only the detailed understanding by commercial judges of the milieu in question,69 but also an imposition of a standard of behaviour. As Potter LJ said for the Court of Appeal in The “Happy Day”70 in dealing with how a charterer should be taken to behave for the law of waiver in the face of a Notice of Readiness issued by the master and known to be invalid by the charterer, “[a]n assumption of lack of fair dealing of that kind is not one which it seems to me appropriate to make on an objective consideration of the parties’ intentions for the purposes of the doctrine of waiver”. These cases demonstrate the significance which has been placed on the commercial milieu of the transaction and a degree of recognition within the courts that questions such as seriousness of breach cannot (at least in every case) be determined by exclusive reference to, and interpretation of, the text of the agreement. Broader commercial considerations must be taken into account, including the impact of one party’s behaviour upon the other; the commercial purpose for which the agreement was entered into; the legitimate commercial expectations of the parties; and the fairness of a party’s actions. Such things cannot be condensed into concise propositions, but must be evaluated within the factually specific circumstance of each case. As has been recently stated by Etherton LJ:71 “[T]here is a danger in attempts to clarify the application of a legal principle by a series of propositions derived from cases decided on their own particular facts … Whether or not there has been a repudiatory breach is highly fact sensitive. That is why comparison with other cases is of limited value.”

66 The Achilleas (n 64) [9]. 67 The Achilleas (n 64) [15]. 68 Transfield Shipping Inc v Mercator Shipping Inc (The “Achilleas”) [2007] EWCA Civ 901; [2008] 1 All ER (Comm) 685. 69 Or as Karl Llewellyn put it, the “situation sense” of the judge: KN Llewellyn, “Some Realism about Realism – Responding to Dean Pound” (1931) 44 Harv LR 1222; KN Llewellyn, The Common Law Tradition – Deciding Appeals (Little Brown 1960) 121–57; Llewellyn particularly admired Scrutton LJ for his “situation sense”: D Foxton, The Life of Thomas E Scrutton (CUP 2013) 267. 70 Glencore Grain Ltd v Flacker Shipping Ltd (The “Happy Day”) [2002] EWCA Civ 1068; (2002) 2 All ER (Comm) 896 [72]. 71 Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168; [2011] 2 All ER (Comm) 223 [61]–[64].

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Or as Gaudron J said in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd: “[t]here is no very precise formulation of the necessary import of conduct before it will be characteri[s]ed as repudiatory.”72 If I may be forgiven a bad pun at this stage of the discussion, the root or essence of what I wish to say is that the search for rules that express, in value-free language, positive law in the field of regulating dynamic human social activity such as agreements, is fraught with inadequacy, and, if pushed relentlessly, likely to lead to over-complexity and incoherence. The parties’ meaning, expressed in the written words they have used, is central but it rarely exhausts the universe of discourse of relevant legal reasoning. Usually there is something more. It may be that this can be seen as the necessary open texture in many legal rules.73 I have called the process characterisation. It is the evaluation of circum­ stances to draw a conclusion, often a taxonomical conclusion, and often one that is contestable, about broadly expressed principles anchored in the honest and fair undertaking of business. That process always calls upon a body of values, private and public, that inform the logical and intuitive reasoning process involved. It is rooted in or founded on ascription of meaning and the positive legal rules attending the relevant subject. It is not a process detached from an ordered legal framework and method. But, it is an evaluative process governed and guided by the context and relevant values attending the question and the contractual milieu in question. If the process is hidden or if there is a refusal to recognise its existence, values and attending norms fall away, meaningless ever-more precise positive tests of ever-ascending particularity are framed, leading to complexity, and bare assertion is met by bare counter assertion. Modern commercial law, as a part of a global commercial community, rests on principle and values (in particular, the values of honest fair dealing) rather than minute rule making. A system based on principle and values requires clear recognition and enunciation of the process of evaluation or characterisation – a process based on the ascription of meaning of the parties and, where called for, the evaluation or characterisation of relationships and conduct by reference to the organised values that conform with, or inform, the relevant principle. That process will take its place in the legal framework of relevant and related rules. Its separate existence as a conceptual process should, however, be recognised in order that the values being brought to bear can be understood.

72 (1989) 166 CLR 623 (HCA) 666. 73 HLA Hart, The Concept of Law (2nd ed, Oxford 1997) 28–29; see also LL Fuller, “Positivism and Fidelity to Law – A Reply to Professor Hart” (1958) 71 Harv LR 630, 663.

7

Interpretation, Evidence, and the Discovery of Contractual Intention Joshua Getzler*

Lord Mansfield and Before On 25 March 2015 Lord Dyson, the Master of the Rolls, gave a Keating Lecture in London.1 Although he signally failed to discuss the political career and parliamentary wit of any Australian Prime Ministers whatsoever, he did offer an excellent overview of the role of construction law in the development of the common law. And by construction he meant primarily the building of buildings, not the manipulation of rules for interpreting or applying contracts.2 But he did have some things to say about that latter topic too. In a tantalizing aside he stated:3 “It is extraordinary how many cases are still being reported in the law reports in the 21st century on how to interpret a contract. I cannot help thinking that the great Lord Mansfield, who was perhaps the founding father of modern commercial law, would have been disappointed and probably astounded too.” *

1

2

3

I thank Joe Campbell, Paul Davies, James Edelman, David Jackson, Mark Leeming, and Caitlin Moustaka for helping me clarify some matters arising in this paper. All errors and misinterpretations remain mine alone. Lord Dyson MR, “The Contribution of Construction Cases to the Development of the Common Law” (Keating Lecture, Assembly Hall, Church House Conference Centre, 25 March 2015) https://www.judiciary.gov.uk/wp-content/uploads/2015/03/keating-lecture.pdf. In this chapter I follow Anglo-Commonwealth usage and use “construction” and “interpretation” as virtual synonyms, that is, denoting the court’s search for the legally effective meaning of an agreement typically embodied in a text whose meaning must be extracted using canons drawn simultaneously from party practice, social context, and legal norms. By contrast, American common lawyers since Arthur Corbin in the 1930s or earlier have seen the process of discovering contractual meaning as divided into two consecutive and distinct stages: first, ‘interpretation’, connoting a search for linguistic meaning as postulated by parties within their socio-linguistic communities, and secondly, ‘construction’, whereby the courts as public agents act to assign legal effect to the linguistic data emerging from the interpretative process (see LB Solum, “The Interpretation-Construction Distinction” (2010) 27 Const Comm 95). Inevitably these two stages have mutual feedback effects, as where the court must offer construction rules as to what counts as a valid interpretation of contractual intentionality, thus reducing the practical differences between American and Anglo-Commonwealth practices. Dyson (n 1) 11.

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Perhaps we would not wish to go back to the methods of contract proof and interpretation of Lord Mansfield’s day too quickly. Adjudication before the Judicature Acts and the Common Law Procedure Acts pursued justice through the common law pleading system.4 Litigants had great difficulty winning discovery and using testimony to get their story into court. They might have to embark on preliminary actions in Chancery to elicit relevant documents and force answers to interrogatories. It could be difficult to frame special pleadings accurately capturing the alleged facts and identifying the correct elements of an effective cause of action where the plaintiff might still be groping for the correct theory of the case. The defendant might meet an over-specified pleading with a defence of “variance”, stating that the cause pleaded and evidence put in issue did not exactly match that which had been alleged in the originating writ. On the other hand if too broad an allegation was brought by the plaintiff, the defendant might plead the general issue to force all questions of fact before a jury immediately and so put the plaintiff to proof. It could also be a tactically sound defence to raise a demurrer alleging that the cause of action was misconceived or unsupported by the facts as pleaded. One possible response in this tactical game was for plaintiffs’ counsel to issue multiple writs covering every eventuality, adding limitless expense and delay to even the most simple contract claims. It has been suggested that the pleading of multiple causes of action and the raising of multiple factual allegations in the alternative impeded the emergence of substantive doctrines of contractual consensus and mistake, because lawyers were used to the idea that a variance in the understanding of the terms of a contract between the parties might simply be a tactical ploy to knock out the claim in limine.5 It cannot be an accident that the first burst of common law theorising as to how consensus and mistake shape formation came in the wake of the Common Law Procedure Acts of 1852, 1854 and 1860, which got rid of the arcane Hilary Rules of 1834 and tamed the pathologies of special pleading and defence on the general issue. After those pleading reforms come the great cases of Couturier v Hastie,6 Raffles v Wichelhaus,7 Kennedy v Panama, New Zealand, and Australian Royal Mail Co,8 Smith v Hughes,9 and Cundy v Lindsay.10 Catharine MacMillan has shown that these classical cases face in two directions: looking ahead, judges of an intellectual bent such as Justice Blackburn begin harnessing Roman and modern Civilian law (especially as refracted through French and American treatise writers) to make better sense of basic principles of consensus ad idem and error in substantia. Looking backwards, the cases are still influenced by variance pleading, such that the validity and meaning of contracts where the parties disagree is found to be 4

JH Langbein, RL Lerner and BP Smith, History of the Common Law: The Development of AngloAmerican Legal Institutions (Aspen Publishers 2009) 85–204, 345–412. 5 See further C MacMillan, Mistakes in Contract Law (Hart Publishing, 2010) 69–82; PA Hamburger, “The Development of the Nineteenth-Century Consensus Theory of Contract” (1987) 7 LHR 241. 6 (1856) 5 HLC 673; 10 ER 1065 (HL). 7 (1864) 2 H & C 906; 159 ER 375 (Ex). 8 (1867) LR 2 QB 580. 9 (1871) LR 6 QB 597. 10 (1878) LR 3 App Cas 459 (HL).



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a question of construction or interpretation by the court of stylised facts as pleaded, to discover if there is sufficient consensus to form a contract.11 It tended to be a winner-takes-all system; either there was a contract enforced on one party’s version of the terms, or there was no contract. Only rarely does a question of discerning and interpreting ambiguous contractual intention go to the jury for proof by documents or witnesses, and then litigants are impeded by the “best evidence” rules, barring party witness, and placing a premium on specialty deeds, and then written evidence and third party testimony, in a hierarchy of proofs. The courts of equity were far better at winkling out evidence of the intentions of parties engaged in transactions and subjecting these contractual intentions to interpretation and then enforcement by the court. And since so much Chancery litigation in the 18th and early 19th centuries involved land and trust settlements by covenant or sealed deed, there was a vast store of cases to help develop canons for construction of contractual intention, and where necessary, abrogation or rectification. This engine of interpretative control was supported by the powerful equitable evidential system of discovery, interrogatories and witness examination on oath.12 By admitting direct party witness Chancery forced a far greater range of party conduct and motive before a single-judge court deciding fact and law together; moreover Chancery could decide the merits of contractual conduct against a metric of preventing fraudulent or unconscionable abuse of rights, rather than formalistic fitting of fact into pleas followed by testing of evidence before juries. One characteristic type of equity case involved impugning an objective contract proved by deed or on an assumpsit, on the basis of oppression or other flaw in formation. Equity judges might then refuse specific performance or rescind the contract after hearing parol evidence of possible fraud or oppression or “accident” (which could embrace mistake) in the negotiation of the deal.13 We might call this primary dis-enforcement. The other type of case would involve establishing that a substantive contract did exist, in which case equity could simply stand back and permit common law enforcement via an action for a liquidated sum or for damages. Alternatively equity could itself intervene to order primary enforcement by an order in personam requiring some act or forbearance. For example if it was a contract for land or realty or for a specific chose, then specific performance might be ordered, with accounting for profit or an order to pay an exact equitable debt as further enforcement channels. If the formal contract was mistakenly framed but the underlying deal was sound, the primary enforcement order might be one for rectification, or “reformation” as it was 11 MacMillan (n 5) 181–215. 12 See further M Lobban, “Contractual Fraud in Law and Equity, c1750-1850” (1997) 17 OJLS 441; MRT Macnair, The Law of Proof in Early Modern Equity (Duncker & Humblot 1999). 13 The foundational cases are Earl of Chesterfield v Janssen (1750-51) 2 Ves Sen 125, 155–56; 28 ER 82, 100; 1 Atk 301, 351–52; 26 ER 191, 224–25 (Lord Hardwicke C); Gwynne v Heaton (1778) 1 BCC 1, 9–11; 28 ER 949, 953–54 (Lord Thurlow C). Full details of pre-Judicature authority are found in E Sugden, A Practical Treatise on the Law of Vendors and Purchasers of Estates (11th ed, S Sweet 1846) 61–153; WW Kerr, A Treatise on the Law and Practice of Injunctions in Equity (W Maxwell 1867) 466–567; for a modern treatment see JD Heydon, MJ Leeming and P Turner, Meagher Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, LexisNexis Butterworths 2015) 925–46.

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earlier known, so bringing the form of the contract into line with the substance of discovered common intentions; thus rectification could be seen as a sub-set of equitable specific performance.14 The rectification jurisdiction was explained by Lord Thurlow C and distinguished from construction in the foundational case of Lady Shelburne v Earl of Inchiquin:15 “Now, the moment you impeach a deed for fraud, you must either deny the effect of fraud on the deed, or you cannot but be under the necessity of admitting evidence to prove it. So if two persons intrust a third person to draw up minutes of their intention, and such person does not draw them according to such intention, that case might be relieved; for that would be a kind of fraud. It must be an essential ingredient to any relief under this head, that it should be on an accident16 perfectly distinct from the sense of the instrument. – So on the head of ambiguity; if there be a latent ambiguity, it must be explained by parol evidence; for though the words do not, prima facie, import an ambiguity, yet if such ambiguity can be made to appear from parol evidence, it must be admitted to explain it, as well as to raise it: but if words have in themselves a positive precise sense, I have no idea of its being possible to change them, and I take it to be an established rule that words cannot be changed in that manner.”

The Chancery judges admitted that it might be very hard to prove by parol evidence an informal common intention in the teeth of denial of any mistake by one of the parties,17 but proof there must have been as rectification was commonly sought and commonly granted. One pathway to rectification was to take discovery of the draftsman’s instructions; it was not enough for one side simply to assert that the written agreement did not capture what the parties had earlier agreed informally.18 If the written contract was sound but the equity court nonetheless felt that there had been some sharp practice not amounting to grounds for rescission, it might simply refuse its aid to either party, for example by refusing an order for specific performance leaving the party seeking enforcement to damages, which might turn out to be minimal. A court of equity might also discipline unworthy litigants with orders for costs. Lord Mansfield is a key figure in the development of contract interpretation in many parts. He was long a leading counsel in the Court of Chancery and took 14 Simpson v Vaughan (1739) 2 Atk 31; 26 ER 415 (LC) (a joint bond reformed into a joint and several bond since it was clear that no survivorship was intended); similar result in Ex parte Symonds (1786) 1 Cox’s Eq Cas 200; 29 ER 1128 (LC); Baker v Paine (1750) 1 Ves Sen 456; 27 ER 1140 (LC) (payment of commission on gross profit reformed to a proportion of wholesale costs); Townshend v Stangroom (1801) 6 Ves Jun 328; 31 ER 1076 (LC) (verbal agreement regarding boundaries of land differed from deed of lease – Lord Eldon C refused rectification, but also denied specific performance of the conveyance, leaving the lessor to common law damages). 15 (1784) 1 BCC 338, 351; 28 ER 1166, 1172 (Lord Thurlow C). 16 “Accident” is here used in the sense of mistake, using the parlance of older law and equity. 17 The locus classicus is Henkle v Royal Exchange Assurance Co (1749) 1 Ves Sen 317; 27 ER 1055 (Lord Hardwicke C); the high standard of proof is stressed in a series of cases including Burt v Barlow (1792) 3 BCC 451; 29 ER 638 (LC); Mosely v Virgin (1796) 3 Ves Jun 184; 30 ER 959 (Lord Loughborough C); Fowler v Fowler (1859) 4 De Gex & J 250, 264–65, 273–74; 45 ER 97, 103, 106–07 (Lord Chelmsford C), summarizing earlier authorities. 18 Mortimer v Shortall (1842) 2 Dr & War 363, 370 (Sir Edward Sugden); for modern restatement of this rule see Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450; Equuscorp Pty Ltd v Glengallan Investments [2004] HCA 55; (2004) 218 CLR 471.



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equitable procedures with him to the Court of King’s Bench, where he presided from 1756 to 1788; he could thus bridge the equitable and legal styles.19 One of his innovations was to strive to get party witness into court, arguing that partiality to one’s cause went to credit not capacity, and it was better to have party testimony tested though cross-examination than excluded.20 It would take a century for this principle fully to be established. Lord Mansfield strove to curb counsels’ practice of sniping at evidence ad hoc by raising a welter of prior exclusionary cases. The cure for this forensic anarchy was to develop a science of evidentiary rules: “The uncertainty of the law of evidence is owing to mistaken notes, which have turned particular cases into general rules. Now the whole of the law of evidence consists in applying general rules to particular cases, for almost all evidence is admissible or inadmissible according to the circumstances of the case.”21 Lord Mansfield also introduced expert commercial witness and special juries of merchants to supply business norms as evidence of the implicit rules by which merchants contracted.22 This was particularly important in insurance and maritime law,23 and also led to recognition of bills of exchange and commercial paper, though Lord Mansfield famously failed to extend mercantile custom to general contract when he sought to convert contractual consideration into a test for enforcing seriously meant promises.24 When it was objected that his experts “speak not as to facts, but as to opinion”, Lord Mansfield replied, “[i]n matters of science no other witnesses can be called … The question then depends on the evidence of those who understand such matters”.25 In our post-fusion world of “free proof ” judges have the broadest latitude to admit and decide fact, without juries to instruct or rules of permissible pleading and admissibility of evidence to observe; and common law institutions such as contract are adjudicated with every possible type of evidence before the judge. This is the real meaning of fusion – deciding common law claims using equitable modes of proof.26 The turmoil in judicial theories of contract interpretation today is in large part a struggle to re-establish filters on the flow of admissible fact regarding intentionality.

19 CHS Fifoot, Lord Mansfield (Clarendon Press 1936) 52–81. 20 Abrahams v Bunn (1768) 4 Burr 2251, 2254; 98 ER 173, 175 (KB), citing Lord Mansfield’s own note of R v Bray, Mayor of Tintagel (1736) (Lord Hardwicke C). 21 Crook v Dowling (1782) 3 Doug 75, 77; 99 ER 546, 546–47 (KB). 22 Fifoot (n 19) 82–117; JC Oldham, “The Origins of the Special Jury” (1983) 50 U Chi L Rev 137; JC Oldham, English Common Law in the Age of Mansfield (University of North Carolina Press 2004) 16–34, 79–205; JC Oldham, The Mansfield Manuscripts and the Growth of English Law in the Eighteenth Century (University of North Carolina Press 1992) vol 1, esp 44–105. 23 See eg Camden v Cowley (1762) 1 W Bl 417; 96 ER 237 (KB). 24 Pillans v Van Mierop (1765) 3 Burr 1663; 97 ER 1035 (KB), analysed by G McMeel, “Pillans v Van Mierop (1765)” in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract (Hart Publishing 2008) 23–58. 25 Folkes v Chadd (1783) 3 Doug 340; 99 ER 686 (KB); Fifoot (n 19) 77. 26 J Getzler, “Patterns of Fusion” in PBH Birks (ed), The Classification of Obligations (OUP 1997) 157–92.

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Lord Hoffmann and After Now that we have seen something of the development of a law of contractual construction based on the forensics of intentions, let us take a closer look at the recent tumult of debate over interpretation in the courts. We may start with two instances singled out by Lord Dyson in his lecture. He cited a passage from Chartbrook Ltd v Persimmon Homes27 where Lord Hoffmann stated in regard to court interpretation of contracts: “that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and it should be clear what a reasonable person would have understood the parties to have meant.”28

Lord Hoffmann’s decisions in Chartbrook and the earlier case of Investors Compensation Scheme v West Bromwich Building Society29 [‘ICS’] expanded the common law conception of the objective meaning of a contract established by Blackburn J in Smith v Hughes,30 so as to allow the court to use most liberally the “background” or “context” of the agreement to order to inform its interpretation of the common intention represented in the words of the contract and acted upon by one party in reliance on the other. Lord Hoffmann stated maximally that the court could use “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”,31 and conversely ought not rest with the simple non-contextual meaning, that is, to decide what the words of the final contract would mean to an uninformed reasonable reader divorced from the parties’ commercial needs or context. This new approach charted a course for contract interpretation combining the three poles of (i) speaker’s meaning, (ii) hearer’s reception, and (iii) “fly on the wall” or detached thirdparty observation.32 Now, the general commercial context will structure what speaker and hearer are taken to have understood of each other when engaging in contractual dealings and bestowing reliance on each other’s conduct and speech acts; the outside context guides discovery of the mutual text. Lord Dyson in his Keating Lecture took from the ICS and Chartbrook restatements “an important trend that rectification and interpretation are simply different aspects of the single task of interpreting a contract in its context, rather than discrete principles”.33 This comment courts controversy, for the relationship of common law construction of a concluded contract to equitable rectification of a flawed or inaccurate contract remains a troubled borderland. Lord Dyson went on to note a tension in the new ICS/Chartbrook 27 28 29 30 31 32

[2009] UKHL 38; [2009] 1 AC 1101. Chartbrook (n 27) 1114 [25]. [1998] 1 WLR 896 (HL) 912–13. (1871) LR 6 QB 597, 607. ICS (n 29) 913. Cf W Howarth, “The Meaning of Objectivity in Contract” (1984) 100 LQR 265; JP Vorster, “A Comment on the Meaning of Objectivity in Contract” (1987) 104 LQR 274; J Phillips, “Smith v Hughes (1871)” in Mitchell and Mitchell (eds) (n 24) 205–22. 33 Dyson (n 1) 12.



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approach allowing the widest possible matrix of fact to inform objective contract interpretation as a matter of law, but still ruling pre-contractual negotiation to be inadmissible evidence in determining what the parties as a question of fact might have meant by their final contractual agreement.34 This inadmissibility has been widely accepted, and justified on the basis that the general context of party negotiation may successfully be metered by the court through taking of evidence, whilst the tenor of immediate pre-contractual negotiations known only to the parties are too subjective and various to be evidenced with any precision. The subjective beliefs of the actors in pre-contractual negotiation may be excluded for purposes of interpretation, but these beliefs may be probative in controversies over formation. There are two main categories where the courts will admit extrinsic evidence capable of undermining the standing of an objectively proven written agreement as a record of the parties’ wills. The first case is where strong extrinsic evidence demonstrates that both sides objectively seemed to mean something different in their agreement than that recorded in the contract, in which case equitable rectification may be ordered (the parties must perform their original mutual agreement and the written terms are varied by order of the court). In the second category of case, if it is proven that one side knew or suspected that the other was making a serious mistake about the terms of the concluded contract, then the contract may not be enforced on its objective terms; either equitable relief for unilateral mistake may be ordered (the contract is undone), or a non est factum finding may be made (such that the contract is found to be void ab initio).35 To add another layer of complexity, courts may also look at the course of dealings between parties when deciding business necessity or efficacy or common sense or reasonable expectations in the construction of terms, or in some cases, through implication of added terms.36 Moreover courts must look at the course of negotiation between the parties when deciding collateral warranties and the operation of estoppels. All of this adds to the tension surrounding the doctrine that general context, but not pre-contractual negotiations, may be admitted in evidence to help the court determine the meaning of a contractual relationship. The judges have offered a myriad of formulae to capture and tame the deep tensions lurking in admission of evidence to aid contractual interpretation. Lord Dyson in his lecture quoted Lord Clarke’s important contribution to interpretation theory in Rainy Sky SA v Kookmin Bank, which really shrouds the problem of evidence by focusing on commercial policy: 34 Dyson (n 1) 12. This problem is explored in PS Davies, “The Meaning of Commercial Contracts” in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann (Hart Publishing 2015) 215–40. 35 This is one possible interpretation of Hartog v Colin & Shields [1939] 3 All ER 566 (KB), a common-law case where an objective view of the context of negotiation showed that there was no legally probative offer made on the terms enunciated by the offeror but rather a misstatement of a key term knowingly snapped up by the offeree; the offeree could not insist on the misstated contract as he was objectively aware from participation in the immediate course of negotiation that no such terms were intended. Interestingly Singleton J in this case described the verbal mistake using the antique language of “accident”, perhaps to distinguish it from misrepresentation; cf Shelburne (n 15). 36 Equitable Life Assurance Society v Hyman [2000] UKHL 39; [2002] 1 AC 408, 459 (Lord Steyn); Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] WLR 1988, 1993–95 [17]–[27] (Lord Hoffmann).

128 Contract in Commercial Law “If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and reject the other.”37

Though Lord Clarke’s contribution in Rainy Sky has been admired, cited and followed, his interpretative claim may no longer be safe in light of recent decisions at the highest tier of English courts. A harbinger of this development was Lord Grabiner, who in a comment on interpretation after Chartbrook warned against use of the notion of business efficacy as a charter for curial rewriting of explicit contractual terms, whilst conceding that such a notion may go towards court construction of what the parties conventionally intended by their choice of words.38 Such an approach has now emerged in the 2015 Supreme Court case of Arnold v Britton.39 In that case a contract term required a lessee to pay a part of the lessor’s expenses as a fixed annual sum with a high inflation accelerator. Lord Carnwath would have read down the clause based on a test of business efficacy. According to Lord Carnwath, in a period with low inflation or even deflation the regular acceleration of a fixed sum would be so “commercially improbable” that no “reasonable observer” would have interpreted the payment clause thus without very clear words; the better interpretation was to see the formula for an accelerated fixed sum as a maximum or cap on a reasonable part contribution to expenses. This approach aligns with the doctrine enunciated in Rainy Sky. But the majority led by Lord Neuberger rejected this approach, on the basis that interpretation that was “necessary to give business efficacy to the contract” was ultimately a search for the parties’ objective intentions at formation and nothing more. Only if the implications for business efficacy of a particular contract interpretation were impossible would it then become necessary to find a different meaning; the impossibility of itself would demonstrate that some other objective interpretation of party intentions was mandated. In the absence of such necessity the court’s power of interpretation could not be wielded to rewrite a contract with hindsight along more reasonable lines, just because it turned out badly for one of the parties who had lacked the foresight to write in better terms. The majority did not find the payment term in this particular contract sufficiently ambiguous to admit a “necessary” court remoulding; the term requiring a rising recurrent fixed payment was certainly amenable to an objective and unambiguous interpretation and was not impossible to enforce. Lord Carnwath in his dissenting judgment in Arnold observed ruefully: “In an unusual case such as this, little direct help is to be gained from authorities on other contracts in other contexts. As Tolstoy said of unhappy families, every ill-drafted contract is ill-drafted ‘in its own way’.”40

It seems that the appellate courts themselves increasingly resemble unhappy families when it comes to contract interpretation. The whole area was rehearsed again by the Supreme Court in December 2015, in the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited.41 This case turned on whether a term could be implied into a lease permitting a 37 38 39 40 41

[2011] UKSC 50; [2011] 1 WLR 2900, 2908 [21]. Lord Grabiner, “The Iterative Process of Contractual Interpretation” (2012) 128 LQR 41. [2015] UKSC 36; [2015] AC 1619. Arnold (n 39) 1649 [108]. [2015] UKSC 72; [2015] 3 WLR 1843.



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tenant to recover a proportion of prepaid rent and charges tendered under a periodic tenancy where the final period had been shortened by exercise of a break power by the tenant. The lease contract was silent on any such right of part recovery. The lessee did not succeed in so recovering. Lord Neuberger with (Lord Sumption and Lord Hodge in agreement) reinterpreted the tests for implication of terms from the 19th century authorities forwards to hold that implication was not always tied to the intentions of the parties and was not an exercise in construction or interpretation. At the moment of formation the parties may have had no relevant intentions at all regarding the matter to be implied; in other words there was a privation of intentionality from which no positive implication could be derived. The “officious bystander” test was not a method to elicit backwards a counterfactual intention that never existed; one could not rewrite a contract by asking imaginary questions of the parties at formation and imagining the likely answers. The true test was “business efficacy” (preferred here as the correct heuristic, rather than necessity or obviousness or common sense), namely “that a term can only be implied if, without the term, the contract would lack commercial or practical coherence”. Lord Neuberger distanced his model of the implication process from Lord Hoffmann’s earlier expressed views that implication was another incarnation of the interpretation process, of finding “what the instrument, read as a whole against the relevant background, would reasonably be understood to mean,”42 of “construction of the agreement as a whole in its commercial setting”’.43 Lord Neuberger’s new model departs explicitly from the prior jurisprudence of implied terms as a dimension of construction. The decision seems to have provoked a sea-change in approaches to interpretation in just a few months: first, the Supreme Court reiterated its approach in Trump International Golf Club Scotland Ltd v The Scottish Ministers (Scotland),44 decided just a few days after Marks and Spencer; and secondly, the lower courts have heavily cited and relied upon the newly announced principles.45 But not all 42 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988, 1994 [21]. 43 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corporation v York Montague Ltd) [1997] AC 191 (HL) 212. 44 [2015] UKSC 74; [2016] WLR 85, 98 [35]. 45 Decisions following Marks and Spencer in the first weeks since the Supreme Court’s decision include Cavanagh v Secretary of State for Work and Pensions [2016] EWHC 1136 (QB); Phoenix Developments (JPJ) Ltd v Lancashire CC [2016] UKUT 38 (LC); Iceland Foods Ltd v Aldi Stores Ltd (6 May 2016, ChD); Rosenblatt (A Firm) v Man Oil Group SA (13 April 2016, QBD); Marussia Communications Ireland Ltd v Manor Grand Prix Racing Ltd [2016] EWHC 809 (Ch); Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396; PM Law Ltd v Motorplus Ltd [2016] EWHC 193 (QB); Vizcaya Partners Ltd v Picard [2016] UKPC 5; Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (QBD, TCC); R (on the application of Menston Action Group) v Bradford MDC [2016] EWHC 127 (QB); Admantine Energy (Kenya) Ltd v Bowleven (Kenya) Ltd [2016] EWHC 130 (Comm); Hallman Holding Ltd v Webster [2016] UKPC 3; Re Beppler & Jacobson Ltd [2016] EWHC 20 (Ch); C & S Associates UK Ltd v Enterprise Insurance Co Plc [2015] EWHC 3757 (Comm); Airport Industrial GP Ltd v Heathrow Airport Ltd [2015] EWHC 3753 (Ch); Regency Villas Title Ltd v Diamond Resorts (Europe) Ltd [2015] EWHC 3564 (Ch); Hayfin Opal Luxco 3 SARL v Windermere VII Cmbs Plc [2016] EWHC 782 (Ch); AL Challis Ltd v British Gas Trading Ltd [2016] EWHC 513 (QB Comm); Europa Plus SCA SIF & Anor v Anthracite Investments (Ireland) Plc [2016] EWHC 437 (QB Comm); Stevensdrake Ltd v Hunt [2016] EWHC 342 (Ch); Walter Lilly & Co Ltd v Clin [2016] EWHC 357 (QB TCC); Manor Asset Ltd v Demolition Services Ltd (Rev 1) [2016] EWHC 222 (QB TCC); TOC Investments Corporation v Beppler & Jacobson Ltd [2016] EWHC 20 (Ch Comp); Cosmetic Warriors Ltd v Gerrie [2015] EWHC 3718 (Ch).

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have bowed down before the new dispensation. Lord Carnwath in Marks and Spencer agreed with the result decided by the majority, but preferred the approach laid down by Lord Hoffmann in the 2009 Privy Council case of Attorney General of Belize v Belize Telecom Ltd. Lord Carnwath accordingly conceived of implication of terms as a pursuit of the meaning of the contract as made by the parties, and not an augmentation of the contract ex post or a setting of default terms by construction of the court to make the deal work better. It may be that since Lord Carnwath saw interpretation in very wide terms in the Arnold case, he could bring implication inside the category of interpretation of party wills and still retain a broad judicial power to make reasonable contracts out of poorly framed agreements. Lord Neuberger by contrast saw the process of interpretation more narrowly, and would therefore wish to take implication of terms away from party intention, thereby arming the court with a wide policy discretion to give effect to agreements by augmentation.

Justice Mason and the Codelfa Controversy Australian authorities have on occasion cited Lord Hoffmann’s ICS formulation of the wide interpretative powers of the court,46 but overall the High Court has preferred to build its jurisprudence on Mason J’s judgment in the Codelfa case. Mason J there stated that: “evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.”47

Mason J’s analysis was in turn derived from Lord Wilberforce’s formulation of contextual interpretation found in the 1976 decision of Reardon Smith Line Ltd v Hansen-Tangen.48 According to that formulation –  “In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”

This formulation seems to open the gate to contextual data as an essential element of all contractual construction. But the later formulation of Mason J in Codelfa on one view added a “gateway” requirement of patent ambiguity on the face of the contract before contextual evidence could be admitted to aid construction. We shall pick up the controversy over the sense of this supposed gateway requirement shortly. 46 See eg Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181, 188 [11]. 47 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (HCA) 352, and more generally at 345–53 (Mason J); Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530, 559 [82] per curiam; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151, 160 [8] (Gleeson CJ). In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45, 62–63 [39] the High Court stated that any differences between ICS and Codelfa Construction were as yet unresolved, and until the correct approach had been suitably aired in the High Court, the latter case should be followed in Australia. 48 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL) 995–96.



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Australian courts49 have also endorsed the distinction Lord Wilberforce made in Prenn v Simmonds in 1971, namely that between pre-contractual negotiations going to establish the parties’ own subjective understanding of the nature of the deal, which were not admissible, as opposed to evidence of the purpose of the deal which could be admitted as part of the objective business context of the contract that could aid interpretation: “the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact … evidence of negotiations, or of the parties’ intentions … ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.”50

Lord Wilberforce’s judgment in Reardon (building on Prenn) has been so influential in the contract interpretation debate that his words are sometimes treated as a legislative definition of curial power, to be glossed and applied respectfully by later courts. It is important to remember the purpose of his judgment. Reardon involved a contract to build a large tanker named “The Diana Prosperity”, with the contract stating that it would be built at a certain shipping yard with a matching certain hull number. Evidence revealed that the yard was in fact too small for the job and moreover that the parties understood that the job would be subcontracted to a larger yard; but this was not recorded in the contract. When market conditions reduced the forward economic value of the ship, the buyer sought to exit the deal, arguing that building at the specified yard was a condition of the contract such that breach entitled termination. By looking at the practice of the international shipping trade and of Japanese ship building at the time, Lord Wilberforce could infer from the business context that the clause naming the shipyard was not a substantial ingredient in the identity of the goods and did not go to the root of the contract; it was simply a description to identify the goods or earmark them for delivery once completed. Thus was invented the innominate term theory, whereby a contractual term can be characterised as either condition entitling termination or mere warranty according to the interpretation by the court of business context as well as measurement of the consequences of breach;51 significantly the remedial power to decide termination remedies is moved away from the parties towards the court.52 In the leading case of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales53 Mason J seemed to distinguish three types of relevant contractual intention. He first adopted the Reardon test for objective discovery of common intentions through general construction; but then isolated a different 49 Eg Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603, 656 [265] (Campbell JA); Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253, 285 [99] (Heydon and Crennan JJ). 50 Prenn v Simmonds [1971] 1 WLR 1381 (HL) 1385. 51 Lord Wilberforce’s approach was adumbrated by Diplock LJ in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA). 52 See further M Bridge, “Reardon Smith Lines Ltd v Yngva Hanseh-Tangen, The Diana Prosperity (1976)” in Mitchell and Mitchell (eds) (n 24) 321–49. 53 Codelfa (n 47) 346.

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type of objective intentionality propelling implication of terms, distinct in turn from subjective intentionality grounding equitable rectification: “The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it – it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties’ actual intention; the implication of a term is designed to give effect to the parties’ presumed intention.”

More recently a plurality of the High Court wrote that the objective test for general construction involves an “assumption” about the intentions of the parties, gathered from context and defeasible by contrary evidence – in other words, a presumption of fact inferred from other facts, and not a finding of law. Unlike the counterfactual presumed intention that drives implication, the assumed intentions at stake in construction are read from the conduct and context of the parties. The relevant passage from Electricity Generation Corporation v Woodside Energy Ltd is as follows:54 “[T]his Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean … it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.55 As Arden LJ observed in Re Golden Key Ltd,56 unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties … intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.”57

There has been fierce controversy in Australia as to whether this High Court statement revised the Codelfa test and returned to the simpler Reardon test by eliminating any possible “gateway” requirement of prima facie ambiguity in the language of the contract before contextual evidence of meaning can be 54 [2014] HCA 7; (2014) 251 CLR 640, 656–57 [35] (punctuation modified). 55 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 995–96; [1976] 3 All ER 570, 574. 56 [2009] EWCA Civ 636 [28]. 57 Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530, 559 [82] (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ).



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admitted to assist construction. This is partly a battle over the authority of nonratio High Court utterances within the federal and State structure of Australian courts. But abstracting from these precedential questions, it is hard not to side on the substantial question with the New South Wales Court of Appeal’s view in Mainteck Services Pty Ltd v Stein Heurtey,58 that ambiguity is not entirely a quality of semantics on the page, but rather involves application of words to conduct; thus ambiguity is initially established by context and then falls to be resolved by context, and the so-called gateway requirement is a linguistic detour that adds nothing helpful to the process. This approach would bring Australian law back into alignment with the English interpretation of the Reardon Smith principle.59 It is not yet clear where Australian law will settle. In Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd60 the Victorian Court of Appeal sidestepped the Mainteck controversy by noting High Court statements insisting that unambiguous contractual language be enforced literally by the court – and then effortlessly finding an ambiguity. By contrast, in Todd v Alterra at Lloyds Ltd, a decision of the Full Court of the Federal Court, Beach J refused to duck the issue. After quoting the key Mason J passage according priority to plain meaning over context in Codelfa, Beach J went on to observe: “Mason J’s approach would not deny the proposition that before reaching such a conclusion you can consider context. By first considering context, you may conclude that there is no one plain meaning. Context can therefore be used to perform two functions. It can enable you to assess whether there is a plain meaning. And if one concludes that there is no plain meaning, it can assist in resolving the latent textual imprecision.”61

Mason J’s revered formulation in Codelfa is thus capable of bearing a more relaxed interpretation where ambiguity is itself judged in context; and in any case there is no magic in words and interpretative canons may be revised as suits each generation of courts.62 The equitable doctrine of rectification sits separately from the doctrines of construction and implication of terms, as we have seen. The contours of rectification are set out in Campbell JA’s scholarly judgment in Ryledar Pty Ltd v Euphoric Pty Ltd.63 In Ryledar Campbell JA noted how rectification required 58 [2014] NSWCA 184; (2014) 310 ALR 113, 130–34 [69]–[86] (Leeming JA; Ward and Emmett JJA concurring). 59 See Cherry Tree Investments Pty Ltd v Landmain Ltd [2012] EWCA Civ 736; [2013] Ch 305. 60 [2015] VSCA 190. 61 [2016] FCAFC 15 [75]. There is a striking echo here of Lord Thurlow C’s classical equitable reasoning in the 1784 case of Shelburne, quoted above (text accompanying n 15). 62 The “gateway” debate is detailed in P Radan, “Construction of Private Legal Documents” http://sydney.edu.au/lec/subjects/understanding_legal_language/Summer%202015-16/ Construction%20of%20Private%20Legal%20Documents%20(Jan%202016).doc. 63 Ryledar (n 49) 655–68 [258]–[316]. The interpretative principles in this case seem to be used extensively in Australian courts up to the present: see eg RCR Tomlinson Ltd v Russell [2015] WASCA 154 [48]–[54], esp [53]: “The parties’ common intention refers to the actual subjective intention of the parties. However, in order to constitute a common intention the intention of the parties must have been disclosed in some way, although not necessarily by a direct communication, that gives rise to an outward expression of accord between them” (citing key passages of Ryledar); also Archer Capital 4A Ltd as trustee for the Archer Capital Trust 4A v Sage Group plc [2015] FCA 960 [128].

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proof of an actual or “subjective” agreement between the parties, not necessarily a contractual agreement, that continued in existence up until its reduction to a contractual document which failed to embody the actual agreement shared by the parties. Parol evidence was then admissible to displace or supplement the objective contract, but to a demanding standard of proof. It was necessary to establish the shared intentions of that prior agreement and also to show how the mistaken written document if enforced would work a hardship to one side. It would then be unconscionable for the other party to insist on the written contract, and the solution would be for both sides to accept a variation of the contract to match the prior common intention. Campbell JA cited Joseph Story’s insight that rectification was a superior remedy to rescission to prevent the fraud, for upholding the original agreement and so overcoming the shared mistake in recordation would stop parties regretting a contract and bringing parol evidence of their subjective intentions in an attempt to throw over the inconvenient contract. The court of equity would give relief by perfecting the subjectively concluded agreement and so denying the advantaged party the benefit of the documentary error; it would not uproot the bargain.64 Campbell JA observed that the one important question left unresolved by the authorities concerned the standard of proof of the subjective continuing agreement being shared by both parties, or at least held by one party to the knowledge of the other. Judges and jurists had differed over whether some outward manifestation, some objectification if you like, of the shared subjective agreement was necessary in order to displace the terms of the concluded and therefore objectively provable written contract.65 Campbell JA gave this resolution to the question: “In my view, when the fundamental requirement for granting rectification is a continuing common intention of the parties, it is of more assistance to concentrate on what is needed before an intention of the parties to a negotiation counts as a common intention. In my view, when that intention relates to the terms upon which they will contract with each other, it is still necessary for them to know enough of each other’s intentions for it to be said that there is a common intention. They might come to know of each other’s intentions in this way through those intentions being directly stated, or they might come to know of them through the various other means by which one person’s intention can become known to another person. Those means can sometimes involve a process of conscious and deliberate inference. Those means can sometimes involve simply perceiving a gestalt in a series of events. Those means can depend to some extent on the people involved sharing a common understanding of how particular bodies of knowledge or markets or social institutions they are operating in work – the experienced surgeon, or the 64 Ryledar (n 49) 666 [309], quoting J Story, Commentaries on Equity Jurisprudence as Administered in England and America (13th ed by M Bigelow, Little, Brown & Co 1886) 168–69, [154]–[155]. For an early judicial example of this reasoning: Uvedale v Halfpenny (1723) 2 P Wms 151; 24 ER 677; 2 Eq Cas Abr 718 pl 4; 22 ER 604 (Ch, MR). 65 Lord Hoffmann’s analysis of the test for common intention in Chartbrook (n 27) 1125–1128 [59]–[65] surveys the field and comes down for a test of objective ascertainment, seemingly on the basis that because both sides mutually observe each other’s intention that makes the intention independent of each one’s subjectivity. This is clever but difficult, and led the court in Daventry to exclude actual or subjective intentions from their assessment of the pre-contractual situation; for criticism see Meagher Gummow and Lehane (n 13) 934 [27.070].



Ch 7  Interpretation, Evidence, and the Discovery of Contractual Intention 135 experienced chess player, can sometimes see what another surgeon, or chess player, is seeking to do, in a way that an inexperienced person cannot. What matters for present purposes is that for a negotiating party to perform actions or say words from which the other party can gather his or her intention is itself a form of communication. Negotiation of any contract takes place in a context in which various facts are known or assumed by the negotiating parties. Sometimes, for example, if a contract is negotiated in a context where there are well understood business practices and conventions, and nothing is said about those practices and conventions not applying, it can be legitimate to conclude that both parties to the contract intended to act in accordance with those practices and conventions, even if they did not expressly communicate to each other that they intended to act in accordance with those practices and conventions. This view of what is needed before an intention is a common intention, accords, it seems to me, with the Australian case law … .”66

Objective, Subjective, and Inter-Subjective Interpretation It would have been fascinating for this approach to have been brought to bear on the facts in Daventry,67 where negotiators for the transfer of a pension scheme from one corporate entity to another had agreed to the transfer payment of some £2.4 million to cover a deficit in the pension fund. When it came to execute the contract, both sides made mistakes; the negotiator for the transferor neglected to inform his principal of the agreed pension payment; the transferor then ensured there was no pension payment clause in the final contract. On the other side both the negotiator for the transferee and the transferee’s legal team misunderstood the tenor of the final contract terms and believed mistakenly that the contract did provide for the payment when it did not. Lord Neuberger MR and Toulson LJ (as they then were) found for the transferee and ordered rectification to include the payment on the basis that the prior shared agreement and ensuing mistake in recordation had been sufficiently proved using the objectivist criteria laid down in Chartbrook. The final contract, despite being checked and agreed by negotiators and lawyers on both sides, was not a fresh negotiation of terms but a faulty draft of the prior agreement. Etherton LJ by contrast saw a distinction between the transferor negotiator’s mind state and that of his principal; the principal by drafting the no-payment clause had snapped off the prior negotiation and forwarded another fresh agreement; and the transferor was not responsible, because it did not know, of the mistake in contract interpretation that the transferee side was labouring under. Hence the doctrine of unilateral mistake could not be brought into play. A criticism of Etherton LJ’s approach is that it allows a corporate entity to rely upon the acts of its agent prior to issuing a fresh agreement, and yet deny the full legal implications of that action; arguably it was correct for the transferor to accept attribution and knowledge of its 66 Ryledar (n 49) 660 [281] (Campbell JA). 67 Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153; [2012] 1 WLR 1333.

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negotiator’s acts which had contributed to the mistaken beliefs of the other side. The contrary argument is that the personnel on the transferee side were quite incompetent in not seeing the plain meaning of the written contract proffered to them by the transferor’s lawyer, and their neglect should bind their principal. Against that the transferee personnel had been led to believe, and apart from the written contract had never been told otherwise, that the contract embodied the prior agreement. It would punish their mistake and reward the other side for that mistake to uphold the objective contract. A welter of critical commentary has emerged in the wake of this decision, notably by each of the judges who participated in the decision, which possibly sets a new precedent in judicial frankness.68 Lord Hoffmann criticised the majority judges in Daventry for confusing rectification of an agreement for common mistake in recordation from varying the terms of an agreement for unilateral mistake where the parties have not truly agreed;69 but that really only restates the different interpretations of the facts of the case put forward by the majority and the dissentient; the majority found a prior objective agreement, and the dissentient judge did not. If we stand back from the stream of authority and take an overview, we find in Australian law four types of shared contractual intention identified by the courts, each operating in distinct legal fashion, moving across a spectrum of objectivity/subjectivity. There is (1) counterfactual implication; (2) factual presumption; (3) outwardly evidenced mutual accord; and (4) subjective intent known or suspected without outward manifestation. These four categories, each with their own forensics, correlate respectively with (1) implication of terms; (2) general construction of extant terms; (3) rectification for common mistake; and (4) rectification for unilateral mistake. This structured taxonomy may have helped the Australian courts avoid some of the arcane debate over the nature of “objective” intentionality found in recent English discourse. The better view is that all measurement of intentionality is “inter-subjective”; we compare the mind state of the person being assessed with our own expectations of intentionality had we been in that other person’s position. This insight was captured in this passage from the 2004 decision of Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd where the High Court affirmed the objective approach in general construction: 68 See eg Sir Nicholas Patten, “Does the Law need to be Rectified? Chartbrook Revisited” (2013) Chancery Bar Association Annual Lecture http://www.chba.org.uk/for-members/library/ annual-lectures/does-the-law-need-to-be-rectified-chartbrook-revisited; Lord Toulson, “Does Rectification Require Rectifying?” (2013) TECBAR Annual Lecture https://www.supremecourt. uk/docs/speech-131031.pdf; Sir Terence Etherton, “Contract Formation and the Fog of Rectification” (2015) 68 CLP 367; Lord Neuberger, “Reflections on the ICLR Top Fifteen Cases” (2015) lecture to the ICLR https://www.supremecourt.uk/docs/speech-151006.pdf; Lord Hoffmann, “Rectification and Other Mistakes” (2015) lecture to COMBAR https://app.pelorous. com/media_manager/public/260/Lord%20Hoffmann%20Lecture%203.11.15.pdf. The storm over Daventry is further dissected by PS Davies, “Rectifying the Course of Rectification” (2012) 75 MLR 387; PS Davies, “Rectification Versus Interpretation: The Nature and Scope of the Equitable Jurisdiction” (2016) 75 CLJ 62; see also D McLauchlan, “Refining Rectification” (2014) 130 LQR 83; J Ruddell, “Common Intention and Rectification for Common Mistake” [2014] LMCLQ 48. 69 Hoffmann (n 68) 9–16.



Ch 7  Interpretation, Evidence, and the Discovery of Contractual Intention 137 “It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.”70

Interestingly the reasonable observer is here not a fully detached third party but stands in the place of the party receiving a legally causative communication. The inter-subjective insight this example supplies may not simply be a question of evidence or appraisal; it may be that inter-subjectivity is constitutive of intention, in that it is impossible to experience or appraise intentionality without comparing one’s mind to the minds of others; the will only operates, only recognises itself, when it engages with other wills and receives recognition from other wills. A fully private subjective will expressed internally (“I must practise piano today at four pm when I have a spare moment”) can be explicated as dialogue within the self, a transaction or moment of recognition between inter-temporal motivational states or successive identities within the person.71 The inter-subjective interpretation of intentionality has been explored in many voices by philosophers ancient and modern;72 perhaps one of the most useful analyses for lawyers was developed in the mid-18th century by Adam Smith in his celebrated Theory of Moral Sentiments. Smith begins by deploying moral psychology as a forensic device to uncover the content of other minds: “As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation.”73

Smith went on to describe how this inter-subjectivity was ultimately the ground not only of our knowledge of others, but our moral regard for them, or as Smith labelled it, our sympathy: “That this is the source of our fellow-feeling for the misery of others, that it is by changing places in fancy with the sufferer, that we come either to conceive or to be affected by what he feels, may be demonstrated by many obvious observations, if it should not be thought sufficiently evident of itself. When we see a stroke aimed and just ready to fall upon the leg or arm of another person, we naturally shrink and draw back our own leg or our own arm; and when it does fall, we feel it in some measure, and are hurt by it as well as the sufferer. The mob, when they are gazing at a dancer on the slack rope, naturally writhe and twist and balance their own bodies, as they see him do, and as they feel that they themselves must do if in his situation.”74

Smith next introduced the heuristic device of the Impartial Spectator, a postulated third party observer who allowed individuals to understand their 70 [2004] HCA 52; (2004) 219 CLR 165, 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ) (emphasis added); see further Phoenix Commercial Enterprises v City of Canada Bay [2010] NSWCA 64 [148]–[166] (Campbell JA). 71 See G Ainslie, Picoeconomics: The Strategic Interaction of Successive Motivational States Within the Person (CUP 1992). 72 Eg G Ryle, “The Thinking of Thoughts: What is le Penseur Doing?” in Collected Papers, Volume 2 (Hutchinson 1971) 480–96. 73 A Smith, The Theory of Moral Sentiments (A Millar 1759) i.1.1, 9. 74 Smith (n 73) i.1.1, 10.

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own purposive intentionality by measuring it against the inter-subjective appraisal of outsiders. Only by imagining the impact of our speech and conduct on others can we discover and appraise the quality of our own wills; we need to transact with others to have any good sense of our own intentions.75 The interpretative doctrines emerging from Reardon, Codelfa, and Chartbrook reproduce the Smithian strategy, but with a twist. It is the court itself that acts as an impartial non-participant observer of inter-subjectivity; by observing the manifestation of contract intentions formulated in a bilateral relationship the court helps each of the parties discover their own contractual intentions, developed through the relation of one with the other. The policies supporting objective interpretation were re-examined by the High Court of Australia in the 2011 case of Byrnes v Kendle.76 Here further reasons were adduced for pursuing an objective measure of intentions governing voluntary relations. The matter to be decided involved a manifested unilateral declaration of trust where the declarer sought to bring oral evidence of a hidden intention not to make a trust. In the earlier case of Commissioner of Stamp Duties (Queensland) v Jolliffe, Knox CJ and Gavan Duffy J had stated that a trust cannot “be created contrary to the real intention of the person alleged to have created it”.77 In Byrnes that statement was held to lack authority, and the decision in Jolliffe, which concerned location of a beneficial interest for the purpose of levying a tax, was held to be justified if at all solely on the policy of the relevant taxing statute.78 The court in Byrnes held that as in the law of contract, so in trust law the existence and content of a trust is proved by objective evidence that can be relied upon by all actors affected by the trust, without worrying that a manifested trust could be undermined by evidence of subjective mind states.79 Doubts may be expressed about the coherence of the position taken in Byrnes, on the basis that trust formation and contract formation are not entirely congruent legal causes. Express trust formation is more of a unilateral than bilateral act, and need not induce reliance upon or even knowledge of the trust by beneficiaries, or in some cases, by trustees themselves. In the case of Korda v Australian Executor Trustees (SA) Ltd the High Court glossed Byrnes and indicated that the expectations of putative beneficiaries of a purported commercial trust were of little significance in gathering objective evidence of a manifested express trust intention.80 And in the important English case of Pitt 75 See J Getzler, “Law, Self-interest, and the Smithian Conscience” in M Del Mar and M Lobban (eds), Law, Theory and History: New Essays on a Neglected Dialogue (Hart Publishing 2016) ch 14. Modern contract theorists endlessly quote Smith’s purported observation, taken from the Lectures on Jurisprudence (RE Meek, DD Raphael and PG Stein (eds), Clarendon Press 1978) 472, that “a promise is your declaration of your desire that the person for whom you promise should depend on you for the performance of it”. But this seems a naïve and bowdlerized version of his views, relayed at second hand from student notes, and cannot be taken as the essence of his highly psychologised vision of voluntary legal relations expressed in his earlier works. 76 Byrnes (n 49). 77 (1920) 28 CLR 178 (HCA) 181. 78 Byrnes (n 49) 276–77 [61]–[65] (Gummow and Hayne JJ). See further C Karaka, “Secret Intentions and Slippery Words: Byrnes v Kendle” (2012) 34 SLR 599. 79 See further Karaka (n 78). 80 [2015] HCA 6; MJR Crawford, “Inferences and Intentions in the Law of Trusts” (2015) 9 J Eq 290.



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v Holt it was held that a manifested trust intention, even when communicated to trustees and beneficiaries and to the tax authorities, but based on a misunderstanding by the settlor of the legal and practical consequences of the ensuing trust, could be undone ex post through the operation of a revived doctrine of mistake in equity.81 Such an equity is no longer available, at least in English law, in the case of bilateral contracts.82 This suggests that the clear endorsement of the contractual model of objective intention in Byrnes must be adapted in the case of the express trust. These trusts considerations are interesting, but for our purposes subsidiary. A most important aspect of the Byrnes decision was the careful analysis by Heydon and Crennan JJ of the foundations of the objective formation and interpretation rules in contract, and the impact of mistakes in disrupting bilateral agreement. Even if these comments were obiter dicta they compel attention. The justices wrote: “Contractual construction depends on finding the meaning of the language of the contract – the intention which the parties expressed, not the subjective intentions which they may have had, but did not express. A contract means what a reasonable person having all the background knowledge of the ‘surrounding circumstances’ available to the parties would have understood them to be using the language in the contract to mean. But evidence of precontractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of ‘surrounding circumstances’. … One reason why the examination of surrounding circumstances in order to decide what the words mean does not permit examination of precontractual negotiations is that the latter material is often appealed to purely to show what the words were intended to mean, which is impermissible … These conclusions flow from the objective theory of contractual obligation. Contractual obligation does not depend on actual mental agreement. Mr Justice Holmes said: ‘[P]arties may be bound by a contract to things which neither of them intended, and when one does not know of the other’s assent. … [T]he making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs, – not on the parties’ having meant the same thing but on their having said the same thing.’ [Holmes, “The Path of the Law” (1897) 10 Harv LR 457 at 463-464 (emphasis in original).] In consequence the actual state of mind of either party is only relevant in limited circumstances, for example, where one party relies on the common law defences of non est factum or duress; where misrepresentation is alleged; where one party is under a mistake and the other knows it; where the contract is liable to be set aside by reason of equitable doctrines of undue influence, 81 [2013] UKSC 26; [2013] 2 AC 108; see further M Ashdown, Trustee Decision Making: The Rule in Re Hastings-Bass (OUP 2015). 82 Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ 1407; [2003] QB 679.

140 Contract in Commercial Law unconscionable dealing or other fraud in equity; where the equitable remedy of rectification is available; where a question of estoppel arises; or where there is a question whether the ‘contract’ is a sham.”83

This discussion poses a conundrum: what does it mean to state that the law uses an objective standard to establish rights and duties – excepting those “limited circumstances” when it does not? One could as well flip the hierarchy of norms and state that the court will admit subjective evidence of inner mind states whenever it is necessary to depart from an initial objective standard. Here is a trope well known to Realist legal theorists: for every rule one can find a counter-rule, so that under the semblance of rule-following the courts are really engaged in rule-choosing in conditions of relative normative freedom; the exceptions deliver a free choice of rules. One answer to the conundrum is to observe that oscillation between a dominant rule and defined conditions for its defeasibility is a good general description of how law works. It has been deployed by theorists as a general form of normative reasoning,84 and by jurists as explanatory models of the various departments of the common law.85 Objective ascription mitigated by subjective defeasibility can serve as a good model for the forensics of intention as well. In another sense this model tracks the interplay of law and equity; and this suggests why the courts have become mired in their struggles to measure contractual intentions: because they have forgotten the different modes of proof in the two cultures and have muddled the operation of ascriptive legal duties established by special or formal evidence on the one hand, and equities that are generally provable, and that function as restraining duties engrafted onto the prior legal claims on the other. Perhaps another answer lies in Oliver Wendell Holmes’ theory of common law objectivism, which was invoked in Byrnes.86 Holmes’ objectivism was arguably the dominant theme in his work, deeper than his anti-metaphysics, his historicism and his pragmatism which are now relentlessly emphasized by American Legal Realists. Holmes’ objectivism is worth noting, for Holmes saw the move to objective notions of consent and liability as the key historical achievement of the common law. In his most famous work, his 1881 lectures on The Common Law, Holmes was at pains to show a formal objectivism 83 Byrnes (n 49) 284–86 [98]–[101] (footnotes omitted). 84 HLA Hart, “The Ascription of Responsibility and Rights” (1948) 49 Proceedings of the Aristotelian Society (ns) 171, reprinted in A Flew (ed), Logic and Language (B Blackwell 1951) 145–66; JL Austin, “A Plea for Excuses” (1956–57) 57 Proceedings of the Aristotelian Society (ns) 1, reprinted in Philosophical Papers (JO Urmson and GJ Warnock (eds), Clarendon Press 1961) 175–204; JR Lucas, “The Ascription of Actions” (MS c1975) http://users.ox.ac.uk/~jrlucas/ ascript.html. 85 AM (Tony) Honoré, “Rights of Exclusion and Immunities against Divesting” (1960) 34 Tul LR 453; R A Epstein, “Defenses and Subsequent Pleas in a System of Strict Liability” (1974) 3 J Legal Stud 165; RA Epstein, “Pleading and Presumptions” (1973) 40 U Chi L Rev 556. For more recent deployment of defeasibility models see H Collins, The Law of Contract (Weidenfeld and Nicolson 1986); J Goudkamp, Tort Law Defences (Hart Publishing 2013); J Getzler, “Ascribing and Limiting Fiduciary Obligations: Understanding the Operation of Consent” in AS Gold and PB Miller (eds), Philosophical Foundations of Fiduciary Law (OUP 2014) 39–62. 86 Byrnes (n 49) 285 [100]. For a hostile reaction to the Holmesian dicta on contract in Byrnes, see D McLauchlan, “The Contract That Neither Party Intends” (2012) 29 JCL 26.



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at work in contract, tort, and even in crime where the jury preserved an informal element. Holmes argued that the law used moral language such as breach of promise, trespass, fault or mens rea, almost with its tongue in its cheek. The modern law’s seeming reference to inner motivations and moral responsibility was merely the conceptual relic of law in times past, a throwback to more primitive forms of culpability and organised vengeance. The success of the rule of law under a modern unified state was to remove self-help and vengeance and replace these anarchic resorts to coercion with orderly, morally neutral laws. The neutrality of the law inhered in treating all subjects alike even when they were not, even when some actors were guilty of knowing transgression and some were unaware of the quality of their actions and could not help themselves. The law channelled and constrained behaviour by setting up signposts that all actors were to be taken to be capable of following, like driving on the left or right, or keeping a promise that was signalled to others by objective conduct. Mala in se, moral transgression, was thus to be transformed and gradually absorbed into the master category of mala prohibita, acts controlled by positive laws that bound all as a precondition of belonging to the legal state. Holmes’ vision of the separation of law and morals was captured in one typically aphoristic sentence of his discussion of negligence liability: “For it can hardly be supposed that a man’s responsibility for the conse­ quences of his acts varies as the remedy happens to fall on one side or the other of the penumbra which separates trespass [connoting strict liability] from the action on the case [connoting fault liability].”87 In a similar vein Holmes saw contract as a device for bilateral assumption of risk with the secondary remedial obligations as the legal insurance mechanism; contractual promises did not subject the will of one person to the moral demands of another, and promise-keeping or -breaking at law were not moral acts.88 This suggests that the courts are right to maintain objectivity as the basic test for the formation and construction of contracts, not only as a convenient method of proof and an accurate guide to the moral psychology of agreement, but also as a theory preserving liberty and protecting the authority of the law by not investing it with too much moral freight.89 Holmes would also agree that conceptual definition can proceed more surely if we have some awareness of the deeper historical sources of our concepts, and do not confine ourselves to the task of reconciling the most recent precedents. The latter task is better performed if we attend to the former.

87 OW Holmes Jr, The Common Law (Boston 1881; M De Wolfe Howe (ed), Little, Brown and Co 1963) 65–66 and M De Wolfe Howe, “Introduction”, xx-xxvii; HLA Hart, “Diamonds and String: Holmes and the Common Law” in Essays in Jurisprudence and Philosophy (OUP 1983) 278–85; MJ Horwitz, “The Legacy of 1776 in Legal and Economic Thought” (1976) 19 J L & Econ 621, 626ff. 88 Holmes (n 87) 235–36. 89 For a similar argument regarding civilian tradition, see JQ Whitman, “Long Live the Hatred of Roman Law!” (2003) 2 Rechtsgeschichte 40.

8

The Foundations of Implied Terms: Logic, Efficacy and Purpose Andrew Robertson

Introduction The implication of terms in fact can be understood as an exercise in gap filling in the sense that it deals with issues the contracting parties might have resolved by express provision, but have not. If the identification of terms implied in fact is an exercise in gap filling then it is dependent on the application of a set of rules which stipulate the kinds of gaps that will be filled and how those gaps are to be filled. The rule-based approach to the implication of terms is exemplified by the test set out Lord Simon of Glaisdale, giving the reasons of the majority of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings: “Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”1

The idea that the implication of terms in fact is an exercise in gap filling involving the application of a set of rules is in tension with the view that the identification of implied terms is an interpretative activity. If implied terms can be or are identified through a process of interpretation, broadly understood, then there are no real gaps in relation to the issues in question because the answers are there to be found. The notion that implication in fact is an exercise in interpretation is not a new idea. In Codelfa Construction Pty Ltd v State Rail Authority of NSW, for example, Mason J said that the implication of a term concerns the “meaning and effect” of a contract and is “an exercise in interpretation”, though not “an orthodox interpretation of the language of a 1

(1977) 180 CLR 266 (PC).

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contract, that is, assigning a meaning to a particular provision”.2 Mason J went on to determine the relevant meaning and effect of the contract through the application of the rules for implication laid down in BP Refinery and set out above. In Attorney General of Belize v Belize Telecom Ltd the Privy Council adopted a strongly interpretative view of implied terms, shifting the focus of implied term analysis away from the application of gap-filling rules towards the more direct ascertainment of the meaning of the instrument.3 Giving the judgment of the Board, Lord Hoffmann held that the identification of implied terms is no more or less than a matter of spelling out what a reasonable addressee would understand the contract to mean. In a series of cases the English Court of Appeal took the view that Belize Telecom had introduced a new approach to the implication of terms, and even a new test.4 More recently, however, the Supreme Court of the United Kingdom has held that Belize Telecom did not change the law in England.5 According to Lord Neuberger (with whom Lord Sumption, Lord Hodge and Lord Clarke agreed), Lord Hoffmann’s observations are open to “interpretations that are wrong in law” and “should henceforth be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.6 Lord Carnwath alone argued for the continuing authority of the judgment in Belize Telecom, which he regarded as “a valuable and illuminating synthesis of the factors which should guide the court”.7 The Commonwealth response to Belize Telecom has been mixed. Lord Hoffmann’s approach has been cautiously welcomed in New Zealand, although notably the idea that “there is only one question” has not been embraced at the appellate level and the BP Refinery criteria have been held to remain useful.8 In Singapore, on the other hand, the Court of Appeal has firmly rejected the Belize Telecom formulation.9 After a characteristically thorough analysis in two cases, the Singapore Court of Appeal has concluded that the implication of terms in fact is best understood as a gap-filling exercise that is concerned to give effect to the parties’ presumed intentions.10 That exercise is best undertaken through “the business efficacy and officious bystander tests used in conjunction and complementarily”.11 The response to Belize Telecom in the scholarly literature 2 3 4

(1982) 149 CLR 337 (HCA) 345. [2009] UKPC 10; [2009] 1 WLR 1988. Including more recently Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2014] EWCA Civ 603; [2014] 2 P & CR DG 16 [21], [24] and NRAM Plc v McAdam [2015] EWCA Civ 751; [2015] ECC 30 [48]. 5 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72; [2015] 3 WLR 1843 [24] (Lord Neuberger). 6 Marks and Spencer (n 5) [31]. 7 Marks and Spencer (n 5) [74]. 8 Hickman v Turn and Wave Ltd [2011] NZCA 100; [2011] 3 NZLR 318 [245]–[250]. See further David McLauchlan, “Construction and Implication: In Defence of Belize Telecom” [2014] LMCLQ 203, 237. 9 Foo Jong Peng v Phua Kiah Mai [2012] SGCA 55; [2012] 4 SLR 1267; Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43; [2013] 4 SLR 193. 10 Sembcorp Marine Ltd (n 9) [93] (Sundaresh Menon CJ for the court). 11 Sembcorp Marine Ltd (n 9) [98]. The court (at [99]) left open the possibility that business efficacy may not be the only basis for implying terms. There may be other grounds for concluding that “a particular term accords with the parties’ presumed intentions”.



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has also been mixed. The Belize Telecom approach to the implication of terms has been criticised as excessively permissive, providing greater scope for the courts to alter bargains.12 It has also been criticised for mischaracterising the nature of the exercise involved in the implication of terms, and for providing a formulation that is less helpful than a rule-based approach.13 Its defenders have welcomed the decision as one that has provided a “doctrinally coherent and workable” basis for implication,14 and has “simplified the law of implied terms and put it on a sounder conceptual footing”.15 This chapter seeks to reconcile those two different understandings of terms implied in fact. The essence of the argument is that there is an identifiable process of reasoning by which it is determined that a contractual instrument must be taken to mean that a term is implied. If we trace that process of reasoning, we see that it affirms core elements of the traditional approach but also helps us to refine it, pointing towards a formulation that is both more precise and more comprehensive. Most significantly, it requires greater attention to be paid to the purposes of contractual provisions, and what is necessary to prevent those contractual purposes being defeated. This chapter will show that necessity to avoid defeating subsidiary contractual purposes is an important, so far largely unacknowledged, basis for the implication of terms in fact. More broadly, the three paths of reasoning identified below suggest that the foundations of implied terms are logic (the implication is a logical inference from the language of the express terms), efficacy (a particular term is needed to make the contract work and represents a singularly apt solution to the problem in question) and purpose (a particular term is needed to prevent a contractual purpose from being defeated and represents a singularly apt solution to the problem in question).

The Belize Telecom Approach In Belize Telecom Lord Hoffmann held that in the process of implying terms the court “is concerned only to discover what the instrument means”.16 An implied term does not add to the instrument, but only spells out what the instrument “must mean”.17 Where it is claimed that a provision ought to be implied, the question for the court is “whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean”.18 The approach articulated by Lord Hoffmann is both prescriptive and proscriptive. The approach prescribed is to interpret the instrument against the relevant background in order to determine whether the provision in question would spell out what a reasonable person 12 Paul S Davies, “Recent Developments in the Law of Implied Terms” [2010] LMCLQ 140. 13 Wayne Courtney and JW Carter, “Implied Terms: What Is the Role of Construction?” (2014) 31 JCL 151; JW Carter and Wayne Courtney, “Implied Terms in Contracts: Australian Law” (2015) 43 ABLR 246; JW Carter and Wayne Courtney, “Belize Telecom: A Reply to Professor McLauchlan” [2015] LMCLQ 245. 14 Richard Hooley, “Implied Terms after Belize Telecom” (2014) 73 CLJ 315, 315. 15 McLauchlan (n 8) 240. 16 Belize Telecom (n 3) [16]. 17 Belize Telecom (n 3) [18]. 18 Belize Telecom (n 3) [21].

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would understand the instrument to mean. The approach is also proscriptive in its insistence that this interpretative process is all that implication involves. The court can only construe the instrument, and cannot improve on it or introduce terms to make it fairer or more reasonable.19 Moreover, and more significantly, other questions or formulations that have been applied in implied terms cases are not to be treated as “different or additional tests” or “as if they had a life of their own”. 20 Rather, they are to be understood as different ways of expressing the “the central idea that the proposed implied term must spell out what the contract actually means”.21

Objectivity A significant feature of the Belize Telecom approach is that the court’s concern is not to identify the manifested intentions of the parties,22 but rather to identify what the instrument must reasonably be understood to mean.23 Focusing on the meaning of the instrument rather than the intentions of the parties (whether manifested, presumed or imputed) has three closely related benefits.24 First, orientating the objective inquiry in this way has the practical advantage of making it clear that the court need not speculate as to what the parties might have thought about the issue or how they might have reacted to particular contingencies or solutions. Paul Davies has criticised Lord Hoffmann’s approach because it suggests – wrongly in Davies’ view – that the subjective intentions of a party are now irrelevant.25 But the parties’ subjective intentions are surely irrelevant on any view.26 Evidence of the parties’ “actual intentions and expectations” or “declarations of subjective intent” would be inadmissible on a question of implication,27 save perhaps in exceptional circumstances such as where the parties were united in rejecting a term that might otherwise have been implied.28 Ex post speculation by the parties themselves would be 19 20 21 22 23

Belize Telecom (n 3) [16]. Belize Telecom (n 3) [21]–[22]. Belize Telecom (n 3) [27]. See eg Oriental Steamship Co v Taylor [1893] 2 QB 518 (CA) 527 (Bowen LJ). This is not, of course, a new approach to the interpretation of legal instruments, see eg Oliver Wendell Holmes, “The Theory of Legal Interpretation” (1898–99) 12 Harv LR 417. The significance of the equivalent shift in the interpretation of express terms in English law was noted by Hugh Collins, “Objectivity and Committed Contextualism in Interpretation” in Sarah Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing 2003) 189, esp 194–200. 24 Criticism of the Privy Council in Belize Telecom for resorting to “fictional imputed intention” (Kelvin Low and Kelry Loi, “The Many ‘Tests’ for Terms Implied in Fact: Welcome Clarity” (2009) 125 LQR 561, 566) is entirely misconceived. There was no resort to intention at all, as Lord Hoffmann made clear, Belize Telecom (n 3) [16]. 25 Davies (n 12) 142. 26 In Regreen Asset Holdings Pty Ltd v Castricum Brothers Australia Pty Ltd [2015] VSCA 286 [154] post contractual conduct which may have indicated the actual intentions of the parties at that point in time was considered irrelevant on a question of implication because it had “very little probative value in relation to the issue of the parties’ presumed intention …” at the time the contract was made. 27 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (HCA) 352 (Mason J) and Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL) 913 (Lord Hoffmann) respectively. 28 See Codelfa Construction Pty Ltd (n 27) 353 (Mason J).



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unhelpful because no one can reliably say how he or she would have reacted ex ante to questions about a risk that has now eventuated.29 Any such evidence or speculation is also irrelevant to the criteria that are taken into account in an implication case. Davies suggests that the subjective intentions of the parties are relevant to the officious bystander test,30 but that test is concerned with the obviousness of the proposed solution, not with the likely reaction of the parties in light of their actual intentions.31 Secondly, focusing on what the instrument must mean renders irrelevant any concerns as to the limits of what the parties themselves might have thought ex ante. Since the court is not concerned to identify the intentions of the parties, the court need not be at all concerned that the parties did not contemplate the contingency that has arisen or the solution that is proposed. The objectivity of the Belize Telecom approach therefore nullifies any criticism stemming from the idea that the parties are unlikely to have formed any relevant intention in relation to the problem in question.32 The allocation of risk is not made directly by the contracting parties, but is simply the applicative meaning of the instrument to which they have assented. Thirdly, this approach allows us to move beyond the idea that implied terms represent the intentions of the contracting parties, and helpfully renders irrelevant any debate as to what might or might not have actually been intended. Adam Kramer has argued that reference to intention in the law of implied terms is not fictional because communication necessarily involves a shorthand form of expression which is deciphered by pragmatic inference.33 Under this process a speaker can intend not only more than he or she says, but more than he or she brought to mind. Kramer’s example is that a person booking a hotel room may properly be taken to intend the room to include a bed, even if the bed is not brought to mind. The example illustrates the point because “hotel room” is the description of the subject matter, and we can reasonably take contracting parties to intend the subject matter to have certain essential characteristics, even if those characteristics are not brought to mind by the parties.34 But that does 29 This is well accepted in other contexts, see eg Reynell v Sprye (1852) 1 De GM & G 660; 42 ER 710, 728–29 (Cranworth LJ). 30 Davies (n 12) 142. 31 Edwin Peel, Treitel’s Law of Contract (14th ed, Sweet & Maxwell 2015) para 6.035 notes that in Luxor (Eastborne) Ltd v Cooper [1941] AC 108 (HL) 117–18 Viscount Simon LC almost appeared to take a subjective approach when he observed that, if the agent had suggested at the time of engagement that the vendor was obliged to contract with a buyer introduced by the agent, “I am by no means satisfied that the vendor would acquiesce”, but went on to conclude that “upon a true construction of the express contract in this case” the agent takes the risk that the vendor might not be willing to contract with the buyer introduced by the agent. 32 For discussion of this point in a different context see Andrew Robertson, “The Basis of the Remoteness Rule in Contract” (2008) 28 LS 172, 176–78 and Lord Hoffmann, “The Achilleas: Custom and Practice or Foreseeability?” (2010) 14 Edin LR 47, 60. 33 Adam Kramer, “Implication in Fact as an Instance of Contractual Interpretation” (2004) 63 CLJ 384, 385. 34 The same applies to Wittgenstein’s famous example of gaming with dice being implicitly excluded (without being brought to mind) from an instruction to “Show the children a game” (Ludwig Wittgenstein, Philosophical Investigations (GEM Anscombe tr, 3rd ed, Macmillan 1972) 33), and Stephen Smith’s example of the inclusion of a key in the sale of a car, see Stephen A Smith, Contract Theory (OUP 2004) 306.

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not take us very far. The fact that the parties have implicit intentions which are not brought to mind about certain things – such as essential characteristics of the subject matter – does not mean that they have implicit intentions that are not brought to mind about everything. As we move beyond the fundamentals, it becomes increasingly difficult to say whether something did or did not go without saying. But under the Belize Telecom approach, it is unnecessary to do so. A focus on the meaning of the instrument renders entirely irrelevant any speculation or debate about what might or might not in a subjective sense go without saying in a particular situation. The Belize Telecom approach does involve the application of interpretative principles “to interpolate or extrapolate from what is expressed”, but we cannot say that to do this “is to find out what was intended even if it was not consciously considered”.35 To determine the meaning of a contractual instrument is not necessarily to determine what the parties to that instrument intended; a fortiori where the meaning in question relates to matters that are not the subject of express stipulations.36 At a more theoretical level, then, we can see that the focus of the Belize Telecom approach on the meaning of the instrument points towards a justification for the implication of terms that does not depend on spurious references to the intentions of the contracting parties. Contracting parties are bound by an implied term because the term represents the meaning of an instrument to which the parties have manifested their assent.

What the instrument means If the implication of terms can properly be understood as an exercise in discovering or spelling out the meaning of an instrument, then it must be accepted that implication is closely related to the interpretation of express terms. Although they are related and overlapping, they are different processes.37 The implication of terms in fact is concerned with issues arising in the application of particular contracts which are not addressed by the express terms of those contracts. There is a difference between interpreting and applying express provisions of an instrument in relation to a particular issue and dealing with an issue that is not addressed by express provisions, and this is properly reflected in the different tests that are applied.38 The law of implied terms is concerned with 35 Kramer (n 33) 399. 36 Since the interpretation of express terms is concerned with more direct manifestations of intention the objective approach is inherently more likely to yield results that coincide with the parties actual intentions. There nevertheless remain situations in which the objective interpretation does not coincide with the parties’ intentions such as Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153, where the parties were held to an interpretation which appeared to be intended by neither party. See further Andrew Robertson, “The Limits of Voluntariness in Contract” (2005) 29 MULR 179. 37 Lord Neuberger observed in Marks and Spencer (n 5) [26] that they are “different processes governed by different rules”. 38 Kramer (n 33) 395–96 sets out a list of interpretation and implication cases which he says are all “cases of supplementation of the linguistic meaning by a process of pragmatic inference” and asks why we have two sets of rules to govern a single task. Tellingly, however, Kramer quotes the express terms in his summaries of the two interpretation cases but not in any of the implication cases.



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issues on which there are gaps in the express terms.39 It can be distinguished from the interpretation of express terms, which is concerned with ambiguity, vagueness and interpretative dissonance between first blush meanings and ostensible contractual purposes.40 Even where the wrong words may have been used, there is a basic difference between dealing with a situation in which words bear directly on the issue in question and a situation in which they do not. As Bingham MR has famously said: “The courts’ usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.”41

Interpretation and implication, do, however, overlap in two respects. First, there is necessarily an area of overlap because the law of implied terms sometimes deals with the effect of gaps in particular express terms, while the interpretation of express terms may also involve filling gaps in particular provisions.42 In some instances a particular gap can be filled either by reading words into an express term or by implying an additional term.43 Secondly, at a much broader level, some interpretation cases and some implied terms cases are concerned with essentially the same set of issues: namely, identifying the relevant contractual purpose and determining what is required to give effect to that purpose. The resolution of those issues must, however, involve the application of a different technique if there is an express provision dealing or potentially dealing with the issue at hand. Lord Hoffmann has said extra judicially that the only difference between implication and interpretation “is that when we imply a term we are engaged in interpreting the meaning of the contract as

39 Hugh Collins, “Implied Terms: The Foundation in Good Faith and Fair Dealing” (2014) 67 CLP 297, 312 suggests that a “sharper distinction between interpretation and implied terms … contrasts a lack of specificity or precision in the contract with an omission to protect against a particular risk”. But not all implied terms cases involve an omission to protect against a particular risk, or even a question concerning the allocation of risk, see eg BP Refinery (n 1) and Belize Telecom (n 3). 40 Drawing on Richard H Fallon, “Three Symmetries between Textualist and Purposivist Theories of Statutory Interpretation – and the Irreducible Roles of Values and Judgment within Both” (2014) 99 Corn LR 685, esp 698. Well known examples of interpretative dissonance in contract interpretation include Fitzgerald v Masters (1956) 95 CLR 420 (HCA), Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd [1997] AC 749 (HL), Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38: [2009] AC 1101. 41 Philips Electronique Grand Public SA v British Sky Broadcasting [1995] EMLR 472 (CA) 481, quoted with approval in Marks and Spencer (n 5) [29] (Lord Neuberger). 42 See McLauchlan (n 8) 206–11. 43 See eg C Itoh Co Ltd v Copanhia de Navegaçao Lloyd Brasileiro (The “Rio Assu”) (No 2) [1999] 1 Lloyd’s Rep 115 (CA). See also Arnold v Britton [2015] UKSC 36; [2015] AC 1619 [113]–[115] and McLauchlan (n 8) 210–11 (both discussing Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56; [2012] SLT 205) and Elisabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths 2003) para 6.21, discussing BP Refinery (n 1).

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a whole”.44 The interpretation of express terms also of course involves reference to the contract as a whole, and in some cases inferences about contractual purposes will decisively influence the interpretation of particular provisions. If the implication of terms in fact is concerned with ascertaining the meaning of a contractual instrument then it is concerned with meaning in its applicative sense: we are seeking to resolve a puzzle about the application of the instrument to a particular case.45 This is properly understood as an exercise in construction,46 which Francis Leiber argued is the proper guide to be used for faithful regulation in cases which the framers of rules have not foreseen (or, more pertinently in the present context, directly addressed): “Construction is the drawing of conclusions respecting subjects, that lie beyond the direct expression of the text, from elements known from and given in the text – conclusions which are in the spirit, though not within the letter of the text.”47

The process of construction involved in the implication of terms involves the drawing of inferences from the express terms of the instrument and the mutually known context in which it was made. In some implied terms cases the factual context introduced through extrinsic evidence is significant.48 More commonly, though, the crucially important context for implication consists of inferences about the purposes of the instrument and particular provisions within it. In Oriental Steamship Co v Tylor, for example, Bowen LJ noted in the context of an implication question that the “true interpretation” of the charterparty before the court “is to be found by keeping in one’s mind the proper functions of a charterparty and of a bill of lading respectively”.49 The implication made by the Court of Appeal in that case rested in part on perceptions of the purposes of bills of lading in general and the “further purposes” intended to be served by the bill of lading in the charterparty in question.50 If we accept that (a) the meaning that we are concerned with here is the applicative meaning of the instrument, and (b) the meaning of the instrument is to be determined by reference to its content, context and inferences as to contractual purposes, then a process of reasoning is still needed in order to determine whether the instrument “means” that a particular term is implied. A reasoning process is needed in order to determine whether the instrument, properly construed, both identifies a solution to the problem that has been 44 Lord Hoffmann, “The Intolerable Wrestle with Words and Meaning” (1997) 114 S Afr LJ 656, 662. 45 Richard H Fallon, “The Meaning of Legal “Meaning” and Its Implications for Theories of Legal Interpretation” (2015) 82 U Chi L Rev 1235, 1238. 46 See McLauchlan (n 8) 206–11. 47 Francis Lieber, Legal and Political Hermeneutics (Little and Brown 1839) 56. 48 Eg BP Refinery (n 1); Regreen Asset Holdings Pty Ltd (n 26); Crema v Cenkos Securities plc [2010] EWCA Civ 1444; [2011] 1 WLR 2066 [50] (Aikens CJ): “[T]he question of implied terms … must be considered in the light of the expert evidence on “market practice”, so that the court can put itself in the position of the “reasonable addressee” of the contract …”. The fact that a document is addressed to third parties may limit the use that can be made of such background material, Belize Telecom (n 3) [36]–[37]; cf Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736; [2013] Ch 305. 49 [1893] 2 QB 518 (CA) 526. 50 Oriental Steamship Co (n 49) 526.



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identified and indicates that the solution is to govern the problem. In most implied terms cases the latter question is the more difficult. Typically there is an answer which is either the obvious solution or can, with some reflection, be seen as the singularly apt solution to the problem.51 The difficult issue for the court or legal adviser is whether the obvious or singular solution governs the problem or the risk lies where it falls according to the express terms. How does one determine whether the contract “means” that the obvious or singular (but unarticulated) solution should govern the problem? This difficulty is illustrated by the facts of Belize Telecom itself. The articles of association of a partially privatised telecommunications company were structured so as to facilitate a sharing of control between the Government and private investors, with power given to different classes of shareholders to elect and remove directors. The Government was issued a special share which operated as an instrument of control. The holders of a majority of C class shares were entitled to elect and remove up to four directors. But the articles of association provided that, if the holder of the special share was also the holder of C class shares representing 37.5% or more of the issued share capital of the company, then the holder of the special share was “entitled … to appoint two of the directors designated ‘C’ directors and by like notice to remove any director so appointed and appoint another in his or her place”.52 The problem was that if the holder of the special share exercised the power to appoint two of the designated C directors but subsequently ceased to hold the requisite proportion of the issued share capital, there was no mechanism for removal of those two directors. That is what occurred. There is little doubt that the articles of association should have provided that any directors appointed by the special shareholder should be removed automatically upon its ceasing to hold the requisite number of C class shares. It is less clear, however, whether the articles of association could reasonably be understood to mean that there was to be an automatic removal, or whether there was simply a gap in relation to this issue.53 The answer was that the articles of association must have meant that the obvious solution was to govern the problem because that implication was required to give effect to the purpose of the relevant provisions of the instrument: “[T]he implication is required to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles.”54

51 See Belize Telecom (n 3) [25] and the discussion below, text accompanying nn 111–134. 52 Belize Telecom (n 3) [5]. 53 Conversely, one could ask why the lease in Marks and Spencer (n 5) could not be understood to mean that the landlord was obliged to repay the portion of advance rent representing the period following the break date, since it was clear that the lease should have imposed such an obligation. It was the obvious solution to the windfall problem created by the possibility of termination of the lease pursuant to a break clause part way through a rent quarter. But it was not compelled by the dictates of logic, the need for workability or the need to avoid defeating a contractual purpose. 54 Belize Telecom (n 3) [32].

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What the instrument must mean Where Lord Hoffmann’s analysis may be considered to have opened up a useful line of inquiry, then, is not in formulating the question as one of “what the instrument means”,55 “actually means”56 or “would reasonably be understood to mean”,57 but in his alternative formulation of the question as one of what the contract “must mean”.58 Posing the relevant question in this way is productive because it leads unavoidably to the identification of the process of reasoning involved. If the implication of terms is concerned with what the instrument must mean, this raises the question of the basis of the imperative. Why must the instrument mean that the obvious, singular solution is to govern the problem? The cases show that there are three alternative reasons why the instrument must mean that the obvious solution resolves the problem. First, that may be what the instrument must mean as a matter of language and logic. Secondly, that may be what the instrument must mean in order to make the transaction workable. Thirdly, it may be what the instrument must mean in order to avoid defeating a purpose underlying the instrument or particular provisions of the instrument. The first of those reasons stands alone as a basis for implying a term while the second and third work in conjunction with the requirement of obviousness. The instrument must mean that a term is implied if it represents an obvious or singular answer to a problem that must be solved. The element of business efficacy or contractual purpose goes primarily to the quality of the problem and establishes that it must be solved. The element of obviousness goes to the suitability of the solution and establishes that the particular solution must be what resolves the problem. This is broadly consistent with the complementarity thesis developed by Andrew Phang and adopted by the Singapore Court of Appeal, which holds that the business efficacy and officious bystander tests should be used in a complementary and cumulative fashion.59 The Singapore Court of Appeal has observed that the business efficacy test helps to identify the existence of a gap, whereas the officious bystander test helps to identify the term that should fill it.60

55 56 57 58 59

Belize Telecom (n 3) [16], [18], [19]. Belize Telecom (n 3) [22], [27]. Belize Telecom (n 3) [25]. Belize Telecom (n 3) [18] (emphasis added). Andrew Boon Leong Phang, “Implied Terms Revisited” [1990] JBL 394, 396ff; Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd [2006] SGHC 3; [2006] 1 SLR (R) 927 [33]–[40] (Phang J); Sembcorp Marine Ltd (n 10) [90] (Sundaresh Menon CJ for the court). See further Andrew Phang, “The Challenge of Principled Gap-Filling: A Study of Implied Terms in a Comparative Context” [2014] JBL 263, 287–95, who notes (at 289) the potential difference between seeing the requirements as complementary and seeing them as cumulative. 60 Sembcorp Marine Ltd (n 10) [90]–[91] (citing JP Vorster, “The Bases for the Implication of Contractual Terms” [1988] J S Afr L 161, 171 on the limited role of the business efficacy test), discussed in Phang (n 59) 291. Cf Collins, “Implied Terms” (n 39) 313 (obviousness and business efficacy tests “were intended to function as alternatives, not cumulative requirements …”).



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Why Must the Instrument Mean that the Solution is Implied? Necessitated by language and logic The most compelling reason for concluding that the instrument must mean that a particular term is implied is that the implication follows as a matter of logic or necessary inference from the language of the express terms of the contract. This kind of implication stands apart from the other two bases for implication because it is based directly on the interpretation of the express terms and does not require separate consideration of obviousness. This category of implication sits at the boundary of interpretation and implication, but can properly be understood as part of the latter because it concerns matters that are not directly addressed by the express terms. It is a gap filling exercise that spells out the meaning of the instrument, but does so at a more superficial level than the other categories of implication in fact.61 While it is well accepted that there is such a class of implied term,62 the ambit of the category and which cases can properly be regarded as falling within it may be matters of debate. The ambit of the category is of particular significance in Australia where the criteria set out by Lord Simon in BP Refinery are held to be elements that must be established before a term will be implied in fact.63 Implication within this category must constitute an exception to that rule and so its scope is potentially an important question. A useful perspective on this category of implied terms may be gained by setting out some illustrative cases on a rough spectrum from those that clearly fall within the class to those at its periphery. The first is Sirius International Insurance Co (Publ) v FAI General Insurance Ltd.64 When A (a retrocessionaire, or reinsurer of a reinsurer) acknowledged an indebtedness to B (the fronting reinsurer) that could only arise if B paid C (the reinsured), that “necessarily meant” that A had agreed that B should pay C.65 Lord Steyn, with whom Lord Nicholls and Lord Walker agreed, considered that this conclusion could be reached on the basis of a “constructional implication”, but also on the basis of an orthodox interpretation of the express term.66 Equally strong examples of cases within this class are those in which the implied term is a negative covenant which is a corollary of an express term. For example, a promise to take all requirements of electricity from a particular supplier implies a promise not to take electricity from any other supplier.67 Less direct, but still clearly within this category, are cases in which an implied term is necessary to make sense of one or more express terms. In Fraser 61 Cf McLauchlan (n 8) 209. 62 Eg JW Carter, The Construction of Commercial Contracts (Hart Publishing, 2013) para 3.23; Carter and Courtney (n 13) 253–54; McLauchlan (n 8) 208–09; Brambles Holdings Ltd (n 36) 164 (“implications contained in the express words”). 63 See below (nn 80 and 134). 64 [2004] UKHL 54; [2004] 1 WLR 3251. 65 Sirius International Insurance Co (Publ) (n 64) [25]. 66 Sirius International Insurance Co (Publ) (n 64) [25]. 67 Metropolitan Electric Supply Co Ltd v Ginder [1901] 2 Ch 799 (Ch D).

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v Thames Television68 a television studio entered into an oral agreement with the plaintiffs (a composer and three actresses) by which the plaintiffs gave the studio an option to produce a television series based on an idea concocted by the plaintiffs. An express term allowed the studio to produce the series with other actresses if the plaintiffs decided not to participate. It followed from that express term that the studio could not produce a series based on the plaintiffs’ idea with actresses other than the plaintiffs without first offering it to the plaintiffs. That negative covenant was claimed by counsel for the plaintiffs to be a corollary of the express stipulation, but was held by Hirst J to be necessary to give the express stipulation business efficacy.69 It is best understood as a clear inference from the express term: the express term assumed the existence of the negative covenant and was redundant without it. In cases within this category the justification for implication is not making the transaction workable but simply making logical sense of the express terms. A case that would seem to lie at the outer limits of this principle is Hart v MacDonald. The plaintiff in that case successfully tendered to supply a dairy plant to the defendant on the basis that: “[T]he price of the machine shall be £766 10s, payable to me as follows: – You to consign all butter produced by your own cows, and manufactured within the factory, to an approved agent in Sydney, you giving authority in writing to hand proceeds of sales to me, less 10 per cent for working expenses. Interest at the rate of 6 per cent per annum to be paid on unpaid balance after factory has been started six months.”70

One of the issues was whether the defendant was under an implied obligation to begin dairying within a reasonable time after completion of the plant.71 The basis for implication was also potentially a live issue because the tender included a provision that: “It is to be understood that there is no agreement or understanding between us not embodied in this tender and your acceptance thereof ”. Griffith CJ held that an implied obligation to commence dairying “arises by necessary implication upon a proper construction of the express words”.72 Perhaps the best explanation for this is that the express words provided that the purchase price was payable by the stipulated method and did not allow for the possibility that the plant might never operate and the price might never be paid. Although reference was made to the duty to co-operate,73 and to an implication to ensure that a contract is not rendered futile,74 it would seem that those references were unnecessary. An obligation to begin operating 68 69 70 71

Fraser v Thames Television Ltd [1984] 1 QB 44 (QBD). Fraser (n 68) 56. Hart v MacDonald (1910) 10 CLR 417 (HCA). This is a variation on an old problem, dating back at least to M’Intyre v Belcher (1863) 14 CBNS 654; 143 ER 602, where a contract for the sale of a medical practice required the purchaser to pay a proportion of the earnings of the practice for four years following the sale. It was held that an obligation to carry on the practice for the four years was necessarily implied. Erle CJ held (at 663, 605) that: “We are bound to give effect to all contracts according to the language of the instrument and the nature of the transaction”. 72 Hart (n 70) 421. 73 Hart (n 70) 427 (O’Connor J). 74 Hart (n 70) 421 (Griffith CJ).



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the dairy was a logical inference from the fact that the price was to be paid, but only by a method that required the operation of the dairy.

Necessary to make the contract work The second reason for concluding that an instrument must mean that a term is implied is that it is necessary to give business efficacy to the contract, or to make it work. As noted above, the idea that a term is necessary to make the contract work supplies the imperative justifying the conclusion that the term expresses what the contract must be understood to mean. This is the core category of terms implied in fact. Lewison observes that the most common reason for the rejection of implied terms is that the failure to meet the requirement that the term be “‘absolutely essential’ to the relationship under consideration”.75 In Shell UK Ltd v Lostock Garage Ltd, for example, the Court of Appeal held by majority that where a garage was tied to a petrol supplier by way of a solus agreement it was not a necessary incident of that agreement that petrol would be supplied on terms that did not discriminate abnormally against the buyer on pricing and discounts.76 “It might be a reasonable term, but it is not a necessary term.”77 In Australia it is well accepted that where a contract has been reduced to writing in a form that is complete on its face, a term will only be implied if it is “necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it …”.78 Where the parties have not attempted to set out the terms in full, the test to be applied is whether the term in question is “necessary for the reasonable or effective operation of the contract …”.79 The more relaxed test applied to informal contracts points to the distinction recognised in Shell v Lostock80 between implications necessary to give the contract an effective operation and implications necessary to give the contract a reasonable operation, with only the former recognised as justifying an implication in a formal agreement, but either justifying an implication in an informal agreement. The business efficacy requirement is sometimes criticised on the basis that “efficacy” is a loose concept which can be applied restrictively or expansively and this makes it an uncertain and unpredictable standard.81 The cases are replete with alternative formulations with uncertain connotations, such as whether a 75 76 77 78

Kim Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell 2011) para 6.08. [1976] 1 WLR 1187 (CA). Shell UK Ltd (n 76) 1197 (Denning MR), 1200 (Ormrod LJ to similar effect). BP Refinery (n 1) 282–83. As McHugh and Gummow JJ noted in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 (HCA) 441 the statement of the Privy Council has been approved and applied in numerous decisions of the High Court of Australia, including Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 (HCA) 599, 605–06; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (HCA) 347, 404 and Commonwealth Bank v Barker [2014] HCA 32; (2014) 253 CLR 169 [21], [62], [90]. 79 Hawkins v Clayton (1988) 164 CLR 539 (HCA) 573 (Deane J), approved and applied in Byrne (n 78) 422–23 (Brennan CJ, Dawson and Toohey JJ), 442, 446 (McHugh and Gummow JJ). 80 Shell UK Ltd (n 76). 81 See eg Hooley (n 14) 322. See also Sembcorp Marine Ltd (n 10) [86]: “The efficacy of a contract or a transaction invariably straddles a spectrum. Many contracts might, to some degree, be efficacious and inefficacious at the same time”.

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term is necessary to give a contract “commercial effect”82 or “commercial or practical coherence”.83 If it is accepted, as argued below, that a term is to be implied where it is necessary to fulfil a subsidiary contractual purpose or the purpose of a particular contractual provision, then the business efficacy category can be understood more restrictively to refer only to workability. Given the range of different fact situations to which it must be applied, however, business efficacy must remain a broad standard requiring judgement rather than a rule that can be applied mechanically to the facts of each case.84

Necessary to avoid defeating a contractual purpose It is a feature of contracts that they contemplate the achievement of particular goals, and it is sometimes necessary to imply particular elaborations or workings out of the parties’ rights and obligations in order to ensure that those goals are achieved.85 Where a particular goal lies at the heart of the contract, an implication necessary to give effect to it may be justified under the business efficacy principle. Just as contracts manifest the existence of broad underlying goals, contractual provisions manifest the existence of particular contractual purposes which may not go to the heart of the bargain. It is sometimes necessary to imply terms in order to prevent those purposes from being defeated.86 The particular contractual purposes that justify the implication of terms are sometimes identified in implied terms cases, but neither the business efficacy rule nor the officious bystander test brings these subsidiary purposes directly into play. If an instrument manifests a particular contractual purpose, an implication is needed to give effect to that purpose, and it is obvious what that implication should be, then the implication must be taken to represent what the contract would reasonably be understood to mean. Belize Telecom If, under the Belize Telecom approach, the only question involved in the implication of terms in fact is what a reasonable person would take the instrument to mean, then it is difficult to justify necessity to make a contract workable as a strict requirement. Such a rule would only be justified if a reasonable person would never understand an instrument to include a term by implication unless it met that requirement. Lord Hoffmann did not consider that to be the case. He said that, in considering what the instrument would have meant to a reasonable person, one must assume that person would take into account the practical consequences of an interpretation one way or another, and whether a particular construction “would frustrate the apparent business

82 Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31; [2013] 1 WLR 1556 [31]. 83 Marks and Spencer (n 5) [21]. 84 Lord Neuberger observed in Marks and Spencer (n 5) [21] that: “[N]ecessity for business efficacy involves a value judgment”. 85 Drawing on Collins, “Objectivity and Committed Contextualism” (n 23) 201. 86 Another way of putting this is to say that the implication is necessary to give business efficacy to a particular clause of a contract, see Specialist Diagnostic Services Pty Ltd (formerly Symbion Pathology Pty Ltd) v Healthscope Pty Ltd [2012] VSCA 175; (2012) 41 VR 1 [95].



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purpose of the parties”.87 The significance of the word “necessary”, he said, is that it is not enough that the implied term expresses what it would be reasonable for the parties to agree to.88 The court must be satisfied that the implied term expresses what the contract means. But Lord Hoffmann rejected the idea that necessity was a strict requirement on the ground that it must be subordinate to the ascertainment of meaning: “It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case (at 459) when he said that in that case an implication was necessary ‘to give effect to the reasonable expectations of the parties.’”89

While it may have been possible to justify the term implied in Belize Telecom on the basis that it was necessary to give business efficacy to the articles of association, Lord Hoffmann justified the implication on the basis that it was required to give effect to a particular purpose, which was to ensure that the composition of the board reflected shareholder interests: “[T]he implication is required to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles.”90

The reasoning in Belize Telecom therefore supports the notion that a reasonable addressee will be compelled to conclude that a term is implied if such a term is necessary to give effect to a contractual purpose. That view is also supported by the principle adopted by the English Court of Appeal that a term is not to be considered unnecessary simply by showing that a contract would work without it, but “may be implied if it is necessary to achieve the parties’ objective in entering into the agreement”.91 Equitable Life Assurance v Hyman The decision of the House of Lords in Equitable Life Assurance Society v Hyman also provides support for necessity to avoid defeating a contractual purpose as a basis for implication.92 The Society offered life assurance policies which allowed policy holders to take an annuity on maturity. Policies issued up until 1988 provided the policyholder with the option to take an annuity at 87 Belize Telecom (n 3) [22]. 88 Belize Telecom (n 3) [22]. 89 Belize Telecom (n 3) [23]. Cf Metropolitan Salvage and Towage Ltd v Seamar Trading and Commerce Inc [2009] EWCA Civ 531; [2010] 1 All ER (Comm) 1 [15] (Sir Anthony Clarke MR): “[A]s I read Lord Hoffmann’s analysis, although he is emphasising that the process of implication is part of the process of construction of the contract, he is not in any way resiling from the often stated proposition that it must be necessary to imply the proposed term. It is never sufficient that it should be reasonable.” 90 Belize Telecom (n 3) [32]. 91 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited (n 4) [28] (Arden LJ, with whom Jackson and Fulford LJJ agreed). 92 [2002] 1 AC 408.

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a guaranteed rate, while policies issued from 1988 onwards did not offer that option. In each case the annuity provided was determined by reference to a base sum, which included bonuses representing the policy-holder’s share of the Society’s surplus investment returns during the life of the policy. Article 65 provided that the surplus was to be apportioned between policy holders “on such principles, and by such methods, as [the directors] may from time to time determine”.93 When the market rate for annuities fell below the rate guaranteed for the pre-1988 policies, the Society adopted a practice of paying a smaller final bonus to those policyholders taking the guaranteed annuity. This was done in order to take account of the extra cost of providing an annuity at above-market rates, and thus to ensure that the surplus investment returns were distributed equitably between those with guaranteed annual rate policies and those without the guarantee. The relevant issue was whether an implied term prevented the Society from declaring a differential final bonus and thereby depriving the annuity rate guarantee of substantial effect. Lord Steyn, giving the main speech, held that the test to be applied for the implication of a term was “a standard of strict necessity”.94 But “necessity” here clearly did not mean necessary to make the contract workable overall. As Hugh Collins notes, “[T]he contract could function perfectly well as a tax efficient investment vehicle and pensions device without the implied term”.95 Lord Steyn said that it was “essential to give effect to the reasonable expectations of the parties”.96 This formulation had previously been advanced by Lord Steyn in extrajudicial writing and must mean, as Lewison suggests, that “the contract would not work in the way that the parties might reasonably have expected it to”.97 While the law of contract undoubtedly should generally give effect to the reasonable expectations of parties to a commercial transaction, “reasonable expectations” is particularly unhelpful as a standard to be applied in implied terms cases.98 It must be assumed that Lord Steyn did not mean to contradict the longstanding rule that a term will not be implied merely on the basis that it is reasonable.99 In Liverpool City Council v Irwin the House of Lords firmly rejected the notion advanced by Lord Denning MR that the reasonableness

93 Equitable Life Assurance Society (n 92) 415. 94 Equitable Life Assurance Society (n 92) 459 (Lord Steyn, with whom Lord Slynn, Lord Hoffmann, Lord Cooke and Lord Hobhouse agreed). Lord Cooke, with whom their Lordships also agreed, held that the adjustment of policy benefits was not a proper exercise by the directors of their discretion because it was not consistent with the purpose of the guaranteed annuity rate policy (at 461). 95 Collins, “Implied Terms” (n 39) 317. Collins prefaces that by says: “The House of Lords held that the term was necessary for business efficacy, which seems unconvincing”. But the only passage that might be thought to support that claim is the statement of Lord Steyn (n 94) 459, which seemed to turn on reasonable expectations rather than business efficacy:

“In my judgment an implication precluding the use of the directors’ discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectations of the parties. The stringent test applicable to the implication of terms is satisfied.”

96 Equitable Life Assurance Society (n 92) 459. 97 Lewison (n 75) 296. 98 Stephen A Smith, “‘The Reasonable Expectations of the Parties’: An Unhelpful Concept” (2009) 48 Can Bus LJ 366 argues that it is no more than a slogan. 99 Hamlyn & Co v Wood & Co [1891] 2 QB 488 (CA) 491 (Lord Esher MR).



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of the suggested term is enough to justify implication.100 As Lord EdmundDavies said in that case, “[t]he touchstone is always necessity and not merely reasonableness …”.101 There is now very clear authority for the proposition that a term will not be implied simply because it is reasonable, even if the contract may be regarded as unfair without it.102 What is needed to give effect to the reasonable expectations of the parties, then, must be something narrower that what is reasonable and broader than what is required to give a contract business efficacy. Far more helpful in providing guidance for future cases is the conclusion that the implication in Equitable Life v Hyman was needed to give effect to the purpose of the annuity rate guarantee, or what Lord Steyn called the ‘selfevident commercial object’ of that provision: “The inquiry is entirely constructional in nature: proceeding from the express terms of article 65, viewed against its objective setting, the question is whether the implication is strictly necessary. My Lords, as counsel for the GAR [guaranteed annuity rate] policyholders observed, final bonuses are not bounty. They are a significant part of the consideration for the premiums paid. And the directors’ discretions as to the amount and distribution of bonuses are conferred for the benefit of policyholders. In this context the self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policyholder against a fall in market annuity rates by ensuring that if the fall occurs he will be better off than he would have been with market rates.”103

The reason the implication was necessary to give effect to the reasonable expectations of the parties was that it was needed to avoid defeating an identifiable subsidiary purpose of the contract, namely to provide the policy holder with protection against a particular market risk. That being the case, the identification of the relevant contractual purpose and what was needed to avoid defeating that purpose was the real reason for the decision. The vague notion of giving effect to the “reasonable expectations” of the contracting parties operated as a justification rather than the operative tool of analysis. Mosvolds Rederi A/S v Food Corp of India A particularly powerful illustration of the need to recognise terms implied in fact which do not satisfy the business efficacy test but are necessary to avoid defeating a contractual purpose is provided by the decision of Steyn J in Mosvolds Rederi A/S v Food Corp of India (The “Damodar General TJ Park” and “King Theras”).104 The implication in question was necessary to give effect to two contractual purposes, neither of which went to the heart of the bargain. The case concerned the calculation of laytime – the period allowed for the charterer of a ship to unload cargo before demurrage is payable – under two separate charterparties made on similar terms. The ships in question were chartered to carry grain to Calcutta, and laytime was normally to run from 100 101 102 103 104

[1977] AC 239 (HL) 253–54 (Lord Wilberforce), 258 (Lord Cross), 265 (Lord Edmund-Davies). Liverpool City Council (n 100) 266 (emphasis in original). See also Marks and Spencer (n 5) [23]. Marks and Spencer (n 5), see esp [21], [33], [49]. Equitable Life (n 92) 459 (emphasis added). [1986] 2 Lloyd’s Rep 68 (Comm Ct).

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the time lightening vessels were ready to discharge in Calcutta. A special provision in each contract (the “Sandheads clause”) stipulated that if a lightening vessel was unable to give notice at Calcutta because of congestion, time would run from the date of notification of the vessel’s “arrival off Sandheads”, an area near the river mouth where vessels would normally wait. The effect of this clause was to place the risk of congestion on the charterer. Another clause (clause 35) expressly gave the owner the right to carry out the lightening or transshipment at another place of its choosing “closer to Calcutta”. In this case the mother vessels moved from Sandheads to Saugor Island, some 40-50 miles closer to Calcutta, where the lightening vessels were loaded and gave notice of readiness. The issue was whether time began to run from when the lightening vessels gave notice of their arrival at Saugor, as the owner contended, or only later when they arrived at Calcutta, as the charterer argued. In both cases the arbitrators found for the owners, and both decisions were upheld by Steyn J. Steyn J held that since “the phrase ‘off Sandheads’ could not be given a meaning so extensive as to cover the vicinity of Saugor”, the “owner’s position cannot be sustained by any process of construction”.105 He also held that it could not be said that the contract was unworkable without it. There can be no doubt that in this case the contract was efficacious without the implied term. The primary obligations on both sides could undoubtedly be performed, and the consequence of the gap was simply that, if the owner chose to effect transhipment at a location closer to Calcutta than Sandlands, then the owner lost the right to claim demurrage with respect to congestion delays. But Steyn J held that there exists another basis for implication, which is that “reasonable men, faced with the suggested term” would unhesitatingly accept it as so obvious that it goes without saying.106 Steyn J held that that test was satisfied here for the following reasons: “The senselessness and wastefulness of requiring the vessels to return to Sandheads after completion of loading at Saugor in order to give notice at a place substantially further away from the discharging place is obvious. In my view, reasonable men versed in the shipping business, and faced in the real commercial world with the question posed in the two arbitrations, would undoubtedly have said: ‘Yes, of course, the vessels need not undertake an 80 or 100 miles deviation in order to give notice of readiness; they may give notice of completion of loading if the transhipment is effected at a place closer to Calcutta’.”107

For Steyn J, the obviousness of the term seemed to be a function of its fairness when viewed in light of the events that occurred rather than at the time the contract was made. A more compelling explanation for the implication was that it was required by the need to give effect simultaneously to the purpose of clause 35 (which was to allow the owner to effect the transhipment closer to Calcutta), and the purpose of the Sandheads clause (which was that the charterer should bear the risk of delay caused by congestion in the port of 105 Mosvolds Rederi A/S (n 94) 70. 106 Mosvolds Rederi A/S (n 94) 70. 107 Mosvolds Rederi A/S (n 94) 71.



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Calcutta). In order to avoid defeating the purpose of the Sandheads clause the charterparties must be taken to mean that notice could be given elsewhere than at Sandheads.108 If the owner is expressly permitted to effect transhipment at a point closer to Calcutta than Sandheads, then the owner must also be permitted to give notice of readiness from that location unless the risk of congestion in Calcutta was to shift to the owner if it chose to exercise that liberty.

Obviousness The reader of a contractual instrument is compelled to conclude that it must by implication include a particular provision if there is a gap that needs to be filled and a singular means of filling it. The obviousness requirement is concerned with the second of those elements. If several equally compelling solutions are available then it cannot be said that the contract must mean that any one of them was adopted.109 It has been held on numerous occasions that a term will not be implied if there are multiple ways of solving the problem in question.110 This proved decisive in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board.111 It must “be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred”.112 In Codelfa Construction Mason J similarly held that it was an “insurmountable problem in saying that ‘it goes without saying’” that multiple solutions were available: “This is not a case in which an obvious provision was overlooked by the parties and omitted from the contract. Rather it was a case in which the parties made a common assumption which masked the need to explore what provision should be made to cover the event which occurred. In ordinary circumstances negotiation about the matter might have yielded any one of a number of alternative propositions, each being regarded as a reasonable solution.”113

The obviousness requirement was introduced by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd as an alternative to, and perhaps a check on, the business efficacy test.114 MacKinnon LJ famously held that the term must be so obvious that it goes without saying so that if an officious bystander were to suggest it to the parties when they were making their bargain, “they would 108 One of the arbitrators held (Mosvolds Rederi A/S (n 94) 71) the term “was derivable by necessary implication from the express terms of the contract, read in light of the subject matter and the purpose of the Sandheads clause”. 109 Cf Courtney and Carter, “Implied Terms: What Is the Role of Construction?” (n 13) 154, “[I]f a term is necessary to give business efficacy to a contract it is difficult to see why it also has to be an obvious term …”. 110 Lewison (n 75) 302–03. 111 [1973] 1 WLR 601 (HL) 609–10 (Lord Pearson, with whom Lord Guest and Lord Diplock agreed), 614 (Lord Cross). 112 Philips Electronique Grand Public SA (n 41) 474–75 (Bingham LJ). 113 (1982) 149 CLR 337 (HCA) 355–56. 114 [1939] 2 KB 206 (CA). Andrew Phang, “Implied Terms, Business Efficacy and the Officious Bystander – A Modern History” [1998] JBL 1, 13ff discusses the test and its origin in a lecture referred to in MacKinnon LJ’s judgment.

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testily suppress him with a common ‘Oh, of course!’”.115 In Codelfa Construction Pty Ltd v State Rail Authority of NSW Aiken J criticised the officious bystander test as unhelpful and speculative, noting that “the manner in which the officious bystander formulates his question will often determine the answer which the parties will give”.116 Elisabeth Peden has also criticised the test, concluding that it does not provide sufficient certainty or predictability.117 Two particular problems with the officious bystander test were identified by Lord Hoffmann in Belize Telecom with the benefit of his prior extra-judicial writing. First, Lord Hoffmann observed that this “vivid bit of pantomime” brings to mind the actual parties, inviting the court to speculate on how those parties might have responded, rather than adopting a strictly objective approach to the construction of the instrument.118 This is a powerful criticism. The officious bystander inquiry was only ever posited as a test of the obviousness of the proposed solution, not a question of the subjectively likely reaction of the parties. The fact that judges not uncommonly have the innocent bystander answering his or her own question illustrates the confusing nature of the inquiry,119 but perhaps also evidences a healthy instinct to make the test more clearly objective. Lord Hoffmann’s second criticism is that it ought not be fatal to the implication of a term that the matter in question is complicated and may require careful consideration before one can conclude that there is only one answer that is consistent with the instrument.120 Conversely, in Ashmore v Corp of Lloyd’s (No 2) Gatehouse J rejected counsel’s submission that, provided a term to be implied is precise and obvious, it need not be uncomplicated.121 Gatehouse J responded that: “The more complicated the question, the less obvious it becomes”.122 If the matter is complicated the answer may not be immediately obvious and the hypothetical parties may be more quizzical than testy in their response to the officious bystander’s question.123 But it is difficult to see why that should be fatal to the implication. If there is a gap that must be filled in order to make the contract workable or avoid defeating one of its purposes, then the fact that “only one answer would be consistent with the rest of the instrument” justifies the implication even if that answer is not “obvious in the sense of being immediately apparent”.124 115 [1939] 2 KB 206 (CA) 227. Phang ((n 114) 21) notes that the bystander test had been introduced by Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 (CA) 605 as an elaboration of the business efficacy test. 116 Codelfa Construction (n 2) 375. 117 Peden (n 43) paras 4.6–4.10. 118 Hoffmann (n 44) 662; Belize Telecom (n 3) [25]. 119 Peden (n 43) para 4.6. For a recent example, see Regreen Asset Holdings Pty Ltd (n 26) [65] where the primary judge had held that “In my opinion a reasonable bystander would, at the time of the making of the … Agreement, have said ‘oh, of course!’” 120 Belize Telecom (n 3) [25]. 121 [1992] 2 Lloyd’s Rep 620 (Com Ct) 628. The case is discussed by Peden (n 43) para 4.8, who also takes issue with the reasoning on this point. 122 Ashmore (n 121) 628. 123 Peden (n 43) para 4.8 has also questioned whether complexity should bar an implied term that is sufficiently precise. 124 Belize Telecom (n 3) [25].



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The appropriate response to those criticisms, then, would seem to be to ignore the officious bystander test, as Mason J did in Codelfa Construction Pty Ltd v State Rail Authority of NSW, and focus directly on the obviousness and singular aptness of the proposed solution. The Singapore Court of Appeal has rightly identified the officious bystander test as a device that supplies the answer to the question whether a specific term should be implied, and as instrumental in this respect.125 But it is the singular aptness of the proposed solution that is ultimately in question, and the officious bystander test distracts attention from the real object of the inquiry. The proposed term need not be immediately obvious before a reasonable person can be compelled to conclude that this is what the instrument must mean, but must unquestionably be a singularly apt solution to the problem in question. It is accepted in England that obviousness provides an independent basis for the implication of a term and can justify an implication where the business efficacy test is not satisfied.126 It is, however, very difficult to find a case in which a term was held to be implied on the basis of obviousness but did not fit within one of the three categories set out above. Most of the cases cited in support of the principle provide support by way of obiter dicta only.127 Others rely on obviousness alongside other grounds such as interpretation of the express terms or business efficacy.128 As discussed above, the implication in Mosvolds Rederi A/S v Food Corp of India was necessary to avoid defeating a contractual purpose. Another decision of Steyn J commonly cited in support of obviousness as a standalone principle is Associated Japanese Bank (International) Ltd v Credit du Nord SA, which involved the enforceability of a guarantee (for reward) of the obligations of a lessee under a lease of machines that did not exist.129 Steyn J held that the guarantee was workable without an implied condition precedent that the goods existed, but was nevertheless willing to imply such a term. His Lordship had, however, already held that because the guarantee expressly contemplated the existence of the machines it was, as a matter of construction, ‘subject to an express condition precedent’ that the machines existed.130 If the condition precedent was to be treated as an implied term, it therefore clearly fell within the first category discussed above, of implications that are necessitated by the language and logic of the express terms. In Gardner v Coutts & Co an agreement provided an “option” or right of first refusal which was triggered by the owner “desiring to sell” the property or by his death. Letting was also restricted during the subsistence of the agreement.131 Cross J held that the “scheme of the agreement” was that the option holder should have the opportunity of buying the property if the owner wished to part from it in his 125 Sembcorp Marine Ltd v PPL Holdings Pte Ltd (n 10) [88]–[91]. 126 Most recently in Marks and Spencer (n 5) [21]. In Australian law it is clear that “the ‘obviousness’” of the term to be implied “is not a freestanding [condition] justifying implication”, TMA Australia Pty Ltd v Indect Electronics & Distribution GmbH [2015] NSWCA 343 [103] (Meagher JA, with whom Macfarlan JA and Bergin CJ agreed). 127 See eg the long list of cases cited in HG Beale (ed), Chitty on Contracts (32nd ed, Sweet & Maxwell 2015) para 14.005 fn 20. 128 See eg C Itoh Co Ltd (n 43). 129 [1989] 1 WLR 255 (QB). 130 Associated Japanese Bank (International) Ltd (n 129) 263 (emphasis added). 131 [1968] 1 WLR 173 (Ch).

life time and if not then on his death.132 This was a statement of the contractual purpose. In order to avoid defeating that purpose or “general scheme”, it was necessary to imply a term that the owner should not be entitled to give the property away without offering it to the option holder on the terms agreed.

Consistency, Clarity and Fairness It has been argued up to this point that, leaving aside implications based on language and logic, the presence of two ingredients compels a conclusion that a contract must be taken to mean that a gap in the express terms is to be filled in a particular way: necessity (to make a contract work or avoid defeating one of its purposes) and obviousness (in the sense a singular solution to the problem in question). Three additional factors were listed by Lord Simon in BP Refinery as requirements that must be satisfied if a term is to be implied: the proposed term must be reasonable and equitable, consistent with the express terms and capable of clear expression.133 In Belize Telecom Lord Hoffmann accepted the relevance of these factors, but treated them as excluders, or factors which would justify a refusal to imply the term, rather than positive requirements: “As for the other formulations, the fact that the proposed implied term would be inequitable or unreasonable, or contradict what the parties have expressly said, or is incapable of clear expression, are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant.”134

Neither consistency with the express terms, nor a capacity to be clearly expressed, provide any positive indication that a particular term should be implied or must be taken to represent the meaning of a contract. They must therefore, as Lord Hoffmann suggests, be viewed as excluders rather than positive requirements. The reasonable and equitable requirement generally also operates in the same way.135 Thus, in BP Refinery, for example, the majority of the Privy Council rejected as “wholly unreasonable and inequitable” an implication that would have imposed a significant restriction on one party in relation to a matter that “cannot have been of the least importance to the [other]”.136 The fact that a term is reasonable and equitable stands apart from the requirements of clarity and consistency because the fact that an implication is reasonable and equitable can also provide a positive indication that it must be taken to represent the meaning of the instrument. The requirement that the 132 Gardner (n 131) 178. 133 On the idea of the five elements as independent, cumulative requirements, cf Bull v Australian Quarter Horse Association [2015] NSWCA 354 [53] (Beazley P): “The criteria for an implied term are not necessarily independent of each other. … To require each and every criterion to be independently satisfied could lead to a degree of artificial characterisation”. 134 Belize Telecom (n 3) [27]. Related to the requirement of a capacity for clear expression is a reluctance to imply a term that would require additional matters to be dealt with, and thus require additional terms to be implied, Crema v Cenkos Securities plc (n 48) [54]. 135 Though in Marks and Spencer (n 5) [21] Lord Neuberger doubted whether it really adds anything to the other elements. 136 BP Refinery (n 1) 284.

term to be implied must be reasonable and equitable does not of course require that the burden in question be shared equitably between the parties. In most cases the effect of the implied term is to shift a risk from one party to another or, perhaps more accurately, to confirm that the party who may appear on the face of an instrument to bear a particular risk does not in fact bear it according to the instrument properly construed. The requirement that the implication be reasonable and equitable focuses on the fairness of the implied allocation of the risk. Fairness can be viewed in three ways: first, as a positive requirement, secondly, as an excluder principle or thirdly as an element that may support the implication. It played the third role in The Moorcock.137 In The Moorcock, fairness in the sense of who was best placed to avoid the risk played a crucial role in the reasoning supporting the implication of a term.138 The question in that case was whether wharfingers letting a berth to the owner of a vessel that was to ground at low tide impliedly warranted that they had taken care to ensure that the river bottom at the berth was fit and safe for the purpose. For both Lord Esher MR and Bowen LJ the two elements that compelled the conclusion that such a term was implied were necessity and fairness. On the first point Bowen LJ held that “all consideration would fail unless some care had been taken to see that the ground was safe” and “business could not be carried on unless there was an implication to the extent I have laid down …”.139 The second step in the reasoning of Bowen LJ was that the parties knew that the shipowner could know nothing at all about the state of the ground, whereas “the jetty owner might with reasonable care know everything”.140 Similarly, Lord Esher’s first step was to note that the boat could not be moored to the wharf without taking the ground at every tide.141 His second step was to observe that the owners have the means of ascertaining the state of the river bed in front of their wharf, whereas shipowners have no means of discovering the state of the bottom until it is too late.142 Thus, in The Moorcock, the fact that one party had a significant degree of control of the risk whilst the other party had essentially none combined with necessity to justify the implication. Fairness took the place of obviousness in justifying the implication, but could also be understood as having established the obviousness of the implied warranty, or its singular aptness as a solution to the problem of ensuring that the riverbed beneath the berth was safe. If, following Belize Telecom, the court is concerned to identify what the instrument must be taken to mean, the question of which party is best placed to avoid a risk could be taken into account as a factor that helps to establish the obviousness or singular aptness of a proposed solution. This can be justified on the basis that factors such as “commercial practices” and “shared normative understandings” form part of the context in which the instrument is to be interpreted and 137 (1889) LR 14 PD 64 (CA). 138 Collins, “Implied Terms” (n 39) 305–06 sees the question of which party was best placed to avoid the risk at the least cost as a question of efficiency, rather than fairness. 139 The Moorcock (n 137) 69 and 71. Collins, “Implied Terms” (n 39) 305 questions whether the business efficacy test was satisfied on the facts. 140 The Moorcock (n 137) 69. 141 The Moorcock (n 137) 66. 142 The Moorcock (n 137) 66–67.

influence the reader’s understandings about the allocation of risks.143 It might also be justified on the basis that “commercial common sense” is one of the factors to be “taken into account on an issue of implication”.144

Conclusion Where a contract has been reduced to writing the “default position” is that no terms will be implied.145 The well-established reluctance to imply terms justifies a preference for the imperative version of Lord Hoffmann’s formulation: a term will be implied only if it spells out what the instrument must mean to a reasonable person. That imperative formulation points us towards the processes of reasoning by which terms are implied. The cases reveal a limited set of reasons that compel the conclusion that a term is implied. A term implied in fact spells out what a contract must mean: first, as a logical implication from the express terms; secondly, because an implication is necessary to make the contract workable and the term represents an obvious or singularly apt solution to that problem; or, thirdly, because an implication is necessary to avoid defeating an identifiable contractual purpose and the term represents an obvious or singularly apt solution to that problem. The criteria in this formulation are broad and their application at times involves difficult questions of judgement, but given the highly fact-specific nature of the enterprise it is difficult to see how greater certainty could be achieved. If legal advisers are to have a fair chance of predicting outcomes, however, then what must be achieved is the articulation of a framework for analysis that can be applied by judges and legal advisers in common.

143 Smith, Contract Theory (n 34) 300–01. 144 Marks and Spencer (n 5) [27] (Lord Neuberger). 145 Crema v Cenkos Securities plc (n 48) [38], [52]. See further Lewison (n 75) 285–87.

9

The Meaning of Words and the Intentions of Persons Robert Stevens

Introduction One of the pieces of advice that Peter Birks once gave me concerns the writing of legal articles. His advice was that the writer is not producing a mystery novel. The reader should not have to wait until the end when, with a miraculous twist, the answer is produced. We should learn “whodunnit” on the first page. In that spirit, here is the solution which we will reach at the end of this chapter. First, the meaning of words in general, and of rights creating words in particular, is determined by their objective meaning, not the subjective intentions of the person uttering them. Secondly, in contract law it is only ever justifiable to enforce an actual objectively manifested agreement, contained in a communicated offer and acceptance.1 The non-conformity of the agreement as so manifested with the subjective intentions of both parties, or of one party when this is known by the counterparty, may provide a good reason for denying enforcement. It never provides a sufficient reason for enforcing the parties’ subjective intentions without more. Thirdly, the parol evidence rule is best understood as an implied “entire agreement” clause, so that the terms of a single document form an exclusive code for determining the obligations entered into. Fourthly, rectification involves partial rescission. The (implied) agreement that the reduction of an agreement to a single document means that it contains the entire bargain between the parties is set aside, replaced by the agreement that there would be if the parties had not so reduced their bargain. In conformity with the second proposition, it is never justified through rectification to give

1 Contra D McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (2008) 124 LQR 608, 610.

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effect to anything other than an actual objectively manifested agreement.2 Fifthly, the rules for the interpretation and rectification of contracts form part of, and are in conformity with, a wider body of law for the interpretation of law creating words in trusts, wills, and statutes. Ultimately, the purpose of this article is to explain why Lord Hoffmann is correct in his analysis in the controversial decision of Chartbrook Ltd v Persimmon Homes Ltd, and why no other answer is sensibly possible, despite some contrary indications from Australian intermediate appellate courts.3

Vows I hate marking. I hate it so much that, unlike many of my colleagues, I cannot joke about it. Every script that I mark places a weight upon me that I find hard to bear. When presented each summer with a pile of exams to mark, I have a number of tricks to try and induce myself to perform the task. So, I resolve that I will only be allowed a cup of tea, a small piece of chocolate, and a look at the newspaper once I have managed to mark five papers. I can only break for lunch once I have finished one-fifth of the total. And so on. I weaken every time. My future self chafes at the restrictions I have imposed. Boredom and despair at my ability to teach anyone anything set in. I find myself doing less awful tasks, such as de-scaling the kettle, or re-grouting the bathroom. The marking is always done, in the end but not without more pain than is necessary. Summer marking that coincides with major international football tournaments is especially problematic. It is sufficient to make a vow to form a resolution in one’s mind. Com­ munication to another is unnecessary. Its meaning is similarly determined by the intention of the person at the time of making it. Whether a reasonable person would think I was making such a vow, which judging by my subsequent behaviour they may not, is neither here nor there. The vow is a product of my willing it into being.

2

3

Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 [57] (Lord Hoffmann); Lord Hoffmann, “The Intolerable Wrestle with Words and Meanings” (1997) 56 S Afr LJ 656. Chartbrook Ltd v Persimmon Homes Ltd was applied, albeit reluctantly, in Daventry District Council v Daventry and District Housing Ltd [2011] EWCA Civ 1153; [2012] 1 WLR 1333 and Tartsinis v Navona Management Company [2015] EWHC 57 (Comm) (Leggatt J). See also Lord Denning’s earlier expression of the same view in Rose v Pim [1953] 2 QB 450 (CA) 461. The position I am adopting here is contrary to the important and large body of work by Professor David McLauchlan. For representative pieces see McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 1); D McLauchlan, “Commonsense Principles of Interpretation and Rectification” (2010) 126 LQR 7; D McLauchlan, “Refining Rectification” (2014) 130 LQR 83. Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [316] (Campbell JA) but see [315] requiring such common intention to have been communicated. See also Mainteck Services Pty Ltd v Stein Heutey SA [2014] NSWCA 184; (2014) 89 NSWLR 633 [121] (Leeming JA) for “objective intention”.



Ch 9  The Meaning of Words and the Intentions of Persons 169

Rights and Virtue Making a vow is not, however, the same thing as promising or contracting. It is possible simply through an act of will to give ourselves a good reason as a matter of virtue to behave in certain ways. My failure to keep to my resolutions is a very bad way to behave. Being resolute is an important virtue. A better version of myself would be able to stick to the resolutions that I make, save where there subsequently appear other, better reasons not to do so. We teach our children the importance of setting goals for themselves and to persevere. “Stickability” is important. Making promises or entering into contracts are not simply acts of will. They require actions in the world. This is because they confer rights upon others. For me to change the rights we have against one another, there must be an action by me that does so. Virtuous people respect the rights of others, but the realm of rights is not the same as the realm of virtue. A contract, or indeed any other words (express or implied) that are the source of rights, such as in a deed, will or statute, take place in the world external to ourselves, not in our heads. What has been done is determined by the meaning of that action. That meaning is, inevitably, determined objectively, and is not determined by what was subjectively intended. In determining the meaning of words we should cease to talk of our searching for the intentions of the parties uttering them.4 This has implications for our rules of construction which must be examined before we look at the rules of rectification.

Objectivity Under the malign influence of the will theory of contracting, many writers see promises as created by the will of the promisor, or in the context of a contract, the combination of wills of the promisor and promisee together. If this were correct, the existence and content of a promise ought to be determined by the intentions of the parties just as it is with a vow. Although this subjective theory of promises clearly does not fit with the positive law as it is, it has persisted from the 19th century until the present day.5 It is not just theorists who think in this way. Sir Christopher Staughton, writing extra-judicially, has stated that: “Rule One is that the task of the judge when interpreting a written contract is to find the intention of the parties”.6 Many hundreds of examples of judicial statements of this kind could be produced. Is it true, and perhaps more importantly, ought it to be true? As we all know, both in determining whether there is a contract and in settling its content, the common law adopts an objective approach; what is actually intended not being determinative of the contract’s existence or 4 5

6

See also M Kirby, “Towards a Grand Theory of Interpretation: The Case of Statutes and Contracts” (2003) 24 Stat L Rev 95. Eg FC von Savigny, System des Heutigen Römischen Rechts (Berlin,1840); C Fried, Contract as Promise (Harvard University Press 1981) 12–13, 60–63, TM Scanlon, “Promises and Contracts” in P Benson (ed), The Theory of Contract Law: New Essays (CUP 2001) 86, 104. C Staughton, “How Do the Courts Interpret Commercial Contracts?” (1999) 58 CLJ 303, 304.

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meaning. How can this be squared with the proposition that we are concerned with discovering the intentions of the parties? Two tactics are commonly employed to explain the law’s divergence from the theory. Neither is persuasive. The first tactic is that the law uses objective standards for evidentiary reasons: it promotes certainty and prevents fraud.7 Certainty alone is never very persuasive as a justification for a rule departing from what justice would otherwise require. A rule stipulating for the slaughter of all first born children may be very certain, but that isn’t much to its credit. The second tactic is that because the promisee will have relied upon the promise, or that there is at least a risk that she will have done so, this provides a good reason for departure from what was actually intended.8 Why apply such a rule in contexts where not only can it be shown that no reliance has taken place, but that no such reliance ever could take place? The terms of a will in a sealed box are interpreted objectively, just as much as the terms of a contract and these are interpreted objectively. However, unlike a vow, we cannot make a promise on our own in a darkened room. I cannot simply will a promise into existence however much I try. Even if two parties intend precisely the same promise from one to another to exist, that alone is not a promise. Promises and contracts are actions in the world. They are acts of communication, indeed they are the archetypal example of speech acts, and their effect is to create rights (whether moral or legal). Both the existence and the content of a promise are determined objectively because the existence and content of communicated words are determined objectively.9 Lord Nicholls, writing extra-judicially, has claimed that in “everyday life we seek to identify what a speaker or writer actually intended by the words he has used … [but] the law proceeds on a different footing”.10 This claim about everyday life is wrong.11 The law’s approach to interpretation is, in this respect, identical to our approach to the meaning of words outside the law. If I say “I offer to buy your black cat for £100” those words do not mean “I offer to sell my white dog for £30” even if that is the meaning I had intended to convey. The meaning of words is not determined by the speaker’s subjective intentions. However, for an act to impose obligations upon me it must be my doing; I must be responsible for it. If a fraudster impersonates me and forges my signature on a contractual document, I am not bound even if the promisee believes that the promise was mine, and any reasonable person in his shoes would have believed the same. It is not the case however that I am responsible only for the consequences of my actions that I intend. If I negligently knock over a Ming vase, I am responsible for its destruction, and in law must pay for it, regardless of the fact that that result was not what I intended. The same is true of words. The promise must be mine, in the sense that I am responsible for it, but it is a mistake to think that I am only responsible for those things I intend. 7 8 9

Fried (n 5) 62–63; E Peel, Treitel on the Law of Contract (13th ed, Sweet & Maxwell 2012) [1-002]. Fried (n 5) 62–63; PS Atiyah, An Introduction to the Law of Contract (5th ed, OUP 1995) 82. See T Endicott, “Objectivity, Subjectivity and Incomplete Agreements” in J Horder (ed), Oxford Essays in Jurisprudence (4th series, OUP 2000). 10 Lord Nicholls, “My Kingdom for a Horse: the Meaning of Words” (2005) 121 LQR 577, 579. 11 Cf Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance [1997] AC 749 (HL): “I propose to begin by examining the way we interpret utterances in everyday life”.



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The narrow doctrine of non est factum is a nice illustration of the point in a contractual context. If a celebrity is asked to sign his autograph and it is later discovered that the document is in fact a contract for the sale of his home, he may plead that the document is not his. If however someone is careless in signing a document, such as someone who signs a document containing blanks that are later filled in otherwise than in accordance with his instructions, he may be bound.12 That words have objective meanings, and that their meaning is not determined by our intentions, is reflected in the law in many contexts outside of contract law. If, for example, I publish an article stating that Justice Edelman is an axe murderer, I commit the tort of libel. I will not be able to resist the claim by proving that what I had intended to say he is a fine golf player. Just so long as I am responsible for the publication, I commit the tort. This objective approach to meaning is followed in the context of wills, trust deeds, statutes, and court orders. The law is not departing from our approach in everyday life, but applying it. Now, the reader may be becoming slightly impatient with the claims made so far. If it is accepted that the meaning of words and consequently promises is not determined by the intention of the person speaking, isn’t it determined by what a reasonable person would with hindsight conclude they intended? That we are neither searching for what was actually intended nor what a reasonable person would now think they intended is shown by the law’s traditional rule “excluding” from consideration in interpreting an agreement the parties’ subsequently conduct.13 If our concern were to determine what the parties themselves subjectively intended their agreement to mean, how they operated it subsequent to their agreement would be extremely strong probative evidence of this fact, and its exclusion would make no sense. If however we are interested in discovering what the words they used mean, what they subjectively thought they meant is usually neither here nor there (unless rarely perhaps they are in a specialist market and their subjective understandings provide evidence of what the words mean generally in the context in which they are used). This exclusionary rule also shows us that the justification for the objective approach is not based upon either the actual or potential reliance of the promise, as meaning is not fixed by the subsequent reliance of the parties’ on a particular understanding. Subsequent events, whatever they may be, cannot determine the meaning of the words at the time spoken. Although the traditional rule lives on in England and Australia, it has been abandoned in other common law jurisdictions such as New Zealand,14 Canada, and Singapore.15 This change is wholly unjustifiable, and it is to be hoped that the Australian High Court’s resistance to adopting fashionable innovation elsewhere prevails. It is mistaken to describe the traditional approach as one adopting an “exclusionary rule”. This is not a self-denying ordinance for purpose 12 13 14 15

Gallie v Lee [1971] AC 1004 (HL). Schuler v Wickman Machine Tools Sales Ltd [1974] AC 235 (HL). Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZSC 109. Corinna Chin Shu Hwa v Hewlett Packard Singapore (Sales) [2015] SGHC 204.

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of policy, but rather a rule based upon the fact that what happens subsequently is legally irrelevant to what has been done at that time. An example. D Bank takes a fixed charge over all receivables due to C Ltd. It is a term of the agreement creating the charge that all payments are to be made into a blocked account with the bank. From the start the account is never operated as a blocked account, C Ltd freely withdrawing all monies paid in for its own use in the ordinary course of business.

In England, which has held out against such modern day innovations as a Personal Property Security Law, the question arises whether the charge is fixed or floating? We know from Spectrum v Digital Plus16 that the meaning of the agreement is determined at the time of contracting. Subsequent conduct may be relevant to the questions of whether the agreement has been varied, or an obligation waived, or even whether the document representing the deal is in fact a sham, but it is not relevant to its construction. Further, that the subsequent conduct may be admitted for these other purposes shows that our approach to construction cannot be based upon either the need for commercial certainty or a desire to restrict admissible material in order to expedite court hearings. The reason for the exclusionary rule is not a pragmatic one, but rather how and when the parties’ rights were created.

Subjectivity It may be objected that there are occasions when the courts look to the parties’ subjective states of mind in finding the existence of a contract.17 The wholly objective approach defended so far is, amongst contract lawyers, most closely associated with Oliver Wendell Holmes.18 The orthodoxy that is nowadays usually taught is that this 19th century view is wrong, or at least not the whole truth. If one party subjectively makes a mistake as to the terms of the deal, and the counterparty knows of that mistake, there is often said to be no binding agreement.19 A famous example is the so-called “snapping up” case of Hartog v Collin Shields.20 The defendant offered to sell Argentine hare skins at a price quoted “per pound”. This was a mistake. It was intended to offer them “per piece” and there were about three hare skins to the pound. As the plaintiff buyer knew that the defendant was making a mistake, he could not enforce the contract at the low price stated in the offer. This rule is usually said to show that the question of agreement is not a wholly objective one, but that it also contains subjective elements.21 However, 16 17 18 19

[2005] UKHL 41; [2005] 2 AC 680. Eg McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 1) 611. OW Holmes, The Common Law (Little, Brown and Company 1881) 6. Smith v Hughes (1870-71) LR 6 QB 597 has come to stand for this proposition. Of course it will be a rare case where the promisee knows this when a reasonable person would not know of the mistake, but it is perfectly possible and if the promisee is honest he will admit it. 20 [1939] 3 All ER 566 (KBD). 21 Peel (n 7) [1.002]; McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 1) 611.



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that this is not so may be shown by considering what the position would have been if the market had moved dramatically, so that the deal had become a good one for the seller. Could the buyer have withdrawn his statement that he agreed to buy, and insisted that there was no agreement? The answer is surely no. There was objectively a bargain, but one that only the seller could enforce. Why could the buyer not rely upon the agreement? Because the seller’s subjective consent to the bargain was vitiated. This is a case where there is a contract, but where one party’s subjective mistake when known by the other allows escape from the deal by one party. The subjective intentions of one22 or both23 of the parties may be used where they are not in accord with the agreement made to set aside or refuse to enforce what has been objectively done, but they cannot themselves be enforced because they are not an agreement. Further, this non-conformity may not be relied upon by the party who is not in error. The following example is important.24 What if Company A thinks it has agreed to lease premises at a particular rent to Company B, and Company B thinks the same. Companies cannot of course have states of mind, but they can have the states of mind of realworld people attributed to them, and we may have very good and compelling evidence as to what those states of mind are. These subjective intentions may be shown through the minutes and memorandum of both companies, and the Chief Executive Officers may both testify that that is what they themselves thought. Is that, in and of itself, an agreement? The answer, as we should all learn in our first days studying contract law, is no. An agreement must be done. Without offer and acceptance between the parties, the mere meeting of minds is not an agreement. The requirement of an offer and acceptance, both of which must be done and neither of which it is sufficient to intend, shows that a mere meeting of minds is not in itself a contract. Their minds may be in agreement, but they have not made a contract. The claim that a “meeting of minds or consensus ad idem is not necessary for contract formation it is surely sufficient”25 is wrong.

On this view, the rule that cross offers on identical terms are not a contract is readily explicable.26 Such cross offers may, and usually will, indicate a concurrent subjective intention to contract on identical terms, but that is not in itself a contract. We need an acceptance not because that is objective evidence of what is subjectively intended, but because acceptance is an integral part to the making of a contact. The rule is not therefore justified by the requirements of certainty,27 indeed the opposite rule would be equally certain, but rather by the fact that an agreement is not found simply through the subjective meeting of minds.

22 Unilateral mistakes. 23 Common mistakes. 24 Compare the example of D McLauchlan in “The Many Versions of Rectification for Common Mistake” at ch 10 of this book. 25 McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 1) 610. 26 Tinn v Hoffmann (1879) 29 LT 271. 27 Peel (n 7) [2.049].

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Interpretation What I have said so far is, I would suggest, entirely consistent with both Australian law and at least the statements of principle set out in Investors Compensation Scheme Ltd v West Bromwich Building Society [ICS] by Lord Hoffmann.28 So his first principle is said to be:29 “(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

Notice that we are looking to ascertain the meaning which would be conveyed, not the meaning that was intended to be conveyed. An example is the decision in Homburg Houtimport BV v Agrosin Private Ltd (“The Starsin”).30 A Bill of Lading was signed on its face by a port agent as “‘Agent for [the Charterer] of the vessel”. The reverse of the Bill contained a clause stating: “33 IDENTITY OF CARRIER  The Contract evidenced by this Bill of Lading is between the Merchant and the Owner of the vessel named herein (or substitute) and it is therefore agreed that said Shipowner only shall be liable for any damage or loss due to any breach or non-performance of any obligation arising out of the contract of carriage, whether or not relating to the vessel’s seaworthiness.” 

The House of Lords refused to give effect to this demise clause, preferring the meaning that would be placed on the face of the Bill by a reasonable person to whom the document was addressed. We may note in passing that it is meaningless in a case such as The Starsin to ask “what was it that the promisor intended”, or “what would the promisor have been reasonably expected to intend”, as the issue was “who is the promisor”? This does not mean that the promise’s meaning is to be determined by a rigid literalism, anymore than this is true of the use of words generally.31 As Lord Hoffman said in ICS, “[m]any people, including politicians, celebrities and Mrs Malaprop, mangle meanings and syntax but nevertheless communicate tolerably clearly what they are using the words to mean. If anyone is doing violence to natural meanings, it is they rather than their listener”.32 When John Prescott, the then United Kingdom Deputy Prime Minister, told the House of Commons that it was government policy to “reduce – and probably eliminate – the homeless”,33 the background circumstances give the words a meaning different from their literal one. This is nothing to do with what Prescott himself subjectively intended. Even if he had actually intended that the homeless be slaughtered, that is not the meaning his words conveyed. 28 29 30 31

[1998] 1 WLR 896 (HL). ICS (n 28) 912–13. [2004] 1 AC 715 (HL). In England by far the most important statement of how promises are to be interpreted is contained in the speech of Lord Hoffmann in ICS (n 28) 912–13. 32 ICS (n 28) 913. 33 HC Deb 13 July 2004, 6th series, vol 423, col 1268.



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This is reflected in Lord Hoffmann’s second principle:34 “(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.”

In principle nothing is excluded that could be relevant, but we are admitting background evidence to show what meaning is conveyed, not what the parties themselves intended. So, just as evidence of Prescott’s personal loathing of the homeless would be irrelevant to the meaning of his words, in admitting background evidence we are not doing so in a hunt for intention. This straightforward idea has given rise to needless confusion in Australian law. In principle, whether contextual evidence is admissible for purposes of interpretation should not require that the words used are, shorn of all context, unambiguous. If we were presented with Prescott’s words without more we might conclude that they unambiguously called for the murder of the less fortunate. In context that is not the meaning conveyed. The origin of the Australian problem was Codelfa Constuction Pty Ltd v State Rail Authority NSW where Mason J stated:35 “Evidence of surrounding circumstances is admissible to the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.”

This statement has been interpreted as requiring ambiguity before it is permissible to look at background circumstances. In 2011 this unfortunate rule was reinforced in the most surprising way. The High Court refused special leave to appeal in Western Export Services Inc v Jireh International Pty Ltd,36 but in doing so Gummow, Heydon and Bell JJ stated that intermediate appellate courts remained bound to follow Mason J’s statement in Codelfa. Subsequently, a majority of a differently constituted High Court in Electricity Generation Corporation v Woodside Energy Ltd stated:37 “The meaning of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean … it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purposes or objects to be secured by the contract.”

This does not seem to require any ambiguity before context is admissible. One might have expected the Court to have expressly considered Mason J’s statement if they intended to depart from it, so strongly had it been endorsed in Jireh. 34 35 36 37

ICS (n 28) 912–13. (1982) 149 CLR 337 (HCA) 352. [2011] HCA 45; (2011) 86 AJLR 1. [2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan and Kiefel JJ).

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Today, at least in New South Wales, the answer is now provided by Leeming JA’s superb, and unanswerable, judgment in Mainteck Services Pty Ltd v Stein Heurtey SA.38 There is neither any principled reason for ignoring context, nor any pragmatic concerns that require its exclusion in any case. The final part of the story so far is the High Court’s decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd.39 The High Court emphasised that statements made by judges in leave applications had no precedential value. The question of whether background circumstances could be admitted to show whether a term was capable of more than one construction was expressly left open.40 Lord Hoffman’s third principle is expressed as follows:41 “(3)  The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.”

The continuation of this (much criticised) rule was recognised, albeit in obiter dicta, by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd.42  Unlike the exclusion of subsequent conduct, all context at the time of utterance is capable of informing the meaning of words used. This rule is hard to justify in principle. However, some second order justifications can be given. It does promote certainty. Assignees may not know or be able to know the content of these negotiations. It may reduce the cost of advice and litigation in trawling negotiations, but as this evidence is relevant and admissible for other purposes, the force of this argument is limited. However, the primary reason for the exclusion is that it is almost always irrelevant. If our task were to discover what was intended or what a reasonable person would understand the parties to have intended, then just as with their subsequent conduct, their prior negotiations would often be of great probative value. In trying to ascertain the meaning of words, it is much more rarely so. There is no doubt, however, that this rule can give rise to counter-intuitive results. For example: D, a shipbuilder, negotiates to repair P’s ship. D proposes as a term: “The plating of the hull to be repaired, but if any new plating is required the same to be paid for extra.” P objects to the italicised words, saying contract must cover all work to make the vessel A1 at Lloyd’s. D agrees to the deletion of the italicised words. Did the 38 [2014] NSWCA 184; (2014) 89 NSWLR 633. See also Stratton Finance Pty Ltd v Webb [2014] FCAFC 110; (2014) 245 IR 223. 39 [2015] HCA 37; (2015) 89 ALJR 990. 40 Mount Bruce Mining (n 39) [49] (French CJ, Nettle and Gordon JJ), [113] (Kiefel and Keane JJ), [118] (Bell and Gageler JJ). 41 ICS (n 28) 913. 42 Chartbrook (n 2).



Ch 9  The Meaning of Words and the Intentions of Persons 177 contract cover the cost of the additional plating, or did this have to be paid for as an extra?

In A&J Inglis v John Buttery & Co it was held that the prior negotiations were inadmissible in answering this question, but clearly this was context directly relevant to the meaning of the words employed.43 We can use evidence of prior negotiations for purposes of rectification and estoppel by convention so as to have a document or agreement amended. A cynic might argue that admissibility for these purposes undermines whatever force there is in the inadmissibility rule for purposes of interpretation. The truth may be that admission for purposes of interpretation misleads more than it assists. Because it may strongly indicate what the parties themselves intended, the malign temptation is to give effect to this, rather than to the meaning of the words used. As background evidence of meaning, prior negotiations will rarely be strong evidence. Whether the danger that a judge may misuse this information is sufficiently hazardous that we must prevent her from using it at all, is a question concerning the competence of the judiciary that I dare not try and answer. Lord Hoffman’s fourth principle is expressed as follows:44 “(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.”

This wide approach means there is much less need for the doctrine of rectification today. But it could not lead to the inclusion of an entire clause omitted in error (eg a time-bar clause) or the exclusion of an entire clause that should not be there. The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition (that we do not easily accept) that people make linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera SA v Salen Rederierna AB:45 “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”

Is this a purposive approach? 43 (1878) 3 App Cas 552 (HL). 44 ICS (n 28) 913. 45 [1985] AC 191 (HL) 201.

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A difficult example: C is entitled to a refund under a shipbuilding contract if the contract is terminated, or if there is an “insolvency event”. Such an event occurred, and C claimed under a guarantee given by D bank in support of the refund obligation. The guarantee referred to “all sums due under the [shipbuilding] contract” but only referred to a refund on “termination”. No commercially discernible reason for guarantee to be limited in this way, so as to not cover the counterparties insolvency, could be discerned.

A majority of the English Court of Appeal held that the bank was not liable under the guarantee,46 but that decision was overturned by the Supreme Court.47 This is a difficult decision where reasonable people will disagree as to the weight to be given to the plain words on the one hand, and commercial context on the other. No approach can make these difficulties of judgment disappear.

Vitiating Factors An agreement may be set aside for a number of reasons related to defects in the subjective intentions of one or both parties. Where there has been a misrepresentation, duress, or undue influence, the party whose consent was, as a result, defective has the power to avoid the contract. If one subscribes to the view that promises arise by virtue of, or are at least dependent upon, our subjective intention to subject ourselves to such obligations, then the true position in all of these cases would be that there is no promise at all. The defect in the intention should mean that there is no promise. Any putative contract ought as a result be void, not merely voidable. This does not align with the positive law. A party subject to duress, or acting under undue influence, or to whom a misrepresentation has been made by the counter party has the power to avoid the contract. It is not the case that no promise has been made: there has been a promise regardless of any defects in the promisor’s subjective consent. The reason why the contract can be set aside is quite separate from what a promise is. It may be objected that there are occasions when a contract is rendered void as a result of a vitiating error, such as mistake, and not just voidable. One common example that is incorrectly relied upon for this proposition (a mistake as to the terms of a deal, known to the other side) is discussed above. Another is the case of common fundamental mistake: A agrees to buy B’s horse, Dobbin, currently in his stables in East Oxford. Unbeknownst to either party, at the time of the agreement the stables had burnt to the ground and Dobbin had been killed.

Under s 6 of the Sale of Goods Act 1979 (UK), a contract for the sale of specific goods is void if the goods have perished at the time of contracting without the knowledge of the seller. However, if we change the story, the oddity of concluding that no agreement was entered into because of the mistake becomes apparent. If the contract 46 [2010] EWCA Civ 582; [2011] 1 All ER (Comm) 18. 47 Kookmin Bank v Rainy Sky SA [2011] UKSC 50; [2011] 1 WLR 2900.



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stipulated that title to Dobbin was to pass the following week upon delivery, and the fire had taken place after the contract but before delivery, the contract would have been frustrated. We could not, however, say that no contract had ever been entered into; clearly there had. The better view is that there is an agreement in both cases, but that promises, like words generally, are not absolute. They run out. To take a rather over discussed example, if parents ask a babysitter to teach their young child a game whilst they are at the cinema, the word “game” cannot in context be interpreted to include knife throwing or playing “chicken” on a busy road. In the abstract the word “game” can include these things, but not in these circumstances. Again this has nothing to do with what the parties themselves subjectively intended, it matters not a jot whether the parents thought about these possibilities. In the law, the limits of what has been promised are inevitably a matter of interpretation. Promises do not cover all unforeseeable eventualities, such as the non-existence of the subject matter. Agreements to buy and sell in such a situation are no less real, but they do not bind. It does not matter that the parties never considered this situation, nor does it matter that they never considered this situation’s possibility. That the contract in the common mistake case is not absolutely void may be shown by reflecting upon the fate of terms other than the promises to buy and sell. If the contract for the sale of Dobbin contains a jurisdiction or arbitration clause these are binding, which they should not be if the contract were indeed void because no agreement had been reached. Rather, all that is no longer binding are the parties’ primary obligations to buy and sell, and this is because the promises do not cover the situation where the subject matter of the agreement does not exist. This is so regardless of whether its destruction takes place 10 minutes before or 10 minutes after the agreement is concluded.

Parol Evidence It is unfortunate that the parol evidence rule has fallen so far out of favour, as understanding it is essential in order to understand the doctrine of rectification which would be unnecessary without it.48 Indeed, that at my own university we teach the doctrine of rectification but omit the parol evidence rule from our contract course is a source of personal embarrassment. The exclusion of the rule from some books or courses on contract probably comes from its name which is wholly misleading. First, the evidence excluded which falls outside of a document which is intended to include the parties’ entire agreement is not limited to parol (ie oral) evidence but also applies to all other evidence, which may be in writing, outside of the document.49 Therefore it is better to speak of evidence extrinsic to the written agreement being excluded. Secondly, the parol evidence rule is not a rule of evidence but a rule of construction. Books on evidence that still include it within their scope quickly explain that it should not really be included.50 The rule as traditionally 48 Cf G McMeel, “Interpretation and Mistake in Contract Law: ‘The Fox Knows Many Things …’” [2006] LMCLQ 49, 66–69. 49 Eg Mercantile Bank of Sydney v Taylor [1893] AC 317 (PC). 50 C Tapper, Cross & Tapper on Evidence (12th ed, OUP 2010).

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formulated states that evidence cannot be admitted (or even if admitted cannot be used) to add to, vary or contradict a written instrument.51 The rule forms part of the law of merger, which is of more general application outside of the law of contract (eg court orders). Once it has been shown that the parties have agreed to be bound to the terms of a contract wholly embodied in a written instrument, each is bound by its terms although one may not know what they are,52 and even though the content of prior negotiations may be inconsistent with the terms contained in the document. The refusal to admit such extrinsic evidence as relevant arises from the fact that it is wholly pointless to admit it as it is irrelevant once the court has concluded that the document was agreed to contain all the terms of the contract. The rule that such extrinsic evidence is irrelevant follows as a matter of logic from what the parties have agreed to be bound by. Such an agreement is determined by the ordinary rules of objective interpretation. If, as a matter of fact, the parties had at an earlier point in their negotiations reached an agreement on different terms from that embodied in the subsequent written contract, this earlier agreement is replaced, and consideration provided by each side’s promise is to be bound solely by the terms in the written agreement. Giving effect to different terms from those contained in the written agreement would be contrary to the agreement the parties have reached. Properly understood, therefore, the “parol evidence” rule is not, as it is sometimes portrayed, a rigid rule based upon a now unfashionable love of certainty which will lead to the frustration of the parties’ actual intentions. Rather the effect of the rule is to enforce, not frustrate, the intentions of the parties as objectively manifested. Although it has been claimed that there are a large number of exceptions to the rule, and that these exceptions have swallowed it up,53 the better view is that the logic of the rule is irresistible and that the so-called “exceptions” are nothing of the sort.54 For example, as a matter of logic, the rule only applies to the contents of the contract, and not to its validity. Only if it has been genuinely agreed that the document is agreed to embody the parties’ entire agreement does it logically follow that extrinsic evidence of other terms is irrelevant. This limitation is not, therefore, an exception to the rule. Further, the most important anterior question to the rule’s application is whether, as a matter of construction, the written instrument is intended to contain all of the terms agreed to. So, in Allen v Pink,55 a buyer received a memorandum from the seller which said, “[b]ought of G Pink a horse for the sum of £7 2s 6d.” As the document was meant as a memorandum evidencing the agreement which had been entered into, and not as containing the entire terms of the agreement, evidence of an oral warranty that the horse would go quietly to harness was admitted. Again, this is obviously not an exception. 51 Bank of Australia v Palmer [1897] AC 540 (PC) 545 (Lord Morris); Jacobs v Batavia & General Plantation Trust [1924] 1 Ch 287 (Ch) 295 (PO Lawrence J); Jacobs v Batavia & General Plantations Trust Ltd [1924] 2 Ch 329 (CA). 52 Parker v South Eastern Rly Co (1877) 2 CPD 416 (CA) 421. 53 McMeel (n 48) 66–67. 54 Law Commission of England and Wales, Law of Contract – The Parol Evidence Rule (Report number 154, 1986) para 2.31. 55 (1838) 4 M & W 140; 150 ER 1376.



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Similarly this rule about what the agreement is needs to be kept distinct from the question as to whether the parties can rely upon extrinsic evidence as an aid to interpretation of a contract. If all that has been agreed is that no terms other than those embodied in the written document have been (or are any longer) agreed to, leading extrinsic evidence to interpret terms within the document is not inconsistent with the agreement. Indeed such contextual evidence may be indispensable. In recent times, the courts have become much less restrictive in admitting such evidence.56 In principle, there is no tension between this and the parol evidence rule. The parol evidence rule is not dictated by public policy, or the needs of commercial certainty, or in order to make the court’s task easier by restricting the relevant material. Rather, it arises because of the agreement itself. It is a form of implied entire agreement clause. Consequently, there is no need to “liberalise” the parol evidence rule. Where a contract is reduced to writing there is a “presumption” that the parties intended it to include all of the terms of the contract.57 This “presump­ tion” is merely a presumption of fact, and reflects the court’s readiness to draw inferences as a result of common background practice. This is to be contrasted with a true presumption of law (eg the presumption that a person’s death can be presumed from his absence for seven years). The “presumption” that when a contract is reduced to writing it is intended to include all its terms is inevitably rebuttable. However, it does reflect the social fact that laymen, in particular commercial parties, attach great significance to the reduction of a contract into writing, so that the “presumption” will in practice be difficult to rebut. Today it is very common for parties to include a clause in written contracts stating that the document represents their “entire agreement”. Such express clauses will also deprive pre-contractual statements of the contractual force they might otherwise have.58 The extent of such a clause’s operation is, inevitably, a matter of construction. In many cases, the entire agreement clause adds nothing to the conclusion that the court would have reached without its inclusion. Such a clause removes any doubts that the parties, by reducing their agreement to a single document, intended it, and nothing else, to represent their agreement. The parol evidence rule is equivalent to the implication of an entire agreement clause into a contract.

Rectification What is it that we rectify? Three views may be distinguished: the traditional, the radical, and the correct. The traditional view is that courts do not rectify contracts but rather the instruments that purport to have been made in pursuance of contracts.59 This is a curious claim however as instruments are merely pieces of paper. They are not themselves the parties’ rights and obligations. Altering pieces of paper on its face does nothing. 56 ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896 liberalises the use of such evidence. See McMeel (n 48). 57 Gillespie Bros & Co v Cheney, Eggar & Co [1896] 2 QB 59 (QBD) 62. 58 Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611 (Ch D) 614 (Lightman J). 59 Mackenzie v Coulson (1869) LR 8 EQ 368 (Ch) 375 (James VC).

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The radical view is that the courts rectify the parties’ objectively manifested agreement in order to make it conform with their subjective intentions where they differ. This view may be naturally arrived at if one believes that the common law adopts a rigidly objective approach for pragmatic or policy reasons, with equity then playing its traditional softening role as a court of conscience of giving effect to the intentions of the parties. It is also radically mistaken. If it were true why would the doctrine be dependent upon the existence of any agreement at all? Why not just cut to the chase and enforce the parties’ shared subjective intentions whenever these could be proven? If we return to the example of the two companies who independently think they have entered into a lease on the same terms, why not just give effect to their subjective intentions? The truth is that equity is no more in the business of enforcing uncommunicated intentions, even where they are shared, than is the common law. If there is a communicated exchange of offer and acceptance on some terms between the two parties (as eg with the two companies that both intend a lease), can that alone be enough to justify enforcing their shared common subjective intentions where they differ? The answer is no. It does not matter how close (or far away) those communications are to what they subjectively intend. There is no contract on the basis of those intentions, and subjective intentions can be no substitute for the communication of offer and acceptance.  It is one of the curiosities of the law that although many people claim that the parol evidence rule is no more, nobody would make the same claim about the doctrine of rectification. Yet if we had no parol evidence rule we would have no need for the doctrine of rectification. Rectification operates by way of partial rescission. If all that it did was amend the document itself it would be of no legal significance. Instead, the agreement that the document alone represents the parties’ agreement is rescinded. What we are left with is the bargain that there would have been if it had not been agreed that the document alone contained their entire agreement. Rectification is akin to specific performance because it is that agreement that we are enforcing. Much confusion is created by thinking that the doctrine of rectification exists in order to give effect to the parties’ intentions. Again, this is a more subtle form of the error of thinking that contracts should represent what the parties’ intended. Lord Nicholls extra judicially suggested that the parol evidence rule could be easily circumvented by pleading rectification, thereby bringing before the court evidence of what the parties’ subjectively intended. This would be correct if the parol evidence rule were a rule of evidence, as this would undermine its entire purpose. But, as we have seen, it is not. Rectification seeks to partially avoid what has been objectively agreed. Rectification sets aside the agreement that this document, and this document alone, contains the parties’ agreement. It is a form of partial rescission. What we are left with is the agreement that the parties have entered into absent their reduction of it to a single agreement. This means that the court may give effect to terms, such as a limitation clause, that have been omitted from a document but which have been agreed to. That does not require, as was once thought, an agreement anterior in time to the final document. This may be impossible to find as there may be no scintilla of time before the finalising of the document when an agreement was made. It does, however, require there to be an agreement to be given effect to. Again,



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subjective intentions may be used for the purpose of setting aside an agreement in whole or in part, but those intentions are not the agreement. The evidence relevant to the question of whether one or more of the parties was making a mistake is simply not the same as the evidence relevant to the meaning of the words used. No rule is being circumvented here. I shall not seek to set out all the circumstances where rectification is possible, but rather to set out what its consequences are. In each case, we are not concerned to give effect to the parties’ intentions but to their agreement. Some examples: (a) A and B agree to the sale of feveroles. Their agreement, when reduced to writing, states that there is an agreement for the sale of ordinary horsebeans. Both mistakenly believe that feveroles and ordinary horsebeans are the same. B now seeks to rectify the contract so that “feveroles” replaces “ordinary horsebeans”.

The parties have made a common mistake as to whether the document contains the terms of their agreement. Rectification should be awarded. Although the written contract was consistent with their actual intentions (for ordinary horsebeans), this is of no relevance. The document does not accord with their actual agreement, and so the agreement that this document and this document alone embodies their agreement can be set aside. A contract for the sale of ordinary horsebeans becomes, after rectification, a contract for the sale of feveroles.

(b) A and B agree to the sale of ordinary horsebeans. Their agreement, when reduced to writing, states that there is an agreement for the sale of ordinary horsebeans. Both independently mistakenly believe that feveroles and horsebeans are the same. B now seeks to rectify the contract so that “feveroles” replaces “ordinary horsebeans”.

Again, here the finalised written document accords with the parties’ agreement irrespective of the document. That this did not accord with their actual subjective intentions is irrelevant, and no rectification will be awarded.60 No agreement for the sale of feveroles was ever entered into, and rectification cannot alter this fact.

(c) A and B agree to the sale of feveroles. Their agreement, when reduced to writing, states that there is an agreement for the sale of ordinary horsebeans. A mistakenly believes that ordinary horsebeans and feveroles are the same. B knows that feveroles are top quality horsebeans. A seeks rectification so that “feveroles” replaces “ordinary horsebeans”.

Again, there should be rectification, and it does not matter that there is no common intention that what is sold is feveroles. The (unilateral) mistake that A makes, if known to B, entitles A to rescind the agreement, leaving the agreement that there would have been if they had not reduced it to writing.

60 Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 (CA); IBM United Kingdom Pensions Trust Ltd v IBM United Kingdom Holdings Ltd [2012] EWHC 2766 (Ch); Chartbrook (n 2) [57] (Lord Hoffmann); Lord Hoffmann, “The Intolerable Wrestle With Words and Meanings” (n 2).

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Once we see that rectification is akin to recession, and that what is set aside is the agreement that the document alone entirely constitutes their agreement, then we can see that the same kinds of defects in intention that permit a contract to be set aside ought to permit rectification. Common mistakes, mistakes made by one party known of by the other, duress and undue influence all ought in principle to suffice, and operate in the same way as they do when it is sought to set aside agreements generally on the same basis. In all cases there is no warrant for doing anything other than enforcing an actual agreement made through a communicated offer and acceptance.

Enforcing Mistakes In reviewing the case law concerning rectification for unilateral mistake, Professor McLauchlan argued that “the object of rectification for unilateral mistake ought to be essentially no different than rectification for common mistake – namely, to ensure that the written contract reflects the true bargain between the parties as determined by ordinary principles of contract formation”61 and that the case law was consistent with this proposition. In principle this is correct, but the judges at least seem to be applying a different rule. Since 1960, Snell’s Equity has contained the following statement:62 “By what appears to be a species of equitable estoppel, if one party to a transaction knows that the instrument contains a mistake in his favour but does nothing to correct it, he (and those claiming under him) will be precluded from resisting rectification on the ground that the mistake is unilateral and not common.”

This principle was subsequently applied by Pennycuick J in Roberts & Co Ltd v Leicestershire County Council.63 Roberts & Co had tendered for a building contract which it thought required its services for 18 months. The Council knew this, but tendered a contract for 30 months which Roberts & Co signed. Pennycuick J held that, as the Council knew that Roberts & Co were mistaken about the length of the contract but nevertheless let them go ahead and sign it, Roberts & Co was entitled to have it rectified. This seems wrong in principle,64 and inconsistent with earlier authority.65 That one party was making a mistake as to the terms of the bargain, and that was known to the other party, ought to be grounds for setting the bargain aside altogether. It should not be grounds for enforcing an agreement that was never made. There never was any offer and acceptance of a contract for 18 months. If the Council had not wished for this drastic result, they should consent to rectification on the terms as understood by the counterparty, but the counterparty should not be able to enforce an agreement that has never been made. Rectification should not be used to give rise to results fundamentally in 61 62 63 64 65

McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 1) 640. EHT Snell, RE McGarry and PV Baker, Snell’s Principle of Equity (Sweet & Maxwell 1960). [1961] Ch 555 (Ch D). See S Waddams, The Law of Contract (5th ed, Canada Law Book 2005) 238–39. Garrard v Frankel (1862) 54 ER 961 (Ch); Harris v Pepperell (1867-68) LR 5 Eq 1 (Ch); Paget v Marshall (1884) LR 28 Ch D 255.



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conflict with basic contract doctrine. If the agreement between the Council and Roberts & Co had not been reduced to writing, it would not have been susceptible to rectification, and it would not have been thought that a contract on the terms as mistakenly understood by Roberts & Co, but never accepted by the Council, could have been enforced. The approach of Pennycuick J in Roberts & Co Ltd v Leicestershire County Council has subsequently been endorsed in England in a series of cases,66 and adopted by the Supreme Court of Victoria in Air New Zealand Ltd v Leibler.67 It may be that we consider that the sharp practice of which the Council was guilty should be sufficient for a claim for damages for wrongdoing in Australia under what is now Pt 3-5 of the Australian Consumer Law (previously found in the Trade Practices Act 1974 (Cth), Pt VA). Further, one party’s mistake as to the terms, known by the counterparty, should be sufficient to enable the mistaken party to get the agreement set aside. If, however, the counterparty never objectively manifested agreement to be bound by the terms the mistaken party thinks has been agreed to, there is no contract on those terms.

Legislation If the propositions concerning the meaning of words used by individuals in voluntarily creating duties, rights, powers, liabilities and immunities under contracts is correct, then a fortiori the same should apply to legislative enactments. Courts frequently speak of the process of interpreting a statute as one of searching for the legislature’s intent.68 This is a mistake. This is not because it is meaningless to speak of a legal construct, such as a legislature or a corporation, as having an intention. Although it is the case that only natural persons can form an intention, we may perfectly rationally attribute those intentions to a non-natural entity. So, just as the act of Geoff Hurst in kicking a ball in a net may be attributed as a goal to a team, England, that itself can only “act” through human agents, we can speak of companies, legislatures, or even entire nations having intentions through the attribution of the intentions of the human agents who make up the corporate entity. This process of attribution may be more complex where we have a group, some of whom may have different intentions from others, but the law can solve problems such as these with a rule. It is not the artificiality or the difficulty of the exercise that is the problem in searching for legislative intent. Rather it is its irrelevance. So, even if we could ask all of the United Kingdom Parliament’s 650 Members of Parliament and 774 members of the House of Lords for their view on the correct interpretation of a statutory provision, and all were in agreement, this on its own would be of no more probative value than asking several hundred random members of the public what they thought the words 66 Riverlate Properties Ltd v Paul [1975] Ch 133 (CA); Thomas Bates & Son v Wyndhams Lingeries Ltd [1981] 1 WLR 505 (CA) (referred to with apparent approval in Taylor v Johnson (1983) 151 CLR 422 (HCA) 433); Agip Spa v Navigazione Alita Italia Spa [1984] 1 Lloyd’s Rep 353 (CA); Commissioner for New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 (CA). 67 Supreme Court of Victoria, 19 November 1996. 68 Eg Pepper v Hart [1993] AC 593 (HL) 643 (Lord Browne-Wilkinson).

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meant. It may show what a reasonable person may think, but the words mean what the words mean, not what members of the legislature intend. Even if they all accorded on the meaning of the words used, this would be equally irrelevant as not part of the context in which the words were communicated. If we had the private diaries of Alexander Hamilton written at the time of the drafting of the United States Constitution this may be of interest to a historian, but not to a lawyer. By sharp contrast, the Federalist papers are appropriate communicated context, as published at the relevant time. The position is no different in cases where the legislative provision is ambiguous or obscure than where it is clear and precise. What is intended by anyone is not determinative of meaning, and consequently of what has been done. Legislation is enacted. The word “Act” of Parliament reflects that its existence and content is determined by what has been done, not by what anyone intended to be done. In this light, we may see that the rule against the admission of statements made in Parliament during the passing of a Bill was not a rule of evidence at all. The problem is not that the material may not have been reported accurately, nor that it may be ambiguous, nor that the costs of searching outweighed the potential costs, nor that the Bill of Rights precluded courts from questioning parliamentary debates, nor that it undermines legal certainty, nor that it undermines the separation of powers, nor does it depend on rejection of the very idea of Parliamentary intent. Rather, admitting clear and unambiguous evidence of Parliamentary intent would rarely tell the court anything it needed to know. It is not a rule of evidence at all but rather a rule of construction. However, just as with the interpretation of a contract, the context in which legislation is passed is relevant to its meaning. This enables us to both justify the modern rule, in Australia contained in legislative rules69 in the United Kingdom in the House of Lords decision of Pepper v Hart,70 that such context is admissible and to understand its limited importance. If it were the case that our purpose is to ascertain the collective intention of the legislature, admitting statements by ministers in charge of promulgating Bills appears to be a poor method of ascertaining this. Ministers may be the mouthpiece of government, but they are not the mouthpiece of the legislature. However, just as with any other material that provides the background to an Act, a white paper, or Law Commission report, or its preamble, or statements made in the passing of legislation may be evidence of its context. A clear and appropriate case was the decision of the House of Lords in Harding v Wealands.71 This concerned the true construction of the Private International Law (Miscellaneous Provisions) Act 1995 (UK). This Act repealed the conflict of law “double actionability” rule in the law of torts, and provided that the law to govern claims in torts was the lex loci actus. Issues of procedure were to be governed by the lex fori. Did matters of “procedure” include the appropriate remedy, in particular the quantification of damages? During the Report stage in the House of Lords an amendment to the then Bill had 69 At a Commonwealth level by the Interpretation Act 1901 (Cth) s 15AB. 70 [1993] AC 593 (HL). 71 [2006] UKHL 32; [2007] 2 AC 1.



Ch 9  The Meaning of Words and the Intentions of Persons 187

been tabled to provide that damages were to be awarded in accordance with the lex fori. The minister promoting the Bill, the Lord Chancellor, responded that issues of quantification of damage were considered to be procedural, so that the amendment was unnecessary. The amendment was therefore dropped. This fact was used as background in construing the meaning of the words. This may be contrasted with the approach in A&J Inglis v John Buttery & Co above – specifically, it is inconsistent with the admissibility in interpreting a statute for pre-contractual negotiations to be excluded as part of the background context in interpreting a contract. Whichever approach is right, the law’s approach appears inconsistent. A statute, unlike a contract, cannot be subsequently rectified because of its non-conformity with the subjective states of mind of those responsible for its passing. Indeed, it is impossible to imagine how it could be as if the formal Act could be so set aside there is not another informal one which could then be given effect to.

Trusts If what I have said so far is accepted, then the same principles of interpretation and rectification should apply in the law of trusts. A trust can no more be created by subjectively intending its creation than can a contract. A trust is irreducibly obligational. A trustee is obliged to another not to use a right or rights for his own benefit. Such an obligation can only be created by some action in the world. This is clearly the case where a settlor conveys a right to another to hold on trust, but is also the case where one party intends to make himself a trustee for another. There must be a declaration of trust, express or implied. Secret intentions are not trusts. In the superb decision of the High Court of Australia in Byrnes v Kendel,72 this objective approach to the existence of a trust was affirmed. As Heydon and Crennan JJ state, “[a]s with contracts, subjective intention is only relevant in relation to trusts when the transaction is open to some challenge or some application for modification”.73 Where a trust deed is rectified (as opposed to when a trust is avoided) what should, indeed must, be given effect to is another objectively manifested declaration of trust. Just as the question of interpretation is dealt with in the same manner as for contracts, the question of rectification should be as well. On its face, the law in England as stated in the Court of Appeal’s decision in Day v Day74 contradicts the principles stated above, and expressly rejects the application of the approach in Chartbrook to the rectification of voluntary settlements. In this case, Mrs Day executed a power of attorney in favour of her solicitor. While she was abroad and in exercise of this power, the solicitor executed a conveyance of Mrs Day’s home to Mrs Day and one of her sons as joint tenants. Mrs Day died leaving her assets to her six children in equal shares. It was clear 72 [2011] HCA 26; (2011) 243 CLR 253. 73 Byrnes (n 72) [115]. 74 [2013] EWCA Civ 280; [2014] Ch 114.

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that she considered that she was the sole owner of the house, and had never intended the conveyance to her son. Rectification of the conveyance to the son was sought so that he held his interest in the property on trust for her. The Chancellor stated: “What is relevant in such a case is the subjective intention of the settlor. It is not a legal requirement for rectification of a voluntary settlement that there is any outward expression or objective communication of the settlor’s intention equivalent to the need to show an outward expression of accord for rectification of a contract for mutual mistake … In Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 the House of Lords agreed with Lord Hoffmann’s (obiter) explanation of an objective test for rectification for mutual mistake in the case of a contract so as to bring the final document into line with the parties’ prior consensus objectively ascertained. Nothing he said there touched upon the requirements for rectification for unilateral mistake in a non-contract case. Although, as I have said, there is no legal requirement of an outward expression or objective communication of the settlor’s intention in such a case, it will plainly be difficult as a matter of evidence to discharge the burden of proving that there was a mistake in the absence of an outward expression of intention.”75

This confuses the question of whether a transaction is invalid with the issue of what is left once it has been invalidated. If, as could be shown, Mrs Day’s subjective intentions did not accord with the objectively manifested transaction carried out on her behalf, this provided a good reason for setting aside the transaction between herself and her son. Unlike in the case of a contract, where the transaction is gratuitous there is no requirement that the defendant knew or ought to have known of the transferor’s mistake. However, if the transaction between mother and son could be set aside because of her mistake, could it be “rectified” so as to give rise to a trust in her favour? Clearly not. Not only did she never outwardly manifest any intention to create such a trust, she did not even subjectively intend to create one. This should not have been understood as a case of rectification at all, as Mrs Day neither manifested an intention to carry out nor subjectively intended any transaction at all. The correct analysis is that if the transaction between them is set aside because of her mistake, the right transferred to the son is held on trust for the mother. There was no possibility of the right to the land revesting automatically back in the mother at law (as would have happened if what had been conveyed had been a chattel). Legal title to the land was determined by the entry on the land register which had been altered in the son’s favour. Rather the invalidation of the transaction between the two of them inter se obliged the son not to use the right for his own benefit, and to re-convey it to the mother at her demand: a trust. In true cases of rectification (of which Day v Day was not an example) the rectification of a document embodying a declaration of trust can only give rise to another express trust on different terms if the latter is also objectively manifested. Equity is no more in the business of enforcing wholly subjective intentions than is the common law. 75 Day (n 74) [22].



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Wills Wills in the United Kingdom are different because of legislation.76 Most Australian States have enacted legislation following the British change. First, the interpretation of wills appears to require that the court look for the actual intentions of the testator, albeit only when certain conditions are satisfied. Section 21 of the Administration of Justice Act 1982 (UK) provides (emphasis added): “(1) This section applies to a will – a) in so far as any part of it is meaningless; b) in so far as the language used in any part of it is ambiguous on the face of it; c) in so far as evidence, other than evidence of the testator’s intention, shows that the language used in any part of it is ambiguous in the light of surrounding circumstances. (2) In so far as this section applies to a will extrinsic evidence, including evidence of the testator’s intention, may be admitted to assist in its interpretation.”

If the conditions of subs 21(1) are satisfied, then such matters as the notes the testator made in drawing up the will would be admissible, even if never communicated to another.77 The terms of the Succession Act 2006 (NSW) s 32 is in similar terms. At common law, it had always been assumed that it was impossible to rectify a will.78 In Marley v Rawlings Lord Neuberger giving judgment for the Supreme Court stated:79 “As at present advised, I would none the less have been minded to hold that it was, as a matter of common law, open to a judge to rectify a will in the same way as any other document: no convincing reason for the absence of such a power has been advanced.”

The reason for the law’s assumption was for precisely the same reason: it is impossible to rectify a statute. The court cannot give effect to bequests that are merely intended but never embodied in a will. If it could do that, why could it not simply give effect to the testator’s intentions in the absence of any will at all? If the document embodying the will is set aside, there is no will. Unlike a contract, where the rectification of the formal agreement does not leave no contract at all, it was never possible for the courts to give effect to an informal bequest that was not embodied in the formal will. Only intentions embodied in a will can be given effect to on death. The setting aside of the will would result in dispositions according to the position before the will was ever entered into, either under an earlier will or, if none, on an intestacy basis. 76 Following the Law Reform Committee Report, Interpretation of Wills (Report no 19, cmd 5301, 1973). 77 Marley v Rawlings [2014] UKSC 2; [2015] AC 129 [26] (Lord Neuberger). 78 Harter v Harter  (1873) LR 3 P&D 11 (Hannen P). See also In re Reynette-James decd  [1976] 1 WLR 161 (Ch D) (Templeman J). 79 Marley v Rawlings [2014] UKSC 2; [2015] AC 129 [28].

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Section 20 of the Administration of Justice Act 1982 (UK) now provides: “Rectification If a court is satisfied that a will is so expressed that it fails to carry out the testator’s intentions, in consequence – (a) of a clerical error; or (b) of a failure to understand his instructions, it may order that the will shall be rectified so as to carry out his intentions.”

Legislation in Australia, such as s 27 of the Succession Act 2006 (NSW) is in identical terms. This provision was (generously) read by the Supreme Court in Marley v Rawlings to permit the court to rectify two wills that a husband and wife had purported to execute at the same time. Because of an error by their solicitor, each spouse had been sent the other’s draft will, and the wrong one signed by both in ignorance of the error. “Will” in the section was read as meaning “putatively valid will”. The sending of the wrong will was interpreted as being a “clerical error”. This generosity was motivated by a desire to give effect to, rather than to frustrate, the testator’s intentions. This expansive reading of the statutory exception, coupled with the failure to see any merit in the old law’s stance against the rectification of wills, threatens to undermine the policy behind the Wills Act 1837 (UK). Clearly if there is no will at all, the courts will not give effect to the deceased’s intention to dispose of his estate in a particular way, however compelling the evidence of those intentions may be. Where there is a will, but on terms entirely different from those we can show the testator subjectively intended, why does this make a difference? Why should the existence of a will, on whatever terms, enable the court to give effect to the testator’s intentions that were never embodied in such a formal way? It may seem unfair to visit the incompetence of the solicitors on to their innocent clients, but the better way of solving this problem is to allow a claim for damages by the disappointed legatees. If it is correct that there is no common law jurisdiction for the rectification of a will, a difficult line of cases concerning the rectification of contracts for the sale of land requires explanation.80 Such contracts are unenforceable unless made in the requisite form. However, it has long been established that they are capable of rectification so as to accord with the (informal) agreement that the parties mistakenly thought their document reflected. Isn’t this giving effect to an informal agreement that the legislation states is unenforceable? The answer turns upon the construction of the formality requirement. If the formal requirement is interpreted as meaning that an agreement not contained in a document validly exists (ie is void) then permitting rectification appears unjustifiable, as it is with a will. If, however, we interpret the formal requirement as being needed to demonstrate seriousness of intention to be legally bound, once it is satisfied there is no necessary reason to require that all enforceable terms are incorporated into the document. Informal contracts for the sale of land are merely unenforceable if they are not, as with a “will” in an incorrect form, legally non-existent. 80 Craddock Brothers v Hunt [1923] 2 Ch 136 (CA); United States of America v Motor Trucks Ltd [1924] AC 196 (PC).



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Conclusion Another lesson on legal writing that Peter Birks taught was that each academic contribution must be self-contained.81 It should not be expected that the reader has already read and understood arguments and explanations expressed elsewhere. In order to comply with this injunction we have had to encompass not just the law of rectification on contracts, trusts and wills, but more generally how words are to be interpreted and the importance of reducing agreements to single documents. That the law of interpretation and rectification as it is understood in England and Australia is not inevitable, and how these issues are interrelated, is perhaps most easily illustrated by the principles of interpretation set out in the proposed (and now abandoned) Common European Sales Law. Article 58 provided: “General rules on interpretation of contracts 1. A contract is to be interpreted according to the common intention of the parties even if this differs from the normal meaning of the expressions used in it. 2. Where one party intended an expression used in the contract to have a particular meaning, and at the time of the conclusion of the contract the other party was aware, or could be expected to have been aware, of that intention, the expression is to be interpreted in the way intended by the first party. 3. Unless otherwise provided in paragraphs 1 and 2, the contract is to be interpreted according to the meaning which a reasonable person would give to it.”

This provision clearly adopts an approach to interpretation that fits more closely with the Civilian tradition than with that of the common law, but that is no objection to it. All of us could point to favourite examples of the common law that make no sense. Rather, the objection is that this rule is inconsistent both with how rights can be conferred, and with how to correctly interpret words in general and promises in particular. Any approach that starts with the proposition that contractual rights and their meaning are to be ascertained by looking at the subjective intentions of the parties is simply wrong. Indeed, in the vast majority of contractual disputes, the parties did not foresee the problem that has arisen, let alone have any actual intentions as to how it should be resolved. Why then has this rule, which is in conflict with everyday life, found favour? The only answer that can be given is an appeal to history. In the first half of the 19th century the “will theory” of contract pioneered by Frederich Carl von Savigny, that promises are a product of will, and contracts the result of a meeting of minds, held sway. This theory, whilst having some influence in England, has always had a more significant hold on the law in continental Europe. If a contract were or could be a product of our combined wills, then 81 He also said that footnotes should be for references and nothing else, otherwise the reader would be distracted by looking up and down. If it is worth saying, say it in the text. This is a rule that is very hard to stick to.

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like a vow its existence and content would be similarly determined by what was intended. No parol evidence rule, and no doctrine of rectification appears in the Common European Sales Law, as is inevitable in a world where we are in the business of giving effect to subjective intentions, and not objective agreements. We cannot fudge these profound differences as comparatists are so often tempted to do. Today, there are no serious subscribers to the will theory. We are bound by those agreements for which we are responsible and which we have made, not those we merely intend. It is not narrow partisanship to suppose that the common law rule is superior to that which is proposed to replace it, and that those jurisdictions that have either in whole or part abandoned it are making a mistake.

10

The Many Versions of Rectification for Common Mistake David McLauchlan

Introduction One could be forgiven for thinking that the equitable jurisdiction to rectify a written contract on the ground of common mistake would be one of the more straightforward areas of equity jurisprudence. Originally conceived as a qualification to the common law parol evidence rule, rectification is available to prevent a contracting party behaving unconscionably by seeking to enforce a written contract that, by mistake, failed to record accurately the common intention of the parties at the time the document was executed. However, an analysis of recent case law and commentaries on the subject reveals that the law has become extraordinarily complex and highly contentious. As Toulson LJ pointed out in Daventry DC v Daventry & District Housing Ltd (“Daventry”),1 there are “some real difficulties in the present state of the law about rectification”. Indeed, so much so that his Lordship and several other judges have taken to speaking extra-judicially about these difficulties and suggesting their own solutions.2 Despite the dry nature of the subject, this is not too surprising since rectification claims are a regular feature of modern commercial litigation that 1 2

[2011] EWCA Civ 1153; [2012] 1 WLR 1333 (CA) [117]. K Lewison, “If It Ain’t Broke Don’t Fix It: Rectification and the Boundaries of Interpretation” (the Jonathan Brock Memorial Lecture 2008) reprinted in the First Supplement (2010) to K Lewison, The Interpretation of Contracts (4th ed, Sweet & Maxwell 2007) 127; P Morgan, “Rectification: Is it Broken? Common Mistake after Daventry” [2013] RLR 1; The N Patten, “Does the Law Need to be Rectified? Chartbrook Revisited” (2013 Chancery Bar Association Annual Lecture) http://www.chba.org.uk/for-members/library/annual-lectures/does-thelaw-need-to-be-rectified-chartbrook-revisited; R Toulson, “Does Rectification Require Rectifying?” (TECBAR Annual Lecture, 31 October 2013) https://www.supremecourt.uk/ docs/speech-131031.pdf; T Etherton, “Contract Formation and the Fog of Rectification” (2015) 68 CLP 367; Lord Hoffmann, “Rectification and other Mistakes” (Lecture to the Commercial Bar Association, 3 November 2015) https://app.pelorous.com/edia_manager/ public/260/Lord%20Hoffmann%20Lecture%203.11.15.pdf. See also the brief consideration of the topic by G Leggatt, “Making Sense of Contracts: The Rational Choice Theory” (2015) 131 LQR 454, 464–65.

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they have to preside over. They would all agree with the view expressed by Lord Neuberger of Abbotsbury MR in Daventry that “it is plainly right that the applicable principles should be as clear and predictable in their application as possible”3 yet, as the Chancellor of the High Court of England and Wales, Sir Terence Etherton, then said in his recent extra-judicial comment, the law is now “marred by uncertainty and complexity and needs the attention of the Supreme Court”.4 The aim of this chapter is to illustrate this uncertainty and complexity, in what I hope is the simplest way possible, through a series of examples and to suggest what I consider to be the best way forward. I have already published articles on this subject, expressing views from which I have yet to see good reason to resile,5 and consequently I will only repeat those views and the supporting arguments to the extent that is necessary.

Example One It is well established that rectification is a remedy solely designed to correct mistakes made by contracting parties in the expression of their agreement. The mistake must relate to the terms of the contract. This may be brought about by a mistaken belief that the contract contains (or omits) a particular term or, in appropriate cases, a mistake as to the meaning of words chosen to give effect to the common intention. Rectification will not lie where there is a mistake in underlying assumptions or a mistake as to the benefits or consequences of implementing the common intention, as opposed to a mistake in reducing that intention to writing. The courts will not, under the guise of rectification, rewrite a document to reflect the agreement that the parties probably would have made if they had been better informed. There has to be an agreement or common intention, whether actual or objective, that is not reflected in the written contract before it is sensible to talk about rectifying the document. The classical illustration of this distinction was long thought to be the wellknown case of Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd (“Rose v Pim”).6 Even in Australia, where historically the courts have taken a more liberal view of the requirements for rectification than their English counterparts, the denial of relief in that case has never to my knowledge been questioned. This is so despite their viewing rectification as primarily concerned to implement the actual mutual intention of the parties, their criticisms of the contrary opinion in Denning LJ’s judgment,7 and their rejection of the need for 3 4 5

6 7

Daventry (n 1) [194]. Etherton (n 2) 368. D McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (2008) 124 LQR 608; D McLauchlan, “Refining Rectification” (2014) 130 LQR 83. Cf PS Davies, “The Meaning of Commercial Contracts” in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann (Hart 2015) 238 (suggesting that my approach “should not be adopted”). [1953] 2 QB 450 (CA). See eg Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 (CA) 336; Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 (CA) [7]–[11].



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an outward expression of accord. However, some recent discussions of Rose v Pim have suggested that the law has moved on since the case was decided and that rectification would now be an available remedy if the complicating feature of the case, namely, that the agreement sought to be rectified was one of a string of three contracts, were removed.8 Let us then take as our first example the essential facts of the case shorn of that feature: Seller (S) and Buyer (B) enter into a binding informal agreement whereby S agrees to sell and B agrees to buy a quantity of “horsebeans”, both parties believing that horsebeans are the same as “feveroles”, a commodity that B had been asked to supply to a third party. In fact, “feveroles” are a variety of medium size horsebeans superior to the large horsebeans, known as “feves”, that are delivered by S after the parties sign a more formal written contract that simply provides for the sale of “horsebeans”. B argues that the contract should be rectified by substituting “feveroles” for “horsebeans”.

In rejecting B’s claim, Denning LJ controversially reasoned that “[r]ectification is concerned with contracts and documents, not with intentions”.9 B could not succeed by establishing that the parties actually intended “feveroles”. It had to be shown that this was their outwardly manifested agreement. B had failed in this respect because both the oral and written contracts were expressed to be a sale of “horsebeans”. However, his Lordship’s oft-repeated view that, in the context of both contract formation and rectification, the law is unconcerned with the actual intention and state of knowledge of the parties was immediately challenged by Glanville Williams who argued:10 “Let it be supposed that with the contract as it was in the instant case, both parties had gone into the witness box and testified that they realised the distinction between ordinary horsebeans and ‘feveroles’, but that they used the term ‘horsebeans’ to mean ‘feveroles’ and not to mean ordinary horsebeans. In that event, it is clear, the contract would be valid for the sale of feveroles and there would be no contract for the sale of ordinary horsebeans. A contract is not enforced according to its ‘outward appearance’ if both parties concur in intending something else. It is not invariably true, therefore, to say, as Denning LJ does, that in the formation of a contract ‘one does not look into the inner minds of the parties’.”

Nevertheless, the decision can be and, as mentioned earlier, has traditionally been, justified on the basis of another point made by Denning LJ and the other two judges, Singleton and Morris LJJ. They all regarded the situation as involving a mistake in underlying assumptions. The parties intended all along to enter into a contract for horsebeans on the mistaken assumption that horsebeans were the same as feveroles. They had not made a mistake in the

8

It is not altogether clear why this feature of the facts should have made a difference since it does not appear that rectification of the contract between the plaintiff and the defendant would, in the particular circumstances of the litigation, have adversely affected the third parties. However, that is not an issue that need detain us here. 9 Rose v Pim (n 6) 461. 10 G Williams, “Mistake and Rectification in Contract” (1954) 17 MLR 154, 154–55.

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expression of their contract.11 Of course, this is a fine distinction that hinges on how the parties’ intention is formulated in the first place. The judges might quite plausibly have ruled that the overriding intention was for the sale of “feveroles” and that the written contract failed to record this intention. The mistake in assumption that feveroles were the same as horsebeans just went to explain why the word “horsebeans” was included in the written contract. Nevertheless, this is not to say that the case was wrongly decided or that it undermines the principle that the case is usually said to illustrate, namely, that a common mistake about the advantages or consequences of a contract does not suffice for rectification. The mistake must, so to speak, be in the contract not about the contract. If, say, parties set up an elaborate contractual structure in the false belief that it will minimise tax, and they would never have entered into the contract if the truth had been known, it will be to no avail for the party most affected to seek rectification.12

Sir Kim Lewison’s reinterpretation The above analysis ought to be relatively uncontentious but, as foreshadowed, different views of Rose v Pim have been expressed in recent times. Sir Kim Lewison13 has argued that rectification would now be available if, as in my example, no contracts with third parties were involved. In his view, it was “clear that when Rose and Pim used the word ‘horsebeans’, what they meant by it was ‘feveroles’. To put it another way, they negotiated on the basis of giving an agreed meaning to the word ‘horsebeans’.”14 He went on to suggest that “[t]hey were, in effect, using a private code” and that “[w]hen Denning LJ gave judgment in Rose v Pim the law had not yet recognised that rectification was an available remedy where parties had deliberately chosen words but were mistaken about their meaning”, citing in support of the private code point that Glanville Williams had taken this view at the time the case was decided in the case note mentioned above.15 A difficulty with this view is that Glanville Williams did not say that there was an agreed meaning on the actual facts of the case. He simply gave a hypothetical to illustrate his objection to Denning LJ’s extreme version of what objectivity in contract entails. Lewison’s view is also inconsistent with the analysis of Rose v 11 See Rose v Pim (n 6) 458 (Singleton LJ), 462 (Denning LJ, “an erroneous assumption underlying the contract”) and 463 (Morris LJ, “[t]he parties had throughout a clear common intention and purpose of buying and selling horsebeans”). Cf J Ruddell, “Common Intention and Rectification for Common Mistake” [2014] LMCLQ 48, 50 who explains Rose v Pim as a case where “rectification was refused where both the written instrument and the prior oral agreement were for the purchase of horsebeans, even though both parties intended to buy and sell ‘feveroles’. Importantly, the parties did not intend to contract for feveroles. They were simply mistaken as to the nature of horsebeans, believing them to be feveroles.” It is difficult to see how the parties “intended to buy and sell ‘feveroles’” but “did not intend to contract for feveroles” (emphasis in original). It would be better to say that they intended to buy and sell horsebeans in the mistaken belief that they were the same as feveroles. 12 See generally D Hodge, Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake (Sweet & Maxwell 2010) paras 3.02–3.20. 13 Lewison (n 2). Lewison’s view is endorsed by Hodge (n 12) para 3.38. 14 Lewison (n 2) para 49. 15 Lewison (n 2) para 51.



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Pim by the Court of Appeal in Joscelyne v Nissen16 where, in the course of ruling that the former case “does not assert or reinstate the view that an antecedent complete concluded contract is required for rectification”, the court said that the explanation for the decision to deny rectification was that “there was no communication between [the parties] to the effect that when they should speak of horsebeans that was to be their private label for the other commodity”.17 A broader question is also raised by Lewison’s analysis. If the parties were using the word “horsebeans” as their private code for “feveroles”, would not the latter be the actual meaning of the contract so that there was no mistake at all and no need for rectification of the contract? This raises questions that go beyond the scope of this chapter concerning the general rule excluding evidence of prior negotiations as an aid to interpretation and the exception for the socalled “private dictionary” principle as explained by Lord Hoffmann (with the agreement of all of their Lordships) in Chartbrook Ltd v Persimmon Homes Ltd (“Chartbrook”).18 His Lordship restricted the application of the principle to situations where evidence is sought to be adduced “that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning”. Suffice it to observe here that, if in the Rose v Pim scenario the parties did indeed mean “feveroles” when they used the word “horsebeans” and the private dictionary principle did not apply, Lord Hoffmann would allow rectification for common mistake on the somewhat artificial basis that the parties “mistakenly thought their words bore a different meaning”.19

Patten LJ’s explanation Lewison’s analysis of rectification was recently endorsed in general terms by Sir George Leggatt in an article in the Law Quarterly Review.20 No reference was made to another, rather more difficult, extra-judicial contribution to the subject, some five years after Lewison’s, by Patten LJ.21 The latter’s comments concerning Rose v Pim are of particular interest because they were made after, and in response to, the view of Lord Hoffmann in Chartbrook, which had been applied by the Court of Appeal in Daventry, that the availability of rectification for common mistake depends on “what an objective observer would have thought the intentions of the parties to be”,22 not on their actual (subjective) intentions. However, Patten’s comments are not easy to follow. He declined to treat Rose v Pim as a “private dictionary” case, saying that the parties’ “common misunderstanding remained uncommunicated and, consistently with it, there was no agreement between [the parties] to give ‘horsebeans’ a private dictionary meaning of feveroles”.23 The first part of this statement is difficult to understand 16 17 18 19 20 21 22 23

[1970] 2 QB 86 (CA). Joscelyne (n 16) 97. [2009] UKHL 38; [2009] 1 AC 1101 [45]. Chartbrook (n 18) [46]. Leggatt (n 2) 464. Patten (n 2). Chartbrook (n 18) [60]. Patten (n 2) para 14.

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because the “common misunderstanding” arose out of a communication from Pim to Rose that feveroles were horsebeans. Nevertheless, Patten does treat Rose v Pim as a case where the subjective intention of the parties was to contract for feveroles.24 He appears to suggest that in such circumstances rectification would be available on a subjective approach, and, indeed, that it ought to be available, but concludes that it is precluded by the objective approach adopted in Chartbrook.25 This is because the initial informal contract that preceded the parties’ written contract was for horsebeans. In other words, the earlier objective consensus was for horsebeans and that was exactly what the written contract provided for. In my view, however, nothing significant hinges on whether one takes a subjective or an objective approach to determining the intention required for rectification on the facts of Rose v Pim. If one analyses the facts as involving a common mistake in assumption (that feveroles were just horsebeans), there was an actual and objective consensus for the sale of horsebeans and no mistake in the expression of the terms. If, on the other hand, it is concluded that the overriding intention was for the sale of feveroles, this could only be based on inferences drawn from the communications between the parties (that horsebeans meant feveroles) and there would be ample basis for a conclusion that this too was their actual and objective consensus.

Example Two Let us move on now to situations where the alleged common mistake does relate to the terms of the contract and start with an example where most would consider that there is no doubt that rectification can be granted. Claimant (C) and Defendant (D) form an actual and objective consensus that their proposed contract shall include Term A. In other words, their actual intention is the same and this is manifested in communications passing between them or, as commonly expressed, “crossing the line”. However, Term A is either omitted from their later written contract or, properly interpreted, it does not have the meaning that C and D actually and objectively intended.

This is essentially the same as the first of four scenarios discussed by Etherton LJ in Daventry: “the parties subjectively and objectively (that is to say in their communications passing between them – or ‘crossing the line’) are in agreement but the formal documentation as executed fails to give effect to that prior agreement”.26 His Lordship’s view was that “[t]he documentation should be rectified to bring it into line (retrospectively) with their prior accord” and that “[s]ubject to such matters as delay and prejudice to any third party interests, there is no good reason not to do so”.27 However, while no-one would 24 Patten (n 2) para 22. 25 Patten (n 2) para 35 (“It will only be a case like Rose v Pim where [the parties’] subjective intentions coincide but the language is inadequate that there can be said to be no injustice in changing the terms of the contract although because of an objective approach to rectification even in that situation a remedy is denied”). 26 Daventry (n 1) [85]. 27 Daventry (n 1) [85].



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dispute this conclusion, not all agree as to the principle to be applied. They would draw a distinction between situations where the consensus reached prior to the written contract amounts to a binding contract and those where it does not. Thus James Ruddell28 argues that it is “fundamental”29 that the availability of rectification depends on whether the remedy is being sought on the basis that the written instrument fails to record the terms of a prior contract. If it is, the instrument should be rectified unless there is proof of an objective intention to vary the prior contract. This is so regardless of whether it is a case of common or unilateral mistake. On the other hand, when there is no prior contract, the correct approach is “radically different”.30 Here “the question is whether there is conduct on the part of the defendant sufficiently objectionable (or unconscionable) to justify rectification”.31 In the case of unilateral mistake the claimant must establish that “the defendant either had knowledge of the claimant’s mistake or deliberately induced that mistake”.32 If, however, the alleged mistake is common, it must be shown that the defendant shared the claimant’s actual (subjective) intention when the written contract was executed but subsequently invokes the terms as written. In essence, therefore, the argument is that when rectification is claimed on the basis of a prior contract an objective approach should be adopted but in all other cases a subjective approach is required. Importantly, on this analysis, rectification ought not to have been entertained on the facts of either Chartbrook or Daventry because in each case the objective prior accord was not a binding contract and the defendant both intended to contract on the terms as written and did not know of the claimant’s mistake. The author gives the following example:33 “C intended to sell her car to D for £10,000 and made an offer on those terms; D accepted the offer but misinterpreted it, intending to pay only $10,000; a written instrument was created with both C and D intending and believing that it simply recorded the oral contract; the written instrument provided for $10,000 (that is, the currency intended by D, but not that intended by and previously agreed with C).”

He concludes that rectification should be granted because:34 “if no written instrument had been created, D would have been contractually bound to pay £10,000 in accordance with the terms of the parties’ oral contract (not $10,000). If neither party intended to vary that agreement, why should C not be entitled to rely on the earlier contract? If there is communication between the forming of the first oral contract and the written instrument that is inconsistent with the former but consistent with the latter, it will be necessary to determine whether that communication meant that it was intended objectively that the instrument would vary the original contract.”

28 29 30 31 32 33 34

Ruddell (n 11). Ruddell (n 11) 49. Ruddell (n 11) 60. Ruddell (n 11) 49. Ruddell (n 11) 49. Ruddell (n 11) 59-60. Ruddell (n 11) 60.

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I agree that rectification is available in this case, but why should it not also be available if a court were to conclude that, due to, say, the informality of C’s initial communication and the parties’ contemplation that both would later sign a written agreement, C did not make a contractual offer, but D had led C reasonably to believe that a price in pounds sterling was on the table? According to Ruddell, the reason is that:35 “when there is no prior contract, either party is free to walk away from negotiations at any point until the signing of the written instrument. It is a significant inroad into freedom of contract to hold a party to an objective accord formed during negotiations but to which he or she never agreed to be bound. In this situation, rectification has the effect of imposing on both parties a contract they never made.”

The argument is premised on the view that there is no “true agreement” between the parties that rectification seeks to give effect to “because, by definition, the only agreement between the parties of any legal effect is that contained in the instrument”.36 On this view, the House of Lords’ analysis of the law of rectification for common mistake in Chartbrook was wrong. It will be recalled that in this case Lord Hoffmann, with whom all of their Lordships agreed, after overturning the rulings of the lower courts that the plain meaning of a payment formula contained in a property development agreement obliged Persimmon to pay Chartbrook nearly £3.6m more than Persimmon contended was due, said that he would have been prepared to uphold Persimmon’s claim for rectification on the ground of common mistake if their argument as to the meaning of the clause in question had been rejected. In his Lordship’s view, the jurisdiction to rectify a written contract hinges on whether an objective observer would conclude that the document failed to reflect the parties’ prior consensus, regardless of whether that consensus gave rise to a binding contract.37 Even if one party (in this case, Chartbrook) believed that the document reflected the prior consensus and intended to contract in accordance with the terms as written, that party will be deemed to be mistaken if the document does not reflect that prior consensus. Thus, on the facts, his Lordship ruled that an objective consensus had been reached in the correspondence between the parties several months before the final contract was signed. A reasonable person who read that correspondence “in the light of the background known to the parties would have taken them to have been intending [Persimmon’s understanding]”.38 And, since there was no evidence of later discussions from which an intention to depart from the consensus might have been inferred, it followed that, assuming Persimmon’s interpretation of the contract was wrong, “both parties were mistaken in thinking that it reflected their prior consensus and Persimmon was entitled to rectification”.39

35 36 37 38 39

Ruddell (n 11) 61. Ruddell (n 11) 64. Chartbrook (n 18) [59]–[60]. Chartbrook (n 18) [54]. Chartbrook (n 18) [66].



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Although I agree with other aspects of Ruddell’s analysis,40 his principal thesis is difficult to accept. The availability of rectification should not depend on the court’s finding in relation to such very often vexed questions as whether or not (a) an informal preliminary agreement gave rise to an immediately binding commitment, (b) a particular communication had the legal effect of a contractual offer or acceptance, or (c) the terms were sufficiently certain to constitute a legally binding contract. The reality is that negotiating parties do often reach an actual or objective consensus on particular aspects of their proposed contract before moving on to settle other, perhaps more contentious, aspects of the transaction, and if that consensus is not reflected in the eventual written contract, is it really wrong to say that the document fails to record the “true agreement” between the parties because no legally binding preliminary agreement was entered into? Why should it matter that the parties were free to walk away from the transaction after the consensus was reached but before the final agreement was signed? Are not the relevant facts that a consensus was reached on the point in issue, that nothing subsequently happened to indicate a mutual intention to depart from that consensus, that the anticipated written contract was eventually completed, and that by mistake, whether common or unilateral, the document does not accurately record the consensus? This is not to say, however, that it is irrelevant that there was an earlier binding contract that the parties intended to record in a later more formal document. Suppose that in Chartbrook the earlier objective consensus was contained in a legally binding heads of agreement. The evidential hurdle to be overcome by Persimmon would have been much lower. Indeed, one suspects that rectification would have been their primary claim. Nevertheless, the essential issue ought to be the same in either scenario: namely, was there in fact a mistake in recording the various rights and obligations that the contract was intended to create?

Example Three Let us now assume that proof of a continuing common intention not reflected in the parties’ written contract suffices for rectification, regardless of whether that intention gave rise to a binding contract. The question then arises: what is meant by “common intention”? Is it actual (subjective) intention or objective intention, ie the intention that a reasonable observer would attribute to the parties? If it is the former, must the actual intention be accompanied by an outward expression of accord? If not, must the intention be disclosed in some manner by each party to the other before it can count as a common intention, or does it suffice that it is otherwise proven that the parties’ intention was the same at the time of the contract? If, however, the law’s concern is with objectively 40 Eg I agree with his view (at 65) that rectification should be available where the parties’ actual common intention is not recorded in their written contract, regardless of whether there was an outward expression of accord. However, I disagree with his acceptance throughout the article of the orthodox view that rectification on the ground of unilateral mistake can only be justified where there is a finding of blameworthy conduct on the part of the defendant. See McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 5).

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determined intention, does this mean that the parties’ actual intention is irrelevant? Indeed, does this mean that a party who actually intended what the written contract provides for could obtain rectification to bring it into line with an earlier “objective” consensus? My third example below raises some of these issues. C leases a building to D. The executed lease places the obligation to pay rates on C. The actual intention of each party was that D was to pay the rates. This is verified by internal company minutes and memoranda, but there were no communications between the parties prior to execution of the lease to show that there was an outward expression of accord on the point. D pays the first two instalments of rates but then realises that the lease obliges C to pay. C seeks rectification of the lease.

According to the leading English authorities, C cannot obtain rectification in the absence of communication between the parties sufficient to give rise to an objective consensus or, as it is usually put, an outward expression of accord. Although there is support for the view that the latter should be treated “more as an evidential factor rather than a strict legal requirement in all cases of rectification”,41 so that C would prima facie be entitled to relief in the above example, this view must now be taken to have been rejected. More fundament­ ally, of course, under the ruling in Chartbrook that the relevant “common continuing intention” is not the parties’ subjective intention but their objective intention, a contracting party may be deemed to be mistaken even though it intended to contract on the exact terms contained in the written contract. This so-called “clarification” of the law prompted Etherton LJ in Daventry to observe that “the requirements of ‘an outward expression of accord’ and ‘common continuing intention’ are not separate conditions, but two sides of the same coin, since an uncommunicated inward intention is irrelevant”.42 This view would not be accepted in Australia where the leading modern authorities hold that “the common intention that is required to grant rectification is subjective”43 and that there is no need for an outward expression of accord on the subject matter of the common intention. Nevertheless, the result in the above example would be the same. C’s rectification claim would fail because it is not sufficient for the parties’ actual intention to be the same at the time the written contract is executed. In order to count as a common intention their identical subjective intentions must be sufficiently disclosed to one another: their intentions must “have been disclosed by each to the other in such circumstances that [those] intentions are not only identical in content, but known, and known to be known, to each other”.44 It is only “unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time that the 41 Munt v Beasley [2006] EWCA Civ 370 [36] (Mummery LJ, with whom Scott Baker LJ and Sir Charles Mantell agreed). This view is endorsed by Toulson (n 2). 42 Daventry (n 1) [80]. 43 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [316] (Campbell JA, with whom Mason P and Tobias JA agreed). See also Newey v Westpac Banking Corp [2014] NSWCA 319 [175]. 44 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 [430] (Campbell JA, with whom Allsop P and Giles JA agreed).



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written contract was entered”.45 Thus, in the leading case of Ryledar Pty Ltd v Euphoric Pty Ltd,46 Campbell JA concluded his analysis by posing the following rhetorical question: “If two negotiating parties each had a particular intention about the agreement they would enter, and their intentions were identical, but that intention was disclosed by neither of them, and they later entered a document that did not accord with that intention, what would be the injustice or unconscientiousness in either of them enforcing the document according to its terms?”

My reaction to this situation is exactly the opposite. It seems to me to be quite unjust to allow a party to hold the other party to a contract that the evidence irrefutably establishes neither party intended. And it is interesting to note that in New Zealand the law is different. The leading case is the decision of Tipping J in Westland Savings Bank v Hancock47 where his Honour stated the relevant requirement for rectification as follows:48 “That while there need be no formal communication of the common intention by each party to the other or outward expression of accord, it must be objectively apparent from the words or actions of each party that each party held and continued to hold an intention on the point in question corresponding with the same intention held by each other party.”

This statement makes no reference to a requirement that each party know of the other’s intention. It apparently suffices that there is reliable objective evidence to support a finding of fact that the parties’ actual intentions at the time of entering into the written contract were the same. Indeed, in holding that this requirement was satisfied on the facts his Honour focussed solely on whether the words and actions of each party, whether before or subsequent to the contract, demonstrated their respective intentions.49 Nothing in his analysis 45 Franklins v Metcash Trading (n 44) [444]. In JD Heydon, MJ Leeming and PG Turner (eds), Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, LexisNexis Butterworths 2014) para 27.050, the Australian position is summarised in the following difficult passage: “the central question is whether each party communicated that party’s actual intentions to the other so as to make their intentions common and agreed … Where the instrument is to be corrected to match the intentions of A and B, to establish a common intention it must be shown that (a) A held the relevant intention and B knew or reasonably believed that A held that intention; and (b) B held the same intention and A knew or reasonably believed that B held that same intention. This is ‘objective’ to a limited extent: there is no common intention unless both parties actually hold the same intention; objectivity enters the scene only to say it is enough, when deciding whether the parties communicated their intentions to one another, that each of them reasonably believes that the other – who in fact holds the relevant intention – does hold that intention. It follows that there will be no rectification to an ‘agreement’ which embodies an intention which one or both parties did not hold and did not, in some manner, communicate to one another” (emphasis in original). This very odd view only meets the criterion of intelligibility if the words “ought to have known” are substituted for “reasonably believed”. 46 Ryledar (n 43) [315]. 47 [1987] 2 NZLR 21 (HC). Despite being only a High Court decision his Honour’s analysis of the law has been widely adopted, including recently by the Court of Appeal in Robb v James [2014] NZCA 42 [21]. 48 Westland Savings Bank (n 47) 30. 49 Westland Savings Bank (n 47) 30.

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of the facts hinted at the need for any kind of communication between the parties of those intentions. In other words, it sufficed that each party’s intention was objectively verified.50

My solution How should the differences of opinion highlighted above be resolved? Many commentators would view the critical issue as being whether the common intention required for rectification is the objective common intention (so that there must be an outward expression of accord) or the subjective common intention.51 However, as I hope to demonstrate, that is a little too simplistic. Several points need to be made at this stage. First, viewed from an historical perspective, the notion that in the present context equity is unconcerned with the actual intentions of the parties seems quite wrong. As the Australian courts have taken some pains to point out, the rationale for granting rectification is the prevention of the unconscientious conduct involved in a party seeking to enforce a written contract that fails to reflect the actual common intention of the parties. Secondly, as I have discussed in more detail elsewhere,52 the need for an outward expression of accord, and the perceived concomitant notion that rectification is solely concerned with the parties’ objective intention,53 arose out of the unsatisfactory reasoning in the decisions of the English Court of Appeal in Joscelyne v Nissen54 and Rose v Pim.55 In the former, the court rightly rejected the view expressed by Denning LJ in the latter case, and in earlier authority, that rectification for common mistake was not available unless there was a prior concluded contract between the parties. It approved,56 inter alia, the view of Simonds J in Crane v Hegeman-Harris Co Inc57 that “it is sufficient to find a common continuing intention in regard to a particular provision or aspect of the agreement”. Nevertheless, it also held that, in addition to “convincing proof ” that the written contract failed to record the parties’ common intention, there must be “some outward expression of accord” before rectification can be granted.58 It is clear that this was said in deference to the view of Denning LJ in Rose v Pim that:59 50 In Ryledar (n 43) [287] Campbell JA suggested that Tipping J left open “the question of to whom ‘it must be objectively apparent’ – the other party or parties to the negotiation, or the Court at the time of the hearing”. However, a close reading of the judgment reveals that it is the latter. It appears that his Honour did not have in mind that each party’s intention must be apparent to the other party or parties. 51 See eg Davies (n 5) 234 (“the crucial area of debate”). 52 McLauchlan, “Refining Rectification” (n 5). 53 But cf the view of Leggatt J in Tartsinis v Navona Management Co [2015] EWHC 57 (Comm) [89] that, despite the requirement of an outward expression of accord, the availability of rectification for common mistake depends upon proof of an actual mistake by both parties. See further text following n 84. 54 Joscelyne (n 14). 55 Rose v Pim (n 6). 56 Joscelyne (n 14) 95. 57 [1939] 1 All ER 662 (Ch) 664. 58 Joscelyne (n 14) 98. 59 Rose v Pim (n 6) 462 (emphasis in original).



Ch 10  The Many Versions of Rectification for Common Mistake 205 “a continuing common intention is not sufficient unless it has found expression in outward agreement. There could be no certainty at all in business transactions if a party who had entered into a firm contract could afterwards turn around and claim to have it rectified on the ground that the parties intended something different. He is allowed to prove, if he can, that they agreed something different … but not that they intended something different.”

It is apparent from this passage and the immediately preceding reasoning that his Lordship was adhering to the extreme version of objective theory that he had expressed in Solle v Butcher,60 commonly known as the “detached objectivity” theory, under which a contract is formed when to all outward appearances the parties are agreed on the same terms and on the same subject matter, regardless of the actual intention and state of knowledge of either party. Thirdly, this is one of the great heresies of the common law of contract. The better view is that, consistently with Blackburn J’s classical statement of the objective principle in Smith v Hughes,61 commonly known as “promisee objectivity”, questions of agreement and intention to be bound are dependent on proof of either an actual mutual consensus/intention or an objective consensus/intention. For example, suppose that I enter into an informal agreement to supply goods or services to an Australian buyer that fails to make it clear whether the currency of payment is Australian or New Zealand dollars. Surely my contention that it is the former ought in principle to succeed if I can prove that this was our actual mutual intention or that I was led reasonably to believe that my understanding was accepted by the buyer. And the position should be no different if the agreement is recorded in writing. Since the whole rationale for rectification is to enable the true agreement to be enforced, that remedy, if necessary,62 ought ordinarily to be available to me if I am mistaken as to what the document on its proper construction provides where it is proven that (a) the buyer made the same mistake or that (b) I was led reasonably to believe that my understanding of the terms had been accepted by the buyer. In other words, the failure of the document to reflect either the actual or objective intention of the parties should suffice for rectification. Fourthly, acceptance of the above analysis disposes of the curious possibility some have raised that adherence to the objective approach might enable a party to obtain rectification on the basis of a prior alleged consensus even though the terms as written reflect that party’s actual intention at the time of 60 [1950] 1 KB 671 (CA) 691 (“[O]nce a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground. Neither party can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake”). See also Taylor v Johnson (1983) 151 CLR 422 (HCA) 428–30 and Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 [59]. 61 (1871) LR 6 QB 597 (QBD) 607. 62 Because the issue of interpretation is resolved against me, perhaps due to the perceived inadmissibility of evidence of prior negotiations.

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the contract.63 In such circumstances the claimant does not believe, let alone reasonably believe, that the other party intends to contract on different terms.

An opposite view In his excellent and very readable book, Principles of Contractual Interpretation, Richard Calnan takes an entirely different view.64 Although recognising that “the law is in a state of flux”,65 he approves the objective approach adopted by the House of Lords in Chartbrook and argues that “[r]ectification – like interpretation – should be concerned with the objective common intention of the parties”.66 This is because:67 “in the case of a contract, what the court is required to do is to establish the parties’ common intention. An intention is not really held in common merely because of the coincidence that each party subjectively and independently believes the same thing. It is only held in common if there has been a meeting of minds, and that is only possible through external manifestation of their individual subjective intentions. So, by its nature, a common intention must be established objectively – by reference to what has passed between the parties.”

The author goes on to suggest that there is little difference between require­ ments of objective common intention and “subjective common intention that has been externally manifested” because:68 “[i]n both cases, what needs to be established is the appearance of consensus, based on what has passed between the parties. In theory, the subjective approach also requires that there is an actual meeting of minds; but, since this can only be proved by what has passed between the parties, it is not at all clear that in practice this requirement adds anything material to the requirement of objective consensus.”

As will be readily apparent, I disagree that actual intentions can only be proved by what has passed between the parties and therefore that relief is necessarily based on what the objective observer would conclude from an outward expression of accord. The difference between our approaches can be demonstrated by our responses to two examples given by Calnan. The first states:69

63 See eg Crossco No 4 Unlimited v Jolan Ltd [2011] EWHC 803 (Ch) [253] where Morgan J, in the course of explaining that he had “some difficulty with Lord Hoffmann’s description of the principles as to rectification for common mistake” in Chartbrook, said that “[t]he law as stated by Lord Hoffmann appears to mean that a court can rectify a contract even though one party to the contract (even the party seeking rectification) fully intended, subjectively, to be bound by that contract, if the court is able to find that the final expression of consensus in the contract as executed differs from an earlier expression of consensus in a communication passing during the negotiations between the parties” (emphasis added). 64 R Calnan, Principles of Contractual Interpretation (OUP 2013). 65 Calnan (n 64) para 9.02. 66 Calnan (n 64) para 9.51. 67 Calnan (n 64) para 9.49. 68 Calnan (n 64) para 9.50. 69 Calnan (n 64) para 9.39.



Ch 10  The Many Versions of Rectification for Common Mistake 207 “A and B agree on the terms of their contract, and they are then put into writing. The document reflects the parties’ common subjective understanding of the agreement, but not their objective common intention. Should the writing be rectified?”

Calnan initially states that either answer is possible but his later preference for the objective approach suggests that he believes rectification should be granted. I, on the other hand, would emphatically deny the possibility of such relief. Indeed, this example calls into question what is meant by “objective” common intention. Calnan appears to favour “detached objectivity”, under which the question is whether an objective observer would have inferred that the parties had reached a consensus on the matter in question, whereas I favour “promisee objectivity”, which denies the very possibility of an objective common intention in the above example. Claimants cannot establish that they were led reasonably to believe that the contract contained terms other than the written terms when they actually intended to contract on the latter terms. Calnan’s second example raises the opposite scenario:70 “A and B agree on the terms of their contract, and they are then put into writing. The document reflects the parties’ objective common intention, but does not reflect their subjective common understanding of the agreement.”

The author again initially states that either view is possible but it is clear that he prefers what he calls “the common law approach”, namely, rectification is not available because the contract reflects the objective common intention of the parties. I, on the other hand, would allow rectification. I would do so regardless of whether there has been some outward expression of the subjective agreement or each party’s intention is disclosed in some manner because, in my view, a court ought never to enforce an agreement that is contrary to the actual mutual intention of the parties. And again, because I adhere to “promisee objectivity”, I find it difficult to accept that the contract reflects the parties’ objective common intention. Claimants cannot establish that they reasonably believed that the document accurately reflected the terms of the bargain when they, and the defendants, actually intended something else. Calnan, on the other hand, suggests that the latter view gives rise to “a curious result”:71 “If the contract had not been put into writing, it would have been the objective common intention of the parties which would have determined what the contract meant. But if the contract is then put into writing, should it be possible for one of the parties to go back to the parties’ subjective common intention?”

I see no such curious result. I would argue that, in the case of an alleged oral contract, a clearly proven actual mutual intention should prevail, as it did in, for example, Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd.72 To me, it is more curious that a court would uphold a contract and give it a meaning that is contrary to the actual intention of both sides. And, even if the arguments in this paper are wrong, the courts have well-established weapons in their armoury, such as estoppel by convention, to avoid such a result. 70 Calnan (n 64) para 9.40. 71 Calnan (n 64) para 9.40. 72 (1985) 2 NSWLR 309 (SC).

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Example Four Let us now consider some examples where the parties’ actual intentions differ but there was a prior objective consensus. The first of these is relatively uncontentious: C and D hold different actual intentions as to the meaning of an important term of their contract. C intends meaning x. D intends meaning y. The communications passing between them prior to signing the written contract support the conclusion that, objectively, meaning y was their common continuing intention and the written contract provides for this meaning.

This is similar to the second of four scenarios highlighted by Etherton LJ, with whose analysis Lord Neuberger agreed,73 in Daventry:74 “the parties never subjectively had the same intention, but the communications crossing the line show that objectively there was a common continuing intention at all relevant times prior to the execution of the final documentation, and the formal documentation reflected those prior communications. In that situation, whether or not rectified, one or other of the parties will be bound by a contract which they did not subjectively intend to enter into. It is right that the claimant should not be entitled to rectification to bring the documentation into line with a subjective intention and belief that was never communicated to the defendant and to which the defendant never agreed.”

The conclusion here is correct, but I suggest that it would be better to say that rectification is unavailable simply because there is no common mistake. The defendant is not mistaken because it intends to contract on the terms as written. This is a classic scenario where only one party, the claimant, has made a mistake. The defendant has not in any relevant legal sense made a mistake because it believes, and has been led reasonably to believe, that the claimant has agreed to the terms as written.

Example Five In this example the facts are the same except that the written contract does not reflect the prior objective consensus. C and D hold different actual intentions as to the meaning of an important term of their contract. C intends meaning x. D intends meaning y. The communications passing between them prior to signing the written contract support the conclusion that, objectively, meaning x was their common continuing intention. However, the written contract provides for D’s intended meaning y.

In my view, this example, like example four, is better categorised as involving unilateral, not common, mistake. In example four (where the document does give effect to the objective prior accord) C has made a unilateral mistake but rectification should be denied because D can establish that it believed and 73 Daventry (n 1) [227]. 74 Daventry (n 1) [86].



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reasonably believed that the claimant agreed to the terms as written. Whereas, in example five (where the document fails to give effect to the objective prior accord), C has also made a unilateral mistake but rectification should be granted if D led C reasonably to believe that C’s understanding was agreed to. The two scenarios are at heart no different except that in example five rectification is required to give effect to C’s understanding. Nevertheless, many disagree that the remedy should be available in the latter situation. After all, they say, D intends to enter into a contract having meaning y and that is exactly what the final written agreement provides for. C should only obtain relief if D knew of, or deliberately induced, the mistake and unconscientiously sought to take advantage of it. My view, however, is that since the purpose of rectification is to “put right” the written contract and ensure that the true bargain is enforced, not to punish nefarious behaviour, it is wrong to focus on the required state of mind and conduct of the defendant rather than on the simpler and more principled question as to whether in all the circumstances that conduct led the claimant reasonably to believe that the terms he or she intended had been accepted by the defendant. I have yet to see any satisfactory reason why the law should distinguish between (a) the situation where the actual and objective intentions of C and D are the same but wrongly recorded in their written contract and (b) the situation where the facts are the same except that D, without communication with C, changes her mind after perusing the final draft. It simply should not matter whether or not D can successfully plead innocence to a charge of wicked conduct. Suppose that the parties to an agreement for sale and purchase of land exchanged several drafts prepared by the vendor which clearly provided that the price was “exclusive of GST” but that the final version contains a typing error which has the effect that the price is now “inclusive of GST”. The purchaser notices the change but says nothing to the vendor. If the vendor later seeks to have the contract rectified, surely it should not matter whether (a) the purchaser, realising that there has been a mistake with serious financial consequences for the vendor, deliberately stood back and sought to take advantage of it75 or whether (b) the purchaser was entirely innocent, being either genuinely confused about the difference between “inclusive” and “exclusive” of GST or assuming (wrongly) that the transaction had no GST implications. In either situation, the court might be entitled to conclude that, despite the purchaser intending the price to be GST inclusive, the contract should be rectified because the purchaser ought to have drawn attention to the change and the vendor was reasonably entitled to assume that the deal that had always been on the table remained on the table. Of course, example five is essentially the situation that occurred in Chartbrook where, as we have seen,76 rectification would have been granted on the ground of common mistake if Persimmon’s interpretation argument had failed, notwithstanding that Chartbrook intended all along to contract in accordance with its, assumed to be correct, interpretation. An objective consensus had been reached on the point in issue prior to the written contract 75 See eg Eldamos Investments Ltd v Force Location Ltd (1995) 17 NZTC 12,196 (HC). 76 Text following n 36.

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being signed and it was held that the requisite common mistake was that both parties mistakenly thought that the document recorded the prior consensus. This view is difficult to accept because, in reality, the parties were at crosspurposes. Only one party, Persimmon, made a legally relevant mistake in the usual subjective sense of that word, in this case a false belief as to what the terms of the written contract provided for. On this view, the question that arose was whether or not Persimmon could obtain rectification for unilateral mistake. The lower courts thought not because Chartbrook did not know of, and had not in bad faith sought to take advantage of, Persimmon’s mistake. Consequently, the latter could not satisfy what were thought to be the requirements for taking the drastic and exceptional step of ordering rectification where there is mere unilateral mistake. However, as I have already indicated, in principle rectification for unilateral mistake ought not to be so restricted and could easily have been justified on the facts of Chartbrook. It seems clear that Chartbrook ought to have been aware from the offers that preceded the drafting of the written contract that Persimmon had a different understanding of the term in question. Furthermore, as a result of the various communications between the parties, including Chartbrook’s agreement in principle to the offers made by Persimmon, the latter were led reasonably to believe that their understanding of the term was assented to by Chartbrook. Of course, this is essentially the same as Lord Hoffmann’s conclusion that the written contract failed to reflect the earlier objective consensus, but the reasoning is different because it does not rest on a finding of mistake by Chartbrook and its focus is the existence, at the time of the written contract, of a consensus that Persimmon was reasonably entitled to believe, and did believe, was being confirmed in that document. Support for the above analysis is to be found in the judgment of Toulson LJ in Daventry. His Lordship questioned the correctness of the Chartbrook principle and therefore whether, given that the principle was strictly obiter, the court ought to follow it. Although he eventually decided to do so for various reasons,77 it seems clear that, had he not been constrained by authority, he would have adopted the alternative principle I have been advocating. In particular, he would have ruled that (a) the facts of both Chartbrook and Daventry were better categorised as involving unilateral mistake on the part of the claimant, (b) rectification for unilateral mistake might be granted where the mistaken party was reasonably entitled to believe that its understanding of the contractual terms was accepted by the other party, (c) the facts of Chartbrook satisfied the latter requirement (the mistaken party, Persimmon, “was led reasonably to believe that its version of the price formula was accepted”78), and (d) so too did the special facts of Daventry. Importantly, his Lordship said:79 “Notwithstanding the immense respect due to Lord Hoffmann and other members of the House of Lords, I have difficulty in accepting it as a general principle that a mistake by both parties as to whether a written contract conformed with a prior non-binding agreement, objectively construed, gives rise to a claim for rectification. Take a simple example. A and B reach what they 77 Daventry (n 1) [180]–[182]. 78 Daventry (n 1) [174]. 79 Daventry (n 1) [176]–[177].



Ch 10  The Many Versions of Rectification for Common Mistake 211 understand to be an agreement in principle. They confirm it by an exchange of letters. A believes that the correspondence means x. B believes that it means y. Neither is aware that the other’s understanding is different and there is no question of either behaving in such a way as to mislead the other. They then enter into a written contract which both believe gives effect to the agreement. They are both wrong. Objectively construed, the non-binding agreement meant x but the written contract means y. On the Chartbrook principle, A is entitled to have the contract rectified to conform with the correspondence. I [have] difficulty in seeing why it should be right to hold B to a contract which he never intended to make and never misled A into believing that he intended to make. In such a case it is hard to see why the written contract should not prevail. Rectification complements the rules of construction of contracts and serves a similar purpose. In general terms, the purpose is that the contract should give effect to what the parties intended should be the contractual bargain or, in some cases, what the party claiming rectification was led or encouraged by the other party to believe was to be the contractual bargain. Rectification in the example given above would not achieve that purpose. Rather, it would bind a blameless party to a re-formed contract which he did not intend.”

This passage should not be taken to suggest, however, that his Lordship disagreed that rectification was available on the actual facts of Chartbrook. As already noted, he appeared to accept that the claimant had been led reasonably to believe that its understanding of the term in question had been accepted. Lord Toulson (as he now is) has since reiterated extra-judicially his objections to the Chartbrook approach.80 His Lordship expressed a strong preference for the view of the majority of the Court of Appeal in Britoil plc v Hunt Overseas Oil Inc81 that there must be an actual common mistake as to the meaning or effect of the parties’ final agreement so that the very basis for finding a common mistake later adopted in Chartbrook was “unsound”.82 He said that in Chartbrook Lord Hoffmann, who had dissented in Britoil, was wrong to distinguish the case on the ground that it was one “where the defendants had failed to establish as a fact the necessary prior common agreement or intention” because Hobhouse LJ (for the majority) “rejected the proposition that the type of mistake advanced by the defendants (namely a mistake as to whether the legal agreement accorded with the heads of agreement, as distinct from a mistake as to the effect in law of the contract) was a common mistake of the kind required by the law for the purposes of rectification”.83 Similar views to those of Lord Toulson have been expressed, both judicially and extra-judicially, by respected English High Court judges including, most recently, Leggatt J in Tartsinis v Navona Management Co.84 His Lordship made, inter alia, the following points: historically, the “essential function of the doctrine of rectification” has been “to provide equitable relief in circumstances 80 81 82 83 84

Toulson (n 2). [1994] CLC 561 (CA). Toulson (n 2) 13. Toulson (n 2) 13. [2015] EWHC 57 (Comm). See also: Morgan J’s observations in Crossco (n 63); Morgan (n 2) 16; and the reservations of Hamblen J in St Maximus Shipping Co Ltd v AP Moller-Maersk A/S [2014] EWHC 1643 (Comm) [60]–[62].

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where the objective approach of the common law results in a document being interpreted in a way that does not reflect the actual intentions of its makers”;85 the requirement of an outward expression of accord only makes it clear that “a mere coincidence of uncommunicated subjective intentions is not enough” and “does not detract from the principle that rectification for [common] mistake depends upon proving that both parties actually were mistaken about the effect of the instrument”;86 it is difficult to see any equity in the “much more strongly objective test”87 in Chartbrook of allowing “a party to obtain rectification of a document to reflect a view of what had been agreed that the party himself did not actually have, just because a reasonable observer would have taken this to be his view”88 or of “imposing the view that a hypothetical reasonable observer would have formed of what had been agreed on a party who did not have that understanding of what had been agreed and whose understanding is reflected in the proper interpretation of the final document”;89 in the latter situations “rectification is not serving to avoid the injustice that would otherwise be caused when the objective principle of interpretation leads to a result which fails to reflect the parties’ real intention”;90 and, perhaps most tellingly, the Chartbrook approach converts what is truly a unilateral mistake into a common mistake and enables the well-established principles contained in “a distinct body of case law” that place strict limitations on the availability of rectification for unilateral mistake to be bypassed.91 It remains to note, however, that it will not necessarily be artificial or wrong in every case to posit a mistake on the part of a party whose intention was to contract in accordance with the terms as written. Let us take the following scenario that is broadly based on the facts, at least as analysed by Hoffmann LJ in his dissenting judgment in Britoil.92 Suppose that C and D sign a nonbinding heads of agreement containing a term that, in accordance with C’s understanding, plainly means x but which D understands as meaning y. Later the parties enter into a formal and more detailed “definitive agreement” that both parties intend “should reflect the meaning of the heads of agreement, whatever that might be”.93 However, as drafted, the agreement means y, which D still intends, whereas C still intends x. It is plausible to find a common mistake 85 Tartsinis (n 84) [87]. Cf PT Berlian Laju Tanker TBK v Nuse Shipping Ltd (The Aktor) [2008] EWHC 1330 (Comm); [2008] 2 Lloyd’s Rep 246 [38] where Christopher Clarke J said that “[t]he court is not concerned with what the parties thought they had agreed or what they thought their agreement meant – a subjective inquiry” (emphasis in original). 86 Tartsinis (n 84) [89]. See also Leggatt (n 2) 464 (distinguishing between cases where “the parties merely happen to have coincident intentions” and those where “they have a shared intention” and arguing that “a shared intention is the only form of actual intention which the law has reason to enforce”. 87 Tartsinis (n 84) [89]. 88 Tartsinis (n 84) [91]. This appears to be a logical corollary of Lord Hoffmann’s objective approach but it is questionable whether his Lordship would have entertained upholding the rectification claim if Persimmon intended to contract in accordance with Chartbrook’s actual intention. 89 Tartsinis (n 84) [91]. This view was recently endorsed by Cooke J in LSREF III Wight Ltd v Millvalley Ltd [2016] EWHC 466 (Comm) [70]. 90 Tartsinis (n 84) [92]. 91 Tartsinis (n 84) [93]. 92 Britoil (n 81). 93 Britoil (n 81) 577.



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here that justifies rectification because, although D intends y, both he and C intended no departure from the heads of agreement. Much more problematic, however, for the reasons already discussed, is some of Hoffmann LJ’s reasoning in support of his decision. His Lordship said, citing in support, inter alia, Rose v Pim and Joscelyne v Nissen, that “rectification will not be granted merely because the effect of the instrument is different from that which both parties subjectively intended”94 and that “[a] subjective mistake [by both parties] as to what the contract means is unnecessary as well as insufficient”.95

Example Six My final example is Etherton LJ’s seemingly simple fourth scenario in Daventry where:96 “[T]here was objectively a prior accord (whether or not a subjective common intention), and one of the parties then objectively changed their mind, that is to say objectively made apparent to the other party that they intended to enter into the transaction on different terms.”

His Lordship’s conclusion was as follows:97 “Leaving aside rectification for unilateral mistake (the requirements for which are quite different), it is right that, if the documentation as executed gives effect to the objectively indicated change of mind, a claim for rectification to give effect to the earlier prior accord should be refused. Once again, to do otherwise would force on the defendant a contract which they never intended to make on the basis of the claimant’s uncommunicated subjective intention to enter into a contract on the basis of the original accord notwithstanding the defendant’s objectively communicated change of mind.”

I agree with this conclusion because the claimant, in view of the communication from the defendant prior to entry into the written contract, cannot reasonably believe that the defendant intends to abide by the original accord and, by signing the contract without objection, the claimant leads the defendant reasonably to believe that it assents to the different terms. The objection to allowing rectification is not so much that it “would force on the defendant a contract which they never intended to make on the basis of the claimant’s uncommunicated subjective intention to enter into a contract on the basis of the original accord”,98 but rather that the defendant reasonably believes that the claimant has agreed to be bound by the terms as written. Without this latter conclusion the correct answer might have to be that no binding contract at all was formed due to the lack of actual or objective consensus on a material term. Etherton LJ’s scenario is not, however, as simple as it appears to be at first sight. This is illustrated by the decision in Daventry itself where not only were different views expressed as to the test to be applied in determining whether the defendant had objectively made it apparent to the claimant that it intended 94 95 96 97 98

Britoil (n 81) 578. Britoil (n 81) 579. Daventry (n 1) [88]. Daventry (n 1) [88]. Daventry (n 1) [88].

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to enter into the transaction on terms different from the objective prior accord but the judges who agreed on the same test were divided as to whether it was satisfied on the facts. Much of the argument causes one’s head to spin and, as I have discussed in more detail elsewhere,99 it illustrates just how much, in the aftermath of Chartbrook, the law of rectification has become inordinately, in fact ridiculously, complex. It will be recalled that the case concerned an agreement by Daventry District Council (DDC) to transfer its housing stock and housing staff to Daventry & District Housing Ltd (DDH), a specially-formed registered social landlord. An important part of the negotiations concerned who would pay the deficit of £2.4m in the pension scheme that transferring staff belonged to. The trial judge, Vos J,100 found that, although an objective accord that DDH would pay the deficit had been reached in the course of the parties’ negotiations, that accord had not continued until execution of the contract. An exchange of e-mails between the parties and their solicitors leading up to the inclusion of a clause unambiguously providing that DDC were to pay the deficit (cl 14.10.3) gave rise to a new objective accord. However, a majority of the Court of Appeal (Toulson LJ and Lord Neuberger MR) allowed DDC’s Appeal. Rectification was granted on the ground that, applying the objective approach endorsed by the House of Lords in Chartbrook, there was a common mistake. Etherton LJ dissented, holding that, although there was a prior accord as in Chartbrook, the subsequent discussions and conduct would have suggested to an objective observer that there was an intention to depart from that accord. Toulson LJ disagreed with Vos J that there had been a change in the parties’ objective common intention as a result of the communications between their solicitors in the days immediately preceding execution. His Lordship thought that in determining whether the common intention had continued it was “necessary to look carefully at all the facts to see whether a reasonable person would have understood himself to be involved in the negotiation of a different deal from the one originally agreed”101 and he concluded that an intention to vary the earlier accord had not been demonstrated. However, Lord Neuberger, while agreeing that rectification was available, preferred the approach of Vos J (and Etherton LJ). The question was whether DDH had objectively manifested an intention to depart from the earlier accord, not whether the exchange of emails showed an intention to vary that accord. His Lordship saw the difference as being that the former question “simply requires one to assess whether the hypothetical reasonable observer would have concluded that DDH was resiling from the prior accord to the extent of contending that DDC, rather than DDH, was to meet the liability to fund the pension deficit”, whereas under the latter “the reasonable observer would also have to consider whether DDC’s reaction amounted to agreeing to DDH’s change to the prior accord”.102 In other words, it “requires one to assess DDC’s reaction to DDH’s alleged resiling from the 99 100 101 102

McLauchlan, “Refining Rectification” (n 5). Daventry DC v Daventry & District Housing Ltd [2010] EWHC 1935 (Ch). Daventry (n 1) [160]. Daventry (n 1) [206].



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prior accord, and in particular whether the reasonable observer would have thought that DDC was agreeing to what DDH proposed”.103 Nevertheless, while preferring the former approach, his Lordship did not reach the same conclusion as Vos J and Etherton LJ. In his view, it was “self-evidently insufficient for a defendant to defeat a rectification claim simply by establishing that the terms of the provision which he put forward clearly departed from the prior accord”104 and in this case “the hypothetical observer would not have concluded that DDH was signalling a departure from the prior accord”.105 Rather, given the factual and commercial context in which cl 14.10.3 was proposed, “the observer would have believed that DDH was making a mistake”.106 Etherton LJ disagreed. He accepted Vos J’s finding that DDH had objectively indicated to DDC an intention with regard to the payment of the deficit that was different from the prior accord. Since cl 14.10.3 had been proposed immediately prior to formation of the contract, “it was DDC’s oversight, rather than any equity arising from mutual mistake, which was the cause of its misfortune”.107 In other words, “[i]t was sufficient … to defeat DDC’s claim for rectification for mutual mistake, that DDH was outwardly clearly indicating its own interpretation and intention, which were at variance with those of DDC, [and that] DDC did not challenge the clause, and indeed, expressly assented to it”.108 There was no basis for changing the terms of the contract “so as to give effect to the uncommunicated subjective intention of DDC to adhere to the original objective provision for DDH to pay the £2.4m notwithstanding the clear terms of the draft clause 14.10.3 to the contrary”.109 His Lordship later added a postscript to his judgment in which, inter alia, he questioned the legitimacy of Lord Neuberger’s conclusion that the objective observer would have inferred, not that DDH had signalled its intention to depart from the prior accord, but rather that DDH had made a mistake. This inference had not been the subject of argument. Furthermore, it raised “questions of principle as to the relevance of any such mistake on the application of the objective test”.110 He concluded that in the circumstances of the present case, “where the communication from the defendant is unambiguously inconsistent with the prior (objective) accord and the documentation as executed reflects that unambiguous communication”,111 Lord Neuberger’s application of the objective test was in principle incorrect. The reasons given by Etherton LJ in support of this view demonstrate just how acutely difficult the modern law of rectification has become. Thus, his Lordship began by doubting whether “the objective test can properly involve speculation as to the motives or the competencies of the parties” because “[t]hat is certainly no function of the objective test for the purpose of interpreting an 103 104 105 106 107 108 109 110 111

Daventry (n 1) [206]. Daventry (n 1) [211]. Daventry (n 1) [213]. Daventry (n 1) [213]. Daventry (n 1) [93]. Daventry (n 1) [93]. Daventry (n 1) [93]. Daventry (n 1) [109]. Daventry (n 1) [110].

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agreement”.112 This immediately invites the question: why is it that an equitable jurisdiction to rectify a contract should be subject to the same strictures as the common law’s approach to the interpretation of the contract? Even more difficult is his Lordship’s second reason that:113 “if, contrary to my view, the objective test for rectification for mutual mistake (outside [cases where the parties were subjectively and objectively in agreement114]) does embrace the possibility of the objective observer concluding that that the defendant was subjectively mistaken, there is no principled basis for treating the inference, assumption or hypothesis of mistake as the end of the inquiry. The question which inevitably arises is what the objective observer might reasonably have expected to follow from the awareness that a mistake had subjectively been made by the defendant. That then raises the question of the nature of the assumed mistake. Would the objective observer have thought that the mistake was merely the incorrect execution of a subjective intention by the defendant to state the objective prior accord? Would the objective observer have thought that the mistake was as to the defendant’s subjective understanding of the objective prior accord? Might the objective observer have thought there was a possibility of the latter, or, even if unlikely, that there had been a change of mind by the defendant? How clear and certain would the objective observer be about those possibilities? Leaving aside that all of this seems hardly consistent with an objective test giving certainty in legal transactions, the objective observer would inevitably think, in the case of an unambiguous inconsistency between the original objective accord and the defendant’s subsequent communication, that the point should be or should have been raised with the defendant and clarified. If it had been, and it would have become apparent that there was a difference of subjective intentions about the original accord or that the defendant had a change of heart, the (extended) objective test should lead to the refusal of rectification.”

Such issues would be largely avoided if, as I contend, the availability of rectification simply hinged on whether the written contract failed to record either a clearly proven actual mutual intention or the intention of one party where that party was led reasonably to believe that the other party shared that intention. Thus, in a case like Daventry where the parties were at crosspurposes, all the circumstances (including the prior consensus, the alleged resiling therefrom, and the unambiguous proposed terms) would need to be weighed together in forming a judgment whether, at the time the contract was executed, DDC had been led reasonably to believe that DDH was accepting an obligation to pay the pension deficit.

Etherton LJ Speaks Extra-Judicially Powerful support for the Chartbrook position is to be found in a public lecture delivered by Sir Terence Etherton at University College London on 23 April 2015, a lecture that I had the privilege of not only attending but being invited to commentate on. An important theme of the lecture was that, as I have been 112 Daventry (n 1) [110]. 113 Daventry (n 1) [111]. 114 His Lordship’s first scenario.



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advocating, the starting point for determining the availability of rectification is the principles of contract formation, but, unfortunately, we do not entirely agree on what those principles are and, as a consequence, our views differ as to the appropriate solution in some situations. Several of the points made in the lecture, aptly entitled “Contract Formation and the Fog of Rectification”,115 are perhaps worth highlighting and responding to.

A wholly objective test? First, Sir Terence, while conceding that there is “a significant and impressive body of judicial and academic opinion in favour of the view that rectification for common mistake should not depend on a wholly objective test”,116 was not convinced that the existing English jurisprudence, as represented by Lord Hoffmann’s judgment in Chartbrook, was incorrect. Thus, regardless of whether rectification is sought on the basis of a prior oral contract or a non-binding continuing common intention, “the claimant cannot succeed merely on proof of an uncommunicated intention and belief shared by all the parties to the contract”.117 Contrary to the view expressed by the Court of Appeal in Munt v Beasley118 that an outward expression of accord is merely of evidential value in determining whether the claimant can discharge the burden of proof, “[i]t is an essential requirement of rectification for common mistake”.119 Accordingly, Sir Terence would disallow a claim for rectification in my third example where a lease places the obligation to pay the rates on the lessor but the actual intention of each party, which is only verified by internal company documents, was that the lessee was to pay them. In his view:120 “there are strong policy objections to the recognition of such a contract term. To extend contractual force to the uncommunicated subjective belief and intention of both parties is not at all consistent with the objective principle, which has been a hallmark of the law of England and Wales and is so important to its commercial and trading traditions. It is inconsistent with the basic principle that, to enter into a contract, there must be a communicated offer. The only relevant communication, however, in the scenario currently under consideration is the final written contract and that contains the term for which the defendant contends.”

He also stressed that there were other “important pragmatic matters to consider”,121 especially given that the claimant will have to pursue discovery in order to prove the actual intention of the defendant:122 “The cost, complexity and time consuming consequences of disclosure in commercial litigation, particularly of electronic communications, are notorious. They prolong litigation and add considerably to litigation costs. 115 116 117 118 119 120 121 122

Etherton (n 2). Etherton (n 2) 377. Etherton (n 2) 376–77. Munt (n 41) [36]. Etherton (n 2) 377. Etherton (n 2) 378. Etherton (n 2) 379. Etherton (n 2) 379–80.

218 Contract in Commercial Law I question whether those who use our courts to resolve commercial litigation would really wish there to be a legal policy which permits such speculative litigation with all its consequences. The policy considerations of precluding litigation of this kind seem to me to be even stronger than the policy considerations for excluding evidence of pre-contractual negotiations for drawing inferences about what a contract means, a policy which the Supreme Court refused to abandon after full argument in Chartbrook. Can it really be said that the current legal policy of precluding such a claim based entirely on uncommunicated subjective intentions is so manifestly wrong or inferior to the alternative that the law should now be changed? I doubt it.”

Such “pragmatic” or “policy” considerations are not, with respect, particularly convincing. Costly and time-consuming discovery processes will inevitably be involved in rectification claims whether or not the Chartbrook approach is preferred. One need only read the recent judgment of Leggatt J in Tartsinis v Navona Management Co123 for confirmation of that. In any event, is it to be prejudged that discovery will not bring to light a “jewel” that might provide the basis for an argument that there was an objective accord or, indeed, an alternative claim of estoppel by convention (which Sir Terence later acknowledged might be available on the facts)? And, as to the point of principle, has not something gone wrong with the law when a party is entitled to hold the other party to a contract that is clearly proven to be contrary to both parties’ actual intention? Further, I do not agree that allowing rectification is inconsistent with formation principles, in particular the need for communicated offer and acceptance. In my third example the parties have communicated their agreement on all terms except one, and their actual intention in relation to that one is the same. Interestingly, Sir Terence said that he did not dispute that “an attractive case can be made for a policy which gives contractual force and permits rectification in respect of a term which both parties actually intended, albeit uncommunicated, and which by mistake has been omitted from the final written contract”124 and he continued:125 “Take, for example, the converse factual situation in which A and B agree heads of term which provide X although both parties intended it to provide Y and the final written contract prepared by solicitors provides Y. There are many who would say that it would be quite wrong for one of the parties, who with changed circumstances now think that X would be to their advantage, to obtain rectification to bring the written contract into line with the antecedent heads of agreement.”

He does not expressly say that rectification would prima facie be available in such circumstances but the impression created is that it would be.126

123 124 125 126

Tartsinis (n 84). Etherton (n 2) 378–79. Etherton (n 2) 379. It is possible, of course, that the remedy might be declined in the exercise of the court’s discretion.



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Common or unilateral mistake? Sir Terence is adamant throughout his lecture that there is no good reason for departing from Lord Hoffmann’s analysis of the facts in Chartbrook as involving common mistake. That categorisation was not invalid “merely because the mistake of each party was a different mistake”.127 There could still be a common mistake that the final written agreement reflected the prior consensus, although he ultimately concludes that “[t]his debate about terminology is, in any event, a distraction and unprofitable”.128 With respect, I disagree on both points. First, this is an area where proper categorisation is important, particularly given that the overwhelming weight of authority supports the view (contrary to mine) that rectification for unilateral mistake is a drastic remedy requiring a finding of pre-contractual unconscionable behaviour on the part of the defendant. It is obviously unsatisfactory if courts are side-stepping that requirement by reconstructing unilateral mistake into common mistake scenarios. Secondly, that is exactly what happened in Chartbrook (and indeed Daventry). The parties in both cases were at cross-purposes. To me it is quite artificial to say that Chartbrook were mistaken at all in view of their Lordships’ refusal to overturn the trial judge’s finding that the officers of the company intended all along to transact with Persimmon on the basis of what (it was assumed for the purpose of the rectification issue) the final written contract provided for. The House of Lords invented a common mistake when it said that both parties mistakenly thought that the written contract reflected the earlier objective consensus. Chartbrook could fairly respond: “How come we were mistaken when the court accepted that we intended all along to contract on the basis of the terms as written? The only thing that mattered to us is that we got the deal we intended.” In discussing and ultimately rejecting the argument that Chartbrook and Daventry are better analysed as cases of unilateral mistake, Sir Terence again acknowledged the need to determine the matter in the light of contract formation principles and then said:129 “It is clear that if A offers to sell to B for X, intending Y, and B accepts the offer of X, intending and reasonably believing that the offer is for X, there is a contract for X. It is therefore elementary that, if that is what has been orally agreed and is not ‘subject to contract’ and the agreement is then put into a written document providing for X, A is not entitled to rectification even though he or she subjectively intended Y. If the formal written document says Y, B is entitled to rectification of the written document to give effect to the contract. That is a straightforward application of the objective principle and I am not aware of anybody who would contend to the contrary.”

It is obviously correct that B succeeds in each of the three scenarios contained in this passage and that the reason, at heart, is that the objective principle applies. But it is worth considering each scenario separately. First, we would normally say that the initial offer by A to sell to B for X is binding upon acceptance despite A’s mistake. Although A intends to sell for Y, she is bound because B has been led 127 Etherton (n 2) 381. 128 Etherton (n 2) 381. 129 Etherton (n 2) 380.

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reasonably to believe that A intends to sell for X. We do not say that B mistakenly believes that A actually intends to sell for X but A is nevertheless bound by her objectively apparent intention. B has not in any relevant sense made a mistake. (Of course, if B knows or ought to know of A’s actual intention, there is no contract because there is neither actual nor objective consensus.) Turning now to the second scenario where the contract for X is later embodied in a written document stipulating a sale for X, the reason that A cannot obtain rectification is that she cannot show that the document fails to record the parties’ common intention, whether actual or objective. B intends to buy for X and there is no question of B having led A reasonably to believe that B was agreeing to buy for Y. In the third scenario, where the document records a sale for Y, as we have seen130 it may be plausible, although artificial, to find a common mistake here that justifies rectification on the basis that both A and B intended no departure from the earlier contract. However, the reality is that only one party is mistaken, on this occasion B (because A intends what the document provides for), but B can obtain rectification because he was led reasonably to believe, and still so believed at the time the document was executed, that the sale was for X. Sir Terence then proceeded to consider the question whether the position should be different if the objective consensus between A and B “was ‘subject to contract’ and B at all times up to the formal written contract for Y reasonably believed the agreement was for X”.131 He said:132 “There are reasonable arguments either way. On the one hand, those who favour a unilateral mistake analysis would argue that it is wrong in principle to favour an antecedent non-contractual consensus for X over a subsequent written contract for Y which gave effect to the defendant’s actual intention at the time the contract was made. Others, who favour a common mistake approach, would say it is inconsistent to have different provisions in the antecedent non-contractual consensus and the later written contract if there has been no change in the intention and belief of the parties as to the contract terms, let alone any communication or outward manifestation of any such change, prior to the written contract itself. The latter position was precisely the situation in Chartbrook since there was no suggestion in that case that Persimmon at any stage prior to the formal contract knew or ought to have known that Chartbrook did not intend to contract in accordance with the ‘subject to contract’ consensus. On the approach of the majority, Daventry was the same type of situation. For my part, I think it is right that in this type of factual scenario the focus is not on the subjective state of mind of the mistaken party at the time of the written contract but rather it is on the prior objectively ascertained consensus which never changed and to which both parties objectively always continued to adhere. That approach, that is to say one of rectification for a common mistake, seems to me to be more consistent with an analysis which looks at the problem through the prism of the contract formation rules. Certainly, it does not seem to me to be so egregious an error of principle or policy that the unanimous approach of the appellate committee in Chartbrook on the point should be overturned.” 130 See text following n 91. 131 Etherton (n 2) 380. 132 Etherton (n 2) 380–81.



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My main problem with this analysis concerns the initial description of the stance of those who favour a unilateral mistake analysis. As will be abundantly clear by now, I favour such an analysis but would not argue that “it is wrong in principle to favour an antecedent non-contractual consensus for X over a subsequent written contract for Y which gave effect to the defendant’s actual intention at the time the contract was made”.133

Rectifying for unilateral mistake Sir Terence concludes his paper with a discussion of rectification for unilateral mistake. In his view, this is arguably “the least satisfactory area of the jurisprudence in relation to rectification”.134 Although it raises matters that to some extent go beyond the scope of the this chapter, a brief reference to the discussion is merited, for two reasons. First, it demonstrates the depth of current disagreement over core principles of the law of contract and, secondly, as will be readily apparent from the analysis throughout this chapter, it is impossible to deal with the supposedly separate grounds for rectification in isolation from one another, particularly since, as a result of the decision in Chartbrook, many situations that would hitherto have been viewed as instances of unilateral mistake are now re-categorised as involving common mistake. The main points made by the judge are as follows. First, my argument135 that, to use his words, “the touchstone for rectification in a case of unilateral mistake is whether or not the defendant reasonably led the claimant to believe that the defendant was accepting the contract term subjectively intended by the claimant”136 should not be accepted. The current law under which “rectification for unilateral mistake will only be ordered where the defendant was aware of the claimant’s mistake and has been guilty of sufficiently unconscionable conduct as would make it inequitable for the defendant to resist rectification”137 should be retained. This is because “[t]he consistently stated reason for that high hurdle is that the circumstances must be exceptional to impose on the defendant a contract which he or she did not and never intended to make and where he or she made no mistake in executing the written contract”138 (to which I interpolate: was not the House of Lords in Chartbrook prepared to impose a contract on the respondent (Chartbrook) in precisely such circumstances?). Secondly, the “promisee objectivity” theory should be rejected “as having no sound jurisprudential basis”139 and replaced by the “detached objectivity”140 approach “which is the more usual English law principle applicable to both the formation and the interpretation of contracts”.141 Thirdly, where a defendant has knowledge of, and unconscionably seeks to take advantage of, the claimant’s mistake, he is estopped “from denying that the terms of the contract are other 133 134 135 136 137 138 139 140 141

Etherton (n 2) 380. Etherton (n 2) 381. McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 5). Etherton (n 2) 381. Etherton (n 2) 381–82. Etherton (n 2) 382. Etherton (n 2) 384. Etherton (n 2) 384. Etherton (n 2) 382.

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than in accordance with the subjective intention of the claimant even though that conflicts with the express literal terms of the contract”.142 Moreover, “[t]he effect of the estoppel is, analytically, to turn a unilateral mistake into a common mistake: the estoppel operates to preclude the defendant from denying that (i) there was a consensus in the terms intended by the claimant and (ii) there was a common mistake that the written agreement gave effect to that consensus”.143 As a result, “there is coherence between the contract formation principles, rectification for common mistake and rectification for unilateral mistake”.144 Fourthly, different considerations arise where there is mere constructive knowledge of the mistake. If the claimant (the party now seeking to enforce the terms as written) ought to have known that the defendant did not intend to accept the stated terms, “[o]ur jurisprudence currently holds that there is no contract in such a case”.145 This is said to be “a fair and principled outcome” and one that, “it is strongly arguable, is consistent with the usual detached objectivity approach of our law to contract formation and interpretation”.146 However, a distinction is drawn between cases where the claimant merely ought to have known that a mistake has been made and those where he also ought to have known the actual term intended by the defendant. Where both elements are present, “it may be said that, on a detached objectivity approach, there should be a contract on the term subjectively intended by the defendant”.147 Interestingly, it is acknowledged that this “would be going even further in favour of the mistaken party than Blackburn J in Smith v Hughes”,148 presumably because the latter’s “promisee objectivity” approach would require a finding, not simply that the claimant ought to have known the intended term, but that the defendant was led reasonably to believe that the claimant agreed to that term. However, the judge said that the answer to this point is that in practice most such cases will fall within the second and third categories of actual knowledge149 in Baden,150 so that the claimant would be bound by an estoppel in any event. A number of issues are raised by the judge’s analysis. For example, what precisely is the difference between “detached” and “promisee” objectivity? Does the former represent the principle underlying the law of contract formation? Is it satisfactory to treat all instances where rectification of a contract is available as being based on common mistake? However, a discussion of these and other issues would unduly lengthen this already too long chapter. I will simply repeat the observations that concluded my commentary when Sir Terence delivered his challenging lecture at UCL. In noting the common 142 143 144 145 146 147 148 149

Etherton (n 2) 383. Etherton (n 2) 384. Etherton (n 2) 384. Etherton (n 2) 384, citing Hartog v Colins & Shields [1939] 3 All ER 566 (QB). Etherton (n 2) 384. Etherton (n 2) 384. Etherton (n 2) 384. That is, wilfully shutting one’s eyes to the obvious and wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make. See Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 (CA) 280–81. 150 Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (Ch).



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ground between us that the starting point for determining the availability of rectification is the principles of contract formation, but suggesting that we have somewhat different views about what those principles are, I gave the following example. Suppose that our chairman, Ben McFarlane, sends me a formal offer to sell me his Rolls Royce for £10,000. He meant to say £100,000 but inexplicably left off a zero. I immediately accept the offer.

Sir Terence’s position is that if I ought to have appreciated that Ben intended to contract on different terms there is prima facie no contract. I agree with that. But, if I actually know that Ben made a mistake and I behave dishonourably and seek to take advantage of it, Ben can get rectification and enforce a contract for £100,000. This is where I have difficulties. Yes, I have been naughty, but should I have the contract that Ben intended foisted on me because of that? Normally, the law’s response to wrongful conduct is simply that the resulting transaction or gain cannot be enforced by the wrongdoer, but rectification in my example will punish me. What if Ben’s car has been in a few accidents and is worth at most £50,000? And what if I did not actually know that Ben had made a mistake but I ought to have known and I ought to have known his intended price? Should I be under an obligation, as Sir Terence suggests, to pay £100,000 for the car in that situation too? Surely not!

Lord Hoffmann Responds Yet another version of the law of rectification was suggested by Lord Hoffmann in a recent speech,151 albeit a version that, not surprisingly, takes as its starting point his analysis in Chartbrook. He argues that the law, properly understood, is quite clear. It is only the “various heresies” that have arisen, especially those promoted by the present writer in the course of attempting to develop a unified theory, that have caused complications and confusion. These heresies arise out of a failure to understand the entirely different concepts and principles involved in rectification for common mistake that were stated “with great clarity” by Denning LJ in Rose v Pim, which Hoffmann re-labels “document rectification”, and rectification for unilateral mistake, which is re-labelled “contract rectification”.

Document rectification In Hoffmann’s view, rectification for common mistake is unconcerned with whether the written contract fails to reflect the subjective or actual intention of the parties. Such intention is entirely irrelevant. Indeed, the jurisdiction is not about mistake as to terms at all. Rather the question to be decided is whether the document accurately recorded the parties’ prior objective agreement and, if it does not, then, in the absence of evidence indicating an intention to depart from that agreement, they will be taken to be mistaken regardless of what one or both actually intended. This was the law clearly stated by Denning LJ 151 Hoffmann (n 2).

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in Rose v Pim and reaffirmed by the House of Lords in Chartbrook. So, cadit quaestio. Any different view is heresy. Indeed, Hoffmann is incredulous as to how the lower courts in Chartbrook could have thought that the actual intention of the respondent to contract on the basis of the terms contained in the final document was relevant to the question whether Persimmon was entitled to rectification on the ground of common mistake. A full response to this line of argument would take up more space than is available here, but several points need to be made. First, his view would not be shared by the courts in other common law jurisdictions. In Australia, for example, there is unanimous agreement that rectification is concerned with subjective intention152 and Rose v Pim has primarily been treated as illustrative of the type of mistake – a mistake as to terms as opposed to a mistake in underlying assumption – required before rectification can be granted.153 Hoffmann, on the other hand, said that he had not been able “to find a case at any level”154 which denied rectification of a written contract on the basis that a previous objective agreement in different terms did not accord with the parties’ subjective intentions. However, if he had looked beyond the shores of the United Kingdom he would have found that precisely this ruling was made by the New South Wales Court of Appeal in Ryledar Pty Ltd v Euphoric Pty Ltd.155 Secondly, Hoffmann argues that, when Russell LJ in Joscelyne v Nissen156 endorsed the view of Simonds J in Crane v Hegeman-Harris Co Inc157 that “it is sufficient to find a common continuing intention in regard to a particular provision or aspect of the agreement”, Russell LJ was referring to objective intention. That is not my reading of the case. For example, his Lordship cited with apparent approval Harman LJ’s statement in Earl v Hector Whaling158 that although there was in that case no oral agreement “[t]here was a common intention and that is enough”.159 It is true that Russell LJ, in accepting the view of Simonds J that a common continuing intention sufficed and rejecting Denning LJ’s view in Rose v Pim that a complete concluded contract (apart from formalities) is necessary, added “the qualification that some outward expression of accord is required”.160 But why would this qualification – which in any event, when read in context, seems to have been regarded as enabling the claimant to satisfy “the strong burden of proof that lies on the shoulders

152 Ryledar (n 43) [266], [316]. See also Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (HCA) 346; Newey v Westpac (n 43). 153 See eg Club Cape (n 7) [39] where Phillips JA said that “[i]n Rose v Pim the parties were mistaken as to the effect of their words, but there was no disconformity between the words employed and what was held to be their common intention – so rectification was not available”. In other words, as discussed earlier, the parties intended to buy and sell horsebeans in the mistaken belief that horsebeans were the same as feveroles. 154 Hoffmann (n 2) para 16. 155 Ryledar (n 43). 156 Joscelyne (n 16). 157 Crane (n 57) 664. 158 [1961] 1 Lloyd’s Rep 459 (CA) 470. 159 Joscelyne (n 16) 97. 160 Joscelyne (n 16) 98.



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of those seeking rectification”,161 – be necessary if it was clear that intention meant objective intention?162 Thirdly, and more importantly perhaps, Hoffmann has a rather selective view of the historical development of the remedy. I am sure I am not alone in thinking that it is, to say the least, surprising that he should treat Denning LJ’s judgment in Rose v Pim as the foundational case concerning rectification for common mistake, for no regard was there had to the fact that historically equity intervened to rectify written contracts because it was seen as contrary to good conscience for a party to seek to enforce a written contract when it was clearly proven that the document failed to reflect the actual mutual intention of the parties. The point was well explained by Professor Francis Dawson in a recent issue of the Law Quarterly Review:163 “Equity … never rode roughshod over the common law’s policy on the integrity of writings. It accepted that the writing was the expressed intention of the parties and interfered in rectification cases on the ground of the defendant’s conscience only where it was convinced that the actual intention of the parties was contrary to the intention expressed in the writing and that the defendant was acting unconscionably in seeking to enforce the writing. The modern idea that an independent observer’s view of a consensus having been reached during the negotiations should count for more than the written agreement where the defendant denies having entered into any such agreement thus appears very curious when examined from equity’s traditional perspectives. For the early chancellors would no doubt have held that in the absence of convincing proof of an actual agreement to the contrary, there was insufficient evidence that the defendant was acting unconscionably and there was no sound basis for interference, because to do so would undermine the integrity of written agreements.”

Fourthly, Hoffmann challenges my argument, repeated throughout this chapter,164 that in Chartbrook, since the respondent intended exactly what (it was assumed) the written contract provided for, they were not mistaken, at least in any usual sense of that word. He says:165 “This seems to me to beg the question of what the mistake must be about. If the mistake has to be about whether the final contract was in accordance with what Chartbrook thought had been agreed, then indeed they were not mistaken. But if the mistake has to be about whether the final contract was in accordance with the previous objective agreement, then, if Chartbrook thought it was, they were mistaken. The authorities seem to me clearly to establish that, at least in English law, the latter is the right question to ask.” 161 Joscelyne (n 16) 98. 162 It is interesting to note also that, immediately after the argument discussed in this paragraph, Hoffmann went on to make the point that “document rectification still carries the marks of its origins in the equitable jurisdiction to grant specific performance”, whereas in Joscelyne ((n 16) 98) Russell LJ said that the court was “puzzled by the suggestion … that rectification should be regarded as a branch of the doctrine of specific performance: we do not see any necessary connection, more particularly since rectification is available in the case of voluntary settlements”. 163 F Dawson, “Interpretation and Rectification of Written Agreements in the Commercial Court” (2015) 131 LQR 344, 348. 164 See eg text following n 129. 165 Hoffmann (n 2) para 40.

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This comment does not accurately describe what, in my view, any posited mistake by Chartbrook would have to be. Their mistake would not be about whether the final written contract was in accordance with what they thought had been agreed. Chartbrook could not possibly be mistaken as to what they were thinking. Unless their overriding intention was that the written contract was to give effect without change to the earlier objective agreement alleged by Persimmon (unlikely on the facts), in which case they might be relevantly mistaken,166 the only mistake they could have made was in thinking that the document contained the term or had the meaning that they intended.167 The existence of mistake requires a finding of fact that a false belief was held on a particular matter that influenced a course of conduct and, on the basis of the undisturbed findings of fact in Chartbrook, the terms of the written contract implemented what was the respondent’s intention all along in relation to the matter in dispute. As Hobhouse LJ pointed out in Britoil plc v Hunt Overseas Oil Inc,168 “there must be a reality to the allegation of common mistake. It is a factual allegation, not a question of law.” Fifthly, Hoffmann discusses at some length the difficulty, noted earlier, that Toulson LJ had in Daventry “in accepting it as a general principle that a mistake by both parties as to whether a written contract conformed with a prior non-binding agreement, objectively construed, gives rise to a claim for rectification”.169 It will be recalled that Toulson LJ gave a “simple” example involving parties A and B who reach a non-binding agreement which A believes means x and B believes means y. Objectively construed, the agreement means x but a later written contract that is intended to give effect to the agreement provides y. His Lordship questioned whether it is right to allow A to obtain rectification pursuant to the Chartbrook principle and thus “hold B to a contract which he never intended to make and never misled A into believing that he intended to make”.170 Not surprisingly, Hoffmann disagrees:171 “The answer, in my view, is because A [sic, B] promised that the contract would contain such an undertaking. If it had been a simple contract with no further document in contemplation, [B] would under the principle in Smith v Hughes have been bound by that obligation, whatever his subjective thoughts on the matter. Why should he be better off because there was a mistake in recording that agreement in a subsequent document? … [I]f a party satisfies the burden of proving that the parties had definitely agreed that their agreement should contain certain terms and they have been left out, why should he be denied the benefit of his agreement because the other party subjectively thought there had been no mistake?”

166 See text following n 91. 167 Hoffmann (n 2) para 41 also says that I described the reasoning in Chartbrook as “formulaic”. I did not use that word. In fact, it was Nicholas Patten (see Patten (n 2) para 34) who said that I had “argued for a less formulaic approach … which would recognise the availability of rectification in the Rose v Pim-type situations and be able to deny it in cases like Daventry”. (In fact I have not argued for rectification in “Rose v Pim-type situations” either!) 168 Britoil (n 81) 573. 169 Daventry (n 1) [175]. 170 Daventry (n 1) [175]. 171 Hoffmann (n 2) para 43.



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Some might question the relevance of B’s non-binding promise, but the point I wish to make is that nothing in my writings necessarily disputes Hoffmann’s conclusion. The whole point of my “unified theory” is to allow A to obtain rectification, despite the fact that B intends the terms as written and hence is prima facie not mistaken, where, in accordance with the Smith v Hughes principle, A has been led reasonably to believe that B accepts A’s understanding.

Contract rectification Rectification for unilateral mistake is renamed “contract rectification” because its rationale is entirely different from “document rectification”. It rectifies contracts, not documents. “It creates a contract different from that which the parties objectively agreed”.172 Unlike document rectification, it is “entirely about subjective states of mind”.173 It involves a mistake as to the terms of the contract as opposed to a mistake about whether the document reflects the prior agreement. “It is based upon a different equitable principle, namely the overarching principle of good faith which has generated specific rules imposing upon parties negotiating a contract specific obligations of good faith”,174 such as the obligations to refrain from making misrepresentations or exercising undue influence. As a result, my attempt to formulate a unified theory is “doomed”175 to failure. I have difficulties with this argument too. First, Hoffmann does not say that the mistaken party is entitled to rectification whenever it is established that the other party knew of the mistake and sought to take advantage of it. He accepts that it is “an exceptional order” that “is not necessarily made even where there is jurisdiction to do so”.176 We are not told what kind of cases are exceptional. Does it depend on the level of egregiousness of the non-mistaken party’s behaviour? Must the latter be aware of the precise term intended by the mistaken party? Secondly, the specific obligations of good faith mentioned above that are allegedly, and dubiously, generated by an “overarching principle of good faith” in contract negotiations177 are instances where breach will justify a decision by the innocent party to resile from the contract, not to enforce a different one. It is one thing to grant relief from an apparent contract induced by known unilateral mistake as to the terms, quite another to impose a different contract 172 Hoffmann (n 2) para 31. 173 Hoffmann (n 2) para 29. 174 Hoffmann (n 2) para 29. 175 Hoffmann (n 2) para 35. 176 Hoffmann (n 2) para 29. 177 Hoffmann (n 2) para 3 where he says that “perhaps the best illustration” of the principle is provided by the judgment of Singleton J in Hartog (n 145) and that the principle applied in that case was later invoked to allow rectification for unilateral mistake. In my view, however, the case is simply a standard application of the objective principle. All that was held was that no offer capable of acceptance had been made because “the plaintiff could not reasonably have supposed that [the] offer contained the offerors’ real intention” (at 568). Furthermore, I do not recall the case featuring in later leading cases on the subject. (It might also be noted that Hoffmann’s discussion of one of those cases, Agip SpA v Navigazione Alta Italia SpA (The Nai Genova and The Nai Superba) [1984] 1 Lloyd’s Rep 353 (CA) gives the false impression that rectification was granted. See the discussion of this case in McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 5) 626–27.)

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intended by the mistaken party which the guilty party may have given no indication that it was prepared to enter into. It would be more accurate therefore if Hoffmann’s “contract rectification” were called “contract imposition” because it may impose on the guilty party a contract that it did not make and did not intend to make. “Rectification” assumes the existence of a prior agreement or common intention not reflected in the written contract, so that the document needs to be “rectified”. It does not make an agreement for the parties. I would concede that sometimes an appropriate solution might be to give the guilty party the option of submitting to rescission or accepting rectification, as arguably sanctioned by a line of old equity cases178 but those cases were, rather unnecessarily, discredited in Riverlate Properties Ltd v Paul.179 Thirdly, Hoffmann downplays the significance of the subjective element in Blackburn J’s version of the objective principle which requires not only that a reasonable person would believe that the promisor was assenting to the terms proposed by the other party but also that “that other party upon that belief enters into the contract with him”.180 Although it is well established that these words require a consideration of the promisee’s knowledge and beliefs when determining whether a contract has been formed,181 Hoffmann treats them as suggesting that “as in a plea of misrepresentation or estoppel, the other party has to adduce evidence that he relied upon the words being given an objective meaning” and then says:182 “But I know of no case in which such evidence was required. The court simply determines the objective meaning of what passed between the parties or the document which they signed. The parties are assumed to have taken the contract at its objective meaning. If one party wishes to allege that the other party knew that something different was intended, the onus is upon him to allege and prove it.”

It is true that ordinarily a court will be entitled to assume that a promisee’s subjective understanding corresponded with the way in which a reasonable person would have understood the transaction unless the promisor introduces evidence to the contrary. But, in principle, once this evidential onus is satisfied, the formal burden should be on the promisee to establish that it believed and reasonably believed that the promisor was assenting to its understanding of the terms. I cannot be sure, but it appears that Hoffmann accepts Lord Denning’s view that, once the parties are to all outward appearances agreed, a binding contract is formed unless the promisor establishes a basis for equitable intervention. He might well therefore disagree with the observation by Lord Phillips of Worth Matravers in Shogun Finance Ltd v Hudson183 that, in the light of Blackburn J’s statement of the objective principle, “the task of ascertaining 178 Garrard v Frankel (1862) 30 Beav 445; Harris v Pepperell (1867-68) LR 5 Eq 1 (Ch); Paget v Marshall (1884) 28 Ch D 255 (Ch). 179 [1975] Ch 133 (CA). 180 Hoffmann (n 2) para 9. 181 See eg Wilson (Paal) & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Bluementhal) [1983] 1 AC 854 (HL) 915–17, 924; Magnum Photo Supplies Ltd v Viko New Zealand Ltd [1999] 1 NZLR 395 (CA) 401. 182 Hoffmann (n 2) para 9. 183 [2003] UKHL 62; [2004] 1 AC 919 [123].



Ch 10  The Many Versions of Rectification for Common Mistake 229

whether the parties have reached agreement as to the terms of a contract can involve quite a complex amalgam of the objective and the subjective”.

Conclusion A resolution of the difficulties currently besetting the law of rectification that is satisfactory to everyone is likely to prove impossible to achieve. As will be obvious from a reading of this chapter, conflicting and firmly held opinions have been expressed on a wide range of issues that go to the very nature and purpose of the remedy. If I were to hazard a guess as to likely future developments, it would be that there will be a return to the pre-Chartbrook position under which (a) rectification for common mistake will require a finding that the written contract fails to reflect the parties’ actual common intention, (b) for this purpose, despite my argument to the contrary, the mere fact that their actual intentions coincide does not suffice, and (c) a common intention is an intention that, as a result of communications between the parties, they knew or ought to have known each other to share. However, I would not wager too much money on this outcome, particularly in view of the fact that there are probably as many advocates of the Chartbrook position as there are detractors.

11

The Emergence of Good Faith as a Principle of Contract Performance David R Percy*

Introduction In November 2014, after a lengthy period of gestation, the Supreme Court of Canada handed down its unanimous reasons for judgment in Bhasin v Hrynew.1 The judgment is notable in two major respects. As a matter of judicial technique, the court chose to frame the new rule as an authoritative statement of general principle rather than to advance the development of the law of contracts through the more familiar process of inductive analogy from the existing body of precedent. As a matter of substance, it imposes a new principle of good faith and honest performance of contracts that is not based on the agreement of the parties. The bulk of this chapter will be devoted to the substance of this decision, through an examination of the new principle and its implications. However, it is initially important to consider the technique of legal reasoning adopted by the court. Just a generation ago, the style of reasoning in Bhasin would have been unrecognisable in Canadian private law and it has particularly important implications in the area of contract law. The change in the technique of legal reasoning of the Supreme Court of Canada in the law of private obligations has been startling. In 1975, Professor Gerald Fridman considered the role of the court in the development of private law on its centenary. He reviewed this remit as “almost, though not quite, like giving a dog a virtually meatless bone on which to chew. The net result is to whet the appetite without providing any substance to satisfy what has been aroused. Or, if you prefer, salivation without salvation”.2 While giving due credit to the significant contributions that the court had already made to the development *

1 2

I acknowledge gratefully many conversations with my patient colleague, Professor Shannon O’Byrne, the comments of Professors Eric Adams and Tamara Buckwold and the invaluable research assistance of Ashton Menuz, a law student at the University of Alberta. 2014 SCC 71; [2014] 3 SCR 494. GHL Fridman, “The Supreme Court and the Law of Obligations” (1976) 14 Alta L Rev 149, 149.

231

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of the law of unjust enrichment3 and recognising some innovations in the law of torts, he was particularly critical of the court’s performance in the law of contracts. He commented unfavourably on the inability of the court to reevaluate the old doctrines of contract and to provide insights into developments that had occurred in the English courts.4 He called provocatively for the Supreme Court to set the tone for lower courts by addressing emerging private law problems boldly and imaginatively.5 As the Supreme Court approaches its sesquicentennial, it is fascinating to note how much its approach to private law has changed. In place of the mechanical application of English precedents that marked much of its decision-making in its first hundred years, the court has boldly staked new ground in private law, most notably in the fields of unjust enrichment and fiduciary relationships. In these areas and others,6 the court has departed from its previously cautious approach and set the law on new courses by issuing ambitious statements of general principle. This process leaves to future courts the task of working out the detailed implications of broadly stated doctrine. The new directions adopted by the court in unjust enrichment and fiduciary relationships became well known, even notorious, in other Commonwealth countries. In Pettkus v Becker,7 Dickson J provided the first and best known example of a different approach through his formulation of the three elements that are required to establish an unjust enrichment. The requirements of enrichment, a corresponding deprivation and the absence of any juristic reason for the enrichment8 were problematic in the law of restitution, but they also marked a sea change in the court’s style of reasoning. Dickson J did not justify the three requirements by a close analysis of the existing law, but they appeared to result from an innovative and personal synthesis of equitable and common law principles. In particular, the reference to an absence of juristic reason for the enrichment had little connection to the existing law and has been described as “distinctly civilian in appearance”.9 In 2004, when the Supreme Court redefined the three requirements in Garland v Consumers’ Gas Co,10 it did so in equally idiosyncratic terms. As Professor John McCamus stated, “it invented a novel analysis of the ‘juristic reason’ aspect of the tripartite Pettkus test”,11 by requiring the plaintiff to establish the absence of any juristic reason for the transfer. The requirement for the plaintiff to prove a negative by ruling out any 3

Fridman (n 2) 154–55, focusing mainly upon Deglman v Guaranty Trust Co of Canada [1954] 3 DLR 785 (SCC) and three cases decided in the 1960s: Eadie v Township of Brantford [1967] SCR 573; George (Porky) Jacobs Enterprises Ltd v City of Regina [1964] SCR 326; County of Carleton v City of Ottawa [1965] SCR 663. 4 Fridman (n 2) 149–50. 5 Fridman (n 2) 159. 6 The law of torts also provides examples of the changed approach of the Supreme Court. The main developments are conveniently summarised in R Brown, “Rethinking Privacy: Exclusivity, Private Relation and Tort Law” (2006) 43 Alta L Rev 589. 7 [1980] 2 SCR 834. 8 Pettkus (n 7) 848. 9 M McInnis, The Canadian Law of Unjust Enrichment and Restitution (LexisNexis Canada 2014) 21. 10 [2004] 1 SCR 629. 11 JD McCamus, “Forty Years of Restitution: A Retrospective” (2011) 50 Can Bus LJ 474, 490.



Ch 11  The Emergence of Good Faith as a Principle of Contract Performance 233

possible juristic reason for the transfer bore little resemblance to the existing common law.12 The court’s unanimous reframing of the requirements of unjust enrichment amounted to another institutional declaration of broad principles that was not closely linked to precedent. The tendency of the Supreme Court of Canada to restate the law in the form of novel principles was also exemplified in Frame v Smith.13 In that decision, Wilson J distilled the ingredients of a fiduciary relationship into three requirements that focused on (1) the existence of discretion; (2) the unilateral exercise of power so as to affect the interests of the beneficiary; and (3) the vulnerability of the beneficiary.14 Although this statement of principle was described as a “rough and ready guide”15 and appeared in a dissenting judgment, it soon became the guiding framework for lower courts.16 The attempt to define the requirements of a fiduciary relationship occupied the court in numerous decisions over the next two decades.17 For the purposes of this chapter, these judgments in unjust enrichment and fiduciary relationships are notable only as examples of a particular judicial technique. In extra-judicial writing, McLachlin CJ has described this technique as an example of universalism, the quest for “broad, general principles underlying the imposition of responsibility and the corresponding rights of recovery”.18 By its very nature universalism is a top-down style of reasoning, which is neither characteristic of the common law, nor of the approach taken by the court in its first century. Richard Posner has described this style of reasoning as follows: “In top-down reasoning, the judge or other legal analyst invents or adopts a theory about an area of law … and uses it to organise, criticise, accept or reject, explain or explain away, distinguish or amplify the existing decisions to make them conform to the theory and generate an outcome in each new case as it arises that will be consistent with the theory … In bottom-up reasoning, which encompasses such familiar lawyers’ techniques as ‘plain meaning’ and ‘reasoning by analogy’, one starts with the words of a statute or other enactment, or with a case or a mass of cases, and moves from there – but doesn’t move far.”19

In contrast to other areas of private law, the Canadian law of contracts continued to develop incrementally in a bottom-up manner in recent decades. 12 13 14 15 16

McCamus (n 11) 490–92. [1987] 2 SCR 99. Frame (n 13) 136. Frame (n 13) 136. PD Maddaugh and JD McCamus, The Law of Restitution (2nd ed, Canada Law Book Inc 2004) 833. 17 For an excellent summary, see A Duggan, “Fiduciary Obligations in the Supreme Court of Canada: A Retrospective” (2011) 50 Can Bus LJ 453, 456–63. 18 B McLachlin, “The Evolution of the Law of Private Obligation: The Influence of Justice La Forest” in R Johnson et al (eds), Gérard V La Forest at the Supreme Court of Canada 19851997 (Canadian Legal History Project 2000) 21, 22, quoted in S O’Byrne and R Cohen, “The Contractual Principle of Good Faith and the Duty of Honesty in Bhasin v Hrynew” (2015) 53 Alta L Rev 1, 15. 19 RA Posner, “Legal Reasoning from the Top Down and from the Bottom Up: The Question of Unenumerated Constitutional Rights” (1992) 59 U Chi L Rev 433, 433, quoted and discussed in Duggan (n 17) 460–62.

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Even when the Supreme Court began to modernise the doctrine of privity in a trilogy of cases in the 1990s, it did so through the familiar process of inductive analogy. The court emphasised in those cases that it was taking only small and incremental steps from the existing body of case law.20 It was thus notable when the Supreme Court of Canada decided to extend the top-down approach from other areas of private law when it addressed the issue of good faith in contracts in Bhasin. The approach took the form of two propositions. First, good faith contractual performance is a general organising principle of the common law of contract. Second, as a particular instance of this organising principle, there is a common law duty to act honestly in the performance of contractual obligations. This landmark decision caused shockwaves in Canada and attracted attention in other Commonwealth countries, where both the top down approach and the nature of the good faith duty created by Bhasin are at odds with present trends. Because of the significant level of debate on the role of good faith in the common law world, section 2 of this chapter will analyse the Bhasin decision. Section 3 will provide an initial assessment of the new Canadian doctrine. Section 4 will contrast the Canadian position with the different approaches to good faith that are taken in England and Australia. A concluding section 5 will set out a preliminary analysis of the possible impact of the new duty of good faith in Canada.

Bhasin v Hrynew The nature of the dispute The case involved Canadian American Financial Corp (Can-Am), which marketed education savings plans to investors through individual dealers known as enrolment directors. Bhasin had been a successful enrolment director for Can-Am since 1989. Under his last dealership agreement, signed in 1998, Bhasin was obliged to sell Can-Am investment products exclusively and owed a fiduciary duty to Can-Am. Can-Am owned all of its dealers’ client lists and maintained responsibility for branding and for policies that applied to all enrolment directors. It was also a term of the agreement that Bhasin would not dispose of his dealership without Can-Am’s consent, which could not be unreasonably withheld. The agreement extended for a term of three years and was automatically renewed unless either party gave six months’ notice to the contrary. Hrynew was also a Can-Am enrolment director. He had proposed a merger of his business with Bhasin on a number of occasions, but Bhasin was not interested. In 1999, the Alberta Securities Commission began to question whether the conduct of Can-Am’s enrolment directors met the requirements of provincial securities legislation. The Commission required Can-Am to appoint a single provincial trading officer (PTO) to ensure that its enrolment directors were acting in compliance with securities laws. Can-Am appointed 20 See the Supreme Court of Canada trilogy of London Drugs Ltd v Kuehne & Nagel International Ltd [1992] 3 SCR 299; Edgeworth Construction Ltd v ND Lea & Associates Ltd [1993] 3 SCR 206; Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd [1999] 3 SCR 108.



Ch 11  The Emergence of Good Faith as a Principle of Contract Performance 235

Hrynew to that position, but Bhasin and another enrolment director objected to allowing Hrynew, a competitor, to review the confidential business records of their dealerships. Bhasin’s refusal to allow Hrynew to audit his records led Can-Am to provide the required six months’ notice that the dealership agreement would not be renewed when it reached its termination date in 2001. As a result of the non-renewal, Bhasin lost the value of his business. Under normal principles, it would have been difficult to contest this straightforward exercise of an unfettered right not to renew the agreement, unless Can-Am’s conduct fell within one of the established principles of contract law that allowed relief, such as misrepresentation or estoppel. Two major factors took this case out of the ordinary mould. The first involved Can-Am’s conduct in appointing Hrynew as PTO. Can-Am tried to overcome Bhasin’s objections to this appointment on the basis that the Securities Commission had rejected the use of an outsider in this position and on the assurance that Hrynew was obliged to treat all information confidentially. Both of these assertions were untrue.21 The second involved Hrynew’s persistent attempts to take over Bhasin’s business through a merger. Unknown to Bhasin, Can-Am had presented the Securities Commission with a new structure for its Alberta operations which clearly showed Bhasin working for Hrynew’s agency. When Bhasin first questioned a Can-Am representative with respect to a possible forced merger, the representative equivocated and did not tell him the truth that, as far as Can-Am was concerned, the merger was then a “done deal”.22 These factors led the trial judge to find that Can-Am had exercised its rights under the non-renewal clause in a dishonest and misleading manner and for an improper purpose.23 However, the judgment encountered difficulties when it came to explaining how these factors could create a contractual liability on the part of Can-Am. The trial judge found that the dealership agreement did not create a relationship in which good faith was required, because it was neither a franchise agreement nor an employment contract. It was a commercial contract that was similar to a franchise agreement, which would have been governed by a duty of fair dealing under provincial law, but it lacked some essential elements of a franchise. It was not a contract of employment, aspects of which can attract the requirement of good faith performance in Canadian law, but it contained some elements akin to employment. However, the agreement was closely related to these established categories and, according to the trial judgment, this allowed the court by analogy to imply a term as a matter of law that required good faith performance on the part of Can-Am.24 Alternatively, the trial judge was willing to imply a term of good faith performance in fact so as to give business efficacy to the agreement.25 21 Bhasin (n 1) [12]. This description of the background to Bhasin is based on DR Percy “The Emergence of a Duty of Good Faith in the Canadian Law of Contracts” (2016) 22 Comm Jud J 34. 22 Bhasin (n 1) [12], [100]. 23 Bhasin (n 1) [26]. 24 Bhasin v Hrynew [2011] ABQB 637; 96 BLR (4th) 73 [72], [86]. 25 Bhasin [2011] (n 24) [101].

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The Court of Appeal gave short shrift to these reasons. It found that there is no general duty to perform contracts in good faith and that the dealership agreement was not an employment contract.26 The trial judge’s decision to imply a term of good faith performance did not satisfy the normal tests for the implication of a term and, even if it did, it was barred by an entire contract clause, which declared that there were no representations, terms and conditions other than those expressly contained in the dealership agreement.27

The recognition of a duty of good faith The emphatic decision of the Court of Appeal neatly crystallised two competing views of the role of good faith in contracts and placed them squarely before the Supreme Court of Canada in the context of a case that involved dishonest and misleading conduct by one of the parties. The conventional view was that good faith is required in certain recognised relationships, such as franchises, employment and fiduciary relationships, and in certain established categories of contract doctrine. As the case did not involve one of the recognised relationships, the question was whether it fell into one of the established categories. The court adopted a tripartite classification, first suggested by Professor McCamus, of the established categories of good faith in Canadian law. The courts have readily found a duty of good faith performance in three broad situations: (1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionary power under the contract; and (3) where one party seeks to evade contractual duties.28 Can-Am’s conduct did not fall within the first or the third of the established categories. The court accepted Can-Am’s argument that its decision to provide six months’ notice of non-renewal was not an exercise of contractual discretion, but that Can-Am was simply relying on an unfettered right of termination.29 As a result, in order to find Can-Am liable, the court was required to recognise an overriding principle of good faith that was not limited to recognised relationships or to existing categories of liability. The court found that the existing categories of liability were examples of an underlying organising principle of good faith, which requires that parties “generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”.30 It went to some lengths to emphasise that an organising principle differs from a legal rule. The organising principle is a standard that underpins specific contractual doctrines, that explains existing law and helps it develop in a coherent and principled way. It requires a contractual party to have appropriate regard for the legitimate contractual interests of its contractual partner to the extent that it must not undermine those interests in bad faith.31 Although the principle generally applies in the three existing categories described by Professor McCamus, it can extend beyond them “where 26 Bhasin v Hrynew [2013] ABCA 98; 362 DLR (4th) 18 [27]. 27 Bhasin [2013] (n 26) [29]. The entire agreement clause is set out at [23]. 28 JD McCamus, The Law of Contracts (2nd ed, Irwin Law Inc 2012) 840–56, cited in Bhasin (n 1) [47]. 29 Bhasin (n 1) [72]. 30 Bhasin (n 1) [63]. 31 Bhasin (n 1) [64]–[65].



Ch 11  The Emergence of Good Faith as a Principle of Contract Performance 237

the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs”.32 The court found that the Bhasin case did not fall into any of the existing categories. However, it chose not to find liability in the conventional inductive manner, which might have pointed to a close relationship with an existing case of liability or a small extension of an existing principle. Instead, the court held that there was a common law duty of honesty in contractual performance that, in its view, flowed directly from the organising principle of good faith. The duty of honest performance requires the parties not to lie or to knowingly mislead each other about matters directly linked to the performance of the contract. The duty of honest performance does not arise from the parties’ intentions or from an implied term of the contract, but is imposed by the court as a minimum standard of conduct. In Bhasin, the breach of this duty resulted from the defendant’s failure to be honest in exercising the non-renewal clause and its general dishonesty in the performance of the contract.33 In order to gain some appreciation of the type of conduct that will amount to dishonesty, it is important to outline the facts which the court found to constitute breaches of the duty of honest performance. The breaches occurred in two ways. The first involved Can-Am’s comments relating to the company’s position on a forced merger of the agencies owned by Bhasin and Hrynew and on the renewal of Bhasin’s dealership agreement. Can-Am consistently failed to deal honestly on these matters and, when questioned about its intentions with respect to the merger in August 2000, Can-Am equivocated and failed to tell Bhasin the truth that the merger was in fact a “done deal”.34 The second instance of dishonesty arose from Can-Am’s untruthful statements that the Securities Commission would not allow the appointment of an independent PTO and that Hrynew was bound by a duty of confidentiality in any audit of the agencies owned by Bhasin and others. The court found that, as a result of these breaches, Bhasin suffered damages that were assessed on the basis of the finding at trial that, but for Can-Am’s dishonesty, Bhasin would have acted so as to “retain the value in his agency”, rather than see it effectively turned over to Hrynew as a result of the nonrenewal of the dealership agreement.35 The court skirted the problem created by Bhasin’s inability to dispose of his dealership without Can-Am’s consent by pointing out that in assessing damages, the trial judge had taken into account the difficulties created by Can-Am’s “almost absolute controls” on its directors and the fact that it owned their books of business.36 Although it is difficult to imagine how Bhasin might have been able to sell his dealership to a third party, the court adopted the finding of the trial judge that, notwithstanding these difficulties, its value around the time of non-renewal was $87,000.37 32 33 34 35 36 37

Bhasin (n 1) [66]. Bhasin (n 1) [94], [108]. Bhasin (n 1) [100]. Bhasin (n 1) [109]. Bhasin (n 1) [109]. Bhasin (n 1) [110].

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An Initial Assessment of the Duty of Good Faith Performance The level of media interest in the Bhasin decision showed that this was far from a run of the mill contracts case.38 A deluge of academic commentary39 emphasises that the case has effected a substantial change in contract doctrine and created a major practical impact on business and contract planning. The implications of the decision will be assessed under four headings that deal in turn with its effect on the traditional concept of freedom of contract, the ability of the parties to modify their good faith obligations, the role of existing common law principles and the influence of other legal systems.

Freedom of contract and party autonomy At first sight, the court’s recognition of an overriding principle of good faith and honesty in the performance of contracts creates a conflict with the idea of freedom of contract. The parties did not stipulate a term of good faith and the court was at pains to emphasise that the duty did not arise from a term implied as a result of the parties’ supposed intentions. Instead it was implied in law, as an obligation imposed by the court. The apparent violation of freedom of contract has been the source of vociferous criticism, much of which is overblown. This line of criticism neglects the fact that the idea of contract as a pure manifestation of the intentions of the parties had long vanished and was probably never fully realised. Although 19th century contract law was viewed “principally as the facilitation of voluntary choices by giving them legal effect”,40 even at that time the parties did not enjoy complete contractual autonomy. Their autonomy was undermined by the fairness principles that underlie the doctrines of duress, undue influence and unconscionability. Ultimate courts of appeal have recognised that many other contractual principles also include elements of fairness. The High Court of Australia has stated that the rationale of estoppel is “good conscience and fair dealing”, although these doctrines result in the avoidance of contractual

38 The decision attracted an unusual interest in mainstream media. See Jacquie McNish, “Supreme Court of Canada Ruling Makes Honesty the Law for Businesses” The Globe and Mail (Toronto, 14 November 2014) www.theglobeandmail.com/report-on-business/supreme-court-of-canadaruling-makes-honesty-the-law-for-businesses/article21583597/; Adrian Myers, “Supreme Court Ruling on Contracts Will Spark More Lawsuits – and that’s okay” The Globe and Mail (Toronto, 17 November 2014) www.theglobeandmail.com/report-on-business/streetwise/supreme-courtruling-on-contracts-will-spark-more-lawsuits-and-thats-okay/article21612816/. 39 See eg E Leaderman “The SCC has Blown Wide Open the Grounds for a Contractual Dispute” (2015) 34 (35) The Lawyers Weekly, http://www.lawyersweekly.ca/articles/2304; J Young, “Justice Beneath the Palms: Bhasin v Hrynew and the Role of Good Faith in Canadian Contract Law” (2016) 79 Sask L Rev 79; S O’Byrne and R Cohen, “The Contractual Principle of Good Faith and the Duty of Honesty in Bhasin v Hrynew” (2015) 53:1 Alta LR 1; N Finkelstein, B Kain, C Spurn, S C O’Neill and J H Nasseri, “Honour Among Businesspeople: The Duty of Good Faith and Contracts in the Energy Sector” (2015) 53:2 Alta LR 349. 40 H Collins, The Law of Contract (4th ed, LexisNexis UK 2003) 6.



Ch 11  The Emergence of Good Faith as a Principle of Contract Performance 239

obligations rather than the imposition of liability.41 The Supreme Court of Canada has recognised the role of fairness in the interpretation of contracts and the implication of terms.42 The view that Bhasin involved an unwarranted interference with freedom of contract also fails to take into account the court’s careful attempt to limit the intrusion of the duty of good faith on the autonomy of the parties. In particular, the court sought to define Can-Am’s duty with a degree of precision and hinted that a generalised duty of good faith may not have a role in all types of contracts. The nature of the good faith duty A major ground for Can-Am’s success in the Alberta Court of Appeal was that a finding of liability would be inconsistent with the provision that allowed either party to terminate the dealership agreement prior to the expiry of the three-year term.43 The Supreme Court carefully recognises the primacy of this provision by emphasising that Can-Am retained an unfettered right to terminate the contract. Its breach of good faith lay in its failure to deal honestly with Bhasin in exercising its right of termination. Can-Am was found liable for its dishonest conduct, not for its decision not to renew the dealership.44 The finding of liability did not override any rights stipulated in the contract, but merely prevented Can-Am from exercising those rights in a dishonest manner. The type of contract in question By the time of termination, the relationship between Bhasin and Can-Am had existed for 10 years. The court recognised that “the general organising principle of good faith would likely have different implications in the context of a longterm contract of mutual cooperation than it would in a more transactional exchange”.45 This paragraph hints that good faith might have a different role in a long-term contract than in a one-off transaction. There is considerable support for the idea that good faith may be required in the performance of a long-term contract, commonly known as a relational contract. Although the dealership agreement did not fit within any of the traditional categories, such as a fiduciary relationship, that attract a duty of good faith, the parties had made a substantial commitment to a 10 year relationship. In the English case of Yam Seng Pte v International Trade Corporation Ltd,46 Leggatt J elaborates the nature of relational contracts of this type: “[They] may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve 41 Walton’s Stores (Intrastate) Ltd v Maher [1988] HCA 7; 62 ALJR 110, 129, 138, described by Mr Justice Steyn, “The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy?” (1991) 6 Denning LJ 131, 134. 42 Bhasin (n 1) [42]. 43 Bhasin (n 1) [29]. 44 Bhasin (n 1) [103]. 45 Bhasin (n 1) [69]. This reference is supported by the court’s statement at [60] that the growth of relational contracts call for a basic element of honesty and performance but that even in a transactional exchange dishonest conduct will fly in the face of the parties’ expectations. 46 [2013] EWHC 111 (QB); [2013] 1 All ER (Comm) 1321 (“Yam Seng”). For more in-depth analysis of Yam Seng see O’Byrne and Cohen (n 18).

240 Contract in Commercial Law expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and longterm distributorship agreements.”47

The reference to a relational contract in Bhasin was much more oblique, but the dealership agreement clearly fits the typical description of a relational contract. A relational contract is contrasted with a contract that arises out of a single exchange transaction, such as the cash sale of a bulk generic good, when there may be no further contact between the buyer and seller once the sale is complete.48 The key distinction is that in the single transaction contract, the parties can be expected to identify and allocate the risks of non-performance at the time of contracting.49 In contrast, in a long-term relational contract there are barriers to identifying and allocating the unforeseeable risks that might emerge over the life of the contract and to drafting the complex adaptations that might be necessary to address even foreseeable contingencies.50 Thus, when Bhasin and Can-Am entered their first agreement in 1989, neither of them could reasonably have foreseen the investigation by the Alberta Securities Commission that arose a decade later or the possible appointment of a competitor with the power to audit Bhasin’s business. They certainly could not have foreseen that a merger between the agencies of Bhasin and his competitor might emerge as a possible resolution of the investigation. Although the parties could not realistically have made provision for this type of risk at the time of contracting, under the theory of relational contracts they would be expected to deal honestly with each other when they confronted the issues with the Securities Commission that emerged in 1999.51 The existence of a relational transaction was not central to the decision in Bhasin. The court merely mentioned the difference between a relational contract and a single transaction contract and pointed out that a duty of good faith might have different implications in the former. However, in its brief comment, the court relied on two articles which argue that the duty of good faith is particularly appropriate in relational contracts,52 although both English courts and senior academic commentators are reluctant to apply any special treatment to relational contracts.53 47 Yam Seng (n 46) [142]. 48 D Campbell, “Good Faith and the Ubiquity of the ‘Relational’ Contract” (2014) 77 MLR 475, 480, citing I Macneil, “Economic Analysis of Contractual Relations: Its Shortfalls and the Need for a Rich Classificatory Apparatus” (1980) 75 Nw UL Rev 1018, 1025–27. 49 I Macneil, “Restatement (Second) of Contracts and Presentation” (1975) 60 Va L Rev 589, 594. 50 Charles J Goetz and Robert E Scott, “Principles of Relational Contracts” (1981) 67 Va L Rev 1089, 1091; Campbell (n 48) 480. 51 Yam Seng (n 46) [135], cited in Campbell (n 48) 482. 52 Bhasin (n 1) [69], citing A Swan and J Adamski, Canadian Contract Law (3rd ed, LexisNexis Canada Inc 2012) s §1.25 and B Dixon, “Common Law Obligations of Good Faith in Australian Commercial Contracts – a Relational Recipe” (2005) 33 ABLR 87, 94–95. 53 Baird Textile Holdings plc v Marks and Spencer plc [2001] EWCA Civ 274; [2002] 1 All ER 737 [16] (‘Baird Textile’), discussed in Campbell (n 48) 477–78 and E McKendrick, “The Regulation of Long-Term Contracts in English Law” in Jack Beatson and Daniel Friedmann (eds), Good Faith and Fault in Contract Law (Clarendon Press 1995) 323.



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Despite the lingering controversy, the brief reference of the Supreme Court of Canada reveals a kernel of truth. Courts are more willing to find a duty of good faith in a relational contract and it is safe to conclude that the long-term nature of the relationship was an important factor in the Bhasin decision. In other cases, such as Yam Seng, the classification of the contract as relational was pivotal. It is unfortunate that the Supreme Court did not expand its discussion of the role of good faith in relational contracts. A more definitive treatment might well have limited the potential scope of the good faith principle and provided a degree of certainty that is only hinted at in the judgment.

The limitation of good faith duties The generalised approach to describing good faith performance is also reflected in the court’s treatment of the extent to which the duty can be excluded, limited or defined by the parties. As mentioned earlier, the Alberta Court of Appeal decision that Can-Am was not liable for any breach was explained in part by the entire agreement clause, which prevented Bhasin from relying on any oral promises by Can-Am or on evidence related to the parties’ expectations. The Court of Appeal recognised that the clause barred only obligations of good faith that were implied in fact, but took the traditional position that good faith obligations imposed by law were restricted to the well-established categories of relationships.54 The Supreme Court of Canada judgment on the ability of the parties to exclude duties of good faith involves a significant departure from the traditional position. The court describes the duty of good faith, manifested in a duty of honest performance, as a principle of law that operates irrespective of the parties’ intentions. The duty of honesty applies, like the doctrine of unconscionability, to all contracts and cannot be excluded by the parties.55 This proposition seems to create a further challenge to the principle of freedom of contract because it limits the parties’ ability to stipulate the rules that will govern their own transaction. The judgment addresses this argument in two ways. The first response is practical. The court points out that the duty of honest performance will interfere very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance.56 The second response envisages a continuing role for freedom of contract because the parties may still define the scope of honest performance and, in some contexts, relax its requirements as long as they respect the minimum obligations that lie at its core. The court suggested a possible model for this principle in §1-302(b) of the American Uniform Commercial Code (UCC),57 which states that: “[t]he parties, by agreement, may determine the standards by which the performance of [good faith obligations] is to be measured if those standards are not manifestly unreasonable”. In practice, it is not unusual to find provisions which manage to fulfil this exact function, without embarking on a fruitless attempt to exclude liability 54 55 56 57

Bhasin (n 26) [28]–[32]. Bhasin (n 1) [75]. Bhasin (n 1) [76]. Bhasin (n 1) [77].

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for bad faith conduct. A common example is found in clauses in commercial leases which require the landlord’s consent to any assignment of the lease by a tenant. At least in Canada, this restriction is often accompanied by a statement that the landlord’s consent to an assignment “may be arbitrarily withheld”. In principle, there is surely no reason why this clause should not be applied in ordinary circumstances, but not surprisingly the Bhasin decision encouraged a tenant to argue in a recent case that such a clause was overridden by the duty of good faith. The argument failed on the ground that the tenant had apparently conceded the validity of the clause, but, in any event, the judge was not persuaded that Bhasin disentitled the landlord from relying on an express term of a contract negotiated by sophisticated parties.58 This comment is surely correct, as the tenant must be taken to understand the risk of an arbitrary refusal before entering the lease and there are good reasons why the landlord may require an unrestricted right to choose its tenant. The views of the Supreme Court and some commentators on restricting the parties’ ability to define the extent of their good faith obligations are discussed only in the context of limiting the duty of honest performance. It is as easy to understand why the court is reluctant to allow much deviation from honest performance as it is to envisage the difficulty of drafting a clause that would allow a party to perform a contract dishonestly. However, the duty of honest performance is just one rudimentary instance of the much broader concept of good faith. Good faith can also include reciprocal duties of co-operation and loyalty and the avoidance of action that is likely to destroy mutual trust and confidence.59 It may be relatively easy to judge whether a party has performed a contract dishonestly or has otherwise knowingly misled the other party, but the absence of good faith is much more open to interpretation. For example, in the lease assignment case discussed above, it is possible to envisage an argument that a landlord’s honest decision to withhold consent to an assignment might nevertheless amount to an exercise of bad faith. This possibility can be illustrated by a fictitious example based loosely on the facts of a well-known Canadian case. In that case, the owner of a shopping centre enticed a department store to move from its existing premises, where it was the anchor tenant in a neighbouring mall, to the owner’s shopping centre. As part of the transaction, the owner took an assignment of the existing department store lease, which still had a remaining term of 17 years, and the owner assumed all the obligations of the department store under the lease. It made no serious effort to further assign the lease or to sublet the former department store premises. Indeed, the owner was quite content to pay the rent and leave the former department store vacant because this action greatly diminished customer traffic at the neighbouring mall and reduced competition for the owner’s shopping centre. On its real facts, the case was easy to resolve because the owner had failed to perform a contractual obligation owed to the landlord of the neighbouring mall 58 Hudson’s Bay Co v OMERS Realty Corp [2015] ONSC 4671; [2015] OJ No 4098 fn 6, [32]. 59 H Collins, “Is a Relational Contract a Legal Concept?”, ch 3, p 37 above. The focus only on honest performance is maintained by one distinguished commentator, A Swan, “The Obligation to Perform in Good Faith: Comment on Bhasin v Hrynew” (2015) 56 Can Bus LJ 395, 395, who purports to distil the essence of good faith in the instruction “Just don’t tell lies!”



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to “use their best efforts” to lease the former department store.60 However, if the best efforts clause had not existed, the original department store lease would have allowed the owner to leave the premises vacant or to refuse to assign them to a third party. In the case itself, Kelly J at trial found as an alternative ground of decision that the owner of the shopping centre was in breach of an obligation to exercise its discretion to sublet the premises in a reasonable manner and in good faith. The Nova Scotia Court of Appeal affirmed the decision only on the ground that the owner had failed to use its best efforts to lease the premises and did not comment on the applicability of a duty of good faith performance. If this case were to recur today, and if there were no best efforts clause, Bhasin leaves open the question whether there might be a breach of the duty of good faith where the contract entitled the owner to take actions which advanced its own interests and “had the effect of literally destroying the viability of ” the neighbouring mall by leaving its flagship premises vacant for a very lengthy period.61 The judgment in Bhasin is unhelpful on this point. It recognises that the parties can define the scope of honest (and good faith) performance as long as they respect its core requirements, but provides little further guidance except by stating that the governing principle is similar to that found in §1-302(b) of the UCC set out above. The court thus signals that both future litigation and contractual drafting in Canada are likely to be guided by the American experience in the interpretation of the UCC. The reference to the UCC invites counsel to embark on a daunting quest into American case law that is unlikely to yield very consistent results. A useful recent summary by Shannon O’Byrne and Ronnie Cohen shows considerable tension in the American case law.62 In one influential and well-known decision, the Seventh Circuit Court of Appeals emphasised the primacy of the words of the contract. Judge Easterbrook stated trenchantly that “[f]irms that have negotiated contracts are entitled to enforce them to the letter, even to the great discomfort of their trading partners, without being mulcted for lack of ‘good faith’”.63 This approach bears considerable similarity to the literal interpretation taken by the Alberta Court of Appeal in Bhasin (CA) and so decisively rejected by the Supreme Court of Canada. In the American decision, the court also applied the terms of the contract literally when it upheld the right of a bank to terminate a client’s line of credit upon five days’ notice and found that this right was not fettered by a duty of good faith. This line of authority strongly suggests that the landlord’s decision to refuse consent to an assignment in the example set out above will be upheld where the contract states that consent may be arbitrarily withheld. However, the fidelity to the text of the contract shown by Judge Easterbrook has been criticised.64 Other cases that deal with the contractual duty of good faith outside the UCC 60 Gateway Realty Ltd v Arton Holdings Ltd (1991) 106 NSR (2d) 180 (SC TD) [80] (“Gateway SC”), affd (1992) 112 NSR (2d) 180 (CA) (“Gateway CA”). 61 Gateway SC (n 60) [15]. 62 O’Byrne and Cohen (n 18) 27–30. 63 Kham and Nate’s Shoes No 2 Inc v First Bank of Whiting 908 F (2d) 1351, 1357 (7th Cir 1990), cited in O’Byrne and Cohen (n 18) 28. 64 For a summary, see O’Byrne and Cohen (n 18) 28–29.

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context indicate that an apparently absolute contractual discretion is limited where there is a bad motive, exemplified by the exercise of a discretionary power to destroy or injure “the right of the other party to receive the fruits of the contract”.65 Cases of this type suggest that in a Canadian context there could be a limit upon the right of the lessee to leave premises vacant in a way that is intended to destroy the viability of a neighbouring shopping mall. Although it was easy for the Court to minimise the problems that might be encountered in limiting or excluding the obligation of honest performance, the concept of good faith is more open-ended. The reference to obtain guidance from the jurisprudence under the UCC is unique and perhaps not particularly helpful to those involved in the interpretation and drafting of Canadian contracts.

The role of existing principles The Supreme Court also justified its decision in Bhasin by referring to the inadequacy of the common law treatment of good faith. The new principle of good faith performance in its view makes the law “less unsettled and piecemeal, more coherent and more just”66 and has advantages over the traditional contract doctrines that were potentially applicable to the facts of the Bhasin case. The court pointed out the shortcomings of those doctrines, but did not explain why they are inapplicable to the facts before it. The facts of Bhasin suggest that there was a strong prima facie case of both fraudulent misrepresentation and estoppel, although the absence of any mention of either possibility in the trial judgment may indicate that they were not pleaded. The Supreme Court judgment proclaims that the duty of good faith has an advantage over civil fraud, because it does not require intention and it allows the award of contractual rather than tortious damages. This is an unduly restrictive statement of the requirements of civil fraud as set out by the court in 2014, when it unanimously reaffirmed the classic requirements established by the House of Lords in Derry v Peek,67 with the single gloss that the false statement must actually induce the plaintiff to act on it.68 The court reformulated the principles of civil fraud in four requirements that contain no reference to intention. The principles required only: (1) a false representation made by the defendant; (2) some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness); (3) the false representation caused the plaintiff to act; and (4) the plaintiff ’s actions resulted in a loss.69 In Bhasin, the court concluded that Can-Am was guilty of dishonest performance because of a number of representations which appeared to satisfy the requirements of civil fraud. For example, when Can-Am was questioned 65 Wilson v Amerada Hess Corp 773 A 2d 1121, 1126–27 (NJ 2001), citing Sons of Thunder Inc v Borden Inc 690 A (2d) 575, 586 (NJ 1997), discussed by O’Byrne and Cohen (n 18) 29. 66 Bhasin (n 1) [33]. 67 (1889) 14 App Cas 337 (HL), affirmed in Bruno Appliance and Furniture, Inc v Hryniak [2014] SCC 8; [2014] 1 SCR 126 [18]–[19]. 68 Bruno (n 67) [19]. 69 Bruno (n 67) [21].



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about its intentions to merge the businesses of Bhasin and Hrynew, its official “equivocated” even though the merger was a “done deal”.70 It is true that any fraudulent misrepresentation would result only in tortious damages, but that would have made no difference to the court’s ultimate award of damages based on the value of the business lost as a result of Can-Am’s dishonest performance. The court also pointed out that the duty of honest performance had an advantage over promissory estoppel and estoppel by representation because it does not require any intention on the part of the defendant that its representation be relied upon and there is no uncertainty over the question whether it can provide the basis for a cause of action. These limitations also seem irrelevant to the actual decision in Bhasin. Can-Am could hardly argue that it did not intend Bhasin to rely on the representation that it was not planning to merge his business with that of Hrynew and Bhasin could readily have used the statement as a shield rather than a sword. The principle of good faith performance undoubtedly has theoretical advantages over existing doctrines, but it seems that they are not advantages which would have made any difference to the result of the case.

The influence of other legal systems The emergence of discussions of good faith in common law jurisdictions has been due in part to internationalisation and an increased awareness of other legal systems. The court justified the adoption of the good faith principle in the Bhasin decision with the comment that the Canadian law of contracts was “out of step with the civil law of Québec and most jurisdictions in the United States”.71 The court recognised that the Civil Code of Québec establishes a broad duty of good faith in the civil law tradition. It observed that an obligation of good faith has long been part of the law of Canada’s neighbour and largest trading partner through the UCC and the Restatement of Contracts.72 In England and Wales, the investigation of good faith has been accelerated by EU legislation and directives, as well as movements towards the harmonisation of European law.73 This has created a momentum for conformity with the law of major trading partners and jurisdictions that form part of a federated union. Any resistance is seen as swimming against the tide.74 However, the requirements of neighbourliness do not demand theoretical consistency. The objective must surely be the more mundane one of ensuring that courts reach broadly similar conclusions in similar cases. Although the court asserted that the common law in Canada “produced results that were inconsistent with the expectations of commercial parties”,75 the decision focused less on the results of cases than on the theoretical desirability of the doctrine of 70 Bhasin (n 1) [100]. At [101] the court affirms that the statement that the Securities Commission had rejected a Can-Am proposal to appoint a third party as PTO was “not truthful” and the assurances that Hrynew was bound by duty of confidentiality were also “lies”. 71 Bhasin (n 1) [32]. 72 Bhasin (n 1) [82]–[85]. 73 Yam Seng (n 46) [124]. 74 Yam Seng (n 46) [124]. 75 Bhasin (n 1) [32].

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good faith. The Bhasin decision recognises the existence of the doctrine of good faith in both Québec and the United States, but does not ask the more important question whether the doctrines in each of those jurisdictions are the same. It cannot credibly be assumed that the good faith principle in Québec yields the same results as in the United States and that those results differ from those reached in the courts of common law Canada. In any event, the decision does not achieve the goal of uniformity even with Québec because it adopts a more limited principle of good faith. The judgment in Bhasin restricts good faith to contractual performance, while the Québec version applies to the formation of contracts and contract negotiations,76 so that there is at most partial uniformity between Québec and common law Canada.

Contrasts between Canada and the Commonwealth The Supreme Court of Canada sought to justify its embrace of good faith performance in Bhasin with references to United Kingdom and Australian experience. The court commented that developments in those two countries “point to enhanced attention to the notion of good faith, mitigated by reluctance to embrace it as a stand-alone doctrine” and that Australian courts have moved towards a greater role for good faith in contract performance.77 Although the court used United Kingdom and Australian authorities to support the legitimacy of good faith, the guarded phrase “enhanced attention” hints that the concept of good faith in those countries differs from the new course that has been set in Canada. This section will sketch the extent of that difference with reference to the position of the Supreme Court before Bhasin and draw a brief contrast between the new Canadian developments with the state of law in England and Australia.

A different Canadian starting point Despite the public attention that greeted the Bhasin decision, it did not come as a bolt from the blue to observers of the Canadian law of contracts. Just as in other Commonwealth countries, lower courts in Canada had raised the principle of good faith performance from time to time, although more frequently and in more varied settings than their counterparts in England and Australia. The major difference was that in the years preceding Bhasin the Supreme Court of Canada had accorded an important role to an independent duty of good faith in a trilogy of cases dealing with the measure of contractual damages. In Wallace v United Grain Growers Ltd,78 the court for the first time imposed an obligation of good faith in a contractual setting without any suggestion that 76 See for example Bhasin (n 1) [80] and Art 1375, Code Civil du Québec. A discussion of Art 1375 can be found in Bhasin (n 1) [83]. The civilian and common law approaches are contrasted in Paul André Crépeau Centre for Private and Comparative Law, “Good Faith” www.mcgill.ca/ centrecrepeau/projects/terminology/guide/good-faith. 77 Bhasin (n 1) [57]–[58]. 78 [1997] 3 SCR 701.



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the obligation arose from the parties’ intentions. In Wallace, an employer had terminated the contract of an employee without providing reasonable notice. From the moment of dismissal up to the beginning of the trial, the employer made the “decision to play hardball”79 by arguing that it had dismissed the employee for cause. This totally unfounded allegation caused the employee a great deal of distress and led others to assume that he had been guilty of wrongdoing.80 The employee’s action to recover contractual damages for mental distress encountered the obstacle that under the existing Canadian law, mental distress damages were permitted only where the distress was a foreseeable result of the actual breach (which consisted of a failure to provide reasonable notice of termination) or if the actual breach was accompanied by the breach of a separate legal duty arising in contract or tort. In this case, it was argued that the requirement of breach of a separate duty was satisfied because the employer had failed to exercise its power of dismissal in good faith. The majority of the court rejected the argument that there was any contractual duty to exercise good faith in discharging the employee.81 Instead, it took the unprecedented step of stating that where there is bad faith in the manner of dismissal that caused mental distress, the court has discretion to extend the required period of reasonable notice. Although the bad faith nature of the dismissal did not amount to an actionable wrong, “employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal, the breach of which will be compensated for by adding to the length of the notice period”.82 The court’s decision essentially created a free standing obligation of good faith. The obligation does not arise from a contractual or tortious duty, but may give rise to damages for mental distress if accompanied by the contractual breach of failing to give reasonable notice of termination.83 This highly unusual use of a good faith principle with no link to a tortious or contractual duty lasted approximately a decade and was highly influential in the Canadian law of wrongful dismissal, where it was argued in several hundred trial decisions that a wrongfully dismissed employee was entitled to a “Wallace Bump Up” in the assessment of damages.84 In a dissenting judgment in Wallace, McLachlin J had pointed out its analytical weakness when she commented that any obligation to avoid bad faith dismissal could only be grounded in an “implied contractual term to act in good faith in dismissing an employee”.85 In 2008, the majority of the court heeded this dissent when it found that any decision to award damages resulting from the manner of dismissal must begin by asking “[W]hat did the contract promise”?86 Although the court did not do so expressly, its 2008 decision clearly based the award of damages for bad faith dismissal on the 79 80 81 82 83

Wallace (n 78) 716. Wallace (n 78) 714, 716. Wallace (n 78) 735–36. Wallace (n 78) 742. S O’Byrne, “Wallace v United Grain Growers Ltd” (1998) 77 Can Bar Rev 492, 500–03. See also McCamus (n 28) 860. 84 Yanez v Canac Kitchens (2004) 45 CCEL (3d) 7 (Ont Sup Ct). 85 Wallace (n 78) [135]. 86 Honda Canada Inc v Keays [2008] SCC 39; [2008] 2 SCR 362 [56]–[57].

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breach of an implied term which required “the employer to act in good faith when exercising the right to dismiss an employee under a contract of indefinite duration”.87 The Supreme Court also relied on the absence of good faith in the award of contractual damages in Whiten v Pilot Insurance Co,88 where an insurance company maliciously and vindictively denied coverage under a fire insurance policy.89 The court restored the original jury award of $1 million in punitive damages for the combination of a breach of contract (the failure to pay a valid claim) and an independent wrong in the form of the breach of an implied obligation of good faith and fair dealing.90 It could be argued that the impact of the trilogy of cases should not be overestimated and that they were in substance, if not in form, examples of the implication of a term of good faith. However, this would be misleading. Wallace explicitly avoided grounding the duty of good faith in a contractual term. The court clearly imposed the duty of good faith as a matter of policy, because of the power imbalance between employers and employees and in recognition of the fact that for most people “work is one of the defining features of their lives”.91 The subsequent decision in Keays, which based the duty of good faith on an implied term of the contract, brought “Wallace-damages” within the fold of the common law of contracts, but only in order to overcome a serious flaw in the original judgment. It is difficult to accept that the duty of good faith was genuinely implied in fact in Keays, for there was little evidence that such a term reflected the intention of the employer in entering the contract. If it was implied in fact, then it could easily be defeated by the insertion of an entire agreement clause in future employment contracts, but the language of the court in both Keays and Wallace suggests that the employer’s duty to act in good faith in dismissing employees was an imperative upon which future courts would probably insist. The judgment in Whiten was much more conventionally anchored in the insurer’s implied duty of good faith and fair dealing.92 This provided a ready solution to the Canadian requirement that an award of punitive damages must be based on a separate actionable wrong in addition to a breach of contract. In Whiten, the insurer’s failure to pay a wellfounded claim constituted the main breach and the implied duty of good faith provided a convenient source of the separate actionable wrong. The court’s willingness to award punitive damages on the dubious basis of a double breach of contract provides a further example of its determination to deter serious bad faith in the performance of contracts. Against this background, Bhasin’s explicit recognition of an independent duty of good faith may allow the court to openly address the types of conduct that arose in the trilogy without the need to tie itself in contractual knots.

87 McCamus (n 28) 862. 88 [2002] SCC 18; [2002] 1 SCR 595 (“Whiten”). 89 Whiten v Pilot Insurance Co (1999) 170 DLR (4th) 280 [29] (Ont CA) (Whiten (CA)), per Laskin JA (dissenting on the quantum of damages). 90 Whiten (n 88) [79], [141], adopting on this point the dissenting judgment of Laskin JA. 91 Wallace (n 78) [94], generally [91]–[95]. 92 Whiten (n 88) [79].



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Good faith in England The high watermark for good faith in the English law of contracts is found in the case of Yam Seng,93 in which International Trade Corporation (ITC) granted Yam Seng (YS) the exclusive rights in a number of territories to distribute certain fragrances that were sold under the unlikely brand of Manchester United. ITC claimed that it had a licence to manufacture and sell Manchester United fragrances, although it had not received a licence at the time it entered the agreement. The relationship between the parties was initially warm, but it deteriorated because of ITC’s repeated failure to supply the goods as agreed. As a result YS was unable to meet commitments to its own customers. YS justifiably came to regard ITC’s repeated explanations of its failures and assurances of improved performance as implausible and ultimately false. As a result of ITC’s conduct, YS terminated the distributorship agreement and sued ITC for breach of contract or, in the alternative, misrepresentation. The distributorship bore some similarities to the dealership agreement in Bhasin and was classified by the court as relational in nature. It had some elements of a relational contract, because ITC was obliged to supply goods in the required quantities over the life of the agreement and because the agreement envisaged further extensions. However, the initial agreement had a duration of only one year, subject to a possible 20-month extension. The distributorship did require continued communication and co-operation between the parties, particularly because YS could not specify in advance the exact quantities of goods that it might require and the parties were aware that this matter would have to be worked out over time. However, this uncertainty did not create an unforeseeable risk, as the parties could easily have inserted a term dealing with expected quantities. The distributorship has been accurately described as “a significantly, but not pronouncedly relational contract”.94 For purposes of comparison, the contract was less relational than the agreement in Bhasin, where the dealership had been in place for many years and where the risk of a Securities Commission investigation was entirely unforeseeable when the agreement was first made. In Yam Seng, Leggatt J emphasised that relational contracts are made against a background of “unstated shared understandings which inform their meaning” and that this background includes shared values and norms of behavior.95 The general norm underlying almost all contractual relationships is “an expectation of honesty”96 and when the court interprets a contract in circumstances that were not specifically provided for, it must give the contract “a reasonable construction which promotes the values and purposes expressed or implicit in the contract”.97 In Yam Seng, the court found that the distributorship agreement contained an implied duty that ITC would not knowingly provide false information on which Yam Seng was likely to rely.98 93 94 95 96 97 98

Yam Seng (n 46). Campbell (n 48) 481. Yam Seng (n 46) [133]. Yam Seng (n 46) [135]. Yam Seng (n 46) [139]. Yam Seng (n 46) [156].

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The judgment in Yam Seng makes a case for the adoption of a duty of good faith and fair dealing in much the same way as Bhasin, but the cases differ in two important respects. First, in Yam Seng the court found that the duty of good faith existed as a matter of intention, as an implied term of the agreement, rather than as an obligation imposed by law. Second, the absence of good faith was not central to the finding of liability on the part of ITC. The court concluded that ITC was in breach of contract because of late delivery and a failure to make products available when promised and liable for misrepresentation as it had induced Yam Seng to enter the agreement through false representations. The existence of bad faith affected the case only indirectly and was not necessary for the decision. The court found that bad faith supported the finding that ITC had repudiated the agreement,99 but it also justified this finding on the straightforward ground that ITC had committed a serious breach of the exclusivity clause in the agreement.100 Yam Seng is an interesting judgment, but Leggatt J’s enthusiasm for the good faith doctrine has not been reciprocated by higher courts. In Mid-Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd,101 the Court of Appeal reversed a trial judgment that, among other reasons, had found an implied duty to act in good faith in a contract to provide catering and cleaning services to a hospital. The trial judge had found that the duty obliged the Hospital Trust not to exercise certain powers “in an arbitrary, capricious and irrational manner”.102 Not surprisingly, the Court of Appeal commented on Yam Seng, which had been decided only about six weeks earlier and might be considered to support the contractor’s position, but scrupulously avoided endorsing its adoption of a broad duty of good faith. Remarkably, the Court of Appeal ignored Leggatt J’s detailed justification of a contractual duty of good faith and focused only on his statement that there is no general doctrine of “good faith” in English law.103 It concluded, in a marked departure from Leggatt J’s analysis, that “if the parties wish to impose such a duty they must do so expressly”.104 The selective omission of any reference to the justifications for a duty of good faith performance suggests little enthusiasm for the doctrine formulated in Yam Seng. A similar lack of enthusiasm is reflected in other senior English decisions, most notably in the comments of Lord Ackner in Walford v Miles105 and the rejection by the Court of Appeal of any special treatment for relational contracts.106

The role of good faith in Australia In Bhasin, the Supreme Court of Canada was cautious in its comments on Australian law. It recognised that “there is no generally applicable duty of good faith” in Australian contract law without adding that its own decision crosses 99 100 101 102 103 104 105 106

Yam Seng (n 46) [173], [230]. Yam Seng (n 46) [173], [230]. [2013] EWCA Civ 200; [2013] BLR 265. Mid-Essex Hospital (n 101) [69]. Mid-Essex Hospital (n 101) [105]. Mid-Essex Hospital (n 101) [105]. [1992] 2 AC 128 (HL) 136–38. Baird Textile (n 52) 744.



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a theoretical divide which Australian courts have eschewed.107 The principle of good faith plays an important role in Australian contract law, but on the basis of the parties’ intentions and under established contract doctrines. In contrast, Bhasin imposes a duty that is rooted in good faith, but is independent of intention and rises above ordinary contract doctrines. There is little support in the Australian authorities for the imposition of a general duty of good faith and honest performance. Instead, good faith is seen not as “an independent concept so much as something which is inherent in contract law itself and therefore a concept which must be taken into account when interpreting a contract [and] determining the scope of contractual rights”.108 Where a requirement of good faith exists, its source is an implied term of the contract and “any attempt to imply an independent term requiring good faith is unnecessary and a retrograde step”.109 The theoretical basis of Australian law is thus similar to Canadian law prior to Wallace and certainly prior to Bhasin. The statements of the role of good faith are similar to a comment made by Professor (now Justice) Edward Belobaba in 1985 that the common law of contracts “shows a consistent and confident judicial vigilance against bad faith behavior”110 that is manifested through 23 techniques of judicial intervention.111 If Australian courts are reluctant to imply independent terms requiring good faith, they would surely reject the judicial imposition of a general duty of good faith. In contrast to both the Australian and English approaches, the Supreme Court of Canada rejects the common law approach on the supposition that an openly recognised principle of good faith will make the law “less unsettled and piecemeal, more coherent and more just”.112

Conclusion The development of a doctrine of good faith in common law jurisdictions invariably provokes strong reactions. Traditionalists have been described as viewing good faith as a “contagious disease of alien origin”113 or in treating it as “an embarrassing social disease”.114 In Canada, the adoption of a doctrine of good faith performance in Bhasin has now shifted the debate from a theoretical to a practical level, which requires lawyers to deal with its implications in a practical way with less emphasis on vivid rhetoric. 107 108 109 110

111 112 113

114

Bhasin (n 1) [58]. JW Carter, Contract Law in Australia (6th ed, LexisNexis Butterworth 2013) para [2.03]. Carter (n 108) para [2.01]. EP Belobaba, “Good Faith In Canadian Contract Law” in Special Lectures of the Law Society of Upper Canada 1985 – Commercial Law: Recent Developments and Emerging Trends (Richard De Boo Publishers 1985) 80, cited in Gateway SC (n 60) [40]. Belobaba (n 110) 81–87, summarised in Gateway SC (n 60) [41]. Bhasin (n 1) [33]. G Teubner, “Legal Irritants: Good Faith in British Law or How Unifying Law Ends up in New Divergences” (1998) 61 MLR 11, quoted in Andre Sinanan, “Good Faith in English Contract Law: A ‘Contagious Disease of Alien Origin’” (2014) Social Science Research Network http:// ssrn.com/abstract=2654752. J Swan, “Whither Contracts: A Retrospective and Prospective Overview” in Special Lectures of the Law Society of Upper Canada 1984 – Law in Transition: Contracts (Richard De Boo Publishers 1984) 148.

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The recognition of an organising principle of good faith performance is necessarily vague. The court provides some operational content when it states that good faith “exemplifies the notion that in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner”.115 The court is aware of the danger of indeterminacy and made it clear that the principle must be developed in a way which avoids “ad hoc judicial moralism or ‘palm tree’ justice” and “should not be used as a pretext for scrutinising the motives of the contracting parties”.116 It envisages that most cases will fall within traditional relationships and existing categories, but recognises that the categories of good faith are not closed and that the principle of good faith will be developed “where the existing law is found to be wanting and where the development may occur incrementally in a way consistent with the structure of the common law of contract”.117 The cautionary tone of these statements is balanced by a number of factors that could be exploited to create an expansionary doctrine of good faith. The reference to incremental development bears a resemblance to Lord Macmillan’s famous words that “the categories of negligence are never closed”,118 which did nothing to discourage the expansion of negligence. The formulation of an abstract principle of good faith expressly leaves the task of putting flesh on the bare bones of the new doctrine to lower courts.119 In this respect, the decision follows the same techniques that have shaped the development of other areas of Canadian private law. However, the express invitation to lower courts to develop the good faith principle neglects to give full weight to the vital function of the law of contracts as a planning tool rather than a source of litigation. There are several indications that the open-ended nature of the good faith principle and the expectation that it will be developed by lower courts may well create more litigation than most contract planners would desire. McLachlin CJ was alert to the danger of the universalist approach when she commented that “having set out the general principle, it is difficult to find a rational way to limit it”.120 Professor Anthony Duggan explored the consequences of the top-down approach of Canadian courts in the fiduciary relationship cases through a contrast with the more traditional bottom-up analysis of the Australian High Court in the case of Breen v Williams.121 Breen, in the common law tradition, takes a functional analysis of the existing case law and avoids the abstract enquiry into the key characteristics of a fiduciary relationship that has preoccupied the Canadian courts. He points out that “these differences in judicial technique matter”122 and concludes that the conceptual nature of the Canadian discussion creates a much wider scope for 115 Bhasin (n 1) [65]. 116 Bhasin (n 1) [70]. 117 Bhasin (n 1) [66]. 118 Donoghue v Stevenson [1932] AC 562 (HL) 619. 119 Bhasin (n 1) [90]–[93]. 120 McLachlin (n 18) 23. 121 (1996) 186 CLR 71. The case is particularly interesting because it poses similar issues to the Canadian case of McInerney v MacDonald [1992] 2 SCR 138. 122 Duggan (n 17) 461.



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the application of the fiduciary principle and may also create different practical results.123 The different technique may partly explain why “the Australian approach to fiduciary obligations is less intrusive on the law of negligence and contract than that which has developed in Canada”.124 The Canadian experience with the impact of the adoption of a freestanding duty of good faith as a component of contractual damages in Wallace125 certainly showed an expansionary effect. One trial judge noted in 2004 that despite the fact that the judgment cautioned against the routine use of the Wallace principle “several hundred Canadian trial decisions have considered the question of whether ‘Wallace damages’ should be awarded” and “very few wrongful dismissal statements of claim fail to include a ‘Wallace claim’”.126 The judgment noted that some plaintiffs and their counsel did not appear to appreciate that the “Wallace bump up” does not occur automatically in every dismissal.127 There is evidence that Bhasin has had an immediate impact on contract litigation, if not on the results of contract cases. A survey showed that in the 11 months following the original decision, Bhasin had been considered in 85 reported decisions across Canada.128 An assessment of the 41 cases that were decided at the trial level in Ontario and the eight appellate decisions from across Canada suggests that Bhasin has not yet made a significant change in the way that courts decide cases. In the 49 cases considered, the courts found a breach of the duty of good faith in only five instances. Three of those cases involved categories of recovery that were established before Bhasin and in the remaining two decisions, the good faith principle played only a supplementary role. This suggests that the common law doctrines continue to do their job and that Bhasin has not had a revolutionary effect. However, the impact of Bhasin cannot be measured by the number of citations alone, as they reflect only the tip of the iceberg. There are undoubtedly many more cases in which the duty of good faith performance has been pleaded, which suggest that Bhasin so far is more of an annoyance in litigation than a game changer. It is difficult to assess its impact in practice, but two minor cases illustrate how Bhasin can have an impact on the resolution of disputes. Data & Scientific Inc v Oracle Corp involved a motion to strike pleadings in a case in which Oracle had terminated a long-term relationship without notice. The plaintiff had been a business partner of Oracle since 1994 under a series of annual contracts that were renewable at Oracle’s sole discretion. The plaintiff 123 See especially the comparative analysis in Duggan (n 17) 457–59 of Hodgkinson v Simms [1994] 3 SCR 377. 124 S Hepburn, Principles of Equity and Trusts (4th ed, The Federation Press 2009) 138. A more down to earth assessment of the consequences of the Canadian approach was provided by Sir Anthony Mason CJ who is said to have commented that “in Canada there are three types of persons: those who have been held to be fiduciaries; those who are about to become fiduciaries; and judges”, quoted in PA Keane, “The 2009 W A Lee Lecture in Equity: The Conscience of Equity” (2010) 10 QUT LJ 106, 107. 125 Wallace (n 78). 126 Yanez (n 84) [12]. 127 Yanez (n 84) [16]. 128 B Berg and M Maodus, “Bhasin Anniversary: You Gotta Have Faith?” (Blake, Cassels & Graydon LLP 2015) www.blakes.com/English/Resources/Bulletins/Pages/Details.aspx?BulletinID=2206.

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was invited to apply for renewal in 2014, but Oracle refused the application. Although there was no indication of any dishonest conduct on the part of Oracle, the court found that it was not obvious that the plaintiff ’s claim that discretionary contractual powers must be exercised reasonably had no chance of success. Ominously, the court relied on the statement in Bhasin that good faith can be invoked in “widely varying contexts” and that this calls for “a highly context-specific understanding of ” the requirements of honesty and reasonableness in performance.129  A recent decision gives an interesting glimpse of the possible impact of Bhasin in arbitration proceedings. In a longterm contract relating to the transportation of waste in the greater Vancouver region, the regional authority was required to provide an annual estimate of the waste to be allocated to a contractor in order to allow the contractor to plan its operations. In 2011, the regional authority materially reduced its allocation of waste to the contractor, which significantly reduced the compensation that the contractor would receive. Despite finding that the regional authority was honest and reasonable in setting the 2011 allocation, the arbitrator decided that it had breached its duty of good faith by disregarding the contractor’s legitimate contractual expectations. Although the British Columbia court gave leave to appeal the arbitration award,130 both this case and the Data & Scientific Inc decision are examples of contracts in which it would have been very difficult to create arguments in favour of liability prior to the Bhasin decision. They give no indication of any change in the direction of Canadian courts, but they emphasise the inevitable temptation to use good faith as an argument of last resort. They strongly suggest that Canadian courts must pay great heed to the careful approach to the construction of contracts urged by the court in Bhasin. While Canada has chosen a new path, most Commonwealth courts apply the existing range of contract doctrines and accord no separate role to the principle of good faith. This approach has the advantage of respecting the traditional notion of freedom of contract and employing techniques that are well-known to common law judges and lawyers. However, the weakness of the common law is its tendency to deal with good faith only indirectly through devices that do not explicitly confront the issues at stake. The adoption of an express principle of good faith forces courts to examine closely the types of conduct that they wish to discourage rather than, for example, dealing with a difficult case through the implication of a term or the manipulative interpretation of the contract which may well not truly reflect the parties’ intentions. In practice, the adoption of a duty of good faith is unlikely to change the results of many decided cases. The theoretical change wrought by the Bhasin decision may be confined to three classes of practical effects. First, it may be more difficult 129 Data & Scientific Inc v Oracle Corp [2015] ONSC 4178; 127 OR (3d) 149, discussed in DW McGrath, M O’Brien, and J Sealy-Harrington “Termination of Contracts-Good Faith Implications” (Blake, Cassels & Graydon LLP 2015) www.blakes.com/English/Resources/ Bulletins/Pages/Details.aspx?BulletinID=2243. 130 Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd 2016 BCSC 68; 2016 CarswellBC 94, discussed in J McArthur and T Posyniak, “Appeal Puts Faith to the Test: Court Grants Appeal From Arbitral Award on Scope of Contractual Duty of Honest Performance” (Blake, Cassels & Graydon LLP 2016) www.blakes.com/English/Resources/Bulletins/Pages/ Details.aspx?BulletinID=2268.



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for the parties to draft a contract which excludes or limits a duty that is now recognised as one that is judicially imposed. Second, courts may begin to treat long-term relational contracts differently from single transaction contracts. Third, the decision presents litigants with a guarded and so far irresistible invitation to expand good faith arguments beyond the traditional relationships and categories recognised in common law. However, it is likely that in practice the changes wrought by Bhasin will be ones of form rather than substance.

12

Encounters with History, Theory and Doctrine: Some Reflections on Discharge by Breach of Contract1 Andrew Phang and Yihan Goh

Introduction The topic of discharge by breach of contract constitutes one of the thorniest areas of the common law of contract. The present chapter is a wide-ranging one. It first explores the nature of a breach of contract before considering the relevant historical origins which might explain the different approaches in ascertaining whether or not the innocent party can elect to treat itself as discharged from a contract as a result of the other party’s breach, focussing on the “conditionwarranty approach” and “Hongkong Fir approach”. The chapter then analyses the aforementioned approaches on doctrinal, theoretical as well as practical levels. Finally, it explores more specific aspects of the topic, including the legal effect of a breach of contract committed by both parties; whether termination of a contract of employment is “elective” or “automatic” (focussing on the UK Supreme Court decision of Geys v Société Générale, London Branch);2 as well as the breach of the implied term of mutual trust and confidence. 1

2

The undisputed expert in this particular area of the common law of contract in the Commonwealth is undoubtedly Professor JW Carter. See also the “Preface” to John E Stannard and David Capper, Termination for Breach of Contract (OUP 2014) v. His seminal work in the area, Breach of Contract (based on his doctoral thesis in the University of Cambridge), was first published by the Law Book Co Ltd, Sydney in 1984. The second edition was published under the imprints of both Law Book Co Ltd as well as Sweet & Maxwell, London in 1991. The third (and latest edition) has (appropriately in our view) been renamed Carter’s Breach of Contract (LexisNexis Butterworths 2011). A United Kingdom edition of this latest edition was also published by Hart Publishing in 2012. And see generally, Andrew Phang, “The Legal Scholarship of Professor JW Carter: An Appreciation” (2014) 28 CLQ 23. The authors would like to dedicate this chapter to Professor Carter. They would also like to express their gratitude to Professor Carter and Professor Michael G Bridge for their very helpful comments and suggestions. However, all errors and infelicities in language are theirs alone. Also, all views expressed in this chapter are the personal views of the authors only and do not reflect the views of either the Supreme Court of Singapore or the Singapore Management University. [2012] UKSC 63; [2013] 1 AC 523.

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It will be immediately seen that this chapter is a rather ambitious one. Arguably, any one of the sub-topics just mentioned could each constitute an entire chapter (or perhaps even a thesis) in itself. However, this chapter has been structured the way it has primarily because (in addition to the specific issues at hand) it illustrates – within the sphere of a particular area of the common law of contract – a broader view of the qualities that (ideally) a graduating lawyer ought to possess. So, if we may be permitted, we would like commence this chapter on a more personal note and refer, in particular, to a speech which one of the present authors delivered over seven years ago during a Mass Call of lawyers.3 In that speech, that author set out what, in his view, are the attributes of a good lawyer. These are four in number and are to be viewed as parts of an integrated process. The first attribute relates to the legal skills that assist the lawyer and judge in navigating a sea of facts and controversy and include the skills of legal analysis, legal synthesis and legal argumentation. Put simply, we often refer to this as “legal doctrine” or (in an even more short-hand form) “doctrine”. Indeed, this particular attribute focusses, in the main, on the present as well. The second attribute is (unfortunately) something that is not concentrated on explicitly in law school – a sense of history and context. By its very nature, this attribute is backward-looking.4 Often, even within the courts, knowing the precise historical origins of a particular rule will help in the understanding and application of that rule to the specific fact situation concerned. The third attribute is – paradoxically perhaps – both in contrast with (as well as complementary to) the second attribute, the ability to think as well as analyse conceptually, and this (unlike the first two attributes) transcends both space and time. Indeed, one of the present authors has discovered that the methodology inherent in legal theory has been of invaluable assistance in arriving at decisions in court and in making connections which arid legal reasoning would never have permitted; and this has enabled the court to achieve justice in the case at hand and, on occasion, even to develop the law. The fourth attribute is perhaps the most important (insofar as the development of individual lawyers is concerned) although, given the nature of the present chapter, it is not directly relevant. And this comprises the integration of character and ideals. Turning now to the relevance of the four attributes just mentioned to the present chapter, the relevance of the first (relating to doctrine) is obvious and is relevant to all aspects of the chapter itself (in particular, the last part where specific aspects of discharge by breach of contract are considered). The second is particularly relevant to the second part of the chapter in which we consider how the condition-warranty approach and Hongkong Fir approach developed in an historical manner, especially since as ostensibly co-existing doctrines, the application of each to the facts of a particular case might (on occasion at least) yield diametrically opposed decisions. Finally, the third attribute is especially helpful when we consider (once again) that the two approaches just 3

4

See Andrew Phang, “Mass Call 2008 – Speech by Justice Andrew Phang Boon Leong” (Supreme Court of Singapore, 5 January 2008) www.supremecourt.gov.sg/data/doc/ ManageHighlights/866/Mass%20Call%202008%20-%20Speech%20by%20Justice%20 Andrew%20Phang.pdf. Indeed, it may be said that the entire methodology of the common law itself is historical and, hence, backward-looking in nature.



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mentioned analysed from a conceptual or theoretical perspective reveal that a perfect or complete reconciliation or integration of both approaches is simply not possible – not least because of the historical manner in which the two approaches developed (which is in fact the last-mentioned point). However, in arriving at as close an integration as possible, one must have regard to the doctrinal elements of each approach. At this juncture, one can see how the various attributes are closely integrated with each other and that no one attribute can be applied at the expense of the other – lest an incomplete analysis result. Put simply, all the aforementioned attributes have to be brought to bear if the present chapter is to bear any fruit. And, on a more general level, that is also why all law students ought, in our view, to receive a legal education that sensitises them to all these attributes, which are not only at play in the context of the law relating to discharge by breach of contract, but also in virtually every other area of the law. Hence, these attributes – coupled with the fourth (centring on character and ideals) – would furnish the law graduate with the best possible skills as well as attitude to succeed in legal practice. Let us now turn in the first instance to the most basic of inquiries – what is the nature of a breach of contract?

The Nature of a Breach of Contract It is trite to state that a contract exists in order that it be performed by the parties. In that ideal (and not by any means unusual) situation, the contract is discharged, in this most natural way possible, by performance. Alternatively, the parties might decide that they would both like to discharge the contract mutually by agreement. Apart from the important doctrine of frustration, the contract can also be discharged by breach, where one of the contracting parties either evinces an intention that it will no longer be bound by the contract or does not perform in accordance with the terms of the contract itself. A breach of contract entitles the innocent party to recover damages from the party in breach as of right. The recoverability and quantum of damages will be subject to the common law rules on damages (in relation to remoteness, mitigation and quantification). That having been said, not every breach will – in addition – entitle the innocent party to elect to treat the contract as discharged. There are important practical consequences to this last-mentioned point inasmuch as if the innocent party elects to treat the contract as discharged when it is not in fact legally justified in doing so, it will itself be in breach of contract. But when, then, is an innocent party legally justified or entitled to elect to treat the contract as discharged (that is, to terminate the contract) as a result of the other party’s breach of contract?

When is the Innocent Party Justified in Electing to Treat the Contract as Discharged in the Event of a Breach by the Other Party? As just mentioned, not every breach will entitle the innocent party to elect to treat itself as discharged from the contract, although the innocent party will

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always be entitled to damages, subject to the relevant common law rules. This is as important from a practical perspective as it is from a theoretical one. Put simply, if the innocent party is not entitled to elect to treat itself as discharged from the contract, then that party will itself be in breach of contract. Hence, it is of the first importance for both parties to know when the innocent party is legally justified in electing to treat the contract as discharged as a result of the other party’s breach of contract. A review of the modern law on this particular issue demonstrates that this is indeed a very difficult area of the common law of contract. Without delving into the theoretical conundrums as well as the historical and doctrinal difficulties, it might be apposite to first state what the tests appear to be – at least in the context of Commonwealth contract law. It is important to also note, however, that these tests are by no means applied in a uniform manner across the various Commonwealth jurisdictions. It suffices for present purposes to note that there are two main tests for ascertaining when the innocent party is justified from a legal standpoint in electing to treat the contract as discharged in the event of a breach by the other party.

The two approaches described The first test has traditionally been termed the condition-warranty approach. It is embodied in the leading English Court of Appeal decision of Bentsen v Taylor, Sons & Co (No 2), when Bowen LJ (as he then was) said that this is, in essence, a problem of contractual construction. The question is whether, in light of the surrounding circumstances, the parties intended a promise to be “a warranty sounding only in damages”, or “as a condition precedent by the failure to perform which the other party is relieved of his liability”.5 Indeed, as the leading work on breach puts it, whether a contractual term is a condition or warranty depends on the construction of the contract.6 The second test has traditionally been termed the Hongkong Fir approach – drawing its (famous) terminology from the observations by Diplock LJ in the leading English Court of Appeal decision of Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd.7 This particular approach is premised on whether the breach has, in Diplock LJ’s words, “deprive[d] the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?”8 The focus is on the actual consequences of the breach of the term concerned, and not on the nature of the term breached. He gave as an example an undertaking by a shipowner to sail with all possible dispatch to a named port: there, the effect of breach, rather than a prior classification of the undertaking as a “condition” or “warranty”, would certainly affect whether the charterer is relieved of further performance. This analysis in Hongkong Fir has received the highest praise. In the leading House of Lords decision of Bunge Corporation, New York v Tradax Export SA, Panama,9 5 6 7 8 9

[1893] 2 QB 274, 281. JW Carter, Carter’s Breach of Contract (LexisNexis Butterworths 2011) 158. [1962] 2 QB 26. Hongkong Fir (n 7) 66 (emphasis added). [1981] 1 WLR 711.



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Lord Wilberforce referred to it as a “seminal judgment”,10 whilst Lord Roskill expressed the view that “the judgment of Diplock LJ in the Hongkong Fir case is … a landmark in the development of one part of our law of contract in the latter part of this century”.11 And, in the academic sphere, Professor Treitel has, for example, lauded the “enormous” influence which the case has had and opined that it “has a fair claim to being the most important judicial contribution to English contract law in the past century”.12 The result of such an approach on the condition-warranty approach is, as Diplock LJ explained, to provide an additional characterisation where contractual undertakings of a more complex character cannot be categorised simply as “conditions” or “warranties”.13 “Conditions” and “warranties” now have a much more limited scope under the Hongkong Fir approach as compared to the condition-warranty approach. The former now involves the breach of a term that almost always14 results in depriving the innocent party of substantially the whole benefit of the contract that it was intended that that party should have, whilst the latter now involves the breach of a term which would never result in depriving the innocent party of substantially the whole benefit of the contract that it was intended that that party should have. A term, the breach of which might or might not have the result of depriving the innocent party of substantially the whole benefit of the contract that it was intended that that party should have is now popularly known as an “intermediate term” or an “innominate term”. The reality is that, if the Hongkong Fir approach were the only approach applicable, “conditions” and “warranties” would, in accordance with the limited nature they possessed under that particular approach, be relegated to the periphery. Indeed, it might even be said that the Hongkong Fir approach is, by its very nature and effect, so powerful that it would have this last-mentioned effect in any event. The Hongkong Fir approach was at first doubted as being unnecessary, and also that it promoted uncertainty and inefficiency.15 It was said to be unnecessary because it amounts to “no more than the proposition that in certain circumstances the breach of a non-essential term may indicate a refusal or inability to perform the contract and thus amount to a repudiation of the 10 Bunge Corporation (n 9) 714. 11 Bunge Corporation (n 9) 725. See also Lord Diplock’s extrajudicial lecture (the Cecil and Ida Green lecture delivered at the Faculty of Law, University of British Columbia, 23 April 1981), published as Lord Diplock, “The Law of Contract in the Eighties” (1981) 15 UBCLR 371, 374–77. 12 Guenter Treitel, Some Landmarks of Twentieth Century Contract Law (OUP 2002) 113. 13 Carter (n 6) 69−70. 14 There was some initial concern that Diplock LJ’s dicta in Hongkong Fir to the effect that “the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise” (Hongkong Fir (n 7) 70), might have limited the condition-warranty approach to instances in which the parties expressly stipulated the term as such. However, in Bunge Corporation, Lord Roskill made it clear that there was no need for such a requirement (Bunge Corporation (n 9) 726) and Lord Diplock himself in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 849 said that parties may by “express words or by implication of law” stipulate that a breach of a particular term entitle a party to terminate regardless of the nature of the breach. 15 Carter (n 6) 237–38.

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contract”.16 However, as has been pointed out, the Hongkong Fir approach actually operates in situations where there is clearly no repudiation.17 Criticisms of uncertainty and inefficiency centre on the inability of ascertaining the remedial consequences at the time of breach. The Hongkong Fir approach is thus said to introduce an unwarranted degree of uncertainty into the doctrine of breach, as well as inefficiency, since the inefficient promisor may be rewarded by arguing for a lesser consequence as a result of this uncertainty. These arguments are ultimately not persuasive since some extent of uncertainty is to be expected in the law. Instead, the correct question to ask may be whether the uncertainty is justified by the flexibility the doctrine affords the law. In that regard, it may be useful to consider the theoretical and historical underpinnings of both the Hongkong Fir approach and the condition-warranty approach, and evaluate whether the former performs a role in addition to the latter.

The different theoretical underpinnings of the two approaches It is first appropriate to note that both these tests are conceptually distinct. Whilst the condition-warranty approach concentrates on the nature of the term breached, the Hongkong Fir approach concentrates, instead, on the actual consequences18 of the breach. However, this is not to state that both approaches are necessarily incompatible with each other from a factual perspective. As the Singapore Court of Appeal observed in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd: “Indeed, there could be fact situations where the application of either approach would make no difference. Take, for example, a situation where there is a breach of a condition which simultaneously results in the deprivation vis-àvis the innocent party of substantially the whole benefit that it was intended that the innocent party should obtain from the contract. Take another example at the opposite end of the factual continuum – where there is a breach of a warranty which simultaneously results in very trivial consequences only.”19

However, the court in that particular case then proceeded to observe that there could also be situations where the application of each of the approaches could, depending on the precise facts, lead to different (indeed, polar opposite) results. This could involve, for example, a situation where there is a breach of condition (which would entitle the innocent party to terminate the contract under the condition-warranty approach), but which simultaneously results in very trivial consequences only (which would not entitle the innocent party to terminate the contract under the Hongkong Fir approach).20 16 RE McGarvie, “The Common Law Discharge of Contracts upon Breach” (1963-1964) 4 MULR 254, 260. 17 Carter (n 6) 237. 18 The inquiry would, in the nature of things, be (potentially at least) somewhat different in the case of an anticipatory breach. Still, in most cases, it would probably be the case that the actual consequences would be known by the time the case itself goes to trial. See also the Singapore Court of Appeal decision of The STX Mumbai [2015] SGCA 35; [2015] 5 SLR 1 [69]. 19 [2007] SGCA 39; [2007] 4 SLR 413 [102] (emphasis in the original text). 20 RDC Concrete (n 19) [103] (emphasis in the original text).



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It is important to reiterate that, notwithstanding the possibility of a coincidence of result due to the precise fact situation concerned, this is not always the case. And this is due, in turn, to the fact that, on a normative level, the condition-warranty approach and the Hongkong Fir approach are quite different. The next issue that arises, therefore, centres on the reason(s) as to how two conceptually different approaches arose in the first place. At this juncture, we must move from the theoretical or conceptual sphere into that of the historical. After all, it is only logical to assume that each approach necessarily originated from a particular point in time. If so, then the order in which they originated from an historical perspective might shed some light as to why we have – today – ended up with two conceptually different approaches. That historical understanding might (in turn) assist us in postulating a possible doctrinal resolution to the problems at hand.

The historical reasons resulting in the two conceptually different approaches There has, admittedly, been some conceptual conflation (and even confusion) inasmuch as there is, strictly speaking, a distinction between a “condition precedent” (which is a prerequisite which must be satisfied before the contractual obligations of the other party kick in or the contract even comes into existence in the first place) on the one hand, and a “promissory condition” (which, as a failure of consideration, could take either the form of a breach of condition or a breach of warranty in the “modern” sense (both of which are embodied in the condition-warranty approach)) on the other.21 However, to add to the complexity of the latter (viz, a promissory condition), the failure of consideration could, it has been argued, take the alternative form of what we have termed today as a fundamental breach as embodied in the Hongkong Fir approach.22 It is significant to note that the Hongkong Fir approach was, in substance at least, adopted as far back as 1777 in the much-cited decision of Boone v Eyre.23 This indicates that the Hongkong Fir approach was indeed the original approach adopted by the courts towards the breach in the context of a promissory condition. If we may hazard some speculation here, it was not illogical for the courts to look at the nature and consequences of a breach of contract if the key motif was in fact an analysis of whether or not there had been a failure of consideration. However, such an approach does not of course conduce to certainty (which is an at least perceived virtue as well as hallmark in commercial transactions) – and which is a disadvantage of the Hongkong Fir approach. However, that having been said, such an approach does conduce towards substantive fairness. In this particular regard, Professor Morton J Horwitz has persuasively argued that the law of contract in the 18th century embodied a 21 And see Stannard and Capper (n 1) 32 and JW Carter, “Discharge as the Basis for Termination for Breach of Contract” (2012) 128 LQR 283, 287. 22 Carter (n 21) 287. 23 (1777) 1 H Bl 273; 96 ER 767. See also Stannard and Capper (n 1) 34–35 as well as James Oldham, “Detecting Non-Fiction: Sleuthing among Manuscript Case Reports for What was Really Said” in Chantal Stebbings (ed), Law Reporting in Britain (The Hambledon Press 1995) 145–50.

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vision of substantive fairness, in contrast to the classical (will) theory of contract law, which developed in the late 18th century and which was crystallised, so to speak, in the 19th century (which theory was more formalistic in nature).24 Indeed, legal positivism as we know it today only took root during more recent times and was clearly absent at the time when decisions such as Boone v Eyre25 were handed down. In light of these broad points, it might be speculated that what we know today as the Hongkong Fir approach predated what we know today as the condition-warranty approach. It is, however, clear that when Sir Mackenzie Chalmers drafted the English Sale of Goods Act 1893, he had in fact adopted what we now know as the condition-warranty approach. The question that arises is whether this was a correct view of the law, given our suggestion that the law had originally endorsed what we now know as the Hongkong Fir approach. One view is that the law had evolved since decisions such as Boone v Eyre,26 that by the time the Sale of Goods Act was drafted by Chalmers, the then existing common law was exemplified by the condition-warranty approach – an approach which, in the words of a learned author, was contained in “the late 19th-century and early 20th-century emphasis on a rigid binary classification of contract terms into conditions (breach of which entitled the innocent party to treat the contract as discharged) and warranties (breach of which sounded in damages alone)”.27 Such a view is supported by decisions such as Bentsen v Taylor, Sons  &  Co,28 although we also see repeated references to the concept of a “condition precedent” in that case.29 However, it is clear that, notwithstanding the (at least apparent) conflation between a “condition precedent” and a “promissory condition”, the court in Bentsen was clearly referring to the latter (and, consequently, its endorsement of the condition-warranty approach).30 It is also significant, in our view, that Bentsen was decided in the same year that the Sale of Goods Act was enacted. In an excellent article, Professor Bridge attempts to demonstrate – in meticulous detail – how the principle of the dependence of contractual promises (which deals with the order of performance of the parties’ obligations pursuant to an executory contract) (“Principle One”) was somehow integrated with the principle of failure of consideration (which, as we have seen, is concerned with 24 Morton J Horwitz, “The Historical Foundations of Modern Contract Law” (1973–1974) 87 Harv LR 917. 25 Boone (n 23). 26 Boone (n 23). 27 Donal Nolan, “Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, The Hongkong Fir (1961)” in Charles Mitchell and Paul Mitchell (eds), Landmark Cases in the Law of Contract (Hart Publishing 2008) 270. However, there are also views that Chalmers in fact misunderstood the law and morphed the law into what we know today as the condition-warranty approach: see JW Carter and C Hodgekiss, “Conditions and Warranties: Forebears and Descendants” (1977) 79 8 SLR 31. 28 Bentsen (n 5). 29 Bentsen (n 5) 278–79 (Lord Esher MR), 280–84 (Bowen LJ), 284–85 (Kay LJ). 30 See, in particular, the references to construction of the contract (Bentsen (n 5) 278 (Lord Esher MR), 280–81 (Bowen LJ), 284 (Kay LJ)) and (perhaps more importantly) the reference to a breach of warranty (Bentsen (n 5) 280–81, 284 (Bowen LJ), 284–85 (Kay LJ)). See also Stannard and Capper (n 1) 36.



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the effect of a breach of contract which has, ex hypothesi, been executed in part) (“Principle Two”), in order to constitute what we now know as the conditionwarranty approach. This argument is not only persuasive as well as interesting, but also (and perhaps more importantly) demonstrates that the Hongkong Fir approach had been neither marginalised nor rejected, but had simply been transformed or morphed into an entirely different concept altogether.31 In particular, it no longer focussed upon the actual nature and consequences of the breach. However, this did not mean that the nature and consequences of the breach were no longer relevant (let alone eradicated from the legal equation altogether). Put simply, the Hongkong Fir approach was embodied in Principle Two. However, when it was combined with Principle One, it then became transformed into the condition-warranty approach. To reiterate a point just made, the nature and consequences of the breach were still relevant, albeit in a different way. As the focus was now on the parties’ intentions as to the relative importance of terms, the inquiry was, necessarily, upon whether or not they were of the view that a particular term was so important that any breach (regardless of the actual nature and consequences of the breach) would entitle the innocent party to elect to treat the contract as discharged simply because it was assumed that a breach of that term would result in the innocent party being deprived of substantially the entire benefit of the contract that it was intended to receive. As Professor Bridge perceptively (and succinctly) put it, “[t]he basic choice was between an a priori and an ex post facto inquiry”32 – the former referring to the condition-warranty approach and the latter to the Hongkong Fir approach. Looked at in this light, the Hongkong Fir approach – in its original incarnation – then went into a kind of legal hibernation until it was resurrected by Lord Diplock in the Hongkong Fir case – at which point we were presented with two approaches, viz, the condition-warranty approach and the (recently resurrected) Hongkong Fir approach. Assuming, then, that we accept that the provisions in the Sale of Goods Act reflected the then existing common law, there is a sense in which those provisions had (by endorsing the condition-warranty approach only) “stereotyped the common law”;33 indeed, Lord Diplock went so far as to note that such “stereotyping” had resulted in a “deleterious influence” on the development of the law of contract in this particular sphere.34 This lastmentioned observation is not perhaps surprising in view of the learned Law Lord’s own pronouncements in the Hongkong Fir case itself35 – which he in fact characterised in the same lecture as a “breakthrough”.36 That breakthrough was that, with the Hongkong Fir approach, courts were “no longer limited to the primary obligations of each party to perform the contract according to its terms and the right of the other party to such performance”.37 Instead, “[i]t 31 Michael G Bridge, “Discharge for Breach of the Contract of Sale of Goods” (1983) 28 McGill LJ 867, 872–85. 32 Bridge (n 31) 880. 33 Lord Diplock (n 11) 374. 34 Lord Diplock (n 11) 374. 35 Hongkong Fir (n 7). 36 Lord Diplock (n 11) 376. 37 Lord Diplock (n 11) 377.

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extended to the secondary rights and obligations of each party that arise when primary obligations are not performed”.38 To summarise the historical narrative thus far, it would appear that what was in substance what we now know as the Hongkong Fir approach was the original approach adopted by the courts in an era when the focus was on the effects or the nature and consequences of the breach (which was due, in part at least, to the focus of the courts on the substantive fairness of transactions, as opposed to the more modern (and objective) will theory of contracts (which focusses on the intentions of the contracting parties)). Indeed, in the 1876 decision of Bettini v Gye, Blackburn J seems to have suggested that the default rule, in the absence of the parties’ express stipulation as to the status of a term, was for the court: “[T]o look to the whole contract, … see whether the particular stipulation goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff a thing different in substance from what the defendant has stipulated for; or whether it merely partially affects it and may be compensated for in damages.”39

By the time the Sale of Goods Act was enacted in 1893, the relevant case law had in fact developed in a manner which centred on an examination of the importance the contracting parties placed on the terms concerned. Put simply, by 1893, the case law appeared to embody the (quite different) condition-warranty approach and it was this particular approach that was incorporated into the Sale of Goods Act – thus marginalising, as it were, the Hongkong Fir approach until it was resurrected once again by Lord Diplock in the Hongkong Fir case40 itself. Indeed, as we have already noted above, if Professor Bridge’s thesis is correct, the Hongkong Fir approach was, in fact, not so much marginalised as subsumed within a legal structure which deprived it of its relationship to the actual circumstances of the case and located it, instead, within a legal structure that focussed on the contracting parties’ agreement as to which terms would be assumed by them to result in a breach which deprived the innocent party of substantially the entire benefit of the contract that it was intended that that party should have. Viewed in this light, the condition-warranty approach can be said to be predicated upon finding out what the parties intended to accomplish through the contract.41 The way this is done is through a construction of the contract, and the parties’ intentions can be deciphered either expressly or impliedly. Where however there is a gap in the parties’ intentions, the courts apply 38 39 40 41

Lord Diplock (n 11) 377. (1876) 1 QBD 183, 188. Hongkong Fir (n 7). Other examples are too numerous to cite but would include also the Court of Common Pleas decision of Glaholm v Hays (1841) 2 M & G 257; 133 ER 743. In that case, it was stated (at 266) as follows: “Whether a particular clause in a charter-party shall be held to be a condition, upon the non-performance of which by the other party, the other is at liberty to abandon the contract, and consider it at an end; or whether it amounts to an agreement only, the breach whereof is to be recompensated by an action for damages, must depend upon the intention of the parties to be collected, in each particular case, from the terms of the agreement itself, and from the subjectmatter to which it relates …” (Tindal CJ).



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the Hongkong Fir approach as a default rule. The Hongkong Fir approach is premised on the parties’ intentions, except that the emphasis is on the imputed (and reasonable) intentions of the parties, as opposed to their agreed intentions. The Hongkong Fir approach can be grounded on the court’s perception of what the parties’ intentions ought to be, taking into account considerations of reasonableness in the circumstances and the context of the contract. Within this rationale there can be flexibility, but such flexibility is encapsulated by the larger premise that rests upon the imputed intentions of the parties.

The doctrinal difficulties and their possible resolution The historical development perhaps explains why we now have two approaches running parallel with each other. This gives rise, in turn, to doctrinal difficulties which must now be resolved – if nothing else, because of practical reasons. More specifically, given the fact that we are presently faced with two possible approaches which might potentially yield completely different or opposite results depending on the fact situation at hand, is there a doctrinal way of either prioritising and/or integrating both these approaches in order to furnish lawyers as well as the courts with a practical approach in dealing with actual cases which come before the courts themselves? We will utilise as our central illustration the legal position in Singapore. We hasten to add that this approach is not due to any bias on our part. To elaborate, the law across the various Commonwealth jurisdictions insofar as this particular issue is concerned is still in a state of flux inasmuch as whilst both the condition-warranty approach and the Hongkong Fir approach are cited by the various courts concerned, there has been no real effort to rationalise the precise relationship between these approaches. The Singapore courts are an exception in this particular regard. Indeed, as one of the present authors has observed, the law in Singapore in this particular sphere of contract law represents one of the rare uniquely Singaporean developments in the common law of contract.42 We do not, however, stake any claim for its persuasiveness. That is for the reader to judge. We only describe it in the present part of the chapter as a possible point of departure for further thought and analysis in a comparative context. The first Singapore decision43 which attempted a rationalisation of the law in this area is that of the Singapore Court of Appeal in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd.44 Somewhat unusually, perhaps, the court in RDC Concrete attempted to summarise as well as rationalise the various tests (including the condition-warranty approach as well as the Hongkong Fir approach) in tabular form, as follows:45 42 Andrew Phang, “Recent Developments in Singapore Contract Law – The Search for Principle” (2011) 28 JCL 3, 11. 43 In the following portion of this chapter, we draw heavily upon Andrew Phang, “Doctrine and Fairness in the Law of Contract” in Jessica Young and Rebecca Lee (eds), The Common Law Lecture Series 2008–2009 (Faculty of Law, The University of Hong Kong 2010) 41–61. 44 RDC Concrete (n 19). 45 RDC Concrete (n 19) [113].

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Table 12.1: Situations Entitling an Innocent Party to Terminate the Contract at Common law

SITUATION

CIRCUMSTANCES IN WHICH TERMINATION IS LEGALLY JUSTIFIED

RELATIONSHIP TO OTHER SITUATIONS

I Express Reference to the Right to Terminate and What will Entitle the Innocent Party to Terminate the Contract (1)

The contractual term breached clearly states that, on the occurrence of certain events, the innocent party is entitled to terminate the contract.

None – it operates independently of all other situations. In other words –  Situations (2), (3)(a) and (3)(b) (ie all the situations in II, below) are not relevant.

II No Express Reference to the Right to Terminate and What will Entitle the Innocent Party to Terminate the Contract (2)

(3)(a)

(3)(b)

Party in breach renounces the contract by clearly conveying to the innocent party that it will not perform its contractual obligations at all. Quaere whether the innocent party can terminate the contract if the party in breach deliberately chooses to perform its part of the contract in a manner that amounts to a substantial breach.

None – it operates independently of all other situations. In other words – 

Condition-Warranty Approach – Party in breach has breached a condition of the contract (as opposed to a warranty).

Should be applied before the Hongkong Fir Approach in Situation (3)(b).

Hongkong Fir Approach – Party in breach has committed a breach, the consequences of which will deprive the innocent party of substantially the whole benefit which it was intended that the innocent party should obtain from the contract.

Should be applied only after the Condition-Warranty Approach in Situation (3)(a) and if the term breached is not found to be a condition.

Situation (1) is not relevant. Situations (3)(a) and (3)(b) are not relevant.

Situation (1) is not relevant. Situation (2) is not relevant.

Situation (1) is not relevant. Situation (2) is not relevant.



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The Singapore Court of Appeal subsequently delivered a similar summary (albeit in non-diagrammatic (that is, textual form)) in Man Financial (S) Pte Ltd (formerly known as ED & F Man International (S) Pte Ltd) v Wong Bark Chuan David,46 as follows: “153 As stated in RDC Concrete, there are four situations which entitle the innocent party (here, the appellant) to elect to treat the contract as discharged as a result of the other party’s (here, the respondent’s) breach. 154 The first (‘Situation 1’) is where the contractual term in question clearly and unambiguously states that, should an event or certain events occur, the innocent party would be entitled to terminate the contract (see RDC Concrete at [91]). 155 The second (‘Situation 2’) is where the party in breach of contract (‘the guilty party’), by its words or conduct, simply renounces the contract inasmuch as it clearly conveys to the innocent party that it will not perform its contractual obligations at all (see RDC Concrete at [93]). 156 The third (‘Situation 3(a)’) is where the term breached (here, Clause C.1) is a condition of the contract. Under what has been termed the ‘condition-warranty approach’, the innocent party is entitled to terminate the contract if the term which is breached is a condition (as opposed to a warranty): see RDC Concrete at [97]. The focus here, unlike that in the next situation discussed below, is not so much on the (actual) consequences of the breach, but, rather, on the nature of the term breached. 157 The fourth (‘Situation 3(b)’) is where the breach of a term deprives the innocent party of substantially the whole benefit which it was intended to obtain from the contract (see RDC Concrete at [99]). (This approach is also commonly termed the ‘Hongkong Fir approach’ after the leading English Court of Appeal decision of Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26; see especially id at 70.) The focus here, unlike that in Situation 3(a), is not so much on the nature of the term breached, but, rather, on the nature and consequences of the breach. 158 Because of the different perspectives adopted in Situation 3(a) and Situation 3(b), respectively (as briefly noted above), which differences might, depending on the precise factual matrix, yield different results when applied to the fact situation, this court in RDC Concrete concluded that, as between both the aforementioned situations, the approach in Situation 3(a) should be applied first, as follows (id at [112]):  ‘If the term is a condition, then the innocent party would be entitled to terminate the contract. However, if the term is a warranty (instead of a condition), then the court should nevertheless proceed to apply the approach in Situation 3(b) (viz, the Hongkong Fir approach).’”47

46 [2007] SGCA 53; [2008] 1 SLR 663. 47 Emphasis in the original text.

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Returning to Table 12.1,48 it will be seen that there are no (general) difficulties with Heading I, which concerns a situation in which there is express reference to the right to terminate the contract and what will entitle the innocent party to terminate the contract. Indeed, the relative straightforwardness means that Heading I comprises (and is, in fact, coterminous with) Situation 1.49 Termination of the contract under Situation 1 might result in a different measure of damages as opposed to termination of the contract under Situation 3.50 The precise relationship between an express contractual power to terminate on the one hand and the general common law right to terminate for breach of contract on the other hand has also been the subject of discussion.51 It should also be observed – for reasons that will be clear in a moment52 – that the corollary of Heading 1 (read together with Situation 1) is where the term concerned states expressly the opposite (viz, that the breach of that term will never entitle the innocent party to terminate the contract). Difficulties arise, however, in relation to Heading II (where there is no express reference to the right to terminate the contract and what will entitle the innocent party to terminate the contract). Under this broad heading are three situations which are set out in the above table (as Situations 2, 3(a) and 3(b), respectively). Situation 2 is relatively straightforward as there is a complete renunciation by the party in breach of the contract itself.53 Where, however, there has not been such a complete rejection of the contract (which is, presumably, indeed the situation in most cases), complications arise. In this regard, there are two alternative tests. To recapitulate, the conditionwarranty approach (which is illustrated by Situation 3(a) in RDC Concrete) focusses on the nature of the term breached and was described as such in RDC Concrete.54 In contrast, Situation 3(b) describes the Hongkong Fir approach which focusses, instead, on the consequences of the breach and was described

48 RDC Concrete (n 19) [113]. 49 For a case which fell squarely within Situation 1 in RDC Concrete, see the Singapore Court of Appeal decision of Fu Yuan Foodstuff Manufacturer Pte Ltd v Methodist Welfare Services [2009] SGCA 23; [2009] 3 SLR(R) 925. It need only be added that although it has been pointed out in Table 12.1 that Situation 1 operates independently of all the other situations, it will be seen that the term operates, in substance, as a “condition”. Indeed, it might even be argued that such a term is clearer than one which simply states (without more) that it is a “condition”. 50 See the English Court of Appeal decision of Financings Ltd v Baldock [1963] 2 QB 104; though cf the English Court of Appeal decision of Lombard North Central Plc v Butterworth [1987] QB 527 (noted in G H Treitel, “Damages on Rescission for Breach of Contract” [1987] LMCLQ 143 and Hugh Beale, “Penalties in Termination Provisions” (1988) 104 LQR 355). Cf also Brian R Opeskin, “Damages for Breach of Contract Terminated Under Express Terms” (1990) 106 LQR 293. 51 See Edwin Peel, “The Termination Paradox” [2013] LMCLQ 519. 52 Text to n 60. 53 Though cf the query (set out in the diagram in RDC Concrete (n 19) [113]) as to whether or not the innocent party can terminate the contract if the party in breach deliberately chooses to perform its part of the contract in a manner that amounts to a substantial breach. 54 RDC Concrete (n 19) [97]−[98].



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in RDC Concrete along those terms.55 As was further explained, these two tests might yield the same result, although this would depend upon the precise fact situation concerned.56 Where, however, the tests yield a different result, the very important issue arises as to which test (that is Situation 3(a) or Situation 3(b)) is to prevail. The court held that the condition-warranty approach57 in Situation 3(a) should be applied before the Hongkong Fir approach58 in Situation 3(b); indeed, the Hongkong Fir approach should only be applied if the term breached is found not to be a condition under the condition-warranty approach.59 The Court of Appeal raised an interesting point concerning the interaction between the condition-warranty approach and the Hongkong Fir approach when it considered the two ways (or situations) in which a “warranty” can arise. The first is where the court itself finds that the term concerned is not a “condition” (this would be pursuant to Situation 3 in RDC Concrete). The second is where the parties themselves expressly designate the term concerned as a “warranty” (this would be the converse of Situation 1 in RDC Concrete).60 To give effect to the first situation (as has been suggested by one writer61) would be to deny any “legal space” to the Hongkong Fir approach

55 RDC Concrete (n 19) [99]. 56 RDC Concrete (n 19) [102]−[103]. 57 Where the focus is on the nature of the term (as opposed, as in the Hongkong Fir approach, to the actual consequences of the breach). And see the oft-cited observations by Bowen LJ (as he then was) in the English Court of Appeal decision of Bentsen (n 5) 281. 58 This approach was first enunciated by Diplock LJ in Hongkong Fir (n 7), and has been elaborated upon above: see text to n 8. 59 For the purposes of the present chapter, we need not delve into the various legal difficulties because our concern is really with the test pursuant to the Hongkong Fir approach. Indeed, there have been commentaries on RDC Concrete itself and one principal difficulty which at least two learned commentators have expressed with the decision was the fact that there appeared to be no provision for the situation where the contracting parties provided that the term (which had been breached) was to be a warranty. This is an interesting critique: see generally JW Carter, “Intermediate Terms Arrive in Australia and Singapore” (2008) 24 JCL 226 and Goh Yihan, “Towards a Consistent Approach in Breach and Termination of Contract at Common Law: RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd” (2008) 24 JCL 251. See also Carol G S Tan, “Nesting the Taxonomy in the Remedial: A Re-examination of Promissory Terms” (2011) 62 NILQ 321 (which also discusses RDC Concrete in some detail). Reference may also be made to Nolan (n 27) 293−94, where, however, the learned author focusses (in the final analysis) on what is (in substance) the Hongkong Fir approach. See also FMB Reynolds, “Warranty, Condition and Fundamental Term” (1963) 79 LQR 534 as well as, by the same author, “Discharge of Contract by Breach” (1981) 97 LQR 541. 60 Bearing in mind the approach of the House of Lords in L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (where it will be recalled that the court held that, despite the fact that the parties had expressly utilised the word “condition”, that word was merely used in a lay sense and not as a legal term of art), we are assuming here that the parties would (in such a situation) utilise clear and unambiguous language that goes beyond merely stating that the term concerned is a “warranty”. 61 See Goh (n 59). Not surprisingly, the learned author also argues that effect should be given to the intention of the parties in the second situation as well (ie where the parties have expressly designated the term concerned as a “warranty”).

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(which, in fact, embodies its own conception of fairness).62 Indeed, in RDC Concrete itself, such “legal space” was, in fact, created for the Hongkong Fir approach under Situation 3 itself. The issue remains, however, as to whether effect should be given to the intention of the parties in the second situation. Suffice it to state that a term in this particular situation would operate, in substance, as a “warranty”.63 It should, however, be pointed out that the Singapore Court of Appeal did subsequently consider the critique contained in the aforementioned commentary in Sports Connection Private Limited v Deuter Sports GmbH,64 where the approach laid down in the RDC Concrete case was reaffirmed, but: “[S]ubject to the extremely limited exception that, where the term itself states expressly (as well as clearly and unambiguously) that any breach of it, regardless of the seriousness of the consequences that follow from that breach, will never entitle the innocent party to terminate the contract, then the court will give effect to this particular type of term (viz, a warranty expressly intended by the parties).”65

It is significant, perhaps, that the position in other Commonwealth jurisdictions is, as already noted above,66 not much clearer and is at least arguably still in a state of flux. For example, in the Australian context, the High Court of Australia only endorsed the Hongkong Fir approach relatively recently in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd.67 Indeed, the majority of the judges (Gleeson CJ, Gummow J, Heydon J and Crennan J) did not (in a joint judgment) rest their decision on the ground that the terms concerned comprised “conditions”,68 but held, instead, that pursuant to the Hongkong Fir approach, the breaches had been serious enough to entitle the innocent party to terminate the contract.69 There was therefore no need for the court to consider the precise (and problematic) relationship between the condition-warranty approach on the one hand and the Hongkong Fir approach on the other. The position in Canada, it should be noted, does not appear to be much clearer – at least with regard to this last-mentioned 62 See eg Reynolds (n 59) (where it is argued that the focus should be on the nature of the breach, rather than the nature of the term broken); GH Treitel, Doctrine and Discretion in the Law of Contract: An Inaugural Lecture delivered before the University of Oxford on 7 March 1980 (Clarendon Press 1981) 6 (where it is pointed out that the law relating to discharge by breach was focussed, originally, on the seriousness of the breach (which is, in substance, the Hongkong Fir approach), although it later developed to focus on the nature of the term (which is the conditionwarranty approach); and Nolan (n 27) 270−76, 294. 63 Reference may also be made to the English High Court decision of M & J Polymers Ltd v Imerys Minerals Ltd [2008] EWHC 344 (Comm); [2008] 1 Lloyd’s Rep 541, 547. 64 [2009] SGCA 22; [2009] 3 SLR(R) 883. 65 Sports Connection (n 64) [57] (emphasis in the original text). 66 Text to n 42. 67 [2007] HCA 61; (2007) 233 CLR 115; noted in Kanaga Dharmananda and Anthony Papamatheos, “Termination and the Third Term: Discharge and Repudiation” (2008) 124 LQR 373 as well as in PG Turner, “The Hongkong Fir Docks in Australia” [2008] LMCLQ 432. 68 Koompahtoo (n 67) [53], [70]. 69 Cf Kirby J who, whilst arriving at the same result as the majority, was nevertheless of the view that the Hongkong Fir approach ought not to be part of Australian law (Koompahtoo (n 67) [103]−[116]) – a somewhat controversial view which, however, does not represent Singapore law and has received a mixed reception in the commentaries cited above (n 67).



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issue (centring on the relationship between the two main approaches).70 The position in Hong Kong is also not unambiguously clear, where, however, at least two decisions appear to have adopted (in substance) the approach in the RDC Concrete case71 – although it should also be mentioned that in one decision, the appellate court did not appear (unambiguously at least) to have adopted the same approach.72 70 The Canadian courts appear to have endorsed the Hongkong Fir approach. See eg the Alberta Supreme Court decision of Dow Chemical of Canada Limited v R V Industries Ltd (1979) 9 Alta LR (2d) 129; the Ontario Court of Appeal decision of Jorian Properties Ltd v Zellenrath (1984) 46 OR (2d) 775; the Ontario High Court of Justice decision of First City Capital Ltd v Petrosar Ltd (1987) 61 OR (2d) 193; the British Columbia Court of Appeal decision of Lehndorff Canadian Pension Properties Ltd v Davis Management Ltd (1989) 59 DLR (4th) 1; the Alberta Court of Appeal decision of First City Trust Co v Triple Five Corp Ltd (1989) 57 DLR (4th) 554; the British Columbia Court of Appeal decision of Ramrod Investments Ltd v Matsumoto Shipyards Ltd (1990) 47 BCLR (2d) 86; and the Alberta Provincial Court decision of Krawchuk v Ulrychova (1996) 40 Alta LR (3d) 196 (and cf the Supreme Court of Canada decision of Field v Zien [1963] SCR 632 as well as the Ontario Court of Appeal decision of 968703 Ontario Ltd v Vernon (2002) 58 OR (3d) 215). It should be noted that, on occasion at least, the Hongkong Fir approach appears to have been applied (in substance at least) in toto. See eg the Jorian Properties case, above, in which, on another possible interpretation, it could be argued that Blair JA appeared to conflate the Hongkong Fir approach and the condition-warranty approach inasmuch as the learned judge, whilst emphasising the observations of Diplock LJ in Hongkong Fir (n 7), also focussed on the issue as to whether or not the term concerned was (in the final analysis) a “condition”. Indeed, the majority of the court appeared to adopt a similar approach, although they differed from Blair JA, insofar as the final result was concerned, based on a difference in view with respect to the application of the law to the facts at hand. On another note, Stratton JA did, in the First City Trust case (above, especially at [49] (and cited in the Ramrod Investments case and in the Krawchuk case)), suggest (as Carter and Goh did (n 59)) that the Hongkong Fir approach would apply only if it could not be ascertained whether the parties intended the term concerned to be a “condition” or a “warranty”. See also generally DM McRae, “Repudiation of Contracts in Canadian Law” (1978) 56 Can Bar R 233. 71 See the Hong Kong Court of Final Appeal decision of Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1 (where the Hongkong Fir approach was rejected and the requirement of practical completion of the hotel concerned was held to be a condition precedent to completion of the purchase instead) and the Hong Kong Court of First Instance decision of Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2005] 3 HKC 408 (relying, in the main, on the leading House of Lords decision of Bunge Corporation (n 9)). 72 See the Hong Kong Court of Appeal decision of Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2006] HKCU 1932 (and for related proceedings – with regard to an application for leave to appeal to the Hong Kong Court of Final Appeal – see the Hong Kong Court of Appeal decision of Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] HKCU 1942). Reference may also be made to the Hong Kong Court of Final Instance decisions of Samsung Hong Kong Ltd v Keen Time Trading Ltd [1998] HKLRD 341 (where the Hongkong Fir approach was held not to apply in the light of s 15 of the Hong Kong Sale of Goods Ordinance (Cap 26)) and Secretary for Justice v Yu’s Tin Sing Enterprises Co Ltd [2008] HKCU 1391 (which involved, inter alia, a situation that fell within the rubric of Situation 1 under RDC Concrete (n 19) and where the court (correctly, in our view) did not (consistently with the approach adopted in RDC Concrete) need to consider either of the two main approaches); the Hong Kong District Court decision of Hang Seng Finance Ltd v Lin Kwok Man [1991] 2 HKC 613 (relating to another situation that apparently fell within the rubric of Situation 1 under RDC Concrete (n 19)); as well as the Hong Kong Court of Appeal decisions of Leung Yee v Ng Yiu Ming [2001] 1  HKC 342 (where both approaches were referred to) and Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309 (where the Hongkong Fir approach was applied). See also generally Stephen Hall, Law of Contract in Hong Kong – Cases and Commentary (4th ed, LexisNexis 2015) ch 10.

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In summary, as we have sought to demonstrate, the difficulties in this crucial area of the law relating to discharge by breach of contract are not merely historical and theoretical, but also (and more importantly) practical as well. In this last-mentioned sphere, we have set out the various approaches in different jurisdictions towards the application of the condition-warranty approach and the Hongkong Fir approach. In particular, we have focussed on the Singapore courts’ approach (principally as embodied within the RDC Concrete case73) as it is a quite different approach.

The Legal Position when Both Parties are in Breach of Contract An issue that has not been determinatively resolved is whether a party, who is in breach of contract, can terminate the contract for the other party’s serious breach or repudiation. This has been described as a “deceptively simple question” that has suffered from the lack of clear authority.74 The lack of a definite answer is curious given the legal and commercial significance of the issue. As has been pointed out, the right to terminate a contract in such a situation allows a party to get out of an unsatisfactory commercial position.75 Where both parties are in breach, it might be financially more advantageous to exercise the right of termination before the other party since only the party who terminates is entitled to damages for a failure to perform primary obligations.76

Whether party in non-serious breach can terminate for breach by the other party In a comprehensive discussion (to which we are greatly indebted), Wayne Courtney suggests that the few authorities on the issue may be discussed along several scenarios. The first scenario concerns whether a party, who is in nonserious breach of contract, can terminate the contract for a serious breach or repudiation by the other party.77 English and Australian cases establish that the party in non-serious breach can terminate, provided that he is ready and willing to perform the contract,78 and his breach does not provide the other party with an excuse for not performing. Thus, in the English Court of Appeal decision of State Trading Corp of India Ltd v M Golodetz Ltd, Kerr LJ held that: 73 RDC Concrete (n 19). 74 Wayne Courtney, “Termination of Contract by a Party in Breach” (2008) JBL 226, 266. See also Carter (n 6) paras 10–35ff. 75 Courtney (n 74). 76 Courtney (n 74) 227. 77 Courtney (n 74) 228–29. 78 It might be argued, as Professor Carter has, that given the modern rules on pleadings, there is no requirement to prove readiness and willingness to perform. And if it is put in issue, absence of readiness or willingness does not prevent termination. The point is that the terminating party’s readiness and willingness is limited to the ability to call for performance, including in an action for specific performance. It is not relevant to termination of performance. By definition, termination of the contract discharges the promisee from any requirement to be ready and willing to perform.



Ch 12  Encounters with History, Theory and Doctrine 275 “The fact that in the present case both parties had committed breaches before one of them elected to treat the contract as repudiated appears to me to make no difference whatever; nor the fact that (assumedly) both had been breaches of condition. If A is entitled to treat B as having wrongfully repudiated the contract between them and does so, then it does not avail B to point to A’s past breaches of contract, whatever their nature. A breach by A would only assist B if it was still continuing when A purported to treat B as having repudiated the contract and if the effect of A’s subsisting breach was such as to preclude A from claiming that B had committed a repudiatory breach. In other words, B would have to show that A, being in breach of an obligation in the nature of a condition precedent, was therefore not entitled to rely on B’s breach as a repudiation.”79

The approach taken in Golodetz has been applied in other cases. In the English Court of Appeal decision of Lidl UK GmbH v Hertford Foods Ltd,80 the seller agreed to supply 1,036,800 units of corned beef to the buyer. After delivering 11,700 units, the seller failed to make further deliveries due to a shortage of raw materials. The buyer refused to make payment for the delivered corned beef by relying on a clause in the contract that allowed it to off-set any losses suffered as a result of the seller’s delay in providing corned beef from the outstanding sums payable. The seller purported to terminate the contract on the grounds of the buyer’s non-payment. The English Court of Appeal held that the seller’s own breach did not prevent it from suing for termination by relying on the principle enunciated by Kerr LJ in Golodetz. However, on the facts, the seller could not terminate the contract as the buyer’s breach was not sufficiently serious. Two Singapore Court of Appeal decisions have also followed this approach. In Jet Holding Ltd v Cooper Cameron (Singapore) Pte Ltd,81 one of the issues raised was whether the first defendant, Cameron, could claim an indemnity from the second defendant, Stork, for the latter’s breach of contract in not conducting a proper dimensional inspection of the Riser Box, when it was also in breach of contract. Cameron had itself breached an implied term to exercise reasonable care by failing to provide Stork with the dimensional drawings of the Riser Box. The Court held that the implied term of the contract breached by Cooper was not a condition precedent. In other words, Cameron’s breach did not prevent Stork from carrying out its contractual obligations. When Stork failed to carry out those obligations, Cameron could sue for breach notwithstanding the fact that it was itself in breach. Similarly, in the Singapore Court of Appeal decision of Alliance Concrete Singapore Pte Ltd v Comfort Resources Pte Ltd,82 the appellant buyer contracted to purchase sand from the respondent seller on terms that the buyer was supposed to order a specified minimum amount of sand from the seller every 79 [1989] 2 Lloyd’s Rep 277, 286 (first and third emphases added; second emphasis in the original text). 80 [2001] EWCA Civ 938. 81 [2006] SGCA 20; [2006] 3 SLR(R) 769. 82 [2009] SGCA 34; [2009] 4 SLR(R) 602, noted by Tham Chee Ho, “Discharge of a Contract where Both Parties are in Breach: Alliance Concrete Singapore Pte Ltd v Comfort Resources Pte Ltd [2009] 4 SLR(R) 602” (2010) 22 SAcLJ 729.

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month and to make payment within 60 days of delivery. The buyer repeatedly failed to order the minimum amount of sand for several months and made payment late. The seller thus stopped the supply of sand to the buyer so as to pressurise it to pay the outstanding invoices. When the buyer still refused to pay, the seller informed the buyer that it treated the contract as repudiated by its conduct and purported to accept the repudiation. The buyer refuted the seller’s allegations and instead claimed that the seller had repudiated the contract by withholding deliveries. One of the issues that arose was whether the seller was precluded from suing the buyer because it was in breach for failing to make the agreed deliveries. The court held that it was not so precluded. Again, applying Kerr LJ’s approach in Golodetz, it held that the seller’s breach was not related to the buyer’s breach occasioned by non-payment and under-ordering. In other words, the seller was not in breach of an obligation in the nature of a condition precedent. However, although the seller was not precluded for suing for breach, it could not terminate as the buyer’s breach were found to be non-serious. It has also been pointed out that “the order in which the breaches occur is not necessarily decisive” in determining whether a party can terminate for breach.83 In the Singapore cases, the party suing for termination breached the contract after the initial breach. However, in Golodetz, the breaches occurred simultaneously. In neither instance was the order of breach determinative by itself. As a matter of principle, this must be correct since the question is whether one party’s breach precluded the other from performing. Where the party suing for termination breached the contract first, the question is whether his breach prevented the other party from performing the contract. This is not dependent on the order of the breaches even though the question is brought about by the fact that the party suing had breached the contract first. In contrast, where the party suing for termination breached the contract after the initial breach, the question of whether his breach was that of a condition precedent does not even arise since, by the order of the breaches, his breach could not have prevented the other party from performing.

Whether party in serious breach can terminate for breach by the other party A second scenario, described as “far more difficult”,84 concerns whether a party in a serious breach can terminate for breach by the other party. The difficulty occasioned by this scenario appears to be whether the seriousness of a party’s own breach ought to, in and of itself, preclude it from suing for termination. The Singapore courts have never dealt with this issue, and the leading English decision appears to be that of the House of Lords in Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corp Ltd.85 In that case, South India’s allegations of defects in bulk carriers it had acquired from Bremer were referred to arbitration. After some serious delays on both sides, Bremer sought relief from the courts to stop the arbitration. Lord Diplock, with whom 83 Courtney (n 74) 231–32. 84 Courtney (n 74) 232. 85 [1981] AC 909.



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Lord Edmund-Davies and Lord Russell agreed, held that there was an implied term in the arbitration agreement that obliged both parties to “join in applying to the arbitrator for appropriate directions to put an end to the delay”.86 In the event, Lord Diplock found that both parties were in breach of this implied term by failing to apply for directions, such that “neither can rely upon the other’s breach as giving him a right to treat the primary obligations of each to continue with the reference as brought to an end”.87 It has been pointed out that there are two possible interpretations of Lord Diplock’s speech.88 The first is that both Bremer and South India’s serious breaches precluded each from suing for termination. The fact of serious breach, while not expressly found by the House of Lords, can be inferred. The second interpretation is that the facts that were said to justify termination in Bremer were due to each party’s respective breaches. Thus, Bremer’s allegation that South India’s conduct had caused serious delays was also caused by its own failure to seek further directions. Courtney argues that “fairness” in this case may dictate that “one party cannot point to the other’s breach when it is equally in breach of the same obligation”.89 In apparent support of the second interpretation, Lord Brandon in The Hannah Blumenthal later explained Bremer in the following terms: “What Lord Diplock was saying was that, since the delay concerned was the consequence of breaches on the part of both the claimant and the respondent of their mutual obligation owed to one another, neither could rely on the other’s conduct as amounting to repudiation.”90

It is suggested that this second interpretation is the better one for several reasons. First, it has the weight of authority behind it. Apart from the explanation in The Hannah Blumenthal, which Lord Diplock had agreed with, Tomlinson  J in Internet Trading Clubs Ltd v Freeserve (Investments) Ltd also said that Lord Diplock in Bremer was “dealing with the special and limited case where the first party’s breach consists of a failure to perform a duty to avoid the consequences of the second party’s breach”.91 In addition, as has been pointed out,92 there have been several Australian decisions favouring termination in spite of a serious breach. For example, in Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver and Manager Appointed,93 the New South Wales Court of Appeal held unanimously that a party in breach of an essential but independent term could terminate for the other party’s serious breach. The emphasis on “independence” is a clear endorsement of the Golodetz approach, which the court also cited with approval. Secondly, and more importantly, the possibility of termination accords with principle. It is difficult to see why the fact of serious breach by itself should 86 87 88 89 90 91 92 93

Bremer Vulkan (n 89) 986. Bremer Vulkan (n 89) 987–88. Courtney (n 74) 232–33. Courtney (n 74) 233. Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854 (HL) 909. [2001] EBLR 142 [29] (Tomlinson J). Courtney (n 74) 235–36. (1997) 42 NSWLR 462.

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prevent the right of termination from arising. The relevant consideration should instead be whether the party’s own breach prevented the other party from performing the contract, regardless of whether the breach was serious or not. It is true, as Courtney has demonstrated, that the seriousness of breach may explain why the right of termination is unavailable. Therefore, where the terminating party’s serious breach precedes the other party’s alleged serious breach, the preceding serious breach may prevent the terminating party from successfully terminating for three reasons. The first is that the breaches may be dependent on one another, such that the prior serious breach precludes the latter alleged breach from being treated as a breach. Secondly, the prior serious breach may be a sufficient intimation to the other party that its performance will be futile. Finally, the prior serious breach may be a sufficient reason for termination by the other party, such that the latter’s non-performance is not a breach but an acceptance of the breach.94 Where the terminating party’s breach is subsequent to the other party’s serious breach, then in most cases the terminating party can argue that its non-performance is an acceptance of the other’s party breach.95 In all of these situations, the relevance of the seriousness of the breach is whether it provides the ground for termination by the other party. If, for some reason, the other party cannot make use of the serious breach as a ground for termination, the question is then the dependence of the breaches.

Whether the dependence of breaches should be the only criterion The normative question that is raised by the foregoing discussion is whether the dependence of breaches should be the criterion in determining whether a party’s own breach should preclude it from terminating for the other party’s breach. The strongest argument in favour of this is the logic of the criterion. Indeed, Kerr LJ’s approach in Golodetz has been termed “logical and principled”.96 It is difficult to see why a party’s own breach, whether serious or non-serious, should have fault connotations attached that preclude that party from suing for breach. The law of termination already provides sufficient measure of fault in that a party whose breach is sufficiently serious is exposed to the possibility that the other party may terminate for breach. It does not add anything, except an unwarranted punitive function, to say that a party’s own breach should prelude it from terminating if such a right were to arise.97 Moreover, as Deane J said in Foran v Wright, it would make much commercial sense to allow for parties to terminate notwithstanding their own breaches so that the contract does not “hang like an albatross around their necks unless and until they can reach a new agreement about its termination”.98 One potential weakness of this approach needs to be considered. If dependence of breaches is the sole criterion, parties may rush to terminate 94 95 96 97 98

Courtney (n 74) 239–40. Courtney (n 74) 239–40. Jet Holding (n 81) [99]. Courtney (n 74) 243. Courtney (n 74) 243 citing Foran v Wight (1989) 168 CLR 385, 438.



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the contract, the “winner being an accident of fate”.99 This, however, does not appear material. Parties will have to consider other commercial considerations before deciding to terminate in any event, and whether to rush to the finish line, so to speak, will form just part of the decision-making process. It is far more important that the law of termination maintains its coherence and not admits of unwarranted punitive elements. It therefore would conduce towards clarity if the dependence of breaches is taken as the sole criterion for deciding whether, in principle, a party’s own breach precludes it from suing for termination. The seriousness of the breach should matter only insofar as it affects the criterion of dependence, or if it furnishes the other party with a right to termination which, if taken first, necessarily precludes the other party from suing for termination in his own right.

Employment Contracts – General Rule of Elective Termination or Automatic Termination? For one of the present writers, this particular topic brings back significant memories because it was the topic of a substantial essay for credit in his course on labour law (taking as the point of departure for that essay the then current (and significant) English decisions of Thomas Marshall (Exports) Ltd v Guinle100 and Gunton v Richmond-upon-Thames LBC101). Unfortunately, he was unable to locate a copy of this essay and, given the absence of technology at that particular point in time, retrieval in the forms we are now accustomed to is, unfortunately, impossible. That having been said, he never thought that the very same topic would be raised some 30 years later for decision by the UK Supreme Court in Geys.102 This topic is interesting and raises a deceptively simple issue: does the general rule that a contract is terminated for breach of contract only upon an election by the innocent party apply to employment contracts (what has been termed “‘the doctrine of elective termination”103), or do such contracts constitute a special category inasmuch as a breach of contract entitling the innocent party to elect to terminate the contract concerned for breach would – in and of itself – automatically terminate the said contract without the need for any election by the innocent party itself (what has been termed “the doctrine of automatic termination”104)? Whilst some might go further and argue that the doctrine of automatic termination ought to replace or supplant the doctrine of elective termination (thus becoming the general rule), we think that this is too radical a proposition and ought not to be entertained. But that leaves us 99 100 101 102 103

Courtney (n 74) 244. [1979] Ch 227 (Ch). [1981] Ch 448 (CA). Geys (n 2). See eg John McMullen, “A Synthesis of the Mode of Termination of Contracts of Employment” [1982] CLJ 110 and K D Ewing, “Remedies for Breach of the Contract of Employment” [1993] CLJ 405. See also FD Rose, “The Effects of Repudiatory Breaches of Contract” (1981) 34 CLP 235, where Professor Rose has referred to this as “the orthodox approach” (at 235). 104 See Rose (n 103) 236, where Professor Rose has referred to this as “the heterodox approach”.

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with the interesting question as to whether or not contracts of employment are sufficiently different as to justify the exceptional application of the doctrine of automatic termination. Lest it be thought that this is a particularly esoteric topic, we would hasten to point out that employment contracts constitute one of the largest categories of contracts to be found across the world and so a nuanced consideration of this particular issue is not only interesting but also essential.105

The cases prior to Geys Although the relevant background as well as various arguments have been comprehensively analysed in Geys,106 it might be apposite to set out some of the background to this particular issue. The oft-cited starting-point are the following observations by Jenkins LJ in the English Court of Appeal decision of Vine v National Dock Labour Board: “But in the ordinary case of master and servant the repudiation or the wrongful dismissal puts an end to the contract, and the contract having been wrongfully put an end to a claim for damages arises. It is necessarily a claim for damages and no more. The nature of the bargain is such that it can be nothing more.”107

The observations just quoted furnish strong support for the doctrine of automatic termination. However, it is important to note that Jenkins LJ was of the view that this was not an “ordinary case of master and servant” as it involved a special statutory scheme108 so that the observations just quoted were, strictly speaking, obiter dicta. It should also be noted that the learned judge was in a minority inasmuch as he thought that the declaration sought by the plaintiff employee to the effect that the action of the National Dock Labour Board in terminating his employment was invalid. On appeal to the House of Lords, the House, in Vine v National Dock Labour Board,109 held that the plaintiff ’s dismissal was indeed invalid and granted the declaration sought – thus varying the order of the court below. Jenkins LJ’s statement of the law was endorsed unreservedly by Viscount Kilmuir LC and Lord Morton of Henryton.110 The next decision of note is that of the Judicial Committee of the Privy Council (on appeal from the Supreme Court of the Federation of Malaya) in Jerome Francis v The Municipal Councillors of Kuala Lumpur.111 In delivering the judgment of the Board, Lord Morris of Borth-y-Gest observed thus: “In their Lordships’ view, when there has been a purported termination of a contract of service a declaration to the effect that the contract of service still subsists will rarely be made. This is a consequence of the general principle of 105 However, it is also important to note that the common law rules we are presently considering with regard to the termination of employment contracts would, of course, be subject to the relevant statutory provisions (which will differ from jurisdiction to jurisdiction, embodying (as most such pieces of legislation do) the social mores of the country concerned). 106 Geys (n 2). 107 [1956] 1 QB 658, 674 (emphasis added). 108 Vine (n 107) 674. 109 [1957] AC 488. 110 Vine v National Dock (n 109) 500 and 503–04, respectively. 111 [1962] 1 WLR 1411.



Ch 12  Encounters with History, Theory and Doctrine 281 law that the courts will not grant specific performance of contracts of service. Special circumstances will be required before such a declaration is made and its making will normally be in the discretion of the court.”112

In Francis, the Board held that, unlike the fact situation in Vine, there were no special circumstances in the instant case justifying the grant of a declaration. What is interesting is the fact that the Board, whilst appearing to lean in favour of the doctrine of automatic termination, nevertheless appeared to suggest that in “rare” instances, the (general) doctrine of elective termination might obtain instead. This appears to adopt a kind of hybrid approach and also suggests that the general doctrine (of elective termination) has now become the exception – at least insofar as contracts of employment are concerned. Put simply, there appears to be a presumption that the doctrine of automatic termination ought to apply (subject to exceptional circumstances which require a result to the contrary). Subsequent decisions – in the English context at least – demonstrated that the law was in a state of flux. In short, there were cases that supported automatic termination,113 and those that supported elective termination.114 Nevertheless, these decisions also acknowledged (correctly, in our view) the practical as well as legal realities that arise from a situation in which the employee’s employment is wrongfully terminated. There is, for instance, the need for the employee concerned to mitigate his or her loss.115 On a practical level, it has also been acknowledged that the employee cannot generally sue for specific performance of the contract of employment.116 However, it could perhaps be argued that there is nothing in these last-mentioned points which detracts, in principle, from the proposition that the general rule of elective termination still applies. In this regard, it is instructive to consider the observations by Blanchard J in the 112 Jerome Francis (n 111) 1417–18 (emphasis added). 113 See eg the National Industrial Relations Court decisions of GKN (Cwmbran) Ltd v TI Lloyd [1972] ICR 214, 220–21; British Building & Engineering Appliances Ltd v Dedman [1973] ICR 82, 85 (affirmed in Dedman v British Building & Engineering Appliances Ltd [1974] ICR 53 (CA)); Hare v Murphy Brothers Ltd [1973] ICR 331, 334–35 and Sanders v Ernest A Neale Ltd [1974] ICR 565, 571. Significantly, these were all judgments by the President of the court, Sir  John Donaldson. 114 See eg the English High Court decision of Cranleigh Precision Engineering Ltd v Bryant [1965] 1 WLR 1293 (QB) 1305; the English Court of Appeal decision of London Transport Executive v Clarke [1981] ICR 355 (though cf Dunn  LJ, 373); the Supreme Court of New Zealand decision of Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26; [2007] 3  NZLR 169 [18]–[19]; as well as the High Court of Australia decisions of Automatic Fire Sprinklers Proprietary Limited v Watson (1946) 72 CLR 435 and Byrne v Australian Airlines Ltd (1995) 131 ALR 422. 115 See eg Automatic Fire Sprinklers (n 114) 452 (Latham CJ) and Byrne (n 114) 428 (Brennan CJ, Dawson and Toohey JJ); as well as the English Court of Appeal decision of Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699, 737 (Harman LJ). 116 See eg Automatic Fire Sprinklers (n 114) 476 (Williams J) and Byrne (n 114) 428 (Brennan CJ, Dawson and Toohey  JJ); as well as the English Court of Appeal decision of Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361, 370 (Salmon  LJ). In the Decro-Wall case, Sachs LJ found that it was unnecessary to come to a definitive view on the facts although the learned judge did (at 376) distinguish between what ought to be the case in strict law and what ought to be the case in practice. Buckley LJ, too, did not find it necessary to come to a definitive view, although the learned judge did leave the point open (at 381).

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New Zealand Supreme Court decision of Paper Reclaim.117 The learned judge pointed out that the difficulty with automatic termination as a general statement of law is that it might result in the employment contract coming to an end even though the repudiatory breach was unknown to the innocent party. He referred to Megarry V-C’s view in Thomas Marshall that the limitation of that party’s range of remedies should not “invade the substance of the contract”.118 Moreover, the limitation of automatic termination was obvious when it was the employee who repudiated, since in this case the employer would be prevented by the termination from obtaining an injunction to restrain breach of a restrictive covenant.119 The correct position of law appeared to be confirmed in Gunton v Richmond-upon-Thames LBC, where Buckley LJ accepted that a contract may only be ended by repudiation on the one side, and acceptance of the repudiation, on the other. This applied to employment contracts as much as it did to general contracts. However, Buckley LJ also alluded to the practical realities that the employee would not generally be able to reject the repudiation, a result that the court should easily infer to be the case. The consequence of this statement is that, while elective termination applied in principle, automatic termination would, for all intents and purposes, be in practice the doctrine applied. In both the Malaysian and Singapore contexts, there has also been some consideration of this particular issue. In the Malaysian High Court decision of Dato’ Abdullah bin Ahmad v Syarikat Permodalan Kebangsaan Bhd,120 for example, NH Chan J undertook a comprehensive analysis of the then existing English decisions on the issue and held in favour of the doctrine of elective termination.121 Not surprisingly, perhaps, the learned judge relied, in the main, upon the Thomas Marshall case122 as well as the Gunton case.123 It is also significant to note that Chan J, whilst acknowledging that contracts of personal service would not normally be specifically enforced, pointed to the fact that there could nevertheless be a situation where a declaration by the court that the contract of employment is still subsisting is necessary in order to enable the employee to restrain the employer from committing the breach of an express or negative implied undertaking. In the Dato’ Abdullah bin Ahmad case124 itself, Chan J held that there was an implied negative agreement on the part of the employer company not to appoint someone else (which it in fact did) as executive chairman and managing director in place of the plaintiff until the expiration of the plaintiff ’s period of employment. He therefore granted an injunction in favour of the plaintiff in order to enforce the performance of that implied negative agreement (and which restrained the second defendant who had been appointed in the plaintiff ’s stead from exercising the powers and duties of the office of executive chairman and managing director). However, 117 118 119 120 121 122 123 124

Paper Reclaim (n 114) [18]. Paper Reclaim (n 114) [18]–[23] citing Thomas Marshall (n 100) 240. Paper Reclaim (n 114) [18]. [1990] 3 MLJ 505. Dato’ Abdullah bin Ahmad (n 120) 507. Thomas Marshall (n 100). Gunton (n 101). Dato’ Abdullah bin Ahmad (n 120).



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it should be noted that this particular decision was overturned on appeal by the Malaysian Supreme Court decision in Dato’ HM Shah v Dato’ Abdullah bin Ahmad.125 The decision of Chan J was reversed on the application of the law to the facts. The appellate court held that an implied stipulation of the type found in the court below could not be properly read into the agreement between the defendant employer and the plaintiff employee. In particular, Hashim Yeop A Sani CJ (Malaya), who delivered the judgment of the court, observed that “[i n practice it may perhaps be much more difficult to find in a service contract an implied undertaking operating against an employer”.126 The court did not, on a close reading of its judgment, arrive at a definitive decision as to whether the doctrine of elective termination or the doctrine of automatic termination ought to be the general rule in the context of contracts of employment.127 Turning to the Singapore context, in the Singapore Court of Appeal decision of Chiam Heng Hsien v Jurong Town Corp,128 the court rejected an application by the plaintiff employee for a declaration to the effect that the contract of service still existed. In arriving at its decision, the court distinguished Vine129 and applied Francis130 instead.131 However, there was no detailed analysis of the relevant case law.132 Indeed, given the at least potential ambiguity surrounding the interpretation of Francis,133 it is submitted, with respect, that the position in Singapore still remains somewhat unclear. There has also – in the Singapore context – been passing reference to Gunton,134 albeit only in relation to the quantum of damages payable to an employee for wrongful dismissal.135 The broad picture that emerges from this comparative survey is that, before the UK Supreme Court decision of Geys, many Commonwealth jurisdictions were in favour of what may be termed a “realistic” application of the elective termination doctrine. The elective termination doctrine applied conceptually to employment contracts, but because the courts would generally infer that the employee had no option to reject the repudiation, the termination was, for all intents and purposes, automatic. The conceptual application of the elective termination doctrine is well-supported by the argument that one ought not to be seen “to be drawing a conclusion about termination from a conclusion about the availability of remedies”.136 Put simply, the fact that the plaintiff 125 126 127 128

[1991] 1 MLJ 91. Dato’ HM Shah (n 125) 95 (emphasis added). Dato’ HM Shah (n 125) 92. [1985] SGCA 5; [1985-1986] SLR(R) 92. See also the Singapore High Court decision of Tullett Prebon (Singapore) v Chua Leong Chuan Simon [2005] SGHC 150; [2005] 4 SLR(R) 344 [6]. 129 Vine (n 107). 130 Jerome Francis (n 111). 131 See, to like effect, the Malaysian High Court decision of Sathiaval a/l Maruthamuthu v Shell Malaysia Trading Sdn Bhd [1998] 1 MLJ 740, 748. 132 Indeed, the reference to Gunton (n 101) was in relation to a somewhat different point, the focus being (as just mentioned) on Jerome Francis (n 111) instead. 133 See the main text accompanying n 112. 134 Gunton (n 101). 135 See eg the Singapore High Court decisions of Chye Lian Huat Sawmill Co v Hean Nerng Industrial Pte Ltd [2002] SGHC 300; [2003] 2 SLR(R) 23 [22]; Aldabe Fermin v Standard Chartered Bank [2010] SGHC 119; [2010] 3 SLR 722 [79] as well as Chiam Heng Hsien (n 128) [15]. See also Schonk Atonius Martinus Mattheus & anor v Enholco Pte Ltd & anor appeal [2015] SGCA 65. 136 See McMullen (n 103) 122–23.

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employee might have no choice but to accept the wrongful termination by the employer and is confined to suing only for his or her wages relates to the availability of remedies. But this is a separate and distinct issue from that of termination. However, because the employee will not be able to reject the repudiation in many cases, the date of termination will be taken to be that of the employer’s repudiatory breach. Grafted onto this general position is the exceptional situation where the plaintiff employee might have a substantive interest in keeping the contract of employment alive, notwithstanding the wrongful termination of the said contract by the employer. In the English Court of Appeal decision of Hill v CA Parsons & Co Ltd,137 for example, the court cited the principle laid down in the Francis case to the effect that a declaration by the court that the contract of employment still subsists would rarely be made.138 However, it held that, on the special facts of that case, it would grant such a declaration as it was necessary to enable the employee concerned to qualify for the pension fund in question. Put simply, this was a situation that was similar (in principle) to that existing in Vine.139 Ultimately, though, the court in Hill appeared, in effect, to adopt the elective termination doctrine.140

The Geys case It is with this background in mind that we come to the recent UK Supreme Court case of Geys.141 A majority of the Supreme Court held that the doctrine of elective termination should apply in employment contracts. In that case, Geys, who was employed by the Bank as a Managing Director, was informed of the Bank’s decision to summarily dismiss him with immediate effect on 29 November 2007. However, the Bank did not tell Geys the reason for his termination. Subsequently, on 18 December 2007, the Bank remitted a sum of money into Geys’ account, but did not explain the reason for the payment. Matters remained somewhat confused until 2 January 2008, when Geys informed the Bank that he had affirmed the employment contract. The Bank then replied on 4 January 2008 stating that it had terminated Geys with immediate effect by its payment in lieu of notice. Geys was deemed to have received that letter on 6 January 2008. The key question raised in the case was the exact date when the Bank terminated the employment contract. The Bank argued that the date of termination was either 29 November 2007, on the basis that its repudiatory breach of contract terminated the contract automatically, or 18 December 2007, when it made a payment in lieu of notice to Geys. Geys, on the other hand, argued that the date of termination was 6 January 2008. At the heart of the dispute was the choice between the doctrines of elective termination (which Geys favoured) and automatic termination (which the Bank supported). 137 138 139 140

[1972] Ch 305. Jerome Francis (n 111). Vine (n 107). See also British Building Appliances (n 113) 85 (Sir John Donaldson) where Hill (n 137) is cited. Though cf the Industrial Tribunal decision of Haydon v South Eastern District of the Workers’ Education Association (1972) 7 ITR 318, 322. 141 Geys (n 2).



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If the elective doctrine had applied, the Bank’s repudiatory breach in either November or December 2007 would have to be accepted by Geys in order for the contract to be terminated. However, if the automatic doctrine applied, then the employment contract would have been automatically terminated in November or December 2007, without any further input from Geys. The practical significance of the choice between the doctrines of elective and automatic termination, and the consequent termination date, was that Geys would have been paid a much higher bonus had the termination taken place in 2008. There were two main judgments in relation to the choice between the elective and automatic termination doctrines: Lord Wilson’s in the majority and Lord Sumption’s in dissent. There were three reasons for the majority’s preference of the elective doctrine. The first may be termed the manifest fairness of the doctrine. Thus, Lord Wilson rejected the automatic doctrine as it would “reward the wrongful repudiator of a contract of employment with a date of termination which he has chosen”, which, in the scheme of things, would certainly be “most beneficial to him and, correspondingly, most detrimental to the other, innocent, party to it”.142 Lord Hope likewise held that the innocent party retained the ability to judge whether it was in his interests to keep the contract alive under the elective doctrine, whereas he would not have this control under the automatic doctrine.143 The second reason was the lack of coherent support for the automatic doctrine. Lord Wilson disapproved of the “readily inferred acceptance” explanation advanced in Gunton as being inconsistent with general contractual principles. What is required is real acceptance, which is a conscious intention to bring the contract to an end. Such an intention should not be too readily inferred so as to render irrelevant the general contractual requirement of a conscious acceptance. Lord Wilson also rejected as “circular” the explanation that a contract is automatically terminated by either party’s unilateral repudiation simply because the contract is not capable of specific performance. That explanation also had the effect of the remedy dictating the extent of the right, whereas the correct order ought to be the other way around. The third reason was the inconsistency within the law of termination occasioned by the automatic doctrine. As Lord Wilson explained, the automatic doctrine arguably only works with an express dismissal or resignation. Where the repudiatory breach did not consist of such overt conduct, the elective doctrine works better. Yet, this inconsistent approach cannot be explained by principle or practicality. Lord Sumption was the sole dissenter. He dismissed the manifest fairness point by saying that the law should not reflect moral indignation about the Bank’s conduct. He also pointed out that if an employer adhered to established practices in terminating an employment contract, it may in effect terminate at a time of its choosing. In this sense, the elective doctrine offers no greater protection than the automatic doctrine. As a point of principle, Lord Sumption said that the right to treat the contract as subsisting has never been absolute. Relying in particular on White and Carter (Councils) Ltd v 142 Geys (n 2) 550. 143 Geys (n 2) 537.

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McGregor,144 he gave particular weight to the rule that an innocent party could not treat a repudiated contract as alive unless it could perform its contractual obligations without the other party’s co-operation, or it could compel the other party to perform via specific performance.145 This principle, according to Lord Sumption, was particularly applicable to employment contracts as they require the co-operation of the employer to be carried out. For him, cases such as Vine146 establish “a long, authoritative, and broadly consistent consensus in favour of the principle that an unaccepted repudiation of a contract of employment which terminated the relationship also brought the contract to an end, in law as well as in fact”.147 The elective doctrine is therefore not as strongly supported by authority as the majority thought it to be. As such, Lord Sumption found it “difficult to see why the law should recognise such a right” if the employment contract cannot in practice be performed or enforced,148 and that the employee, in reality, cannot treat the contract as subsisting. The employee therefore cannot sue for his wages once dismissed, since there is no longer a contractual obligation to pay the wages. While it may be tempting to frame the elective and automatic doctrines as a reflection of principle and practice respectively, the two views articulated in Geys were ultimately reasoned on principle. The reason for Lord Wilson’s and Lord Sumption’s differing opinions was due to each learned judge’s understanding of the law.149 While Lord Wilson adopted a more orthodox view of the law of repudiation, Lord Sumption read the important case of White and Carter as standing for the broad proposition that a repudiatory breach need not be accepted to be effective, if the performance of the contract requires the cooperation of the repudiating party. However, as Professor Burrows has argued, White and Carter was really concerned with whether a plaintiff could sue in debt where the contract had been repudiated, but before the innocent party had commenced performance of his promised services.150 The case established that the innocent party could perform his services and then claim the debt pursuant to the contract. While this principle is subject to limited exceptions where the plaintiff has “no legitimate interest” in keeping the contract alive,151 the case cannot be taken to stand for any broader principle than that. The fact that employees cannot claim wages as a salary after the employer’s repudiation cannot therefore be taken as an embodiment of any broader principle in the specific context of employment law. Instead, that outcome in employment law can be explained by other means, none of which supports the automatic doctrine.152 144 [1962] AC 413 (HL). 145 The obvious answer to Lord Sumption is that this ignores the contractual core of modern labour law: see Alysia Blackham, “Uncertain Junctures between Employment and Contract Law” [2013] CLJ 269, 271–72. 146 Vine v National Dock (n 109). 147 Geys (n 2) [128]. 148 Geys (n 2) [116]. 149 Andrew Burrows, “What is the Effect of a Repudiatory Breach of a Contract of Employment?” (2013) 42 ILJ 281, 285. 150 Burrows (n 149) 286. 151 “Specific Implement: How Far Have We Come? How Far to Go?” (2014) 123 ELB 6. 152 Burrows (n 149) 286.



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Yet, an adherence to the elective doctrine, while providing for conceptual clarity, also raises some practical problems for employment law. In particular, as has been pointed out by David Cabrelli and Rebecca Zahn, the elective theory has serious implications for summary dismissals.153 They raise as an example the situation where an employer summarily dismisses the employee – who has performed his or her contract for service – for stealing, which the employee denies. The employee then further argues that the employer’s summary dismissal is a repudiatory breach and affirms the contract. If the elective doctrine applies, the employer cannot know for certain whether its summary dismissal was valid until the matter has been considered by, for example, an employment tribunal. Until that happens, the employer is left with no assurance as to whether it is obligated to pay the employee wages from the point of the employee’s affirmation as a debt under the still-subsisting contract. Practically, the employer could pay the employee the notice damages and lost wages while reserving its position, but this has rightly been seen as a “contrived dynamic”.154 Having said that, it is acknowledged that, since there was no change in the law that specific performance of employment contracts will be very rarely granted, the practical effect of the elective doctrine will be much limited in the broader employment law context.155 However, the summary dismissal example also more broadly illustrates that the elective doctrine, while providing for conceptual clarity, is not without its share of practical problems.

Suggested approach While the UK Supreme Court has undoubtedly decided the issue under English law, what, then, should be the approach which we think ought best be adopted by other courts? In our view, this is not an “either/or” situation such that one ought either to choose the doctrine of elective termination or the doctrine of automatic termination. Indeed, David Cabrelli and Rebecca Zahn have observed that the majority in Geys did not adopt a “genuine form of the elective theory” insofar as the decision does not make it any easier for the employee to keep the employment contract alive via specific performance.156 The choice between the elective and automatic theory will involve a degree of overlap inasmuch as the practical realities dictate a certain manner in which the concept is to be effected. In short, we would suggest that both approaches are too blunt and neither affords the courts sufficient flexibility to deal with real-life scenarios as they occur. Whichever approach is adopted, there must be the possibility of exceptional situations (depending, of course, on the precise facts concerned). In this last-mentioned regard, one approach would be to commence with a presumption that the (general) doctrine of elective termination ought to apply 153 David Cabrelli and Rebecca Zahn, “The Elective and Automatic Theories of Termination in the Common Law of the Contract of Employment: Conundrum Resolved?” (2013) 76 MLR 1106, 1117–18. 154 Cabrelli and Zahn (n 153) 1118. 155 Ian Smith, “Rich Pickings” (2013) 163 NLJ 57. See also the more recent case of Ashworth v Royal National Theatre [2014] 4 All ER 238 (QB), where specific performance in the context of an employment contract was once again refused. 156 David Cabrelli and Rebecca Zahn, “The Elective and Automatic Theories of Termination at Common Law: Resolving the Conundrum” (2012) 41 ILJ 346, 356.

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(albeit subject to an exception on the facts of the case which, if established on the objective evidence, would serve to rebut the aforesaid presumption). An alternative approach would be to commence with a presumption that the doctrine of automatic termination ought to apply (albeit subject to an exception on the facts of the case which, if established on the objective evidence, would serve to rebut the aforesaid presumption). A moment’s reflection will reveal that there is, in the final analysis, little (if any) difference between the approaches just referred to – particularly if attention is paid to the substance (as it should be) and not merely the form of the situation itself. Having regard to the discussion above, although accounting for the practical reality that ensues from a wrongful termination of a contract of employment,157 it might be persuasively argued from a perspective of principle that the former approach might be more appropriate, that is, that the court would commence with a presumption that the doctrine of elective termination ought to apply (albeit subject to an exception on the facts of the case which, if established on the objective evidence, would serve to rebut the aforesaid presumption). The factual (as well as practical) reality may, in some circumstances, tilt the balance in favour of opting for one approach in preference to the other. Put simply, if the factual (and practical) reality is that if it is indeed the fact that in some cases in which the employment of the employee is wrongfully terminated by the employer the employee concerned has no real (practical) choice (inasmuch as the employee must (again, owing to practical circumstances as well as the legal position to the effect that he or she must mitigate his or her loss, and that an insistence on the continuance of the relationship of employment will not, generally speaking, be specifically enforced), it might be more appropriate to adopt the approach which rebuts the presumption that the doctrine of elective termination ought to apply.

Breach of the Implied Term of Mutual Trust and Confidence Employment contracts raise yet more specific difficulties in the area of breach. Specifically, the breach of the implied term of mutual trust and confidence in employment questions has raised, at least in the Singapore context, questions concerning the ambit of the term and the available remedies. It is clear that the House of Lords in Malik v Bank of Credit and Commerce International SA (in compulsory liquidation)158 held that there is a term implied in law that an employer shall not without reasonable and proper cause conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. The implied term of mutual trust and confidence has raised a couple of interesting issues in the Singapore context, which may be of interest to note.

157 Text to nn 136–40. 158 [1998] AC 20.



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When is an implied term of mutual trust and confidence breached? The first issue concerns when an implied term of mutual trust and confidence is breached. More particularly, whether breach of such a term is identical with the breach of a duty of good faith. The New South Wales Court of Appeal in Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney159 treated mutual trust and confidence as a synonym for a good faith obligation. The court said that it was “probably sufficient to identify” both implied duties of good faith and mutual trust and confidence “as a single obligation”.160 Although the High Court of Australia in Commonwealth Bank of Australia v Barker161 did not adopt the implied term of mutual trust and confidence in Australia, that decision does not quite affect whether implied duties of good faith are the same as those of mutual trust and confidence.162 Similarly, Lord Steyn in Johnson v Unisys Ltd said that the interaction of the implied term of mutual trust and confidence and the express terms of the contract “can be compared with the relationship between duties of good faith or fair dealing with the express terms of notice in a contract”.163 The Singapore courts have not been overly enthusiastic about the interchangeable use of the obligation of good faith and mutual trust and confidence. In Cheah Peng Hock v Luzhou Bio-Chem Technology Ltd,164 the Singapore High Court held that the danger of implying a duty of good faith concurrently with mutual trust and confidence risked introducing a potentially far-reaching concept that might impose positive duties and fettering the freedom of parties.165 The Singapore Court of Appeal in Ng Giap Hon v Westcomb Securities Pte Ltd likewise cautioned against too readily implying a term of good faith “in law” into contracts because the concept of good faith presently requires much clarification and could not be practically applied.166 The consequence is that the Singapore courts have treated the implied term of mutual trust and confidence within very narrow confines, left to be defined by the particular context. Having said that, the Singapore courts have accepted the starting point laid down in Malik that the implied term of mutual confidence was a “portmanteau, general obligation” necessary for the continuation of the employment relationship “in the manner the employment contract implicitly envisages”.167 It can be flexibly applied to different employment situation but is subject to an objective test and limited to the manner of treatment within the employment relationship. Unlike the doctrine of good faith, the House of Lords observed that this was a “workable” and “sound” doctrine.168 It is a 159 [2008] NSWCA 217. 160 Russell (n 159) [32]. 161 [2014] HCA 32; (2014) 312 ALR 356. See JW Carter et al, “Terms Implied in Law: ‘Trust and Confidence’ in the High Court of Australia” (2015) 32 JCL 203. 162 See eg Russo v Westpac Banking Corporation [2015] FCCA 1086 [279]–[280]. 163 [2003] 1 AC 518 (HL) [24]. 164 [2013] SGHC 32; [2013] 2 SLR 577. 165 Cheah Peng Hock (n 164) [46]. 166 [2009] SGCA 19, [2009] 3 SLR(R) 518 [46]. 167 Malik (n 158) 35. 168 Malik (n 158) 46.

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narrower doctrine than the doctrine of good faith and is the natural corollary of an implied duty of faithful service (of which there is little dispute in the common law).

Consequences arising from breach of an implied term of mutual trust and confidence Another issue raised specifically by the implied term of mutual trust and confidence concerns the consequences arising from its breach. In Wee Kim San Lawrence Bernard v Robinson & Co (Singapore) Pte Ltd,169 the appellant was a former employee of the respondent company. His employment contract allowed for termination by the payment of two months’ salary in lieu of notice. After the appellant resigned, he sued the respondent alleging constructive dismissal. He argued that he had been forced to resign as a result of the persecution and bias directed against him by the respondent. He claimed in the alternative that the respondent had breached the implied term of mutual trust and confidence in the employment contract. The appellant’s claim was dismissed by the Singapore High Court, which held that even if the appellant had been constructively dismissed, he would only be entitled to two months’ salary in lieu of notice, and he had already been paid twice that amount by the respondent. On appeal to the Singapore Court of Appeal, the appellant argued that he had an arguable case that he was entitled to damages exceeding the amount of salary payable for his contractual notice period if such damages flowed from the breach of the implied term of mutual trust and confidence in his employment contract. The question raised, therefore, was what were the consequences arising from the breach of an implied term of trust and confidence. The Singapore Court of Appeal held that the breach of the implied term of mutual trust and confidence that results in constructive dismissal will give rise to a claim for “premature termination losses”.170 In other words, these are losses causally connected to the premature termination of the employment contract. The damages awarded to the employee should in this case be the same as the damages which would have been awarded if the employee had been actually dismissed unlawfully. This would be the amount which the employee would have received under the employment contract had the employer lawfully terminated the contract by giving the required notice or paying salary in lieu of notice. At the same time, the court also recognised the possibility that breach of an implied term of mutual trust and confidence can give rise to financial losses of a different nature. However, this could only happen if the consequence of breach is something other than the premature termination of the employment contract. In Malik, an example of such losses was “continuing financial losses” sustained and claimed as damages where the breach has affected an employee’s future employment prospects.171 Another example would be financial loss flowing from psychiatric or other illness 169 [2014] SGCA 43; [2014] 4 SLR 357. 170 Bernard (n 169) [34], [36]. 171 Malik (n 158) 37, 48.



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brought about by the employer’s breach of this implied term, as was raised in Eastwood v Magnox Electric plc.172 The Court of Appeal clarified that losses of such a different nature that flow from the breach of an implied term of mutual trust and confidence are different from those flowing from premature termination. They are therefore recoverable in principle although their occurrence will still need to be proved on the facts. An example of a case with such facts is the Hong Kong Court of Appeal decision of Semana Bachicha v Poon Shiu Man.173 In that case, a domestic helper was forced to leave her employment after just six months due to an oppressive work regime. The domestic helper was held to be entitled to damages for wrongful dismissal, and damages for any additional pecuniary loss caused by the employer’s breach of the implied term of mutual trust and confidence. This recognises that a given set of facts might constitute both a breach of the implied term requiring reasonable notice to be given to lawfully terminate the employment contract, as well as a breach of the implied term of mutual trust and confidence, thereby giving rise to simultaneous but separate entitlements to damages. A perhaps more interesting question is whether the breach of an implied term of trust and confidence should result in specific performance. It has been argued that, when taken together with the renewed approval of the elective doctrine in Geys, the recognition of the legal obligation of mutual trust and confidence greatly advances the occasions on which specific performance of an employment contract should be awarded.174 Specific performance could be seen to accord fuller recognition of the employees’ interest in the relationship. Thus, in Hill v CA Parsons Ltd,175 the plaintiff ’s action for specific performance was successful as the majority of the English Court of Appeal accepted that he wanted to end his working life in honourable service and derived much social and psychological benefit from being gainfully employed. The key impediment to specific performance, as was recently pointed out in Ashworth v Royal National Theatre,176 is that the loss of confidence would naturally preclude specific performance. Yet, perhaps an argument could be made that the denial of specific performance is akin to the denial of important social and psychological benefits integral in the employment contract, which would go against the main thrust of a legal obligation of mutual trust and confidence.177

Two Issues in Anticipatory Breach – A Brief Note As noted at the outset of the present chapter, the task embarked on was a very ambitious one. Nevertheless, there are yet other topics of much interest. For example, the doctrine of anticipatory breach contains at least two topics which have hitherto yet to be resolved (at least in a definitive fashion). Because these 172 173 174 175 176 177

[2005] 1 AC 503 (HL) [29]. [2000] 2 HKLRD 833. n 151. Hill (n 137). Ashworth (n 155). Eastwood (n 172).

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issues have already been dealt with by the existing literature, we propose to only flag them for a brief consideration. Turning briefly, therefore, to the first topic, the issue concerned relates to claims for a fixed sum in general and the House of Lords decision of White and Carter (Councils) Ltd v McGregor.178 In particular, it was held (albeit by a bare majority of three to two) in White and Carter that, where there is a claim for a fixed sum (as opposed to a claim for unliquidated damages), there is no duty179 on the part of the plaintiff to mitigate its loss. However, this could possibly lead to unjust and unfair (and even bizarre) results. This perhaps explains the qualification by Lord Reid in that decision in which the learned Law Lord (who was in the majority) observed, in essence, that the plaintiff could not refuse to mitigate its loss and insist on continuing with its performance in order to claim the fixed sum agreed upon by the parties where (i) it (the plaintiff) required the co-operation of the other party (viz, the defendant) or (ii) it (the plaintiff) had no legitimate interest in continuing such performance.180 The former qualification (at (i) above) is easy to understand and is, indeed, entirely logical as well as commonsensical; more than that, it recognises the very practical 178 White (n 144). And see generally JW Carter, Andrew Phang and Sock-Yong Phang, “Performance Following Repudiation: Legal and Economic Interests” (1999) 15 JCL 97 (and the literature cited therein); Qiao Liu, Anticipatory Breach (Hart Publishing 2011); as well as Stannard and Capper (n 1) paras 12.12‒12.34. Recent case law includes the English Court of Appeal decision in Reichman v Beveridge [2006] EWCA Civ 1659; [2007] Bus LR 412 and the English High Court decision in Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61 (this latter decision was noted in David Winterton, “Reconsidering White & Carter v McGregor” [2013] LMCLQ 5). See also Jonathan Morgan, “Smuggling Mitigation into White & Carter v McGregor: Time to Come Clean?” [2015] LMCLQ 575 (which also focusses on the recent English High Court decision in MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2015] EWHC 283 (Comm); [2015] 1 Lloyd’s Rep 359). 179 There is some controversy as to whether or not a “duty” as such is (legally) imposed on the plaintiff, or whether the so-called “duty” to mitigate is merely a principle centring on causation instead. In this last-mentioned sense, whilst there is no “duty” on the part of the plaintiff to mitigate its loss as such, nevertheless, to the extent that the plaintiff has not mitigated its loss, the defendant will be considered, to that extent, to not have caused the plaintiff ’s loss (and therefore not be responsible for that loss as such). And see, in this last-mentioned regard, the decision of the English Court of Appeal in Sotiros Shipping Inc and Aeco Maritime SA v Sameiet Solholt (“The Solholt”) [1983] 1 Lloyd’s Rep 605, where Sir John Donaldson MR observed (at 608) thus (emphasis added):



“A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase ‘duty to mitigate’. He is completely free to act as he judges to be in his best interests. On the other hand, a defendant is not liable for all loss suffered by the plaintiff in consequence of his so acting. A defendant is only liable for such part of the plaintiff ’s loss as is properly to be regarded as caused by the defendant’s breach of duty.”

However, as the present authors have observed (see Andrew BL  Phang  and  Goh Yihan, Contract Law in Singapore (Wolters Kluwer Law & Business 2012) paras 1525–26 (emphasis in the original text)):

“The learned Master of the Rolls thus views the concept of mitigation as turning on the issue of causation as opposed to that of duty … It is, however, respectfully submitted that the effect is, in substance, the same, and that it may well be a semantic difference more than anything else. Indeed, Scrutton LJ appeared to imply as much in Payzu, Ltd v Saunders, when he observed thus [see [1919] 2 KB 581 (CA) 589 (emphasis added)]: Whether it be more correct to say that a plaintiff must minimise his damages, or to say that he can recover no more than he would have suffered if he had acted reasonably, because any further damages do not reasonably flow from the defendant’s breach, the result is the same.”

180 White (n 144) 430−31.



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nature of the law itself. Put simply, where the plaintiff requires the co-operation of the defendant in completing its performance (in order to receive the fixed or agreed sum) and that co-operation is not forthcoming from the defendant, it follows that the plaintiff will be unable to complete his part of the bargain and, that being the case, will not be entitled to claim the fixed sum (which is given in return for full and complete performance by the plaintiff of his contractual obligations). However, the second qualification (at (ii) above) is far more problematic. It is, in essence, an attempt to achieve a just and fair result by balancing the need to respect the sanctity of contract on the one hand and the avoidance of waste on the other.181 However, as Professors Stannard and Capper – in their lucid yet nuanced survey of the relevant case law as well as arguments in this particular regard – point out, it is notoriously difficult to define (on a normative level) what precisely constitutes a “legitimate interest”. A number of other concepts have been utilised (for example, “unreasonable”) but, like the authors just mentioned, we are of the view that we are no nearer to a clear as well as workable legal criterion as such. All we can state is that much will depend on the precise facts as well as context concerned. Admittedly, this is not very helpful but, in our view, this is the best that can be laid down – at least at this particular stage of development of this specific issue in the law relating to anticipatory breach. Indeed, if the concern is (as we have alluded to above) with achieving a just and fair result, then why could the court in White and Carter not have simply adopted the approach followed by the minority in that particular decision – holding that there was indeed a duty to mitigate. However, we also acknowledge that such an approach, whilst practical, also runs into conceptual difficulties inasmuch as it would (as we have already noted above) be odd to insist that there is a duty on the part of the plaintiff to mitigate its loss in a situation where the claim is in fact for a fixed or agreed sum and not for unliquidated damages as such. In such a situation, it bears reiterating that the claim is merely dependent on complete (or at least substantial) performance on the part of the plaintiff – in return for which the fixed or agreed sum is consideration. In other words, there is no room, in such a situation, for the application of the doctrine of mitigation – at least on a conceptual or theoretical level. We would, however, also add that perhaps more conceptual as well as practical clarity might ensue from the recent renewed interest (at least in the context of Commonwealth jurisdictions) of the concept of good faith. As we have already noted above, the concept (and, a fortiori, the doctrine) of good faith is still in a state of flux.182 That having been said, it seems to us that a persuasive argument can be made for utilising the concept of good faith as a basis in ascertaining whether or not the plaintiff had a “legitimate interest” in insisting upon continuing performance; put another way, if it can be demonstrated that the plaintiff, in so doing, was indeed acting in bad faith, then it could not be said that it had a “legitimate interest” in so acting. However, we also acknowledge 181 Qiao Liu, “The White and Carter Principle: A Restatement” (2011) 74 MLR 171 and Stannard and Capper (n 1) para 12.23. 182 Text to nn 164−66.

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that all the difficulties we have mentioned above (in particular, the uncertainty that results from the application of the concept of good faith) would also apply in such a context as well. Turning now to the second topic, as already mentioned, this was only recently raised for decision in the Singapore Court of Appeal in the case of The STX Mumbai.183 This particular topic may be simply stated as follows: does the doctrine of anticipatory breach apply not only to executory contracts but also to executed contracts (in the sense of being already executed by the innocent party)? With the exception of a few state jurisdictions, the general consensus in the United States of America appears to answer the question just posed in the negative.184 However, as the court in The STX Mumbai observed,185 both the relevant English case law186 as well as academic authorities187 suggest a contrary legal position, that is, that the doctrine of anticipatory breach ought to apply to executed contracts as well. Whilst English law accepts that the doctrine of anticipatory breach could apply to an executed contract, there has been no real explanation why this should be the case beyond a statement in a case with a partially executed contract that “it would be very strange and hardly workable” if the innocent party had to wait until the time for performance had arrived.188 The Singapore Court of Appeal in The STX Mumbai offered two justificatory accounts for applying the doctrine of anticipatory breach to executed contracts. The first is based on an extrapolation of the traditional analysis by redefining the implied promise: the defendant impliedly promised that it would not “act in such a manner so as to render the plaintiff ’s performance of its obligation towards completion of the contract an exercise in futility”.189 Thus, if the defendant announced that it would not be performing its obligations before the time for performance, it would necessarily have rendered the plaintiff ’s performance, whether already or to be performed, an exercise in futility since the plaintiff would not be receiving its part of the contractual bargain. The Singapore Court of Appeal’s reasoning also resolves an intuitive problem with the view that anticipatory breach does not apply to executed contracts. It noted the injustice as well as illogicality that would ensue if a plaintiff who had performed all its obligations under the contract were to be placed ‘in a worse position compared to a situation in which it (the plaintiff) had yet (although it was able and willing) to perform all its obligations under the same contract.’190 However, the Singapore Court of Appeal also acknowledged that an 183 The STX Mumbai (n 18). 184 The STX Mumbai (n 18) [56]. 185 The STX Mumbai (n 18) [54], [59]–[62]. 186 See, for example, the English House of Lords decision of Moschi v Lep Air Services Ltd [1973] AC 331; though cf the decision of the New Brunswick Supreme Court (Appeal Division) in Melanson v Dominion of Canada General Insurance Co [1934] 2  DLR 459. The position in Australia appears to be uncertain (cf, for example, the High Court of Australia decisions in Mackenzie v Rees (1941) 65 CLR 1 and Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17). 187 See, especially, Carter (n 6) paras 7.80–7.81 and Liu (n 178) 164–67. 188 Moschi (n 186) 356 (Lord Simon). 189 The STX Mumbai (n 18) [45] (emphasis omitted). 190 The STX Mumbai (n 18) [46] (some emphasis omitted).



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explanation based on an implied promise could be somewhat strained and artificial. An implied promise may be fictitious in some cases and the reliance on fiction is inimical to good legal reasoning. In light of the potential artificiality of an implied promise explanation, the Court of Appeal endorsed an alternative account founded on the defendant’s indication of a clear intention that it will not perform its obligation under the contract. Where this has occurred, the Court of Appeal held that this very fact would form the basis for holding that an actual breach has in substance occurred even though the time for performance had not arrived. We do not propose to say anymore about this particular decision for the purposes of the present chapter – not only because it is a relatively recent one but also because there has since been some commentary on it (to which the reader may refer).191

Concluding Observations The law relating to discharge by breach of contract is, as we have pointed out at the outset of the present chapter, an extremely thorny and often frustrating one. However, its importance in the practical sphere cannot be gainsaid. We cannot pretend to have even come close to resolving the many conundrums which afflict so very many aspects of this area of the common law of contract. We hope, however, to have demonstrated – on a more general level – how important historical as well as theoretical analysis is and that a strictly doctrinal analysis (especially in areas of law such as this) is insufficient in and of itself. On a more specific level, we hope to have raised sufficient legal food for thought – particularly with respect to the very practical issue as to how the condition-warranty approach and the Hongkong Fir approach might be integrated in a manner that aids the court in determining when an innocent party would be entitled to elect to treat the contract concerned as discharged. There were, of course, other important issues raised as well. What is clear is that, in order to attempt a resolution of the various issues, a comparative approach is also imperative. Ultimately, while theoretical explanations of breach and its related issues need to be coherent, the ability of the law to respond to real-life practical situations must never be lost. Far from being an exercise in philosophy, the law has real consequences that must always be kept in mind. As we have attempted to demonstrate, there needs to be a degree of flexibility built into the law so that real problems can be solved by the application of legal principles. This bears out the four attributes that one of the present authors has said a law student should possess. Ultimately, the law of contract across the common law world has – particularly over the last few decades – become a rich and varied one. This is extremely encouraging as it furnishes courts with much to draw upon – especially when seeking to resolve the thorny issues that have been canvassed in the present chapter.

191 See Yihan Goh and Man Yip, “Rationalising Anticipatory Breach in Executed Contracts” (2016) 75 CLJ 18.

13

Of Debts, Damages and Errant Trustees Andrew Tettenborn

Introduction “My Lords, my clients have no merits, but they are right.” These words, according to legal urban legend, were used many years ago by the then Kenneth Diplock KC to open a large but delicate commercial case. They would have been equally appropriate in the mouth of counsel for the losing claimants in Target Holdings Ltd v Redferns1 and AIB Group (UK) plc v Mark Redler & Co,2 whose clients’ deserts were, to say the least, decidedly doubtful. Of course, if undeserving clients with a technical case are indeed right, they must win. But were they right in Target and Mark Redler? This is the subject of this chapter. To recapitulate, Target involved a breach of trust committed by solicitors acting for mortgage lenders and also for their borrowers, the buyers of a Birmingham building site. Having received the loan money from the lenders on trust to pay it to the site vendors in exchange for a valid mortgage, they instead paid it to third parties3 and omitted to get anything at all in return for it. However, as matters turned out the lenders actually received the necessary mortgage paperwork a month later, thus getting the exact security they had bargained for. But the lenders’ joy was not to last: they had all along been the dupes of a mortgage valuation fraud, and when the borrowers collapsed they got less than half their money back. On these facts, they sought to make their solicitors account in equity for their total damage (that is, the total amount of the loan, less only the sale proceeds). It was true that their claim was less than deserving. Their solicitors’ bungle had in essence not cost them a penny piece, since they would still have lost their money even if everything had gone like clockwork. But this was, they said with engaging simplicity, irrelevant. What they were seeking was the reconstitution of a trust fund (in other words, the loan monies) admittedly disbursed in breach of trust: and whatever the position might have been had they sought unliquidated damages at common 1 2 3

[1996] AC 421 (HL). [2014] UKSC 58; [2015] AC 1503. The third parties were a paper company that had simultaneously sold the property to the vendors for a good deal less than the purchase price.

297

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law, in this kind of claim the question whether the fund might or might not have been lost by some other means was beside the point. This argument succeeded at first instance, and by a majority on appeal.4 But it failed in the House of Lords, who on these assumed facts held that a nil award was appropriate. Lord Browne-Wilkinson, giving the leading judgment, accepted the general rule that a defaulting trustee had to restore the trust fund without reference to what might otherwise have happened to it. But he declined to apply it there. First, he said, the rule requiring restoration of the trust fund did not apply once the purpose of the trust had been fulfilled and (as here) the only trust left to restore would be a spectral bare trust existing solely to receive and pay out any monies restored to the erstwhile beneficiaries. In such a case the proper solution was to short-circuit the trust and order payment direct to the beneficiary, who could recover only what he had actually lost.5 Secondly (he said), even if the defendants’ liability was to restore the value of the trust assets wrongly paid away, any award made could (he thought) take account of knowledge that, in hindsight, those assets would have been lost in any case.6 Target possessed one curiosity, namely that the purpose of the trust (payment balanced by receipt of the security documents) was ultimately fulfilled. Despite Lord Browne-Wilkinson’s unorthodox approach to the question of loss, this made it a case which could, just, be reconciled with equitable orthodoxy by postulating that when the transaction was completed as expected, the trustees could be regarded as having notionally restored to the trust fund what they had misguidedly removed from it a few days earlier.7 The same escape, however, was not to hand in the later decision in Mark Redler.8 About £3.3 million of loan monies entrusted by lenders to solicitors in a residential remortgage were released at the right time, and in the main to the right person. But some £270,000 that ought to have gone to discharge a previous second mortgage was by mistake paid to the borrowers instead. As had happened in Target, here too the security had been seriously overvalued (whether fraudulently or not was unclear). The borrowers went bankrupt, and the lenders lost in total some £2 million. A claim for unliquidated damages for negligence would have yielded some £270,000, the amount of the undischarged mortgage which owing to the solicitors’ negligence now outranked the lenders’ security. But, as in Target, the lenders sought to stand on equitable technicality by demanding an accounting in equity of the whole sum released, less only the sale proceeds.9 Here the escape in Target was not available, since owing to the failure to discharge the second mortgage there was no possibility of arguing that the 4 5 6 7 8 9

See Target Holdings Ltd v Redferns [1994] 1 WLR 1089 (CA). Target (n 1) 435–36. Target (n 1) 436–41. A point first made in P Millett, “Equity’s Place in The Law of Commerce” (1998) 114 LQR 214, 227. See too M Carn, “Clarifying the Law for Breach of Commercial Trusts” (2014) 4 Tru LI 226. Mark Redler (n 2). It having been held in the Court of Appeal (see AIB Group (UK) plc v Mark Redler & Co [2013] EWCA Civ 45; [2013] PNLR 19), and accepted in the Supreme Court, that even though some of the loan had been disbursed entirely properly there had been a technical breach of trust in respect of the whole, rather than an observance of the trust in respect of that properly paid and a breach only as regards the amount misspent.



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trust had been completely performed.10 The case thus directly raised the issue of whether Lord Browne-Wilkinson had been right in Target to decide that the trustee’s duty to account should reflect matters which would have caused the loss of the trust property anyway. Lord Toulson, delivering the most substantial opinion, said that this had indeed been correct. The object of ordering a trustee who had wrongfully disbursed assets to reconstitute the trust fund was, he said, essentially to ensure that the beneficiaries’ interests did not suffer: in so far as those interests would have been damnified in any case, it followed that the amount of any restitution had to be reduced.11 His Lordship also added, with some superficial plausibility, that where what was alleged was essentially legal malpractice it was desirable that the measure of recovery for breach of trust should not be wildly discrepant from that available in contract or tort.12 Lord Reed gave a separate opinion saying much the same thing, though slightly less incisively: the other three justices simply agreed with both.

Target and Mark Redler: Two Attacks Two specific complaints can be made about the decisions in Target and Mark Redler. The first is that, by taking into account the fact that the lenders would have lost their money even if all had gone well, they substituted a duty to compensate the beneficiary in respect of loss suffered for the traditional duty to make good the position of the trust itself.13 The second is that both involved a failure to spot, let alone to draw, the distinction between debt and damages in the context of equitable claims.14 As will appear below, neither complaint is justified.

Reinstatement of the Trust Property, Not Compensation of Loss The first complaint we can deal with fairly straightforwardly. It starts from the long-standing equitable rule that, when it came to trustees who had failed to look after trust assets, or wrongly abstracted them from the trust estate, the remedial scheme was nothing like that of the common law.15 The stress was not on wrong and resulting loss, but instead on the beneficiary’s right to insist 10 The solicitors had argued that their only breach of trust had encompassed the misdirected £270,000. But the Court of Appeal held that there had been a single breach of trust in relation to the whole sum entrusted (see Mark Redler (n 9)), and no appeal was taken from this holding. 11 See Mark Redler (n 2) [64]–[66]. 12 Mark Redler (n 2) [71]. 13 P Birks, “Equity in the Modern Law: An Exercise in Taxonomy” (1996) 26 UWALR 1, 45–48; C Mitchell, “Stewardship of Property and Liability to Account” [2014] Conv 211; Carn (n 7); A Shaw-Mellors, “Equitable Compensation for Breach of Trust: Still Missing the Target?” [2015] JBL 165. 14 See the articles referred to in n 32 below. 15 It might just be argued that even at common law the claimants could have recovered in full from the solicitors had they framed their case as one brought on the basis of failure of consideration, despite the loss they would otherwise have made: cf Wilkinson v Lloyd (1845) 7 QB 27; 115 ER 398. But that must wait for further discussion elsewhere.

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on having the trust performed, enforced by a correlative duty on the trustee to render accounts to confirm whether this had been done. The accounting could be either “in common form” or in respect of possible “wilful default”.16 (There could also be a third form of account, namely an accounting for profits: but we leave that aside.) Under the account in common form the trustee had, so to speak, to exhibit on demand the assets entrusted to him. If he could not do so, the beneficiary could “falsify” the account, and insist that the trustee either restore any missing assets in specie or personally pay the trust their value. This applied generally,17 not only where the trustee had lost an asset, but where he had alienated it,18 sold an authorised investment and substituted an unauthorised one,19 or retained an otherwise permitted asset longer than authorised.20 The trustee’s only defence was proof that he had performed his trust: that is, that all dealings with the trust property had been authorised, or (in the case of loss) the asset had been lost or taken despite all reasonable care on his part.21 It followed from this that where dissipation was concerned, then not only was there a reversal of the burden of proof, but there was no room for speculation as to whether some other casualty might have befallen the asset in any case,22 nor yet for the kind of nuanced argument on causation or remoteness that could be found in common law actions.23 Furthermore, the form of the order on an accounting, which was to restore the assets or their value to the trust and not the beneficiaries personally (for the very good reason that not all the beneficiaries might have sued, or for that matter have been in a position to do so)24 had perforce to shut out arguments as to the particular loss suffered, or

16 The point has been made repeatedly. Two of the clearest expositions are C Mitchell, “Equitable Compensation for Breach of Fiduciary Duty” (2013) 66 CLP 307, 322ff and the earlier Millett (n 7) 225–26. See too R Meagher, JD Heydon and M Leeming, Meagher, Gummow & Lehane’s Equity: Doctrine and Remedies (4th ed, LexisNexis 2002) para 2.155; AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58; [2014] 3 WLR 1367 [53]–[57] (Lord Toulson) and the pithy comment of Sir Peter Millett (by then Millett NPJ) in Libertarian Investments Ltd v Hall [2013] HKCFA 93; (2013) 16 HKCFAR 681 [167]: “an account”, he said, “is not a remedy for a wrong”. 17 Clough v Bond (1838) 3 My & Cr 490; 40 ER 1016, 496–97 (Lord Cottenham); Mark Redler (n 16) [52]–[54] (Lord Toulson); Libertarian Investments (n 16) [166]–[172] (Lord Millett NPJ). 18 For example, Hewett v Foster (1843) 6 Beav 259; 49 ER 825; Shepherd v Mouls (1845) 4 Hare 500; 67 ER 746. 19 Kellaway v Johnson (1842) 5 Beav 319; 49 ER 601 324; Knott v Cottee (1852) 16 Beav 77; 51 ER 705 79–80; Re Salmon (1889) 42 Ch D 351 (CA) 357; Re Massingberd’s Settlement (1890) 63 LT 296 (CA). 20 Wills v Trustees Executers & Agency Co Ltd (1900) 25 VLR 391; Fales v Canada Permanent Trustee Co (1976) 70 DLR (3d) 257 (Can SC). 21 See eg Clough (n 17) (monies stolen by co-trustee: defendant trustee liable, since not without fault). 22 “[W]e are not at liberty to speculate whether the same result might not have followed whether the bank had been guilty of that default or not” – Magnus v Queensland National Bank (1888) 37 Ch D 466 (CA) (Lord Halsbury). See too Caffrey v Darby (1801) 6 Ves Jun 489; 31 ER 1159, 496 (Lord Eldon); Cocker v Quayle (1830) 1 Russ & M 535; 39 ER 206. 23 Clough (n 17) 496–97 (Lord Cottenham); see too Re Dawson [1966] 2 NSWR 211 (foreign currency wrongly paid away: liability to replace it, despite loss being greatly increased by unforeseeable devaluation of home currency). 24 Target (n 1) 434 (Lord Browne-Wilkinson); see too Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 294 [155]–[156] (Bathurst CJ).



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not suffered, by the flesh-and-blood beneficiary who happened to be suing.25 It was only in respect of an accounting on the basis of wilful default – that is, loss involving not failure to produce items subject to the trust but rather failure to preserve or exploit the trust property properly, or culpable omission to realise some gain from it – was there any similarity to common law damages. Here it was indeed up to the beneficiary to prove breach, loss to the trust estate and a connection between the two: thus far, but only thus far, could he “surcharge” the account and force the trustee to repair the loss.26 The difficulty with Target and Mark Redler is that the reasoning in both cases cavalierly ignored this distinction. Both decisions took cases on the trustee’s duty to account for wilful default, where causation was relevant, and applied them to liability for unauthorised payment, where it was not. Both thereby arbitrarily substituted a duty to compensate the beneficiary for the traditional duty to make good the trust. And both failed to deal with the logical point that, because the duty of a trustee was to restore mispaid trust funds to the trust, the question whether the benefit of such funds would or would not have been lost to the beneficiary had to be irrelevant. It follows that, whatever the rights and wrongs of these decisions, neither can be said to score highly in the logic or doctrine stakes. But, even if this is true, is the result necessarily wrong? It is respectfully suggested that it is not. It is indeed true that the liability of a trustee who alienates or misdisburses trust assets without authority is reconstitutive (or “‘restorative’, as Lord Millett NPJ perceptively put it in the Hong Kong decision in Hall v Libertarian Investments Ltd).27 But this is only half the solution. What do we actually mean we say the erring trustee must restore the trust estate? The answer, it is suggested, is that in line with the beneficiary’s right to have the trust carried out, the trustee must put the trust estate in the position that it would have been in if the trust had been properly executed in the ordinary course of things.28 Thus viewed, the standard differences with damages for breach of contract or tort neatly fall into place: the irrelevance of remoteness, the disregard of what other misfortunes might have supervened, and the ignoring of the personal 25 Such as arguments that if the assets had remained in the trust the beneficiary personally would have had to pay tax on them. See Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515 (Ch D); also Re Bell’s Indenture [1980] 1 WLR 1217 (Ch D). 26 On this similarity see Millett J in Bristol & West Building Society v Mothew [1998] Ch 1 (CA) 17 (“Although the remedy which equity makes available for breach of the equitable duty of skill and care is equitable compensation rather than damages, this is merely the product of history and in this context is in my opinion a distinction without a difference. Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution.”); also the instructive Singapore decision in Then Khek Koon v Arjun Permanand Samtani [2012] SGHC 17; [2014] 1 SLR 245 [108] (Vinodh J). 27 [2013] HKCFA 94; (2013) 16 HKCFAR 681 [168]. 28 In other words, if the transaction had proceeded to fruition as everyone expected it would, without reference to any error by the trustee. See Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, 556 (McLachlin J); also compare Litton NPJ in Libertarian Investments (n 16) [168] (“This approach to equitable relief treats the defendant as if he had carried out his fiduciary duties” (emphasis added)).

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position of beneficiaries. But now return to Target and Mark Redler. It is one thing to ignore arguments that the trust would have lost the assets concerned in any event owing to the actions of some third party, or some other outside event. But it is quite another to extend this disregard to the subsequent would-be actions of the trustee himself where those actions (a) would have been legitimate and even required by the trust, and (b) would in the ordinary course of events have been precisely what was expected to happen. In such a case it is entirely artificial, and certainly not mandated by the authorities, to insist on ignoring all this and taking as a comparator for the purposes of restoration the situation that would have obtained had the trustee stopped the whole transaction in its tracks a moment before the unjustified payment and then kept the funds locked away in the trust. And this is exactly the point in Target and Mark Redler. In Target the defendants, had they executed their trust as required and expected, would have disbursed the trust monies in exchange for mortgage documents. The obvious remedy for their default was to make them restore the position that would have obtained had they done exactly that. So too in Mark Redler, where part of the loan monies were misdirected to the borrower rather than the second mortgagee. Granted that the solicitor-trustees had to make restitution to the trust estate, the question still remains: was the position to be restored that which would have applied if the whole of the mortgage monies had been paid to the right people, or if no monies had been paid to anyone? The same comment applies: the sensible comparator can only be the former. Moreover, this is also consistent with at least two of the later leading Commonwealth cases. One was the important Australian decision in Youyang Pty Ltd v Minter Ellison Morris Fletcher.29 There, plaintiffs (to oversimplify slightly) entrusted solicitors with a large investment fund and instructed them to transfer it to an investment company against a bank CD in their favour. The solicitors paid the money over but got no CD: later, the investment company collapsed and the plaintiffs’ money disappeared. To an action for the amount lost, the solicitors pleaded that after the initial transfer but before the collapse of the investment company they had been authorised to maintain the investment despite the lack of the CD. The New South Wales Court of Appeal30 held that this was a good plea: this was largely on the basis of Target, but the case could equally well have been decided on the basis that the solicitors were not bound to restore the trust fund in so far as the monies would not have been in it even if they had done as they were told. The case was reversed in the High Court on the basis that in fact no later authorisation had been given:31 but no suggestion was made that had the authorisation been made the result should have been any different from that reached in the Court of Appeal.32 29 30 31 32

[2003] HCA 15; (2003) 212 CLR 484. See Youyang v Minter Ellison [2001] NSWCA 198. Youyang (n 29). See Youyang (n 29) [35], [63]. This may well be why Simmonds J in the later Western Australian decision in Re Rowena Nominees Pty Ltd; ex p Conlan [2006] WASC 69; (2006) 199 FLR 415 [61] saw no inconsistency here (though it must be admitted that Edelman J in Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 285 FLR 121 [359] was less certain on this point, as was WMC Gummow, “Three Cases of Misapplication of a Solicitor’s Trust Account” (2015) 41 Aust Bar Rev 5, 12).



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The other was the Hong Kong cases of Libertarian Investments Ltd v Hall.33 In that case, the defendant fell to be treated as though he were a trustee who had failed to account for certain securities which he held on behalf of the claimant.34 The securities were volatile, and had the trust been properly carried out a large block of them would have been sold off at a particular point in time – well before the action was brought. In deciding on the valuation of these shares for the purposes of an accounting action, the Court of Final Appeal reckoned the value of that particular block of shares as at the time at which they should have been sold. This is, it is suggested, entirely consistent with the thesis being put forward here: the proper way of reckoning a trustee’s restorative liability is to assume that the trust had been properly executed, and to order compensation accordingly.35

Damages and Debt We are left with the second, and more radical, complaint. This is that the real difficulty with Target and Mark Redler was the Law Lords’ failure in the context of equity to understand, let alone to draw, a distinction fundamental to English law: namely, that between a claim in debt and one for damages. Lionel Smith put forward this argument most elegantly in 2010.36 Whatever the position in respect of compensation where an accounting was taken on the basis of wilful default, where (as in Target and Mark Redler) simple mispayments were involved neither wrongdoing nor compensation came into the equation at all. Proceedings following an account in common form, under which the beneficiary got the right to surcharge the account for assets unaccounted for, involved, on this argument, the enforcement of a primary duty in the trustee to maintain, and where necessary reconstitute, the trust fund. Claims of this kind had been categorised in the 19th century, with prescience and accuracy, as involving “equitable debts”:37 the point being that the analogy lay not with damages but with claims in debt at common law for the price of goods or services, in which issues relating to loss were necessarily beside the point.38 True, enforcing the trustee’s duty to pay money to the trust might indirectly result in the making good of a loss suffered by a beneficiary; but this was essentially a 33 Libertarian Investments (n 16). 34 In fact he had been entrusted with funds to buy these securities, but had not bought them at all. Instead he had stolen the monies and then falsely told his principals that he had purchased the securities on their behalf. But nothing turns on this. 35 Libertarian Investments (n 16) [155] (Litton NPJ). 36 L Smith, “The Measurement of Compensation Claims against Trustees and Fiduciaries” in E Bant and M Harding (eds), Exploring Private Law (CUP 2013) ch 16. See too Mitchell, “Stewardship of Property and Liability to Account” (n 13) 223. 37 See Re Collie, ex p Adamson (1878) 8 Ch D 807 (CA) 819 (James LJ); Re Smith Fleming & Co, ex p Kelly & Co (1879) 11 Ch D 306 (CA) 311 (James LJ). 38 Another common law analogy, not drawn by Prof Smith but arguably even closer to the trustee example, is a customer’s complaint against a bank which has debited his account on the basis of a forged cheque. Such a claim is not for compensation but simply a plea for payment on the basis that the bank’s original obligation (debt) to the customer has not been discharged and therefore remains: see Richmond J’s pithy exposition in National Bank of New Zealand Ltd v Walpole & Patterson Ltd [1975] 2 NZLR 7, 12.

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by-product of the trustee’s liability, rather than the gist of the action. It followed the attempt by the House of Lords in Target and the Supreme Court in Mark Redler to limit the claimants’ recovery by reference to the amount by which they were worse off, or to talk in terms of causal relations between breach of trust and loss suffered, were logically misconceived. This is a formidable argument, though (as will appear below) it is suggested that it is ultimately unsound. Before saying why this is, however, it is as well to make clear what is meant by the common law debt-damages distinction. For the purposes of this chapter, the divide will be regarded as equivalent to that between liquidated and unliquidated pecuniary liabilities, with debt placed in the former category and damages in the latter. Admittedly the correspondence is not exact,39 and usage varies.40 Nevertheless it will suffice for the purposes of argument. Unliquidated liabilities, of which damages are a subset, include cases where the amount of the plaintiff ’s entitlement is not a matter of simple calculation at the time it becomes payable, but involves either substantial discretion or the application of some more or less complex legal principle by the court, for example (in the damages context) the rules as to quantification and as to what counts as recoverable loss.41 They cover, as well as damages, non-wrong-based compensation liabilities42 and claims for fees whose amount is explicitly subject to court control,43 not to mention a few other specialised claims.44 Liquidated liabilities, typified by debt claims, comprise by contrast obligations to pay sums immediately calculable, albeit possibly with some little complexity. They include stipulated contractual payments (the agreed price of goods or services,45 or the amount of an abstract payment obligation);46 contractual duties to pay a reasonable sum (plus possibly quantum meruit 39 Thus liquidated claims such as demurrage can share features with unliquidated claims, for example the unavailability of common law interest (at least in England): see President of India v Lips Maritime Corp [1988] AC 395 (HL). And occasionally “debt” has been extended to cover unliquidated claims: see eg Morse v Tucker (1846) 5 Hare 79; 67 ER 835 and Bisset v Burgess (1856) 23 Beav 278; 53 ER 109 (provision in a will for payment of “debts” out of particular property). But these mismatches are relatively minor. 40 Indeed, Lloyd LJ in Phillips & Co v Bath Housing Co-operative Ltd [2012] EWCA Civ 1591; [2013] 1 WLR 1479 pertinently observed [39]–[41] that what counted as a liquidated claim was not always a term of art and might well vary according to the (especially legislative) context. See too Halsbury’s Laws of England, vol 29 (Re-issue 2014) para 306; also generally N Andrews and others, Contractual Duties: Performance, Breach, Termination and Remedies (Sweet & Maxwell 2012) ch 19. 41 “The phrase ‘liquidated claim’ connotes a claim for a specific sum or, alternatively, for a sum which can be readily and precisely ascertained. … A claim for damages in tort is by definition not a liquidated claim. The assessment of damages in tort involves the application of a set of common law rules to the particular circumstances of the case. The application of those rules may be relatively straightforward in some instances, but that does not make the claim a liquidated one.” (Jackson J in Dŵr Cymru Cyf v Carmarthenshire County Council [2004] EWHC 2991 (TCC) [49]). 42 Dŵr Cymru (n 41) [54]); Khan v Tyne & Wear Passenger Transport Executive [2015] UKUT 43 (LC). 43 As with a lawyer’s untaxed bill of costs: Truex v Toll [2009] EWHC 396 (Ch); [2009] 1 WLR 2121. 44 Such as salvage and general average: The Potoi Chau [1984] AC 226 (PC) 237 (Lord Diplock). 45 H Beale, Chitty on Contracts (31st ed, Sweet & Maxwell 2013), vol 1, para 26.008. 46 Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382; [2015] 1 Lloyd’s Rep 97 [38] (Moore-Bick LJ).



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claims);47 duties to account, for instance where a defendant wrongly filches money belonging to the plaintiff;48 and assorted miscellaneous obligations denominated in money, such as judgment debts, or taxes.49 (The status of restitutionary claims in this connection is unclear. Logically they should be unliquidated;50 but on the authorities the matter remains open.)51 The distinction matters for numerous reasons. Some are technical: for example, set-off (more generous for liquidated than for unliquidated crossclaims);52 assignment (liquidated claims being assignable absolutely53 but unliquidated ones only sub modo);54 limitation (acknowledgment restarts the limitation clock, but only in respect of a “debt or other liquidated pecuniary claim”);55 and personal insolvency (while most claims are now provable, only claims embodying a “liquidated sum” allow the initial institution of insolvency proceedings).56 But the important point here is that because a liquidated claim is by definition one whose amount is calculable without reference to the individual circumstances of plaintiff or defendant, it follows that it is not subject to reduction due merely to a failure by the plaintiff to prove loss57 or

47 See eg Amantilla Ltd v Telefusion plc (1987) 9 Con LR 139. 48 See eg Re Vassis, ex p Leung (1986) 9 FCR 518, 526–527. In Hope v Premierspace (Europe) Ltd [1999] BPIR 695 (unliquidated) a claim for the return of stolen money was held unliquidated, but it seems that this is best interpreted as involving a tort claim: see Webster v Mackay [2013] EWHC 2571 (Ch); [2013] All ER (D) 193 [22]. 49 Commissioner of Stamps (WA) v West Australian Trustee, Executor & Agency Co Ltd (1925) 36 CLR 98 (HCA); Re McGreavy [1950] Ch 269 (CA). 50 Since the measure of recovery is not a matters of simple calculation, but involves a process of evaluation analogous to that applying in damages: namely, looking to the situation of the individual parties and applying specific legal rules, such as what counts as a relevant gain, or the relevance of matters such as officiousness or change of position. 51 Unliquidated: see Hope (n 48) (money had and received claim for the return of filched funds is unliquidated, and thus incapable of supporting bankruptcy petition) (accepted by Patten LJ in McGuinness v Norwich & Peterborough Building Society [2011] EWCA Civ 1286; [2012] 2 All ER (Comm) 265 [40]); also Sutherland v Jatkar [2014] FCA 532; (2014) 222 FCR 601 (contribution claim between tortfeasors, although not for damages, regarded as unliquidated). Liquidated: Chalke v Inland Revenue Commissioners [2009] EWHC 952 (Ch); [2009] 3 CMLR 14 [157] (claim for recovery of mistaken payments); Re Vassis (n 48) 527–28 (stolen monies); Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93 (CA) 105 (total failure of consideration). And see too the assumption by Glidewell LJ in Woolwich Equitable Building Society v Inland Revenue Commissioners [1991] 3 WLR 790 (CA) 835 (power to award damages in judicial review proceedings does not encompass award of restitution, the former being unliquidated and the latter liquidated). 52 Halsbury’s Laws of England (n 40) paras 652ff. 53 Fitzroy v Cave [1905] 2 KB 364 (CA); see too Norglen Ltd (In Liquidation) v Reeds Rains Prudential Ltd [1999] 2 AC 1 (HL). 54 Trendtex Trading Corp v Crédit Suisse AG [1982] AC 679 (HL). 55 Limitation Act 1980 (UK) s 29(5)(a). Modern Australian legislation does not draw this distinction, however: eg Limitation Act 1969 (NSW) s 54. 56 Insolvency Act 1986 (UK) s 267(2)(b) (equivalent to Bankruptcy Act 1966 (Cth) s 44(1)(b)(ii) (referring to a “liquidated sum due at law or in equity”)). 57 “The plaintiff who claims payment of a debt need not prove anything beyond the occurrence of the event or condition on the occurrence of which the debt became due. He need prove no loss; the rules as to remoteness of damage and mitigation of loss are irrelevant …” – Jervis v Harris [1996] Ch 195 (CA) 202 (Millett LJ). See too McGuinness (n 51); E Bant and M Harding (eds), Exploring Private Law (CUP 2010) 369–73.

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causation,58 or because allowing the victim of a wrong to recover in debt would over-compensate him.59 At this point we can return to the decisions in Target and Mark Redler and the argument that the liability there ought to have been regarded as a liability for an “equitable debt”, meaning thereby a liquidated equitable claim analogous to a debt at common law. The first difficulty here is that the application of the common law liquidated–unliquidated distinction to equity is not straightforward. It is true that in some contexts it has been carried over. Thus the rule in limitation cases that only liquidated claims can be revived by acknowledgment extends to equitable liabilities to which the Limitation Act 1980 (UK) applies directly or by analogy;60 in bankruptcy equitable liabilities, like legal obligations, can found a petition only if liquidated;61 and in assignment law unliquidated equitable claims are subject to the same restrictions as legal ones.62 Nevertheless, it has to be said that apart from these specialised areas equity lawyers have largely ignored the common law position. True, judicial references to “equitable debts” are plentiful from the 19th century onwards. But they have little to do with the common law divide between debts and damages, or liquidated and unliquidated liabilities.63 Instead use of the term was overwhelmingly for unconnected reasons, such as making clear that a given duty to pay was not enforceable at common law but only in chancery,64 that a claim was not proprietary but personal,65 or that the claim concerned did not 58 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2015] EWHC 283 (Comm); [2015] 1 Lloyd’s Rep 359. Similarly with mitigation: see White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL) and Abrahams v Performing Right Society Ltd [1995] ICR 1028 (CA) 1037 (Hutchinson LJ). 59 For instance, by allowing a claim for an agreed deposit: see Dewar v Mintoft [1912] 2 KB 373 (KBD) and Firodi Shipping Ltd v Griffon Shipping LLC (“The mv Griffon”) [2013] EWCA Civ 1567; [2014] 1 CLC 1. 60 For recent examples see Manning v English [2010] EWHC 153 (Ch); [2010] Bus LR D89 (partnership account claim unliquidated and not subject to rule) and Barnett v Creggy [2014] EWHC 3080 (Ch); [2015] PNLR 13 (claim for mispayment of trust funds liquidated and subject to it). 61 See eg Darjan Estate Co plc v Hurley [2012] EWHC 189 (Ch); [2012] 1 WLR 1782 (rent under equitable lease liquidated and capable of founding bankruptcy petition). Similarly with claims in equity for filched funds, though whether these are liquidated for these purposes is controversial: compare Re Vassis (n 48) 526–27 (liquidated) with Hope (n 48) (unliquidated). 62 Implicit in Re Buick Sales Ltd [1926] NZLR 24 (SC) (discussing the assignability of equitable claims against a company director). 63 Indeed, in Re Blencowe (1866) LR 1 Ch App 393 (CA) 394, the term “equitable debt” was used, with no hint of incongruity, to refer to a claim for compensation for wilful default (in the context of bankruptcy law). 64 See eg Re Blencowe (n 63) (equitable claim outside the then bankruptcy legislation, which was limited to legal debts); Re Adams (1878) 9 Ch D 307 (CA) and Foster v Reeves [1892] 2 QB 255 (CA) (rent under a mere equitable lease); Dick v Swinton (1813) 1 V & B 371; 35 ER 145, Bosanquet v Wray (1815) 6 Taunt 597; 128 ER 1167, Thompson v Norris (1852) 5 De G & Sm 686; 64 ER 1299 (intra-partnership claims); Terrell v Hutton (1854) 4 HLC 1091; 10 ER 790; Re Athenæum Life Assurance Society (1858) 4 K & J 549; 70 ER 229 (claims by shareholders based on a company constitution before the enactment of what is now the Companies Act 2006 (UK) s 33). 65 Notably in connection with claims to secret profits before FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45; [2015] AC 250: see Metropolitan Bank v Heiron (1880) 5 Ex D 319 (CA) Lister & Co v Stubbs (1890) 45 Ch D 1 (CA) Clarkson v Davies [1923] AC 100 (PC) Reading v R [1949] 2 KB 232 (CA) John v James [1991] FSR 397 (Ch D) 439; Ardlethan Options Ltd v Easdown (1915) 20 CLR 285 (HCA) 292, Suzlon Energy Ltd v Bangad [2014] FCA 1105 [75]. But there were other examples too: eg Re Rowena Nominees Pty Ltd (n 32) [59] (personal claim against trustees of investment scheme not entitling plaintiff to interest in trust property).



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amount to an action in tort.66 Indeed, it is probably most accurate to say that the term “equitable debt” was not used as a term of art at all.67 All this means that, while Professor Charles Mitchell is correct to state that “[t]he courts have said that substitutive performance claims resemble claims for ‘an equitable debt’”,68 the significance of this may well be rather limited. Of the two statements cited in support of the “equitable debt” analysis, that in Ex p Adamson69 was in the context of a polite fiction aimed at allowing fraud claims to be proved in bankruptcy in the teeth of the restrictive rules in the then bankruptcy code,70 while that in Re Smith Fleming & Co71 was making the simple point that, in the absence of traceable trust property, the only claim against an errant trustee had to be an in personam one. Neither had anything to do with the difference with liquidated and unliquidated claims. But let us put this point to one side. The phrase “we do this at common law but that in equity” is not of itself a respectable argument;72 and it is perfectly possible that the common law distinction between liquidated and unliquidated claims, even though not in fact used by equity lawyers with any consistency, is 66 More important than it might first seem, in the late nineteenth century. At a time of unregulated markets characterised by rampant fraud, the then bankruptcy laws denied proof of claims “in the nature of unliquidated damages arising otherwise than by reason of a contract or promise”: Bankruptcy Act 1869 (32 & 33 Vict, cap 71) (UK) s 31 (since repealed). To circumvent this, a series of decisions allowed victims to prove against bankrupt fraudsters by somewhat implausibly characterising breach of trust as an equitable (or even contractual) debt. See eg ex p Adamson (n 37) referred to below; Flitcroft’s Case (1882) 21 Ch D 519 (CA) 527 (Bacon V-C); Re Smith Fleming (n 37) 311 (James LJ). Note, too, the shady company promotion case of Emma Silver Mining Co v Grant (1880) 17 Ch D 122 (Ch D) 130 (Jessel MR). 67 Other representative examples of liabilities which have at one time or another been called “equitable debts” include the following: claims for income due from trust funds (Horsley v Cox (1868–69) LR 4 Ch App 92 (CA); Webb v Stenton (1883) 11 QBD 518 (CA)); a life tenant’s duty to make good waste (Micklethwait v Micklethwait (1857) 1 De G & J 504; 44 ER 818); claims by and against estates in general (eg Stones v Cooke (1834) 7 Sim 22; 58 ER 745, Taylor v Taylor (1875) LR 20 Eq 155: also Wentworth v Rogers [2003] NSWSC 472); claims for compensation for breach of trust or breach of fiduciary duty (Obee v Bishop (1859) 1 De G, F & J 137; 45 ER 311, 142; Re Blencowe (n 63); Huggons v Tweed (1879) 10 Ch D 359 (CA); Wickstead v Browne (1992) 30 NSWLR 1, 15 (Handley JA)); claims arising by subrogation or some similar doctrine (eg Reversion Fund & Insurance Co Ltd v Maison Cosway Ltd [1913] 1 KB 364 (CA)); claims depending on equitable assignments (Re London & Birmingham Flint Glass & Alkali Co Ltd (1859) 1 De G, F & J 257; 45 ER 357; Tony Lee Motors Ltd v M S Macdonald & Son (1974) Ltd [1981] 2 NZLR 281, 286); promises to settle property (ex p Campbell) (1809) 16 Ves Jun 244; 33 ER 977; Thompson v Thompson (1821) 9 Price 464; 147 ER 152); a surety’s right to be preindemnified (Ferguson v Gibson (1872) LR 14 Eq 379); not to mention insurance contribution claims (QBE Insurance (Australia) Ltd v SLE Worldwide Australia Pty [2005] NSWSC 776; [10]13 ANZ Ins Cas 61–654). It is hard not to sympathise with Jessel MR’s dismissive characterisation of the whole thing as an “inaccurate phrase” – Re Jones (1881) 18 Ch D 109 (CA) 120. 68 See Mitchell, “Stewardship of Property and Liability to Account” (n 13) 223. 69 Ex p Adamson (n 37) 819. 70 See n 66 above. Adamson’s case does not seem to have involved any abstraction of property held on trust: it was a simple financing fraud. See too the more modern decision of the Federal Court of Australia in Re Vassis (n 48) 526–27, holding a claim for defalcations by a solicitor-trustee to be a debt and hence liquidated so as to be able to found a petition under s 44 of the Bankruptcy Act 1966 (Cth). 71 Re Smith Fleming (n 37) 311 (James LJ). 72 See A Burrows, “We Do this at Common Law but that in Equity” (2002) 22 OJLS 1 (admittedly in another context).

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nevertheless one that ought to be applied by them to throw light on the liability of a trustee who fails to deal properly with trust property. The question then is this: is it right to argue that the liquidated–unliquidated distinction reflects the difference between the common form and wilful default forms of account claims against a trustee, with the common form account corresponding to a liquidated claim and a wilful default claim to an unliquidated one? Put another way, can it be said that because the trustee’s liability is not dependent on the loss suffered by the beneficiary, does not require proof of wrongdoing and is based on the reconstitution of an ongoing trust fund, it must therefore be regarded as a liquidated or debt liability artificially fixed at the value of the assets unaccounted for? It is respectfully suggested that the answer is No. First, we can deal with the fact that the amount of personal loss to the beneficiary suing, or for that matter the entire lack of any loss to him, does not represent the measure of the trustee’s liability. This is true;73 but it has to be seen in context. It reflects the fact that a suit seeking reinstatement of the trust property is brought for the benefit of all beneficiaries, not necessarily those suing.74 It does not mean that a claim for reinstatement of the trust fund is not a claim for loss, but rather that the beneficiary’s claim to surcharge the trustee is essentially one brought in respect of third party losses, in this case the loss suffered by a notional “trust estate”.75 Such third-party loss claims are nothing very unusual in the context of the law of obligations as a whole,76 and there is certainly no reason to regard them as being anything other than ordinary unliquidated claims, albeit of a special type. Secondly, what of the “no wrong” argument? This is the argument that unlike (say) a liability in tort, or a liability in a trustee for wilful default in failing to preserve the trust property, a trustee’s liability to make up the value of assets found missing on the taking of accounts does not require the claimant to plead or prove any breach of duty on the trustee’s part.77 It is this factor which, the argument goes, shows that what we have here is in essence a debt or liquidated liability. But this contention also, it is suggested, collapses under stress. To begin with, while the fact that a liability does not depend on a breach of duty by the defendant may prevent it being styled a liability in damages,78 this does not mean that it must therefore be an unliquidated obligation in the nature of a debt. On the contrary: there are plenty of examples of such liabilities which are nevertheless unliquidated – for instance, a duty 73 Witness Bartlett (n 25) and Re Bell’s Indenture (n 25), holding that any tax saved by the beneficiary is out of account. 74 Target (n 1) 434 (Lord Browne-Wilkinson); see too Mark Redler (n 16) [100] (Lord Reed) and Australian Special Opportunity (n 24) [155]–[156] (Bathurst CJ); see also n 17 above. 75 Nocton v Lord Ashburton [1914] AC 932 (HL) 952, 958 (Viscount Haldane); Target (n 1) 434 (Lord Browne-Wilkinson). 76 For example, bailees suing for bailors’ losses (eg The Winkfield [1902] P 42 (CA) and The Jag Shakti [1986] AC 337 (PC)), or personal representatives suing negligent solicitors for prejudice to legatees (see Chappel v Somers & Blake [2003] EWHC 1644 (Ch); [2004] Ch 19). 77 Mitchell, “Stewardship of Property and Liability to Account” (n 13) 223–24, citing Bacon v Clark (1837) 3 My & C 294; 40 ER 938, 298–99 and Angullia v Estate & Trust Agencies (1927) Ltd [1938] AC 624 (PC). 78 Cf The Trident [1939] 1 KB 748 (CA) 756 (Mackinnon LJ) (statutory liability to compensate for damage independent of breach of duty).



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to pay compensation for compulsory disturbance,79 and probably also certain restitutionary liabilities.80 But in any case, the contention that the trustee’s liability is not based on breach of duty is itself dubious. True, the beneficiary need not prove a breach of trust. All he has to do is call on the trustee to account for the assets entrusted to him, with it then being up to the trustee to produce them or face presumptive liability if he cannot.81 But the liability remains presumptive only. The trustee can still escape by showing that even though a given asset is not to hand, its loss or alienation was not his fault or was otherwise trust-compliant – in plain English, by proving that he was not guilty of a breach of his obligations as a trustee. In other words, it is suggested that this is simply an instance where liability does depend on wrongdoing, but subject to a reverse burden of proof, of exactly the same kind as applies (for example) to a bailee who no longer has the goods bailed to him and cannot prove lack of breach of duty on his part.82 Nobody argues that his liability is for this reason one in debt and not damages: and there is no reason to treat a trustee any differently. Thirdly, what of the contention that the nature of the trustee’s duty to carry out the trust in specie, on which the duty to account is based, makes the latter equivalent to the common law idea of a liquidated claim? The answer here is simple: it does not. Return for a moment to the definition referred to above: a liquidated claim is an abstract obligation to pay a fixed or calculable sum in money. Now take a trust of a non-cash asset: for example, a block of shares. It is quite true that the duty of the trustee is tied strictly to that asset. Thus a trustee of 1000 shares in BHP Billiton plc must apply those shares for the benefit of the beneficiary.83 There is no cash alternative; if, with engaging eccentricity, he takes the dividends himself and tells his broker to credit the trust with an identical income from his own resources, this is a breach of trust.84 To the extent that this obligation is also enforceable in specie (for example, where the trustee still has the shares but refuses to treat them as trust property), it is also correct to say that questions of loss are indeed beside the point. It is exactly like a specificallyenforceable contractual obligation to convey a house or pay a pension. Just as

79 Khan (n 42). For that matter, it never seems to have been seriously suggested that the claim in Burmah Oil Company (Burma Trading) Ltd v Lord Advocate [1965] AC 75 (HL) was a claim in debt (though the issue of classification never in fact arose). 80 See Chalke (n 51) [157]; Re Vassis (n 48) 527–28; Biggerstaff (n 51) 105 (same re money paid where failure of consideration). But these are possibly controversial: see above. 81 This was the point being made by Lord Cottenham in Bacon (n 77) 298–99 and Lord Romer in Angullia (n 77) 637 (see note above). 82 This is true whether the bailor sues in detinue (see Reeve v Palmer (1858) 5 CB (NS) 84; 141 ER 33, 93 and Ballet v Mingay [1943] KB 281 (CA); N Palmer, Bailment (3rd ed, Sweet & Maxwell 2009) para 10.30ff) or for breach of bailment (Port Swettenham Authority v TW Wu & Co Sdn Bhd [1979] AC 580 (PC)). 83 True, it was held in Hunter v Moss [1994] 1 WLR 452 (CA) that there could be a declaration of trust of fungibles which left the interests of trustee and beneficiary interchangeable (and see too White v Shortall [2006] NSWSC 1379). But that is a special case, and it does not alter the point in the text. 84 Admittedly, this will normally be a harmless breach. But not necessarily so. It may matter if, for example, the trustee invests the dividends wrongly taken in an appreciating asset. The beneficiary in such a case will get the gain.

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the question whether the plaintiff has suffered any loss is an irrelevance there,85 so also here: the trustee must treat a trust asset as trust property, period. But the duty to account if assets are found to be missing or unavailable is different. True, where this liability takes the form of a money obligation it looks at first sight a bit like a debt, being a pecuniary obligation, fairly readily calculable in amount by reference to the value of the trust asset unaccounted for,86 and independent of the specific circumstances of either beneficiary87 or trustee.88 But the resemblance is deceptive. For one thing, save where the missing trust assets are still under the trustee’s control,89 it is impossible in the nature of things to compel him to perform the trust. All the law can do is impose a duty on him to do the next-best thing: namely, to transfer into the trust a cash sum equivalent to the asset unaccounted for. Even if the trust assets lost were themselves cash assets, moreover, the same follows: replacing lost cash is not carrying out the trust but providing a substitutive remedy to restore the trust funds.90 For another, assuming that we are talking about making the trustee pay a cash sum into the trust, the amount of that sum depends on court assessment. Hence even though it differs from a liability to make good an open-ended loss (giving rise to the eminently sensible suggestion to style it “substitutive compensation” as opposed to “reparative compensation”),91 it remains at bottom an unliquidated liability to make compensation.92 The most helpful analogy, it is suggested, is the liability in detinue93 of a bailee who loses goods. 85 The pension example was, of course, deliberately chosen: see Beswick v Beswick [1968] AC 58 (HL), where exactly this point was in issue. 86 And does not, it has been said, include further consequential loss. As Burchett J put it in Re Vassis (n 48) 526–27, there is a clear distinction between the nature of claims for the actual trust moneys misappropriated and other consequential claims for damages which may arise from a breach of trust. See too C Rickett, “Understanding Remedies for Breach of Trust” (2008) 11 Otago LR 603, 606–07; J Glister, “Breach of Trust and Consequential Loss” (2014) 8 J Eq 235. But this is not certain: see note below. 87 For example, liability is unaffected by the fact that the asset would have been taxable in the beneficiary’s (equitable) hands: Bartlett (n 25). 88 Thus the fact that the ultimate loss to the trust fund is entirely unforeseeable – for instance, owing to a sudden subsequent appreciation in the value of the asset removed – is beside the point: Re Dawson (n 23). 89 And even here the remedy of a specific order of restitution is not available as of right, with the court retaining a jurisdiction to make a money award instead. See the South Australian decision in Pickering v Smoothpool Nominees Pty Ltd (2001) 81 SASR 175 (Full Ct) (trust property consisting of unique fishing permit unobtainable in the market: money payment nevertheless ordered). Conversely, the defendant cannot it seems insist on making restitution in specie where the plaintiff would prefer cash: see Nant-y-Glo & Blaina Ironworks Co v Grave (1878) 12 Ch D 738 (Ch D) and Re Dawson (n 23) 214–16. 90 Compare the situation with conversion. If I steal a $100 bill of yours I must pay you $100: but this is still a substitutive remedy in damages for conversion. See D Fox, Property Rights in Money (OUP 2008) para 9.08. 91 Terms originating in J Edelman and S Elliott, “Money Remedies against Trustees” (2004) 18 Tru LI 116: see too Rickett (n 86) 606; Agricultural Land Management (n 32) [349] (Edelman J). 92 See Dwr Cymru Cyf (n 41) [49] (Jackson LJ). To this extent care must be taken with Lord Millett NPJ’s statement in Hall (n 27) [168] that such liability “is not compensation for loss but restitutionary or restorative”. 93 In England, unlike Australia, this is now a liability in conversion, following the statutory suppression of detinue by the Torts (Interference with Goods) Act 1977 (UK) s 2. But the basis of liability remains unaffected.



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The theory of this latter liability is, indeed, an almost exact common-law doppelgänger to that of the trustee. The bailee must return the goods entrusted to him, or prove their loss was due to some cause exonerating him: if he cannot, then he is precluded from denying that he still has them and must pay the bailor their value.94 Yet this is a liability which, albeit based on a simple valuation exercise, is beyond doubt neither liquidated nor a claim in debt.95 Moreover, there is a further point of dissimilarity with a debt or liquidated sum worth noting. Such a claim is by definition fixed or calculable without reference to the individual circumstances of particular parties. But the sum payable by a trustee where property is unaccounted for may vary according to the loss suffered by the trust.96 Hence while normally the award is of the value of the misdirected property plus a standard rate of interest, if the trust would have made a particular amount of gain from the assets concerned, then the liability on an accounting may include this sum.97

Conclusion The conclusion to this chapter can be expressed in short order. First, it must be admitted that the reasoning by which the courts in Target 98 and Mark Redler99 reached their result will not do. In particular, both cases clearly misread the old authorities on the taking of accounts against trustees, and wrongly started from an overriding assumption that recovery for breach of trust should be treated almost as if it were a branch of the law of damages for breach of contract or tort. Secondly, however, there is no reason to regard the actual outcome in either case as either unjust or wrong, or to say that the court should have disregarded the fact that the claimants would have lost their money even if there had been no breach of trust. Properly interpreted, the principle that a beneficiary is entitled to have the trust fund reconstituted is entirely consistent with a decision to have regard to what the trustee would legitimately have done with the trust funds had everything gone according to plan. Nor is there any reason to regard a trustee’s duty to reconstitute the trust fund as a form of debt or liquidated liability. On the contrary: even on a strict interpretation of the old authorities, this liability of the trustee’s falls to be regarded as compensatory in nature and not as a fixed liability enforceable come what may whatever loss the trust may or may not have suffered. In short, the claimants not only had no merits: in this particular case they were not right, either. 94 Palmer (n 82) paras [1.072]–[1.073]; Reeve (n 82) 93; Jones v Dowle (1841) 9 M & W 19; 152 ER 9. 95 See Blue Sky One Ltd v Balli Group plc [2010] EWHC 631 (Comm); 2010 WL 902909 [118] (Beatson J). See too Dŵr Cymru Cyf (n 41) [49]–[51] (Jackson J); McGuinness (n 51) [36] (Aldous LJ) (both stating that all claims in tort are by definition unliquidated). 96 Note, the loss suffered by the trust, not individual beneficiaries: see Bartlett (n 25). 97 See the careful discussion by Hamilton J in Lewis v Kation Pty Ltd [2006] NSWSC 480 [9]–[13], approved by Allsop J on appeal (Kation Pty Ltd v Lamru Pty Ltd [2009] NSWCA 145; (2009) 257 ALR 336 [111]). To this extent the statement in Rickett (n 86) 606–07, referred to in n 86 above, that consequential loss does not fall to be considered at all in such cases, has to be taken with a pinch of salt. 98 Target (n 1). 99 Mark Redler (n 2).

14

Specific Implement and Specific Performance: Are They Really Much the Same? David Hope I began my professional life in Scotland as an advocate at the Scottish Bar. I had studied law at Edinburgh University. So the system of law that I grew up with was Scots law. The sources from which its system of private law has developed have no single point of origin, but the way the law is classified is essentially civilian in character. Private law was classified by the early institutional writers into the law of persons, the law of things and the law of actions.1 This was the way it had been classified by French, German and Dutch commentators on the Roman civil law, whose writings were introduced to Scotland during the 17th and 18th centuries. The principles which they had developed were accepted in Scotland along with the general mercantile and marine customs of Western Europe and some of the principles of the common law and equity from England. The basic structure, with its strong emphasis on order and principle, remains with us today. The system is sometimes referred to as a mixed system, because of the various sources from which it is drawn.2 But it is the civilian tradition that gives it its unique character. The law of persons is concerned both with natural persons and with other bodies such as partnerships and corporations. The law of things is divided into personal rights, including rights of obligation, and rights of property. The law of contract is part of the law of obligations, as indeed is delict too. We were taught that obligation is a legal bond between two legal persons by which one is bound to pay or perform something to or for the benefit of the other.3 When such a bond exists it creates rights to performance in the one party, and it imposes corresponding duties, liabilities or burdens on the other which that other party is obliged to make good to the party to whom he is bound. If those duties are not implemented, the law provides remedies to secure implement of the obligation, or reparation for its non-implementation which will normally take the form of an award of damages. That is the essence of the law of obligations. The general rule is that a party to a contractual obligation is entitled to enforce that 1 2 3

Stair, Institutions, I, 1, 23; Bankton, Institute, I, 1, 86; Erskine, Institute, I, 2, 1. See Vernon Palmer, Mixed Jurisdictions Worldwide (Cambridge 2001) 201–03. Justinian, Institutes, 3, 13, 2; Stair (n 1) I, 3, 1.

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obligation as of right by seeking and obtaining a decree for specific implement. As Lord Herschell put it in Stewart v Kennedy,4 in Scotland specific implement is one of the ordinary remedies to which a party to the contract is entitled where the other party refuses to implement the obligation which he has undertaken. In the same case Lord Watson said5 that the laws of England and Scotland regard the right to specific performance from different standpoints, and that in Scotland breach of the contract gives the party aggrieved the legal right to sue for implement. Although he may elect instead to sue for damages, he cannot be compelled to do so unless implement is shown to be impossible. The Scots approach can be traced back to the 17th century institutional writer, Lord Stair. He said that it was in the creditor’s option to pursue for performance or for damages and interest and that, while the common opinion of the civilian jurists was that there could be no pursuit for performance of an obligation in faciendo, it seemed more suitable to equity that it should be in the creditor’s option either to suit for performance or interest, “as he pleaseth, if both be prestable”.6 As Lord Rodger of Earlsferry once remarked,7 our law might have adopted a different approach, but from Lord Stair’s time onwards the basic rule has been that the creditor has a choice of remedies. There are some exceptions. The court will not give decree of specific imple­ ment where implement is shown to be impossible,8 or where the enforcement of the obligation would be an undue restraint on personal liberty, as in the case of contracts to enter into a partnership or to perform personal services.9 And the remedy is subject to the residual discretion of the court. But it is a discretion that is not to be exercised simply for reasons of expediency. It has been said that it is to be exercised only in exceptional circumstances where there exist cogent reasons to refuse to order that the obligation be implemented.10 I cannot remember when it was that I first learned that the remedy of specific performance under English law is regarded as an exceptional remedy, in contrast to that of damages to which a successful party is entitled to as of right. I can be sure that, whenever it was that I first heard of this, it was more a matter of idle curiosity than of real concern as I do not recall having been instructed in a case where this difference between the two systems of law actually mattered. I did not have to study the way in which the English courts dealt with applications for this remedy or the basis for the withholding of it in a system where it was not available as of right. When I became a judge, the office which I held first was that of Lord President in the Court of Session in Edinburgh. So the system of law which I was required to apply was the law of Scotland.

4 5 6 7

(1890) 17 R 1, 5. Stewart (n 4) 9. Stair (n 1) I, 17, 16. Highland and Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297, 299, in his judgment as Lord President. He noted that South African law had settled on not dissimilar lines: Benson v SA Mutual Life Assurance Society 1986 (1) SA 776 (A). 8 Stewart (n 4) 9 (Lord Watson). See also WM Gloag, The Law of Contract: A Treatise on the Principles of Contract in the Law of Scotland (2nd ed, Caledonian 1929) 655. 9 Gloag (n 8) 657. 10 Highland and Universal Properties (n 7) 311 (Lord Kingarth).



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One of the more important cases on which I sat was Church Commissioners for England v Abbey National plc, which was heard in 1994. My court sat, exceptionally, as five judges to consider whether it was competent to enforce the implement of a positive obligation under a lease by means of an interdict.11 The order was sought by the Church Commissioners, who were the landlords of units in a shopping centre, against one of its tenants, Abbey National, who had breached the terms of the lease by ceasing to keep their unit open for business. This was one of the early cases of attempts in our court to enforce a keepopen clause. The tenant was still in occupation of the unit but the business had been relocated to other premises, the electricity had been switched off, the security shutters were being kept closed and the staff had ceased to work there. Counsel for the tenants accepted that the landlords were entitled to an order declaring that the tenant was bound to implement its obligations under the lease, and that they were entitled in principle to an order for specific implement as well.12 It was the request for an interdict that was in issue. There had been a decision in an earlier case at first instance, in Grosvenor Developments (Scotland) Ltd v Argyll Stores Ltd who were the tenants of a supermarket and had given notice of their intention to discontinue trading, that an interdict to prevent them from doing so was incompetent.13 The sheriff ’s decision was affirmed in the Inner House of the Court of Session on the ground that where the obligation is to refrain from doing something the court will grant a decree of interdict, but that it will not do so to enforce a positive obligation.14 Lord Kincraig said that the obligation in the keep-open clause was far too general to be enforced by specific implement, and Lord Jauncey said that in his view an action for specific implement of the keep-open clause would fail not only because the order sought implement of the obligation in circumstances in which performance would not be required under the lease but also because it would be impossible of enforcement.15 It must be appreciated that, in contrast to the mandatory order issued under the injunction procedure in English law, under Scots law an interdict cannot be issued to order someone to do something. The issue for us in Church Commissioners was whether the Grosvenor Developments case had been wrongly decided on this ground. We held that as the function of an interdict was essentially a negative one, namely to prevent the taking of action in breach of the obligation, the earlier decision was sound. We endorsed the decision at first instance that it was not competent for the court to grant an order to perform an obligation in the form of an interdict. I went on to say that the objection to the granting of interdict on the grounds of competency did not leave the party without any other possible remedy to regulate matters for the time being pending the granting of an order for specific implement.16 It would have been open to the judge to grant an order for specific relief under s 46 of the Court of Session Act 1988 (UK) if that remedy had been asked for. But, as it had not been asked for, we did not make that order. 11 12 13 14 15 16

Church Commissioners for England v Abbey National plc 1994 SC 651. Church Commissioners (n 11) 654. Grosvenor Developments (Scotland) plc v Argyll Stores Ltd 1987 SLT (Sh Ct) 134. Grosvenor Developments (Scotland) plc v Argyll Stores Ltd 1987 SLT 738 (IH). Grosvenor Developments (n 14) 741, 745. Church Commissioners (n 11) 661.

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It is worth emphasising that, although the parties to that dispute had their head offices in England, the issue between them was decided according to Scots law as this was the law of the forum where the litigation was being conducted. The arguments on both sides were about what was competent according to Scots law. No authorities from England were cited, and none are referred to in the court’s judgments. I mention this simply in order to make the point that on matters such as this Scots law has developed its own way of dealing with them. It is a mature system which does not need to refer to or borrow from others to resolve disputes of the kind that arose in that case. I think that it should also be said that it was the practice, at least during my time in the Court of Session both as an advocate and as a judge, to regard English authorities as of no help and even perhaps as misleading when we were dealing with areas of law where it was clear that our own system could provide the answers. So references to English decisions in matters of that kind were not encouraged. It was assumed that, as our own system gave us all we needed to resolve the dispute, we had nothing to learn from them. In many respects, as one would expect in what we still call the United Kingdom, the laws of the two countries – England and Scotland – are the same. But their laws as to the remedies that are available under the law of contract are not. This is not just a matter of language: “specific implement” in the one, and “specific performance” in the other. It is a matter of substance too. In this area of the law – to borrow a phrase which describes the position of Hong Kong after its handover to China – the United Kingdom is one country with two systems.17 In 1996 I was asked to move to London to sit in the House of Lords as a Lord of Appeal in Ordinary. Here I was, of course, required to sit on appeals from the courts of England and Wales and Northern Ireland as well as from the Court of Session in Scotland. And before very long, in February 1997, I was asked to sit in the Appellate Committee in a keep-open case which had come before the House from the Court of Appeal in England. This was Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd.18 As so often in these cases, the lease in question was of a unit in a shopping centre. The unit in this case was in Sheffield which was to be operated as a supermarket. As it was the largest shop in the shopping centre and the greatest attraction, it was to serve as a magnet for other traders there. Magnets of that kind are commonly sought by developers to attract other traders to take up places in the shopping centre, and it is important for the long-term viability of the centre that they should remain there. The lease contained a covenant which required the tenant to keep the premises open for retail trade during the usual hours of business in the locality. Having undertaken a major review of their operations across the country, however, the tenants had decided to close a number of their supermarkets which were loss-making or less profitable. The landlords asked them to continue trading until another tenant could be found, but the tenants went ahead and closed their supermarket and began stripping out the fixtures 17 Article XIX of the Act of Union 1707 provided that the Court of Session was to remain ‘in all time coming within Scotland’. Its effect was to ensure the continuity of the Scottish legal system after the union with England. 18 [1998] AC 1 (HL).



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and fittings. So the landlord brought an action against them seeing specific performance and/or damages. The judge at first instance granted an order for damages but refused an order for specific performance. The Court of Appeal allowed an appeal against that decision and ordered specific performance.19 But its decision was not unanimous. There was a vigorous dissent by Millett LJ. No doubt prompted by that dissent, the landlords sought and were given leave to appeal by the House of Lords. The panel assigned to the case consisted of three English judges, Lords Browne-Wilkinson, Slynn and Hoffmann, and two Scots – myself and Lord Clyde. We decided to allow the appeal and to restore the judge’s order to refuse specific performance. There were no dissents. The judgment was given on 21 May 1997 by Lord Hoffmann. I cannot now recall how the discussion went when we conferred at the end of the hearing. But I think that it is probable that both Lord Clyde and myself drew attention to how the issue would be dealt with under Scots law. This is all the more likely as the report shows that among the cases cited in argument were two decisions of the Court of Session. One was the Grosvenor Developments case already mentioned, in which it was observed that the keep-open obligation in that case was far too general to be enforced by specific implement.20 The other was Retail Park Investments Ltd v The Royal Bank of Scotland,21 another keep-open case, in which the Inner House held, contrary to what had been thought to be the position in Grosvenor Developments, that the order of specific performance that the landlords sought in that case would merely require the tenants to continue to honour their obligation for the remainder of the term of the lease and, as it was sufficiently precise and specific as to what had to be done, the order should be granted. What we do know is that near the start of his speech Lord Hoffmann permitted himself to make a comment on the two systems which has prompted others to wonder whether he was right. He had noted a few paragraphs earlier that a decree of specific performance is a discretionary remedy and that the question for the House was whether the Court of Appeal was entitled to set aside the exercise of his discretion by the judge. Addressing then what he described as the settled practice in the English courts, he said that there was no dispute about that, although as it had never been examined by the House of Lords it was open to the landlords to say that it rested on inadequate grounds or had been too inflexibly applied. In Braddon Towers Ltd v International Stores Ltd Slade J said22 that, whether or not it might properly be described as a rule of law, for many years practitioners had advised their clients that it was the settled and invariable practice of the court never to grant mandatory injunctions requiring persons to carry on a business. Having examined the basis for it and how it had been applied in practice, Lord Hoffmann concluded that the settled practice was based on sound sense. There were no binding rules, but that did not mean that there could not be a settled practice which the court would apply in all but exceptional circumstances. All 19 20 21 22

[1996] Ch 286 (CA). Grosvenor Developments (n 14); see also n 15. Retail Park Investments Ltd v The Royal Bank of Scotland (No 2) 1996 SC 227. [1987] 1 EGLR 209 (Ch D) 313.

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the reasons that the judge had given for refusing the order were proper matters for him to take into account. So the appeal should be allowed. But it is his comments on the two systems that are of continuing interest and which deserve a second look. Having observed that it was the orthodox doctrine by the end of the 19th century that the power to decree specific performance was part of the discretionary jurisdiction of the court to do justice in cases where the remedies available at common law were inadequate, he went on to say this:23 “By contrast, in countries with legal systems based on civil law, such as France, Germany and Scotland, the plaintiff is prima facie entitled to specific performance. The cases in which he is confined to a claim for damages are regarded as the exceptions. In practice, however, there is less difference between the common law and civilian systems than these general statements might lead one to suppose. The principles upon which English judges exercise the discretion to grant specific performance are reasonably well settled and depend on a number of considerations, mostly of a practical nature, which are of very general application. I have made no investigation of the civilian systems, but a priori I would expect that judges take much the same matters into account in deciding whether specific performance would be appropriate in a particular case.”

It was the practice in the House of Lords for every member of the Appellate Committee, when we were giving judgment in the Chamber of the House – as we had to do as we were giving judgment on the House’s behalf, to make a speech stating what his decision was on the appeal. In that environment, where the tradition is that every communication by a member of the House when sitting in the chamber has to be made orally, that was the only way we could do this. The leading judgment and any dissents from it had, of course, to be fully reasoned. Where concurring speeches were being delivered it was the usual practice for them to be confined simply to a statement of that fact. In this case, all the other members of the Committee delivered formal speeches agreeing with Lord Hoffmann. Lord Browne-Wilkinson and Lord Slynn both said that they would allow the appeal for the reasons that Lord Hoffmann had given. The wording that Lord Clyde and I adopted was subtly different. We both said that we had the benefit, or the opportunity, of reading Lord Hoffmann’s speech in draft, and we both said that we agreed with him that the appeal should be allowed. But neither of us said in terms that we would do so for the reasons he gave for making this order. Lord Clyde said, on the contrary, that he wished to reserve his opinion on the approach which might be adopted by the civilian systems. Perhaps I should have done so too. But at least I did not endorse everything that Lord Hoffmann had said. I think that this does leave me with room to examine the soundness of his observations without any embarrassment. I should perhaps add that there would have been a let out if I had said that I agreed with his reasons. We always comforted ourselves with the thought that the use that phrase did not mean that we agreed with everything that our colleague had said. But I do not have to resort to that excuse. 23 Co-operative Insurance (n 18) 11.



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If Lord Hoffmann’s intention was to suggest that in practice the judges under the two systems, taking much the same matters into account, could be expected to reach much the same result, he was before very long shown to have underestimated the effect of the differences between these systems as to their respective starting points. A case was already pending before the Court of Session in which, in yet another keep-open case, the landlords of a shopping centre were seeking a decree of specific implement against one of their tenants who had announced its intention to close its supermarket there. This was the case of Highland and Universal Properties Ltd v Safeway Properties Ltd. On 12 January 1998 the Lord Ordinary, Lord Penrose, having heard evidence, granted a decree ordaining the tenants to keep the store open for retail trade in any such goods as were from time to time sold in a high class retail store throughout the normal hours of business until the earliest of the date of the expiry of the lease, of its lawful termination or its lawful assignation to another occupier. Unfortunately his judgment is not reported, but the case went on appeal to the Inner House of the Court of Session. Full reasons were given for its decision on 1 February 2000 to affirm the decision of the Lord Ordinary, subject only to a minor change to the wording of his order.24 The phase the normal hours of business was thought to be in need of clarification so that it referred not merely to “the normal hours of business” but to “normal hours of business in the retail trade”. So here we find a Scottish court, adopting the Scots approach that an order for specific implement is available as of right unless there are cogent reasons to refuse it, making an order for specific implement in a case in which it seems likely that, if it had come before an English court applying the settled practice, an order for specific performance would not have been made. This makes one wonder whether the differences between the two systems are not, after all, rather greater than Lord Hoffmann was suggesting and that Lord Clyde was right to reserve his opinion on this question. But it would not be right to leave the point there. In order to do justice to Lord Hoffmann, it is necessary to look more closely at the reasons that were given in these two cases for the decisions that were made, in each case, to affirm the decision of the judge at first instance – which in the Co-operative Insurance case in England was to refuse an order for specific performance, and in the Highland and Universal Properties case in Scotland was to order specific implement of the obligation which the tenants had undertaken to keep the supermarket open. A study of what was said in Co-operative Insurance has to begin with the Court of Appeal and with the dissenting judgment of Millett LJ in particular.25 He began by referring to the settled practice of the court not to grant a final injunction or a decree of specific performance which would have the effect of compelling the defendant to carry on a business indefinitely. He referred to decisions to that effect in the cases about the business of an innkeeper, and agreements to work a mine and a railway, to maintain an airfield and a

24 Highland and Universal (n 7); see 318–19. 25 Co-operative Insurance (n 19) 302.

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ferry service.26 Having also mentioned Slade J’s decision, after reviewing the authorities, in Braddon Towers v International Stores27 to refuse an interlocutory injunction which would have required the defendants to reopen and operate a supermarket, he said that in his opinion the existence of the practice was beyond dispute but that none of the authorities contained a comprehensive rationale for the practice. So he set about providing his own analysis. He took first an objection which was to be found in the early cases based on the impossibility of the court supervising the carrying out of the work. He said under reference to Shiloh Spinners Ltd v Harding28 that this objection had little force today. In that case Lord Wilberforce said that it was necessary to move away from earlier authorities to reject as a reason against granting relief the impossibility for the courts to supervise the doing of the work. He thought also that objections based on doubts that the defendant might have as to what he should do to avoid being in breach of the order, on difficulties that the court might have in the interpretation and application of the order and on the possibilities of evasion should carry little weight too. The argument was that in view of such difficulties the order might be the engine rather than the means of resolving disputes. The plaintiff, said Millett LJ, is the best judge of his own interests. A sounder objection was that the court should not make an order which obliged the defendant to do continuous acts involving labour and care or to require the continuous employment of people. In his view it was always necessary to consider the consequence to the defendant of granting the relief as well as the consequence to the plaintiff of leaving him to his remedy in damages.29 There was a fundamental objection to such an order, as if granted for any length of time or for an indefinite period it would be oppressive. It would expose the defendant to potentially large, unquantifiable and unlimited losses which might be out of proportion to the loss which his breach of contract had caused to the plaintiff. An award of damages, on the other hand, reflected normal commercial expectations and ensured a more efficient allocation of resources. Recognising the objection that it would be a travesty of justice that a party should be allowed to break his contract at pleasure by electing to pay damages for the breach,30 he said that English law has adopted a pragmatic approach in resolving that dispute. Courts of equity had never enforced all contracts. The leading principle was that where damages are an adequate remedy it is inappropriate to grant equitable relief. The moral strength of the claim to a decree of specific performance was that the court would be doing no more than requiring the defendants to do what they had undertaken to do. But that 26 Hooper v Brodrick (1840) 11 Sim 47; 59 ER 791; Lord Abinger v Ashton (1873) LR 17 Eq 358; Powell Duffryn Steam Coal Co v Taff Vale Railway Co (1874) LR 9 Ch App 331; Attorney-General v Colchester Corporation [1955] 2 QB 207 (QBD); Dowty Boulton Paul Ltd v Wolverhampton Corporation [1971] 1 WLR 204 (Ch D); Gravesham Borough Council v British Railways Board [1987] Ch 379 (Ch D). 27 Braddon Towers (n 22). 28 [1973] AC 691 (HL); he referred also to C H Giles & Co Ltd v Morris [1972] 1 WLR 307 (Ch D) and Jeune v Queens Cross Properties Ltd [1974] Ch 97 (Ch D). 29 Co-operative Insurance (n 19) 304. 30 See Union Pacific Railway Co v Chicago, Rock Island and Pacific Railway Co 163 US 564, 600 (1896) (Fuller CJ).



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approach had never been applied to the grant of a mandatory injunction or a decree of specific performance. In this case the potential loss to the defendants if the order was made was enormous and unquantifiable. The court could not know the consequences of its order, and it should not be granted regardless of its consequences. Pausing there before turning to Lord Hoffmann’s analysis, I think that a Scots lawyer would find it hard to see how the Millett approach can be reconciled with the basic rule in the Scots law of obligations that a party has a right to sue for implement of the contract and that he cannot be compelled to resort to the alternative of an action of damages. To the objection that it is oppressive for the court to grant an order which obliged the defendant to do continuous acts or to require the continuous employment of people, the Scots answer would be: why should the defendant not be held to his contract if the performance of the obligation is what he has undertaken to do? It has never been the law in Scotland that a party can escape from the obligations that he has freely entered into simply because the performance of them has become oppressive or unduly burdensome. To the objection that it would be oppressive for such an order to be granted for any length of time or for an indefinite period, the answer would be that the court should be guided by the period that was set for the performance of the obligation by the words of contract. If a termination date was set by the contract it could hardly be regarded as oppressive for the defendant to be required to continue to performance of the obligation until the period set by the contract for its performance has expired. Lord Hoffmann began his examination of the English practice, under reference to a dictum of Sir John Pennycuik V-C in Dowty Boulton Paul v Wolverhampton Corporation31 that it was unnecessary to consider whether damages would be an adequate remedy, with the observation that the reasons that underlie the established practice may justify a refusal of specific performance even when damages are not an adequate remedy. Here too it is hard to see a Scottish judge reaching the same conclusion. But of course there is no such established practice in Scotland to fall back on. Moving on, he set out what I take to be eleven reasons why the court should decline to order someone to carry on a business. They can be summarised as follows: (1) such an order would require constant supervision by the court which, differing from Millett LJ, he thought was still a powerful argument; (2) the court would have to give an indefinite number of rulings in the course of doing so; (3)  the heavy handed enforcement mechanism would have undesirable consequences; (4) a person ought not have to make commercial decisions under a sword of Damocles, in circumstances that differ from those under which the business was run before the order was made; (5) supervision would be likely to be a heavy and expensive piece of litigation; (6) there would be ample room for imprecision in the terms of the order, in contrast to an order designed to achieve a result; 31 Dowty Boulton (n 26).

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(7) there would be the possibility of wasteful litigation if the order could not be precisely drawn; (8)  it would be an injustice if the effect of the order were to be that the plaintiff could secure more than was due to him; (9) to carry on business in a hostile relationship is wasteful for the parties and the legal system; (10) in contrast to all the above, an award of damages would bring the litigation to an end; (11) it is undesirable for judges to make orders in terrorem under threat of imprisonment which will work only if one does not inquire too closely what they mean. He concluded this analysis by saying that, as the principles of equity have always had a strong ethical content, the needs of justice will override all the considerations which support the settled practice where there is a gross breach of personal faith or an attempt to use the threat of non-performance as blackmail. It is plain that some of these reasons for supporting the settled practice overlap and run into each other. They can perhaps be compressed into three main concerns about the risk of injustice if an order or specific performance were to be made. The first was the difficulty, waste of time and expense of litigation that would result from supervision of the order by the court: see reasons (1), (2), (5), (6) and (7). The second was the undesirable effects of the order on the party against which the order was made: see reasons (3), (4), (8) and (9). The third was a public interest argument: the contrast between the bringing of litigation to an end by an award of damages, and the undesirability of judges engaging in a rather disreputable process by making an order which lacks precision under the threat of imprisonment: see reasons (10) and (11). From the standpoint of English law this is quite a formidable basis for saying that the settled practice is founded on practical considerations and common sense. But what about the proposition that, as they have that quality and are of very general application, one could expect the civilian judges to take much the same matters into account in their jurisdictions and, as the proposition implies, come to the same conclusion? An indication as to how this question should be answered can be found in the reasons given by Lord President Rodger and Lord Kingarth in Highland and Universal Properties v Safeway Properties.32 The leading opinion was given by Lord Kingarth, but the Lord President added some penetrating observations of his own with which ought to be looked at first as they set the scene for what follows. The court had, of course, the advantage of having Lord Hoffmann’s reasons in Co-operative Insurance before them, and the challenge of having to explain why in their case they were to reach a different result. The tenants had submitted that the English practice rested on important considerations which should lead to the same result in Scotland, so the issue could not be avoided. In the result the court’s reasoning was much fuller and more carefully expressed than it might otherwise have been. After all, their own domestic law was well 32 Highland and Universal (n 7).



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settled and was not difficult to apply, even in a keep-open case. We can see this in the fact that six years earlier, in Church Commissioners, the tenants accepted that the landlords were entitled to an order declaring that the tenant was bound to implement its obligations under the lease, and that they were entitled in principle to an order for specific implement too. The effect of Lord Hoffmann’s speech was to require the judges to take a fresh look at the Scots approach to see whether it stood up to scrutiny. The Lord President noted at the outset that the tenants, who were seeking to have the order for specific implement set aside, were drawing on arguments about the exercise of a discretion in English law to support the argument that, irrespective of any discretion in a Scottish judge to withhold the order where it would be unjust to grant it in the particular case, the court should not ever make such an order in a keep-open case. Nevertheless he was prepared to recognise that points which the English courts take into account may well be factors which would have a bearing on the decisions to be reached under Scots law and under other systems which share the same basic approach.33 But he added that, when weighing the various factors, it was necessary to keep in mind the experience of the Scottish courts. Leaving the detailed reasoning to Lord Kingarth, he concentrated his attention on two inter-related factors. The first was directed to Lord Hoffmann’s comments on the enforcement process which I have grouped together in the first of the concerns about injustice: the difficulty, waste of time and expense of litigation that would result from supervision of the order by the court. The second was the suggestion that it might not be possible to formulate a decree which tells the tenant sufficiently clearly what he must do. As to the first point, Lord Rodger said that unquestionably there are happier circumstances to run a business. But it must also be noted that all the decree did was to require the party to perform the commercial obligation which it deliberately undertook when it entered into the contract. I would add that, for the Scots lawyer, this is the logical starting point. It is quite striking how this fundamental argument seems to be absent from the English judges’ analysis. The explanation for this, of course, is that their starting point is that the remedy to which a plaintiff is entitled as of right is the remedy of damages. It is not all that surprising that taking this as the starting point leads to a different conclusion. Lord Rodger then said that the penal aspects of the order which feature in Lord Hoffmann’s list may not be the same in Scotland. The ordinary rule is that no penal consequences follow on a failure to comply with the order unless it is shown that the failure was a deliberate defiance of the order of the court. As for the burden of continued supervision, the Scottish experience did not suggest that applications to the court for its supervision had been frequent or had consumed an undue amount of court time. Provided the decree was sufficiently precise, proceedings for breach of the order should be the exception rather than the rule. As for the second point, as to whether a sufficiently precise order could be framed, the test in practice was whether a decree could be formulated which would leave the tenants in no doubt as to the exact obligation which they were bound to discharge. He saw no difficulty in satisfying the required standard of 33 Highland and Universal (n 7) 302.

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precision in this case. The Lord President refrained from making any comment as to the soundness of Lord Hoffmann’s reasoning under English law. His message was that the Scottish experience of the way these cases were dealt with suggested quite strongly that the objections were much less formidable in his jurisdiction than they appeared to be in England. Lord Kingarth34 set out, as background to his comments on Lord Hoffmann’s reasons, the statements by Lord Herschell and Lord Watson in Stewart v Kennedy35 that no assistance can be drawn from the English decisions because the two countries approach the issue from different standpoints. From that starting point he said that, while it was possible that matters might have developed since then, the weight of recent Scots authority appeared to be firmly against the tenants’ contentions. It was inconceivable that the court could have said what they did in Church Commissioners36 case if they had thought that, as a matter of general law, it was not competent to enforce the keep-open obligation by specific implement. Interim orders by way of specific implement had frequently been granted since that decision, and they had apparently not given rise to any obvious difficulties of enforcement. He said that observations in Grosvenor Developments37 that the obligation was far too general to be enforced by specific implement were plainly obiter. In his view any practical difficulties in policing such orders in Scotland could be exaggerated. He made the same point when considering the objection that it would be difficult to draw up an order which reflected the terms of the obligation with sufficient precision to pass the required test for an order of this kind. That test would have to be satisfied before the order could be granted, but not every single particular needed to be spelled out. It would be sufficient to state what had to be achieved, leaving open the precise means of doing so. The court could take account of the commercial realities which formed the background to the undertaking of the parties’ mutual obligations. He proposed a small adjustment to the order which had been made by the Lord Ordinary for the avoidance of doubt, to clarify what was meant by “the normal hours of business”. That change having been made, he was satisfied that the order was sufficiently specific in its terms. I recall very clearly my concern that the decision of the Court of Session to grant specific implement on that case might be appealed to the House of Lords. Even the most basic principles of Scots law could seem to be quite vulnerable in that forum. They can do even today in the UK Supreme Court. There was usually room for only two Scots Law Lords on any committee, and there are now only two Scottish justices on the Supreme Court. They would be outnumbered by the English by two to three and, if the committee was enlarged to seven instead of the normal five, they would be outnumbered by two to five. The situation would be likely to be even more critical after the judgment was delivered if, as soon happened, Lord Rodger were to become one of the two Scottish Law Lords. Having sat on the case in the Court of Session, he could not sit on any appeal against that decision in London. That would have left me on my own 34 35 36 37

Highland and Universal (n 7) 309. Stewart (n 3). Church Commissioners (n 11); see n 16. Grosvenor Developments (n 14) 741, 745.



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as the sole Law Lord from Scotland. Of course, I would have done my best to hang on to what was established Scots law. But doing so is not always easy in the face of suspicious English judges. I recall being saved from possible disaster in another case, on an issue of Scots property law as to which the law of Scotland has its own distinct rules where the two Scots were on one side and two of the English on the other, only by the shrewd chairmanship of Lord Bingham.38 “I do not want to create alarm in the drawing rooms in Edinburgh”, he said as we discussed the case after the hearing. “If the two Scots among us agree with a unanimous Court of Session, who am I to disagree?” His was the casting vote. In the event, the decision in Highland and Universal was not appealed, and it has been followed without question in Scotland ever since.39 Britel Fund Trustees Ltd v Scottish and Southern Energy plc,40 which was the first to come before the Court of Session after the decision in that case was given, provides a useful guide as to how the decision in Highland and Universal works out in practice. The landlords of a shopping centre in Dundee brought proceedings against the tenants of one of their shop units which had ceased trading there. The remedies that they sought included interdict and an order of specific performance which required the tenants to keep the unit open. Various interim orders were pronounced and the tenants, who had re-opened the shop, entered into negotiations with the landlords. As the Lord Ordinary noted in his opinion,41 the tenants accepted that they were in breach of the keep open clause, that it was binding in general terms and specifically enforceable against them and that a final order of specific implement should be pronounced. The issue which was before the court was simply as to the terms of the final order. There was no challenge to the decision in Highland and Universal which was, of course, binding in the Outer House. But no attempt was made to keep the issue open for review by a higher court. Counsel for the tenants derived three propositions from Highland and Universal which were at the heart of the discussion: that an order for specific performance should not innovate upon the terms of the contract, although the court could make an order which was more restricted or more particularised than those of the contractual obligation; that it must be precise, so as to make the party against whom it was pronounced aware of what was required of it; and that a party will not be ordered to do the impossible or that which was outwith its power.42 The dispute was whether, as the tenants contended, the proposed final order purported to bind the tenants in circumstances in which they would not be bound by the contractual obligation. Having examined the contract, the Lord Ordinary was persuaded that he should not pronounce a final order in the terms proposed by the landlords and deferred a final decision to afford them an opportunity to reconsider their position and, if so advised, reformulate the terms of the order they were asking the court to pronounce. The report does not say what then happened, but the usual procedure in such cases is for the parties to present the 38 See Moncrieff v Jamieson [2007] UKHL 42; [2007] 1 WLR 2620. 39 It was set down for appeal to the House of Lords shortly after the judgment of the Court of Session was given, but the appeal was not proceeded with. 40 2002 SLT 223 (OH). 41 Britel Fund (n 40) [18] (Lord Macfadyen). 42 Britel Fund (n 40) [11] (Lord Macfadyen).

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court with an agreed form of order, which the court then makes without having to deliver another judgment. In AMA (New Town) v Law,43 which is the only case in which the decision in Highland and Universal has been discussed in the Inner House after the judgement in that case was given, the pursuer was seeking implement of a contract to buy flats in a housing development by the making of an order against the purchaser to pay the price. It was not a keep-open case. The question was whether the pursuer could be compelled to seek the alternative remedy of damages. It had, contrary to the usual practice, withheld delivery of the title to the flats until the price was paid. The defenders, for their part, were not willing to complete the contract. Their argument was that the pursuer could not obtain the price while retaining the title, as these were concurrent and reciprocal obligations. As the contract had not been completed, the only remedy was damages. This was rejected, applying White & Carter (Councils) Ltd v McGregor, on the ground that it was for the pursuer as the innocent party to choose how to enforce its rights.44 The decision itself is controversial and the reasons for it may require to be looked at again one day.45 But it was accepted, following an observation by Lord President Rodger in Highland and Universal, that there could be exceptional circumstances in which implement would impose a burden on the contracting party which was completely out of proportion to the remainder of the contract.46 So far as it goes, this passing reference can be taken as a recognition that the way Highland and Universal dealt with the question of specific implement was soundly based and is not open to question. Although the decision differed from that of the House of Lords in the Co-operative Insurance case,47 there appears to be no pressure from Scotland for a change in the law on that particular issue.48 That is not say, however, that Highland and Universal has escaped criticism. In a recent comparative analysis of “keep open” covenants in Scotland and England49 it has been argued, not only that the two jurisdictions are not as different as has been suggested, but also that the current Scots law as declared in Highland and Universal is a recent, radical and mistaken departure from previous authority. The authors of this chapter, David Campbell and Roger Halson (“the authors”), accept that, from the perspective of what they describe as the performance interest, the decision in Highland and Universal is bound to be preferable to that in Co-operative Insurance. But they say that Lord Rodger’s contrast between the two cases involves an excessive simplification of the laws of both jurisdictions and that this amounts to a real error in respect of keep-open covenants.50 They make three preliminary points in support of 43 44 45 46 47 48

[2013] CSIH 61; 2013 SC 608. 1962 SC (HL) 1; [1962] AC 413. WW McBryde and GL Gretton, “Sale of Heritable Property and Failure to Pay” 2012 SLT 17. AMA (New Town) (n 43) [56] (Lady Dorrian). Co-operative Insurance (n 18). Letter by Professor H MacQueen, a member of the Scottish Law Commission, to the author (6 February 2015). 49 D Campbell and R Halson, “The Irrelevance of the Performance Interest” in LA Dimatteo, Q Zhou, S Saintier and K Rowley (eds), Commercial Law, Transatlantic Perspectives (CUP 2013) 466. 50 Campbell and Halson (n 49) 473.



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this argument. First, while accepting that specific implement is the “primary” remedy for breach of Scotland, it is not a common remedy as in practice it is sought comparatively rarely and has even more rarely been granted. Second, prior to the decision of the Inner House in Retail Parks,51 the position in Scots law was for all practical purposes indistinguishable from that in England52 and the decision of the Inner House in Retail Parks represented an effective reversal of the law as it was up to that date. And third, the cases decided after Retail Parks did not provide unambiguous support for the view of Scots law take in Highland and Universal. If the law is as that case left it, this did not represent the continuity of the Scots legal tradition but a remarkable change in the law of keep-open covenants because, prior to Retail Parks, Scots law had entertained quite the opposite position to the one for which Highland and Universal had received such affirmation from the perspective of the performance interest. It is hard to disagree with the first proposition. There are various reasons why, leaving aside considerations of hardship and impossibility, the court will decline to grant such an order: where the obligation is to pay a sum of money, for example, or to deliver an article which is readily procurable on the market, or the obligation involves an intimate relationship such as service or partnership.53 And at first sight, the second flows from the first, as looked at overall, it is probable that in practice the application of the remedies did not differ much between the two jurisdictions. It is certainly true that, prior to the decision of the Inner House in Retail Parks, it was thought that the possibility of obtaining an order for specific implement in a keep-open case had been precluded by what had been said in Grosvenor Developments because the terms of the obligation, as reflected in any order that might be made to enforce it, were too vague. As noted above,54 it was observed in that case that an action for specific implement of the keep-open clause would fail not only because the order sought implement of the obligation in circumstances in which performance would not be required under the lease, but also because it would be impossible of enforcement. In Postel Properties Ltd v Miller and Santhouse plc55 the Lord Ordinary refused to make an order for specific implement of a keep-open clause on the view that no case had been put before him where such an onerous obligation had been imposed by a court and that in Grosvenor Developments, which was the only case that came anywhere near it the proposition had been firmly rejected. In Church Commissioners 56 the Inner House, sitting as a court of five judges, approved the decision in Grosvenor Developments. And in Overgate Centre Ltd v William Low Supermarkets Ltd57 the Lord Ordinary, following what had been said in Grosvenor Developments and Postel, held that the terms of the proposed order of specific implement was too wide and too unspecific in its terms and refused to make the order. 51 Retail Parks (n 21). 52 In Co-operative Insurance (n 18) the Court of Appeal said that it was “similar”. 53 TB Smith, A Short Commentary on the Law of Scotland (Green 1962) 854–55; WW McBryde, The Law of Contract in Scotland (3rd ed, W Green 2007) para 32.21. 54 See Grosvenor Developments (n 14) 741, 745. 55 1993 SLT 353 (OH). 56 Church Commissioners (n 11). 57 1995 SLT 1181 (OH).

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But I believe that, on closer examination of all these cases, the possibility of enforcing a keep-open clause by an order for specific performance had not been nearly as clearly negatived as Campbell and Halson are suggesting. For one thing, as the judges in both Retail Parks and Highland and Universal were right to observe later,58 the observations in support of that view in Grosvenor Developments were obiter. The issue in that case was whether it was competent for the court to enforce a positive obligation by means of an interdict. An order for specific performance was not being sought in that case, and it is clear from the context in which the observations were made that the point was not fully argued. For another, the decisions of the Lords Ordinary in the Postel and Overgate cases, in so far as they were based on what was said in Grosvenor Developments, were from the outset open to review by the Inner House in a case where the issue as to whether an order for specific implement should be granted was fully argued. And, while the authors were right when they said that the Grosvenor Developments was explicitly and unambiguously followed by the five judges in Church Commissioners, the issue in that case once again was as to the competency of enforcing a positive obligation by an interdict. The suggestion that the views in regard to an order for specific implement in Grosvenor Developments had been endorsed in Church Commissioners was rejected in Retail Parks, on the ground that the court in Church Commissioners was dealing with a subsidiary issue about the enforcement of a hypothetical application based on the particular terms in which the lease was expressed.59 As already noted,60 counsel for the tenants in that case accepted that the landlords were entitled in principle to an order for specific implement. It is worth noting too that in Highland and Universal Lord President Rodger regarded my observations in Church Commissioners as supporting the view that, as a matter of general law, it was competent to enforce obligations of this kind by such an order.61 For these reasons it seems to me that the question whether an order for specific implement could ever be made in a keep-open case was still an open question when it came before the Inner House in Retail Parks. Contrary to what the authors believe, I think that its decision that the order sought by the pursuers in that case would merely require the defenders to honour their obligation for the remainder of the term of the lease, and that it passed the test of precision and specification laid down in the authorities, did not depart from previous authority on this issue. This leads me to the third proposition. As will be clear for what I have said so far, I do not accept the authors’ assertion62 that the view taken in Highland and Universal of the law prior to Retail Parks was in important respects wrong. They are right, however, to conclude that the law as applied in Retail Parks is now regarded in Scotland as having been settled by Highland and Universal and that litigation there which directly opposed a decree of specific implement would be fruitless, save in exceptional circumstances. That was the view of the 58 Retail Parks (n 21) 247 (Lord Cullen); Highland and Universal (n 7) 310 (Lord Kingarth). 59 Retail Parks (n 21) 247 (Lord Cullen). See also the discussion of this point in Church Commissioners (n 11), 661 (Lord President Hope); 666 (Lord Clyde). 60 See Church Commissioners (n 11) 654. 61 Highland and Universal (n 21) 310. 62 AMA (New Town) (n 43) 487.



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Lord Ordinary, Lord Drummond Young, in one of the few keep-open cases that have reached the Court of Session, all in the Outer House, since the decision in that case.63 Even if there was something to be said for the view that the Inner House over-reached itself in Highland and Universal, I see no prospect of the decision in that case being overruled or departed from in Scotland in the foreseeable future. The late Lord Rodger was one of the outstanding jurists of his generation. His judgments are universally regarded as carrying great weight, especially in Scotland. The prospect of this issue ever reaching the UK Supreme Court, where the Scots judges would be in minority, has receded now that permission is required for an appeal from the Court of Session to that court.64 The old system, whereby an appeal to that court lay as of right, has been departed from. It is hard to see a direct challenge to the decision in Highland and Universal getting over that first hurdle. The authors go on, however, to develop another criticism of that case which needs to be examined too. It affects the view that one might take of whether, leaving aside the question whether that decision brought about a change in the law, it was soundly based. Having applauded65 what they describe as the wisdom of Millett LJ, when he said that it was always necessary to take into account the interests of both parties,66 they say that the judgment in Highland and Universal misses the point as it concentrated so much on the supervisory difficulties.67 This should not have been the main point taken, as it prevented proper consideration of the issue of interpretation of the covenant. Their main concern, as expressed prior to their discussion of the cases,68 is that what really matters in commercial practice is clarity of the law’s rules, not the mandatory stipulation of outcomes by the law of contract, around which commercial parties can plan and bargain. A declaration that keep-open covenants will actually be enforced according to their terms jeopardises that clarity. If, as in English law, compensatory damages are the default remedy, parties should be assumed to have contracted on that basis. When a party contracts on such a basis, it never gets a guarantee of literal performance. What gets is a guarantee that the court will impose on the party in breach a secondary remedy which will, by default, take the form of compensatory damages. The court should have focussed on the point that, prior to Retail Parks, a keep-open covenant would almost certainly have been interpreted in the English way. As the lease in Highland and Universal was entered into in 1979, it should have been interpreted on the basis of the law that was in force at that time which was indistinguishable from English law. So too should the lease in Retail Parks, which was entered into in the same year. It was unhelpful for Lord Rodger to focus almost entirely on the supervision issues, as it diverted his attention from this crucial issue. It seems a bit unfair to criticise the judges in Highland and Universal for concentrating almost exclusively on the supervision issues when they featured so 63 64 65 66 67 68

Oak Mall Greenock Ltd v McDonald’s Restaurants Ltd [2003] ScotCS 135 (OH) [5]. Courts Reform (Scotland) Act 2014 (asp 18) (UK) s 117. AMA (New Town) (n 43) 486. Co-operative Insurance (n 19) 304. AMA (New Town) (n 43) 493. AMA (New Town) (n 43) 470.

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strongly among the points made by Lord Hoffmann in Co-operative Insurance69 in support of his view that the judge was right to refuse specific performance. The appellants’ main submission, after all, was that it was not open to the court to grant specific implement in that case, drawing on the observations of Lord Hoffmann in support of their argument.70 Moreover, as Lord Kingrath’s summary of the appellants’ submissions71 shows, the issue of interpretation as defined by the authors was not mentioned. But a point which was addressed and then dismissed by Lord Rodger in the course of his judgment came close to it. In an earlier case about rent review clauses in commercial leases in Scotland72 I had noted that they tended to follow English styles, which in their turn had been influenced by decisions in the English courts which had established the principles to be applied.73 I said that there were sound reasons for adopting a common approach to the interpretation of those clauses and for taking notice of the case law in England where it might assist towards an understanding of them.74 Under reference to those observations, it was submitted that it would be undesirable if tenants were exposed to a decree of specific implement of keepopen clauses in Scotland when they would not be exposed to a decree of specific implement of the same clause in England. Lord Rodger said that he could find nothing whatever in my observation which supported that submission.75 In my judgment I had gone on to say that there could be no compromise of the wellestablished principles of Scots law such as those relating to irritancies, that there were significant differences between the laws of the two countries relating the use of that remedy and that any investor in commercial property in Scotland must accept that those differences will continue to exist. Lord Rodger said that the mere fact that the two systems might come to different results in particular cases was not a sufficient reason for saying that the court should remould Scots law so as to reach the same result as would be reached under English law. What, then, would the answer have been if the submission had been that, as in English law compensatory damages are the default remedy, the parties should be assumed to have contracted on that basis when entering into their lease for premises in Scotland? It seems plain that, as I had already said in my judgment in the earlier case, that the assumption would have been to the contrary, namely that the parties had contracted in the knowledge that the two systems were different and that those differences would continue to exist. The authors point out that the leases in Retail Parks and Highland and Universal were entered into in 1979 and say that they should therefore have been interpreted on the basis of the law as it was understood to be at that time. There are, however, two answers to that point. The first is that, as I explained earlier, the possibility of enforcing a keep-open clause by an order for specific performance had not been nearly as clearly negatived by that date as the authors seem to have assumed. The second is that, leaving aside statutory rules which are not in point here, parties who 69 70 71 72 73 74 75

Co-operative Insurance (n 18). Highland and Universal (n 21) 301–02 (Lord President Rodger); 308 (Lord Kingarth). Highland and Universal (n 21) 306–09. Visionhire Ltd v Britel Fund Trustees 1997 SLT 883 (IH). Especially United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 (HL). Visionhire (n 72) 889. Highland and Universal (n 7) 300; see also 313–14 (Lord Kingarth).



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enter into their contract under a system of law such as ours must accept that the way the law is to be applied in their case is not frozen at any particular point of time but is always open to interpretation by the court according to the proper law of the contract. As the premises were in Scotland the proper law must be taken to have been Scots law. I do not, for this reason, agree with the authors that the judges in Highland and Universal missed the point or that the focus of their judgment was misplaced. I see, then, no escape from the conclusion that there is, and will continue to be, a fundamental difference of approach between the two systems as to the performance of the obligation that has been agreed upon. In Scots law there is a basic entitlement to insist upon the performance of it. Factors such as possible hardship to the party in breach are dealt with by the exercise of a discretion by the court, to be weighed against that entitlement. For the English courts there is no such basic entitlement which has to be outweighed. One may still argue as to whether this difference is more theoretical than real – whether, as Lord Hoffmann put it,76 there is less difference between the common law and civilian systems than one might suppose and that judges can be expected to take much the same matters into account in deciding whether specific performance or specific implement would be appropriate in a particular case. But I do not think that one can now overlook the fact that the two systems approach the issue from different starting points and that, as the courts in Scotland are likely to favour the entitlement to specific implement, the results are likely to be different too. There are exceptions which may be developed further, and it may be that commercial needs of the kind that the authors favour will strengthen the argument for a more equal balance in the choice of remedy between the two parties to the contract.77 I do not see this as likely to happen for quite some time, however, and in the absence of any enthusiasm for change on the part of the Scottish Law Commission legislation to address the issue is not in prospect. There are some issues on which the Scots like to differ from the English, and this is one of them.

76 See n 23. 77 See A Smith, “Specific Implement” in K Reid and R Zimmermann (eds), A History of Private Law in Scotland (OUP 2000) vol 2, 219.

15

Commonwealth v Amann Aviation Pty Ltd 25 Years On: Re-examining the Problem of Pre-breach Expenditure in Contract Law David Winterton

Introduction It is now 25 years since the High Court of Australia’s landmark decision in Commonwealth v Amann Aviation Pty Ltd (“Amann”),1 which raised fundamental questions in relation to the assessment of damages following the repudiation of a commercial contract. In particular, Amann presented the question of whether, following the promisor’s wrongful repudiation, a promisee who is unable to prove that it would have made a net profit from the contract’s performance can nevertheless recover reasonable expenditure incurred, but not recouped, in preparing for such performance. Amongst other matters, Amann also raised the question of which party bears the onus of proof in relation to the recoupment (or non-recoupment) of pre-breach expenditure in these circumstances. The case has provoked significant academic commentary,2 but important questions remain unresolved. The purpose of this chapter is to identify, and attempt to answer, some of these questions. After briefly outlining the facts and decisions below, this chapter proceeds to undertake a close review of the different approaches taken by the Justices in the High Court, with the aim of identifying those aspects of their Honours’ reasoning that are defensible and those aspects which, it is respectfully submitted, 1 2

(1991) 174 CLR 64 (HCA). See eg GH Treitel, “Damages for Breach of Contract in the High Court of Australia” (1992) 108 LQR 226; HK Lücke, “The So-called Reliance Interest in the High Court” (1994) 6 CBLJ 117; N Seddon, “Contract Damages Where Both Parties are at Fault” (2000) 15 JCL 207; G Ng, “The Onus of Proof in a Claim for Reliance Damages for Breach of Contract” (2006) 22 JCL 139; D McLauchlan, “Reliance Damages for Breach of Contract” [2007] NZLR 417.

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are not. As a result of this process, a number of claims will be defended. These claims include – but are not limited to – the following: (1) If awards for reasonable wasted expenditure are understood simply as a particular application of “the Robinson v Harman principle”,3 the promisee should not have the benefit of a “legal presumption”4 in favour of the recoupment of such expenditure when it is uncertain whether this party would (eventually) have profited from the contract’s performance. This, however, does not preclude the existence of an “evidentiary” onus on the promisor, as found by both Toohey J and Gaudron J in Amann, to raise doubt as to whether the promisee would have recouped its pre-breach expenditure before a decision-maker will require the promisee formally to prove the likelihood of recoupment. (2) If, contrary to the first claim, a “legal presumption” in favour of the recoupment of wasted expenditure is found to be supported by the authorities,5 this presumption should not extend to financial benefits that were not (expressly or impliedly) promised under the contract, even if such benefits can be said to have been within the parties’ reasonable contemplation at the time of formation. (3) The foregoing claims are also consistent with recognising that the chance of realising any commercial benefits that may have accrued to the promisee as a consequence of the contract’s performance are recoverable if the promisee can establish the loss of this chance with sufficient certainty in accordance with established principles.6 (4) Consistently with the approaches taken by Deane and McHugh JJ in Amann, when determining what position the promisee would have occupied “but for” the promisor’s repudiatory breach, there should be an appropriate discount made to reflect the existence of any relevant, non-negligible countervailing contingencies in accordance with the principles enunciated in Malec v JC Hutton Pty Ltd,7 and Sellars v Adelaide Petroleum NL.8 3

4

5

6 7 8

This is the principle that when awarding damages for breach of contract the aim is, “so far as money can do it”, to put the promisee into “the same situation … as if the contract had been performed”: Robinson v Harman (1848) 1 Ex 850 (Exch), 855 (Parke B). For detailed consideration of what application of this principle entails, see D Winterton, Money Awards in Contract Law (Hart Publishing 2015). As Professor Swadling has observed, the word “presumption” is used in a variety of different senses within the law: WJ Swadling, “Explaining Resulting Trusts” (2008) 124 LQR 72, 75–77. But as Swadling explains, the existence of a strict “legal presumption” connotes a rule that proof by evidence of one fact (eg the incurring of certain reasonable expenditure in reliance on a contract) gives that party to the litigation the benefit of a second fact (that such expenditure would in fact have been recouped “but for” the breach), so that the burden of proof then lies on the opposing party to adduce evidence to rebut this presumed fact. As Swadling proceeds to explain, in the case of a true “legal presumption” the failure to rebut means that “the tribunal of fact must find the secondary fact proved” (emphasis in original). Note that Lücke has argued convincingly that there was not majority support for the “presumption of recoupment” in Amann itself: Lücke (n 2) 145. This point is discussed further below. See eg Howe v Teefy (1927) 27 SR (NSW) 301 (SC); cf Chaplin v Hicks (1911) 2 KB 786 (CA) where the lost chance was one that was in fact promised under the contract. (1990) 169 CLR 638 (HCA). (1994) 179 CLR 332 (HCA).



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(5) As far as Amann itself is concerned, it was McHugh J who decided the case correctly. (6) Finally, in cases where the promisee cannot establish with sufficient certainty that it would have recouped its reasonably wasted expenditure, consideration should be given to the development of a mechanism for apportioning between the two contracting parties this loss having regard (at least) to the parties’ respective contributions in bringing about the contract’s early termination.

An Overview of the Case The facts of Amann are well known to any (diligent) Australian law student. In 1987, the Commonwealth and Amann entered into a contract under which Amann agreed to provide the Commonwealth with aerial surveillance services for three years. Amann commenced the flights on the required date, but at this time it was clear that Amann did not have all its aircraft ready to perform and that none of its planes were then in all respects contractually compliant.9 On this basis, the Commonwealth purported to terminate the contract by serving Amann with a notice of termination. Amann treated this action as a wrongful repudiation of the parties’ agreement on the basis that the Commonwealth had failed to comply with cl 2.24 of the contract, which required the Secretary of the Department of Transport, before terminating, to give Amann due notice to show cause why the agreement should not be cancelled. Amann purported to accept this alleged repudiation and claimed damages. At trial, Beaumont J found for Amann on the question of liability on the basis that cl 2.24 “exhaustively regulates the Commonwealth’s right to terminate the agreement”10 so that any common law right to terminate it might otherwise have possessed was precluded by the parties’ agreement. His Honour then awarded Amann $410,000 in damages. This figure was arrived at on the basis that Amann would have made a profit of approximately $820,000 if the contract had been performed, discounted by 50% to reflect the probability that the Commonwealth would at some stage have validly terminated the contract in any event. Notably, Beaumont J rejected Amann’s contention that it was entitled to recover the expenditure it had incurred by the date of breach in preparing for the contract’s performance even though he accepted that there was a strong prospect that Amann would renew its arrangement with the Commonwealth following the conclusion of the parties’ initial three-year contract. On appeal,11 the Full Federal Court adopted what McHugh J later described as a “radically different approach”12 to the assessment of damages, finding that Beaumont J had erred in his application of the principles laid down by the High 9

While it was arguable that Amann’s breaches were sufficiently serious to justify termination at common law, Beaumont J at trial and Sheppard J in the Full Federal Court held that they were not so serious. 10 Amann Aviation Pty Ltd v The Commonwealth (1988) 100 ALR 267 [136] (FCA). 11 Amann Aviation Pty Ltd v The Commonwealth (1990) 22 FCR 527. 12 Amann (n 1) 159.

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Court in TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd.13 A majority of the Full Court held that Amann’s damages should be substantially increased to $5,475,184 (plus interest), which represented a full reimbursement of Amann’s (reasonable) net wasted expenditure ($5,219,135), plus the return of a security deposit ($113,000) and reimbursement for certain termination payments that Amann was required to make to its employees ($143,049). A significant factor in the court’s reasoning to this figure was its assessment of the prospect of the Commonwealth’s valid termination of the contract via cl 2.24 at some point during the parties’ three-year contract as only 20% and its consequential conclusion that no discount should be made for this contingency. On appeal to the High Court, six different judgments were delivered but the Full Federal Court’s award in Amann’s favour was upheld by a bare majority, comprising Mason CJ and Dawson, Brennan and Gaudron JJ. The next part of this chapter undertakes a comprehensive review of the various different approaches adopted in the High Court, but for now the following important observations may be noted: (1) In opposition to what might then have appeared to be the position under English law,14 all the High Court Justices agreed that in an action for breach of contract a claimant cannot recover its reasonable wasted expenditure, sometimes misleadingly described as “reliance damages”,15 in the alternative to an award aiming to uphold the Robinson v Harman principle. Such an award nevertheless may be available as a particular application of (or in substitution for) this principle in circumstances where it has not been established with sufficient certainty that the promisee either would or would not have profited from the contract had the breach not occurred. (2) Except for McHugh J, all of the Justices held that in an action for damages for breach of contract, once the claimant demonstrates that it has (reasonably) incurred expenditure in reliance upon the contract’s existence, the onus to some extent shifts to the defendant to show that the claimant would not (or may not) have recouped this expenditure “but for” the breach.16 (3) A majority of the court (Mason CJ and Dawson Brennan and Deane JJ) appeared to hold that the basis for the aforementioned shift in onus is the raising of a rebuttable “legal presumption” in the promisee’s favour that it would have recouped any expenditure reasonably incurred in preparing for the contract’s performance.17 By contrast, Toohey and Gaudron JJ took the view that there is merely an “evidentiary” onus on the defendant 13 (1963) 180 CLR 130 (HCA). 14 Note that it now seems clear that this is not the position in England. See Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd [2010] EWHC 2026 (Comm); [2011] Bus LR 212. 15 The misleading nature of this description is made very clear by McLauchlan, “Reliance Damages for Breach of Contract” (n 2). 16 It is important to appreciate, however, that there was a difference in opinion between Toohey and Gaudron JJ on the one hand and (at least) Mason CJ, Dawson and Deane JJ on the other hand, as to whether the reversal of the onus is formal or merely evidential, as explained in the text immediately below. 17 I say “appeared” because, as is further explained below, Lücke argues convincingly that there was in fact no majority support for the “presumption of recoupment” in Amann because of Brennan J’s reasoning on this point: Lücke (n 2) 145.



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 337

to raise the possibility that the claimant would not have recovered its reasonable wasted expenditure, with the formal onus of proof remaining on the claimant to prove the financial position it would have occupied “but for” the breach. (4) McHugh J took an altogether different approach from the rest of the court, awarding Amann substantial damages on the basis that this was necessary to uphold the Robinson v Harman principle directly by putting Amann into the position it would have been in had the Commonwealth not repudiated the agreement rather than because the Commonwealth had failed to prove that Amann would not eventually have recouped its wasted expenditure.

An Examination of the High Court’s Reasoning The purpose of this part of the chapter is to examine the different approaches taken by the Justices in the High Court, with a view to identifying which aspects of their Honours’ reasoning are defensible and which, it is respectfully argued, are not. The discussion commences with the joint judgment of Mason CJ and Dawson J before proceeding to compare this analysis with the approaches respectively taken by Deane and Brennan JJ. Following this, the reasoning adopted by Toohey J, on the one hand, and Gaudron J on the other, is compared. Finally, the altogether different approach taken by McHugh J is explained.

The approach taken by Mason CJ and Dawson J According to Mason CJ and Dawson J, Amann’s prima facie entitlement to recover its reasonable wasted expenditure could be displaced only to the extent that the Commonwealth could prove, on the balance of probabilities, that Amann’s expenditure would not have been recouped even if the contract had been performed. Despite the $3.9m Amann stood to lose on the initial contract, their Honours found that this burden had not been discharged because there was a “strong” prospect that the parties’ arrangement would be renewed,18 and because the loss of this chance of renewal was not “too remote” (since it was within the parties’ reasonable contemplation at the time that their contract was concluded).19 Finally, said their Honours, there was no reason to discount the award for wasted expenditure by reference to the prospect of the contract’s valid termination via cl 2.24 because the Full Court’s assessment of this chance at 20% was justified, with the consequence that this was a hypothetical (future) event that was unlikely to happen and therefore irrelevant to the court’s assessment. There are, respectfully, two significant difficulties with this reasoning. The first relates to the legal “presumption of recoupment” that Mason CJ and Dawson J found operated in Amann’s favour. Two distinct problems with their Honour’s reasoning on this issue are discernible. The first is the holding that the circumstances of evidential uncertainty pertaining here in relation to what would have happened “but for” the Commonwealth’s repudiation 18 Amann (n 1) 74. 19 Applying Hadley v Baxendale (1854) 9 Ex 341 (Exch).

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justified bestowing upon Amann the benefit of a “legal presumption” that the expenditure it incurred in preparing for the contract’s performance would have been recouped. The result of this was effectively to reverse the usual onus of proof on the promisee to prove its loss with sufficient certainty so that it was now for the promisor to demonstrate, on the balance of probabilities, that the promisee’s reasonably incurred pre-breach expenditure would not in fact have been recouped. Although Mason CJ and Dawson J recognised that prior to Amann it could not be said that this so-called “presumption of recoupment” was part of Australian law, their Honours found persuasive support for the existence of such a presumption in a number of English and American authorities,20 as well as the views of certain leading commentators in those jurisdictions. In proceeding then to explain why they were of the view that Australian law also should recognise the existence of the “presumption of recoupment”, their Honours commenced with a discussion of the High Court’s important earlier decision in McRae v Commonwealth Disposals Commission (“McRae”),21 which in their view: “‘illustrates the proposition that a plaintiff has a prima facie case for recovery of wasted expenditure once it is established that the expense was incurred in reliance on the promise of the party in breach, there being a failure of performance by that party’.22

Although Mason CJ and Dawson J recognised that, due to McRae’s peculiar facts, its reasoning “does not depend upon the presumption that an innocent party would not have entered into the contract unless it would at least have recovered its reliance expenditure under the contract had it been performed”,23 their Honours nevertheless held that the High Court’s reasoning in that case was “not inconsistent with the application, in appropriate cases, of … [the aforementioned] presumption” and that the existence of such a presumption “has much to commend it … [because] it is just and fair that the repudiating party should bear the onus of showing that the party not in breach would have made a loss on the contract”.24 This may persuade some, but the preceding statement demonstrates that, as both Toohey and Gaudron JJ recognised, strictly speaking, McRae is not authority for the strict “legal presumption” that Mason CJ and Dawson J recognised in Amann, which certainly provides a basis for questioning the validity of their Honours’ reasoning. The same point has been made forcefully by Ng, who argues convincingly that the existence of the so-called legal presumption in favour of recoupment in the United States and England “is predicated upon a fundamentally different conception of the basis for reliance damages to that which prevails in Australia”.25 Ng explains that this is 20 For example, L Albert & Son v Armstrong Rubber Co (1949) 178 F 2d 182 (2d Cir) and CCC Films (London) Ltd v Impact Quadrant Films Ltd [1985] 1 QB 16 (QBD). 21 (1951) 84 CLR 377 (HCA). 22 Amann (n 1) 89. 23 Amann (n 1) 89. 24 Amann (n 1) 89. 25 Ng (n 2) 139.



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 339

because awards for reasonable wasted expenditure in these two jurisdictions are generally understood as “a remedy intended to place the plaintiff into his or her pre-contractual position”, an objective for which a clear and persuasive rationale remains to be articulated.26 By contrast, in Australia, as indeed all the Justices who upheld Amann’s claim for wasted expenditure recognised, such awards are conceived: “as an alternative (albeit imperfect) method of placing a plaintiff in the position in which he or she would have been had full performance of the relevant contract occurred.”27

The second problem with the reasoning of Mason CJ and Dawson J in relation to the “presumption of recoupment” concerns their Honours’ extension of this presumption to Amann’s lost chance of a renewal. Even if one thinks that the adoption of some kind of legal presumption in Amann’s favour is defensible, it is very difficult to justify their Honours’ decision to extend the benefit of this presumption so as to take into account Amann’s lost chance of a renewal of its arrangement with the Commonwealth. Such an extension places too great a burden on the promisor given the promisee’s relative advantage in relation to the proof of the (speculative) benefits that it hoped would follow from the contract’s performance and may have the effect of turning the promisee into an indemnifier of the promisor’s (possibly) ill-conceived business venture. More fundamentally, this extension of the benefit of the “presumption of recoupment” overlooks the distinction between benefits a promisor promises to provide under the contract and benefits that the promisee hopes for in consequence of the promisor’s performance. The chance of renewal that Amann lost as a result of the contract’s early termination was in the latter category not the former, at least on the construction of the contract adopted by Mason CJ and Dawson J,28 and was therefore not a benefit that should have been taken into consideration when quantifying Amann’s award for wasted expenditure. To explain why, the basis for Australian law’s approach to claims for wasted expenditure must be appreciated. The normal rule, at least in relation to damages claims that aim to make good financial losses attributable to the breach, is that it is for a claimant to prove, on the balance of probabilities, what profits it would have made had the breach not occurred. The justification for reversing the usual onus of proof in relation to a claim for reasonable wasted expenditure is that, as Professor Burrows has explained, since the defendant’s actions have created the difficulty in determining what the claimant’s future position would have been “but for” the breach, it is “only fair and proper that the problems of proving that the claimant would not have 26 For discussion, see M Owen, “Some Aspects of the Recovery of Reliance Damages in the Law of Contract” (1984) 4 OJLS 393, 395. 27 Ng (n 2) 140. In consequence, Ng favours the approach taken by Gaudron and Toohey JJ on this point, as is explained below. 28 Note that it is possible (and perhaps preferable) to see the “cause” of this lost opportunity not as the Commonwealth’s repudiation of the agreement but rather as Amann’s decision to terminate for this repudiation: see Seddon (n 2), drawing an analogy with the High Court’s reasoning in Shevill v Builders Licensing Board (1982) 149 CLR 620 (HCA).

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recouped its reliance losses should fall on the contract-breaker and not on the (innocent) claimant”.29 But this says nothing at all in relation to how far the benefit of this presumption should go when determining the promisee’s future hypothetical position and it is clearly necessary that the law impose some limit here. The limit chosen by Mason CJ and Dawson J appears to be (some but perhaps not all of) those losses that were within the parties’ reasonable contemplation at the time their contract was formed and therefore not “too remote”. With respect, however, this cannot be the appropriate place at which to draw the line. The opportunity for Amann to renew its arrangement with the Commonwealth was not something that the Commonwealth ever promised to provide and, if Amann’s lost chance of renewal is indeed included, consistency of legal principle demands that all other not “too remote” possible losses also should be relevant to an assessment of Amann’s prospects of recouping its expenditure. One does not need an overly active imagination to realise that the adoption of this as a general principle may lead to considerable difficulties in its application to certain cases, particularly because, as already observed, the promisee will generally, if not always, be in a significantly better position to adduce evidence in relation to the (possibly speculative) benefits that it hoped to reap as a consequence of the contract’s performance. In Amann, for example, it seems likely that Amann was better placed to adduce evidence in relation to the likely prospects of obtaining a renewal (and possibly further renewals) because this chance must have formed an integral part of its overall commercial strategy and, accordingly, its decision to enter into a contract with the Commonwealth in the first place.30 This, of course, is not to say that Amann could not seek to recover the profit it would have made had the parties’ arrangement been renewed. But the onus should have been on Amann to prove the existence of this (speculative) prospective loss both because it was better placed to adduce evidence in relation to the chance of renewal and also because only this approach properly recognises the fundamental distinction, generally recognised by the law, between benefits that a promisor has a legal obligation to provide and benefits that the promisee hopes for or expects as a consequence of the contract’s performance. Such a claim would be in the nature of one for the “loss of a chance” to make a further 29 A Burrows, Remedies for Torts and Breach of Contract (3rd ed, OUP 2004) 70. A notable aspect of the Amann case was that the claimant was not entirely “innocent”. Also see Learned Hand J’s famous statement in L Albert & Son v Armstrong Rubber Co (n 20) 189, that where it is difficult to know “what the value of the performance would have been … it is a common expedient and a just one … to put the peril of the answer upon that party who by his wrong has made the issue relevant to the rights of the other. In principle therefore the proper solution would seem to be that the promisee may recover his outlay in preparation for performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost, if the contract had been performed”. 30 This is true even if, as in Amann, the Commonwealth ultimately had the power to decide whether to grant a renewal. The likelihood of a renewal is a fact that must be determined objectively and, in this regard, Amann would appear to have been better placed to adduce evidence in relation to this matter on the assumption that it would have formed an integral part of its overall commercial strategy and thus its initial decision to contract with the Commonwealth.



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 341

profit consequent upon performance similar to that made by the successful claimant in Howe v Teefy.31 It is, however, (tentatively) suggested that where the promisee’s commercial strategy involves making, or at least taking a calculated risk of making, a loss on an initial contract in the hope of securing a (possibly quite speculative) consequential financial benefit the value of which it is not possible to assess with any reasonable degree of certainty, it may be appropriate for the law also to have available a mechanism that allows a decision-maker to apportion the promisee’s reasonable wasted expenditure between the parties. The important point made here is that requiring the promisor to prove the likelihood of nonrecoupment in circumstances of evidential uncertainty is not the appropriate way in which to “apportion” the promisee’s reasonable wasted expenditure. This is both because it produces an “all or nothing” outcome and because it places too heavy a burden on a defaulting promisor given that it effectively turns this party into an indemnifier of the promisee’s (possibly highly speculative) business venture in circumstances where the promisee will generally be better placed to prove the fact in question. This difficulty with the approach adopted by Mason CJ and Dawson J (as well as Deane J and the Full Federal Court), in overlooking the importance of the distinction between “direct” and “consequential” loss (as well as apparently between the limiting doctrines of “causation” and “remoteness”), was recognised by McHugh J in his judgment. His Honour explained that, even assuming it is legitimate to characterise the Commonwealth’s repudiation as the cause of Amann’s loss of the chance of a renewal,32 this does not mean this lost chance should be treated identically to the Commonwealth’s failure to perform its obligations under the initial contract. According to McHugh J, the Full Court: “appear to have acted on the assumption that, if the parties contemplated that the contract would probably be renewed, Amann was entitled to have its damages assessed on the basis that it had lost the chance of earning profits under a renewal. But, the contemplation of the parties goes to the issue of remoteness, not causation … [which] is an exclusionary rule … [that] marks the boundary of the liability for loss or damage caused by a breach of contract.”33

The second major difficulty with the approach adopted by Mason CJ and Dawson J is much more easily explained: it is that their Honours’ analysis lacks internal consistency. It was just argued that their Honours were mistaken to hold that the chance of renewal was a matter on which the promisor bore the onus of proof. But if, contrary to this view, such a position is taken, consistency demands that any other, non-negligible contingencies affecting the value of what the promisee has lost that the promisor can establish with sufficient 31 (1927) 27 SR (NSW) 301 (SC). Compare Chaplin v Hicks (1911) 2 KB 786 (CA) where the lost chance was a benefit that was promised under the contract. 32 An assumption that, his Honour notes in Amann (n 1) 174, was made by the Full Court. 33 Amann (n 1) 174 (emphasis added), approved in Lahoud v Lahoud [2009] NSWSC 623 [111] (Ward J). A similar point is made by Treitel in “Damages for Breach of Contract in the High Court of Australia” (n 2).

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certainty also must be taken into account. However, Mason CJ and Dawson J specifically disavowed such an approach, refusing to discount Amann’s award for wasted expenditure by reference to the proven 20% chance that the Commonwealth would validly terminate the contract under cl 2.24. Their Honours’ stated reason for doing so was because this was an event that was “unlikely” to happen. But as Deane J explained, this was inappropriate because this chance was “a superimposed risk” that flowed “not from performance of the contract but from Amann’s own breach”,34 which meant that it should have been taken into account in the usual way that such contingencies are (that is, via a degree of probabilities discount rather than a balance of probability analysis).35

A comparison of the approaches taken by Deane and Brennan JJ A strength of Deane J’s approach in Amann is that, by making an appropriate discount in Amann’s award for the chance that the Commonwealth would have validly terminated the contract in any event, his Honour avoided the second of the difficulties identified in the reasoning of Mason CJ and Dawson J. This observation leads naturally to the question of whether his overall approach is defensible. Unfortunately, and respectfully, it is not because, in finding that Amann was entitled to the benefit of a “legal presumption” that it would have recouped its reasonably wasted expenditure (and in extending the benefit of this presumption beyond those benefits that the defendant promised to provide), his Honour’s approach also exemplifies the first difficulty identified in the approach taken by Mason CJ and Dawson J. By contrast, Brennan J appeared to avoid this error by adopting a construction of the parties’ agreement according to which the prospect of renewal was a benefit that was “implicit in Amann’s right to perform” rather than being a mere “incidental benefit” (consequent upon performance). According to his Honour, although the contract did not contain an implied promise of renewal, the prospect of renewal was to be treated as a “substantial” commercial advantage that was “inherent in [Amann’s status as] the provider of the service for three years”.36 Brennan J’s adoption of this construction is understandable given that, for reasons already explained, the prospect of renewal could not legitimately be treated as something that was relevant to Amann’s claim for wasted expenditure unless it could be treated as a benefit that was in some way implicit in what the Commonwealth promised to provide under the original contract. With respect, however, it is difficult to accept his Honour’s classification of this commercial advantage as somewhere between a benefit that was promised and one that was not promised: the Commonwealth was either promising something to Amann in relation to the prospect of renewal or it was not, and the better view, as 34 Amann (n 1) 131. Deane J’s reasoning is considered immediately below, but it is noteworthy that the High Court subsequently endorsed his approach to the quantification of damages in relation to future hypothetical unknown losses in Sellars (n 8). 35 See eg Malec (n 7). 36 Amann (n 1) 142.



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all the other judges recognised, is that it was not promising anything in this regard. Lücke agrees, explaining that there are “great difficulties with this aspect of Brennan J’s judgment” because even if “the negotiating advantage may have been a likely, or even a necessary consequence of the three-year contract … it does not follow that it had itself been promised”.37 Moreover, Lücke goes on to observe that: “On Brennan J’s view, the contract would, by freezing the tender conditions, have stultified the freedom of the Commonwealth to negotiate in 1990 … [so that the] Commonwealth could, for example, no longer have offered to provide the planes itself in order to attract a wider range of tenderers from which to select a truly reliable organisation.”38

A further important point to make in relation to Brennan J’s analysis concerns his view as to the relevance of the trial judge’s finding that there was a 20% chance that the Commonwealth would have validly terminated the contract in any event. Like Deane J, and in my view correctly, Brennan J recognised that this finding was “relevant to the value of Amann’s contractual benefits”.39 However, unlike Deane J, his Honour held that discounting was inappropriate here because the Commonwealth had failed to discharge its onus of proving that Amann would not recoup its expenditure. Assuming that the prospect of renewal was indeed a benefit “implicit in Amann’s right to perform”, this reasoning is defensible because a failure to show that 80% of the value of the prospect of renewal was less than Amann’s wasted expenditure equates to a failure to show that Amann would not have recouped its wasted expenditure. That being said, there does remain an (at least apparent) incongruity in his Honour’s decision to take into account Amann’s prospect of renewal in computing its award for reasonable wasted expenditure whilst not taking into account the chance that the Commonwealth would have validly terminated the contract in any event, which it is respectfully contended arises as a consequence of his Honour’s artificial construction of the parties’ contract.

The approaches of Toohey and Gaudron JJ compared Toohey J’s judgment commenced by distinguishing the McRae decision from the present case. According to his Honour, “since it was theoretically impossible for the defendant [in McRae] to adduce any evidence as to expenditure at all, the case is not … authority for a general proposition that an onus of proof in the strict sense rests on the defendant to show that, even without his breach, the plaintiff would not have recovered the expenditure.”40

Rather, said his Honour, the case demonstrates that there is: 37 Lücke (n 2) 140. 38 Lücke (n 2) 140. 39 Amann (n 1). The fact that his Honour generally agreed with Deane J’s approach is supported by his statement (at 114) that discounting would have been appropriate had Amann “borne the onus of proving its damages as expectation damages”. 40 Amann (n 1) 141 (emphasis added). The reference to “any evidence as to expenditure” surely means “any evidence as to recoupment of expenditure”.

344 Contract in Commercial Law “in effect, an evidentiary onus on the defendant to show that receipts would not have equalled outlay by the plaintiff, though ultimately the aim is to determine what loss has occurred on the basis of all available evidence.”41

According to Toohey J, it followed from this that “the fairest method of assessing damages … in circumstances of uncertainty, is to balance contingencies that are significant”, given that assessing the likelihood of hypothetical events “is not simply a matter of proof … [but rather one that] involves prediction and conjecture”.42 However, his Honour was also of the view that, when doing this, “there is no requirement of a mathematical appraisal of the likelihood of every possible future occurrence”.43 Whilst recognising that “views will [no doubt] differ as to how these possibilities should be reflected in the quantification of Amann’s damages”, his Honour concluded that, since the prospects of renewal (or non-renewal) and of the Commonwealth’s early termination were all “significant”, Amann’s loss was “most fairly represented” by an award of 50% of its wasted expenditure.44 Although eschewing the commendable attempts at scientific precision evident in some of the other judgments, Toohey J’s approach, in effectively apportioning Amann’s wasted expenditure between Amann and the Commonwealth, is certainly not without some appeal in light of the parties’ respective contributions in bringing the contract to an end.45 Additionally, Toohey J’s view that the onus of proof resting on the defendant in defending a claim for reasonable wasted expenditure is merely “evidentiary” in nature is compelling. It is compelling especially given that his Honour correctly observed that, when deciding McRae, it was only necessary for the High Court to hold that the defendant was under an evidentiary (rather than presumptive) onus given that, in the circumstances of the case, it was not possible for the Commonwealth Disposals Commission to discharge even this weaker burden. Toohey J’s stated reason for apportioning Amann’s wasted expenditure between it and the Commonwealth was that balancing “contingencies that are significant” is “the fairest method of assessing damages … in circumstances of uncertainty”.46 It was suggested that there is undoubtedly some appeal in this approach. It is also the case that it is not all that dissimilar from the analyses favoured by Deane and McHugh JJ, even though their Honours each opted for a lesser degree of discounting in accordance with the Full Court’s factual findings. Significantly, however, Professor Seddon has identified an alternative basis upon which a result similar to that reached by Toohey J might be defended, which involves recognising that “Amann’s losses were at least partly attributable to its own fault in being so far behind in preparing to perform the contract”.47 41 Amann (n 1) 142, noting that “It may be assumed, in the absence of evidence to the contrary, that the plaintiff would have recovered his costs”. 42 Amann (n 1) 145, citing Malec (n 7) 642. 43 Amann (n 1) 147. 44 Amann (n 1) 147, noting that this concurred with the award made by Sheppard J (dissenting) in the Full Federal Court. 45 Seddon advocates an approach that reaches a similar conclusion to Toohey J, but on the basis explained further in the text: Seddon (n 2) 219. 46 Amann (n 1) 143. 47 Seddon (n 2) 219.



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The reason why Amann’s arguable failure to be “ready, willing and able” to perform its own future obligations at the time of the Commonwealth’s wrongful termination was not made an issue in the High Court appears to be that the findings of fact below on this issue were accepted for the purposes of the appeal.48 It is at least arguable, however, that even if Amann’s breaches were not sufficiently serious to constitute a repudiation of its agreement with the Commonwealth, a court should nevertheless be able to take them into account when deciding upon the extent to which the Commonwealth should have to bear responsibility for Amann’s wasted expenditure, given that these breaches clearly contributed to the contract’s early termination. The problem with this suggestion, as Professor Seddon makes clear, is that the common law’s present “switch mechanism” tends to produce “all or nothing outcomes”, like that reached in Amann, and does not allow for some kind of apportionment of loss between the parties. In opposition to this approach Professor Seddon argues that: “the law should more readily embrace mechanisms for reducing damages in respect of a loss suffered by the plaintiff if it could be said that part of the loss was caused in some way by the plaintiff or was the responsibility of the plaintiff ”.49

More will be said about this suggestion later, but first it is necessary to finish reviewing the various judgments in Amann. Turning next to Gaudron J’s approach, her Honour agreed with Toohey J that there was only a practical or evidentiary onus on the Commonwealth to show that Amann would not have recouped its expenditure.50 Her Honour nevertheless reached a different conclusion to Toohey J, agreeing in the result with the award made by Mason CJ and Dawson J, and Brennan J. The critical difference between Gaudron J’s approach and that of all the other members of the court was in relation to her estimation of the value that should be attributed to the planes that Amann would own upon the conclusion of the initial threeyear contract. Thus, while her Honour said that it “would be wrong to assess the value of Amann’s contractual rights” by reference to the prospect of renewal since this was not a benefit that the Commonwealth ever promised to provide, she also held that: “it would be equally wrong, and contrary to common sense, to assign a value to Amann’s planes at the end of the contract period without regard to the Commonwealth’s likely need for aerial surveillance.”51 48 While it is recognised that the Amann appeal was concerned solely with the issue of damages, the question of Amann’s readiness and willingness to perform was (at least arguably) relevant to this issue and not just to the issue of liability. 49 Seddon (n 2) 208. The appeal of Seddon’s approach can be seen in his observation that: “The result arrived at by, for example, Toohey J that Amann should recover only half of its expenditure could have been arrived at by asking: to what extent was Amann’s breach a cause of its losses? Or to avoid the word ‘cause’, to what extent was Amann responsible for the losses that it suffered? This seems to be no less a legitimate exercise – and far less convoluted – than asking: what were the chances that the Commonwealth (already in breach) might have used its contractual powers to terminate (had it not been in breach) so that Amann would not have been able to recoup its expenses?” (at 219). 50 Amann (n 1) 156. 51 Amann (n 1) 152.

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According to Gaudron J, Amann’s ownership of these planes would mean that it was either very well placed to secure a renewal of the contract or that, if no renewal was secured, it would very probably be well-placed to sell these planes to its successor.52 Leaving aside the question of precisely who should bear the onus of proof in relation to Amann’s lost chance of future consequential profits,53 this analysis appears prima facie to be defensible, at least absent evidence that the value of the planes would have depreciated markedly over the three year period or that any successor would have preferred not to buy these secondhand planes.54 However, according to Lücke, this benefit was probably more “fanciful than real” because: “The interest of one or two of Amann’s potential rivals for the contract extension would scarcely have amounted to a market, and there is no basis for the assumption that such rivals would have been willing to pay more for the planes than their market value.”55

McHugh J’s approach As already noted, McHugh J also awarded Amann substantial damages. However, this was not because the Commonwealth had failed to show that Amann would not profit from the arrangement but because such an award was necessary in order to uphold the Robinson v Harman principle directly by putting Amann into the financial position it would have occupied “but for” the contract’s early termination. His Honour’s reasoning to this conclusion proceeded as follows. (1) A  promisee’s occasional entitlement to recover proven wasted expenditure is not based upon an assumption that this expenditure will be recouped, which is contrary to the “experience of commerce”,56 but on “the broad principle of justice” that, if the defendant’s breach has made it impossible to ascertain whether or not the plaintiff would have profited from the contract’s performance, “it is only fair that the defendant should reimburse the plaintiff for expenditure which it has wasted as the result of the breach”.57 (2) This meant that awarding Amann its reasonable wasted expenditure could be justified only if the contract’s early termination had made it “impossible or too uncertain to ascertain whether the plaintiff would have made any net profit or, if it would have, what the amount of that profit would have been”.58 52 Amann (n 1)159. See also Deane J’s similar conclusion at 151. 53 Any difference in opinion between Gaudron J and myself in relation to which party should bear the onus of proof in relation to a promisee’s claim for the consequential profits it would have made “but for” the promisor’s breach seems to be more apparent than real since her Honour’s view was that, where there is uncertainty as to the plaintiff ’s future position, the onus on the defendant is merely “evidentiary” in nature, so that there is “no reason to impose on a defendant the formal burden of establishing that a plaintiff would not have recouped his or her wasted expenditure” (at 156). 54 However, this is not to deny the validity of the approach of the other Judges in accepting the finding below as to the post-contractual value of the planes. 55 Lücke (n 2) 151. 56 That is, the assumption that parties generally do not enter losing contracts is false. 57 Amann (n 1) 166, relying on McRae (n 21). 58 Amann (n 1) 164.



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(3) Crucially, this pre-condition was not satisfied here because there was no express or implied promise in the initial contract that, if Amann performed this contract, it would obtain a commercial advantage that would have allowed it to make a net profit, meaning that it was possible to know with certainty that Amann would not in fact have made a profit from the contract’s performance. (4) As at the date of breach, Amann had paid, or was liable to pay, $9,526,464, comprised of $6,136,464 in expenditure it had incurred “in acquiring aircraft and other establishment costs” and a further liability of $3,390,000 in the form of interest payments or borrowing costs associated with this expenditure.59 (5) In addition to these expenses, the incurring of which was not dependent on whether performance of the contact preceded, it was estimated that in order for Amann to earn $17,107,462 in revenue over the contract’s duration it would incur further operating costs of $12,043,420 in addition to a sum of $368,479 on aircraft acquisition. (6) For McHugh J, this meant that the provisional sum required to put Amann into the financial situation it would have been in had the contract been performed was [$17,107,462 – (12,043,420 + $368,479)] = $4,695,563, plus any further (not “too remote”) losses Amann had or would incur as a result of the contract’s early termination. (7) Here, these further consequential losses were the $143,049 in termination payments Amann had to pay its employees and the $113,000 security deposit that had been wrongfully forfeited to the Commonwealth. (8) Significantly, however, the finding below that there was a 20% chance that the Commonwealth would have validly terminated the contract meant that there was a 20% chance that Amann would have suffered this “loss” (ie estimated future revenue – future expenses – further losses consequent on termination) in any event, which meant that, in accordance with the principles articulated in Malec v JC Hutton Pty Ltd,60 Amann’s damages must be discounted by 20%. (9)  However, while McHugh J discounted the $4,695,563 figure and the $113,000 security deposit by 20%, he did not discount the termination payments in the same way, meaning that he awarded Amann the sum of $3,989,899.

59 Thus, an important point of difference between McHugh J and the other Justices was that his Honour treated Amann’s borrowing costs as an expense that had already been incurred by the date of breach. According to Professor McLauchlan this finding is “surprising”, but it appears to be entirely sensible (McLauchlan, “Reliance Damages for Breach of Contract” (n 2) 434). The point McHugh J makes is that Amann had this liability regardless of whether the contract proceeded so that it was sensible to ignore this “expense” for the purposes of calculating the “loss” caused by the contract’s early termination. Professor Lücke agrees, observing that McHugh J’s characterisation of Amann’s borrowing costs as already incurred “seems correct, subject to the comment that plaintiffs have a duty to mitigate their loss and that they may be able to do so by seeking to be released from such obligations”, though any costs incurred in doing this would obviously also be recoverable: Lücke (n 2) 132. 60 Malec (n 7).

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(10) McLauchlan describes this as “curious”,61 but this different treatment of the employee termination payments and the security deposit appears to be defensible on the basis that, while the liability to pay the employee termination payments was a financial loss that arose consequent upon Amann’s acceptance of the Commonwealth’s repudiation, the forfeiture of the security deposit arose from a term of the contract itself. Thus, according to McHugh J, Amann’s entitlement to recover this deposit depended upon whether it fulfilled its contractual obligations, a contingency the probability of which was assessed at 80% (on the basis that there was a 20% chance that the Commonwealth would have validly terminated the contract in any event). By contrast, Amann’s liability to pay the employee termination payments did not result from any breach of a contractual term but instead because, having no work for the employees, Amann decided to terminate their employment and was accordingly required to compensate them.

Taking Stock The preceding discussion was intended to establish a number of propositions. Relevantly, these included the following: (1) the analysis favoured by Mason CJ and Dawson J was problematic for at least two distinct reasons and therefore cannot be supported;62 (2) In finding that Amann was entitled to the benefit of a “legal presumption” that it would have recouped its reasonably wasted expenditure (and in extending the benefit of the “legal presumption” of recoupment beyond those benefits that the Commonwealth promised to provide), Deane J’s reasoning also cannot be supported; (3) subject to Brennan J’s overly broad interpretation of McRae, and provided his Honour’s construction of the parties’ agreement was indeed correct, his reasoning was internally consistent and therefore prima facie defensible;63 (4) the interpretation of McRae adopted by Toohey and Gaudron JJ is preferable to those favoured by Mason CJ and Dawson, Brennan and Deane JJ; (5) Toohey J’s conclusion that Amann’s wasted expenditure should have been apportioned between it and the Commonwealth, whilst not without some intuitive appeal, was nonetheless unsupportable as a matter of authority; 61 McLauchlan, “Reliance Damages for Breach of Contract” (n 2) 434. 62 The most significant of these errors involved holding that Amann was entitled to the benefit of a “legal presumption” that it would have recouped its reasonably wasted expenditure (and in extending the benefit of this presumption beyond those benefits that the Commonwealth promised to provide under the contract). 63 Note, however, Lücke’s insightful observation that even if Brennan J’s interpretation was correct, it is “difficult to accept his claim that the commercial advantage which the breach had denied Amann could not have been made the subject of an assessment and damages award quite independently of the plaintiff ’s reliance expenditure” because any difficulties associated with such an assessment “were hardly greater than those which faced the court in Chaplin v Hicks … [since on] Brennan J’s interpretation, the promise was to allow Amann its commercial advantage and that would yield the same good reason for overcoming any difficulties of assessment”: Lücke (n 2) 140.



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 349

(6) Gaudron J’s reasoning was internally consistent and, subject to the (doubtful) validity of her factual assumptions regarding the residual value of Amann’s planes,64 prima facie defensible; and (7) McHugh J’s reasoning was supported by the applicable legal principles and should be adopted in analogous future cases to the extent that this remains open as a matter of stare decisis.

How should Amann have been decided? One issue so far largely overlooked is the significance of the fact that Amann had itself committed several breaches of contract at the time of the Commonwealth’s purported termination. These breaches were sufficiently serious for it to be at least arguable that Amann was repudiating the contract at this time, but in the courts below no repudiation was found to have occurred and this finding was not challenged in the High Court appeal. Perhaps one reason this issue was not pursued is that it was by this time accepted that the contract’s “show cause” procedure was the exclusive mechanism by which the Commonwealth could validly terminate,65 with the consequence that there was simply no place for the operation of common law termination principles in relation to the question of liability. But surely Amann’s readiness and willingness to perform nevertheless remained relevant to Amann’s entitlement to an award designed, albeit indirectly, to give effect to the Robinson v Harman principle.66 Moreover, even if it was accepted that Amann’s breaches were not sufficiently serious to justify termination at common law, the Commonwealth should still have been entitled to bring a counterclaim for damages in relation to these breaches.67 Given that Amann’s arguable lack of readiness and willingness to perform was not raised as an issue in the High Court, this matter was treated as irrelevant to the question of whether Amann could recover some or all of its reasonable wasted expenditure. But if a claim for reasonable wasted expenditure is understood as an indirect way of giving effect to the Robinson v Harman principle, as it should be, this cannot be the correct approach as it is clearly established that, following a promisor’s repudiatory breach, a promisee’s entitlement to an award designed to put it into the position it would have been in had the contract been performed is dependent upon the promisee being “ready, willing and able” to perform its future contractual obligations. It is noteworthy, however, that there is presently considerable academic debate as to whether or not a promisee is in these circumstances 64 Note, however, that such evidence was presented and accepted by the rest of the Court and that, in Lücke’s view, her Honour may have been taken in by “the ingenuity of counsel” in concluding that that the performance of the contract would have resulted in the planes becoming more valuable by 1990 than they were in 1987: Lücke (n 2) 151. 65 Amann Aviation (n 10) [136] (Beaumont J). 66 For a recent, extensive discussion of this issue, see Flame SA v Glory Wealth Shipping PTE Ltd [2013] EWHC 3153 (Comm). 67 Normally, such a claim would be for the financial loss the Commonwealth could causally attribute to such breaches, but in Amann there appears to have been “liquidated damages” provisions that the Commonwealth could have relied on. It appears as though the Commonwealth did not seek to enforce these provisions, though it is not clear why.

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entitled to the benefit of a rebuttable “legal presumption” that it would have so performed.68 In Amann the High Court appeared either to assume that Amann was “ready, willing and able” to perform or that the issue was not relevant in view of the finding below that the parties’ contract exclusively regulated the Commonwealth’s entitlement to terminate. But whatever the reason for why the issue was not raised it is important to appreciate that a promisee’s entitlement to recover its reasonable wasted expenditure should depend upon its own readiness and willingness to perform its future contractual obligations, at least on the conception of such awards that currently prevails in Australia. Even if it is legitimate to allow a promisee to recover its reasonable wasted expenditure when the promisor cannot demonstrate that the recoupment of this expenditure is unlikely, it is not inconsistent with the adoption of this position also to make the promisee’s entitlement to an award designed to uphold the Robinson v Harman principle to depend upon its “readiness and willingness” to perform its own prospective obligations, albeit perhaps with the benefit of a rebuttable “legal presumption” in its favour in relation to the proof of this fact.69 This issue was not, however, raised in the High Court appeal. Moreover, on the basis that the Commonwealth’s repudiation had made it impossible to determine with certainty what position Amann would have occupied had the repudiation not occurred, a majority of the court concluded that Amann was prima facie entitled to recover the expenditure it had reasonably incurred in preparing for the contract’s performance by the time the contract was terminated. Of course, this prima facie entitlement was subject to reduction if the Commonwealth could show that Amann would not in fact have broken even on the contract. Again, however, a majority of the court concluded that the Commonwealth had failed to do this either because it was reasonably contemplated, and likely,70 that the parties’ arrangement would have been renewed (Mason CJ and Dawson, Deane and Brennan JJ) or because of the residual value that should be attributed to the planes that Amann would have owned upon the conclusion of the initial three-year contract (Gaudron J). For reasons already explained, the prospect of a renewal was not something that should have been relevant to determining Amann’s entitlement to recover some or all of its reasonable wasted expenditure because it was not a benefit that the Commonwealth ever promised to provide, at least on any reasonable construction of the parties’ agreement. Leaving aside the unlikely possibility

68 Cf eg E Peel, “Desideratum or Principle: The ‘Compensatory Principle’ Revisited” (2015) 131 LQR 29 with D McLauchlan, “Repudiatory Breach, Prospective Inability and The Golden Victory” [2015] J Bus L 530. The argument of this chapter is consistent with (but does not mandate) the existence of such a presumption as long as it remains open for the promisor to prove that the promisee was not in fact “ready, willing and able” to perform. The critical point made here is simply that conclusive proof that the promisee was not “ready, willing and able” to perform its future obligations should preclude this party from recovering all its reasonably wasted expenditure. 69 For further explanation of this suggestion, see Peel (n 68). 70 More accurately, it was not shown to be unlikely.



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 351

that Gaudron J’s assessment of the planes’ residual value was correct,71 this should have meant that the evidence established that Amann would not in fact have broken even on the contract and, assuming that any hypothetically valid termination by the Commonwealth happened at or near the beginning of contract’s three-year duration, had an approximately 80% chance of making an initial loss of approximately $3,913,572. This in turn meant that, assuming Amann’s readiness and willingness to perform and leaving aside the question of the planes’ post-contract value, Amann was prima facie entitled to recover at least 80% of $1,561,612,72 being the value of the chance that it lost as a result of the Commonwealth’s wrongful repudiation.73 It must be observed, however, that this figure also could have been arrived at via a simple application of the Robinson v Harman principle. This would be done simply by subtracting the remaining $15,801,899 (ie $21,021,034 – $5,219,135) to be incurred from the payments that would have been received from the Commonwealth ($17,107,462) and then adding the forfeited security deposit ($113,000) and employee termination payments ($143,049), neither of which Amann would have incurred, to give a total of $1,561,612, but discounting all of this, except the employee termination payments, by 20% to reflect the chance that the Commonwealth would have validly terminated the contract in any event. An important question that then arises is how this figure (which might be increased by the inclusion of not “too remote” consequential losses proved with sufficient certainty) is to be reconciled with the sum arrived at by McHugh J. If his Honour was indeed correct in concluding that the entirety of Amann’s liability of $3,390,000, in the form of interest payments or borrowing costs associated with expenditure already outlaid, would have been incurred even if the contract did not proceed, then he must be correct in not deducting this amount from the gross profits ($17,107,462) that Amann would probably have received from the Commonwealth because to do so would, in effect, be to count this liability twice. Thus, assuming that McHugh J was correct that this entire liability was to be incurred regardless of whether the contract proceeded, the minimum amount that Amann should have recovered on the analysis favoured here is 80% of ($1,418,563 + $3,390,000) + $143,049 = $3,989,899. Additionally, as explained above, it remained open to Amann to prove any further consequential losses that it could establish with sufficient certainty, provided it could causally attribute these losses to the Commonwealth’s breach and establish that they were within the parties’ reasonable contemplation at the time of formation in accordance with the generally accepted approach to 71 As observed at n 64, Lücke suggests that her Honour may have been taken in by “the ingenuity of counsel in concluding that that the performance of the contract would have resulted in the planes becoming more valuable by 1990 than they were in 1987”: Lücke (n 2) 151. 72 Whether McHugh J’s significantly higher figure of $4,695,563 was correct depends upon whether his Honour was right to characterise, as expenditure that would be incurred regardless of whether the contract proceeded or not, Amann’s liability of $3,390,000 in the form of interest payments or borrowing costs associated with its pre-performance expenditure. As Lücke observes, this approach “seems correct”, provided of course that account is taken of any mitigatory actions Amann could reasonably have taken in order to reduce this expenditure: Lücke (n 2) 132. 73 This figure (ie $1,561,612) comes from subtracting $3,913,572 from $5,475,184.

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contractual “remoteness”. It was held in the courts below that the lost chance of renewal was indeed a loss that satisfied the second of these requirements and, at least according to accepted principles, it also satisfied the first.74 Finally, it should be noted that even if Amann was entitled to recover compensation for this (consequential) lost chance of renewal (or, more accurately, for the chance of obtaining the profits that would thereby have resulted), it is clear that the prospect that the Commonwealth would have validly terminated the initial contract in any event would need to be taken into account in valuing this lost chance.75

Two final matters The purpose of the discussion that follows is to say a little more about two issues that have not been properly dealt with so far. The first of these issues is the status of the so-called legal “presumption of recoupment”, which formed a critical part of the reasoning of at least Mason CJ and Dawson J, and Deane J. Closely related to this issue is a second, more fundamental, question that is starkly presented by Amann. This question is precisely how the law should respond in cases where a plaintiff promisee has reasonably wasted expenditure in preparing to perform a prematurely terminated contract, but cannot establish with sufficient certainty that it would have recouped this expenditure if this early termination had not occurred.

The status of the (legal) “presumption of recoupment” On the basis of views pronounced by Mason CJ and Dawson Deane JJ, as well as (arguably) Brennan J in Amann, it might be claimed that the decision supports the existence, at least in certain cases, of a “legal presumption” in favour of a promisee who terminates for the promisor’s wrongful repudiation that the promisee would have recouped any reasonable expenditure incurred in preparing for the contract’s performance. One claim made here has been that, as opposed to the position in England and the United States, Australian law, at least prior to Amann, did not unequivocally recognise the existence of any such presumption because reliance upon it was not a necessary step in the High Court’s reasoning in McRae. A further argument has been that the recognition of such a presumption, particularly the broad one upheld by Mason CJ and Dawson and Deane JJ, is undesirable because it is overly burdensome on the 74 It is worth noting, however, that it might be argued that this lost chance was better viewed as caused by the promisee’s decision to accept the promisor’s repudiation (and terminate the contract rather than affirm) instead of by the repudiation itself via an analogy with the reasoning in Shevill (n 28). For further discussion of this suggestion, see Seddon (n 2) 220. 75 As explained earlier, this is simply an application of the principles established by the High Court in Malec (n 7) and Sellars (n 8). Thus, whatever chance there was found to be of a renewal if the initial contract was completed would need to be discounted by 20% to reflect the chance that the initial contract was not in fact completed. It might also be argued that the Commonwealth should have been able to set-off against any liability a “counterclaim” for 20% of any financial losses it could prove it would have incurred had the initial contract been validly terminated. But this cannot be correct because termination under a term does give the terminating party an entitlement to recover “loss of bargain damages”, in accordance with the High Court’s decision in Shevill (n 28).



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 353

promisor given this party’s relative disadvantage in relation to the proof of the relevant facts in issue. This of course says nothing in relation to whether the aforementioned “presumption of recoupment” was made part of Australian law in Amann. While there is considerable support for the existence of this presumption in the judgments of Mason CJ and Dawson J, and Deane J (as well as significant opposition to it in the judgments of Gaudron, Toohey and McHugh JJ), Brennan J’s views on the matter, upon which the establishment in Amann of any such presumption must depend, are more equivocal. While Brennan J held that on the facts Amann was entitled to the benefit of the postulated presumption, according to his Honour this was because an assessment of Amann’s damage “on an ordinary basis” had been made “impossible” by the Commonwealth’s breach. However, as Lücke points out, even if one is of the view that it was, in the relevant sense, “impossible” to assess Amann’s damage, any such difficulty was not created by the Commonwealth’s repudiation but by “pre-existing evidentiary difficulties” because had “it been attempted before the breach to predict the plaintiff ’s chances of profit, it would have been just as difficult as it was afterwards”.76 This observation is entirely persuasive, but the point can perhaps be put even more simply in the following way. In McRae it was theoretically impossible even to speculate as to the value of the chance that the plaintiff lost due to the Commonwealth’s breach, while in Amann it was not theoretically impossible to speculate about the value of Amann’s lost chance even though, practically speaking, it was very difficult, perhaps even impossible, to place a value on this lost chance because of the insufficient information available at the time of the contract’s termination to make any kind of reliable assessment as to what would have happened following the contract’s (hypothetical) completion.77 In any event, returning to the central point, Lücke is clearly quite correct to note that since: “Brennan J did not support a general version of the presumption but one which had been forced into the straight-jacket of McRae … there was [in Amann] no majority [support] for the presumption [of recoupment], whether one counts all the judges or only those who supported the dismissal of the appeal.”78

It is therefore contended that it cannot be said that Australian law unequivocally recognises the existence of a “legal presumption” in favour of a promisee who terminates for the promisor’s repudiation that the promisee would have recouped the expenditure reasonably incurred in preparing for the contract’s performance. Moreover, even if one takes the view that Brennan J’s judgment did recognise the existence of such a presumption, his Honour certainly did not hold that the promisor’s burden in discharging this onus extends to demonstrating the unlikelihood of recoupment when (at least some) reasonably 76 Lücke (n 2) 147 (emphasis added). 77 This point was in fact expressly recognised by Mason CJ and Dawson J when their Honours said: “The present case differs from McRae in that it was not impossible, as a matter of theory, for Amann to establish what its profits (if any) would have been had the Commonwealth not repudiated the contract”: Amann (n 1) 89. 78 Amann (n 1) 89.

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contemplated, but unpromised, consequential financial benefits of performance are taken into account. As noted earlier, however, none of this should preclude recognition of the existence of an “evidentiary” onus on the promisor, as both Toohey J and Gaudron J found in Amann, to raise some doubt as to whether the promisee would have recouped its expenditure before the court will require the promisee to prove, on the balance of probabilities, how much, if any, of its wasted expenditure would in fact have been recouped. More controversially, what has been said above also does not preclude the possibility of Australian law developing a mechanism that allows a decisionmaker, in certain cases, to apportion responsibility for the promisee’s reasonable wasted expenditure between the two contracting parties on an appropriate basis. Precisely how such an apportionment might be done is, however, a difficult question requiring further consideration.79

What is the optimal approach to the problem of pre-breach expenditure in circumstances of evidential uncertainty? As just foreshadowed, a related, and more fundamental, question that arises from Amann is precisely how the law should resolve cases where damages are claimed for a contractual repudiation in circumstances where the plaintiff promisee cannot establish with sufficient certainty that it would have recouped the expenditure reasonably incurred in preparing for the contract’s performance. The starting point in the analysis, as indeed all the Justices in Amann recognised, is clearly that the aim of awarding damages to the promisee is “so far as money can do it”, to put this party into “the same situation … as if the contract had been performed”. But in upholding this principle, it may be legitimate for the law to start with certain “assumptions”80 about what would have happened “but for” the promisor’s breach. One of these might be that the promisee was, at the time of the promisor’s breach, “ready, willing and able” to perform its own prospective contractual obligations. The appropriateness of adopting this assumption has not been discussed here, but it was noted that there is presently considerable controversy as to whether a rebuttable “legal presumption”’ in favour of future performance should be extended to the promisee in these circumstances.81 Another possible “assumption” is that, assuming there had been no (repudiatory) breach by the promisor, the promisee would have recouped the pre-breach expenditure it reasonably incurred in preparing for the contract’s performance. In contrast to the former possibility, this “assumption” has been the focus of this chapter and it has been argued that the law should not give a promisee the benefit of a “legal presumption” to this effect even when there is considerable uncertainty as to what would have happened “but for” 79 Unfortunately, there is not space to explore this issue in any detail here, but the two obvious choices are the development of a common law principle to this end or the enactment of a legislative solution in accordance with the suggestion made in the text that follows. 80 This term has been chosen deliberately to leave open the question of the precise nature of this “assumption” (ie whether it is a legal presumption or merely an evidentiary starting point). 81 Compare the views expressed in Peel (n 68) and McLauchlan, “Repudiatory Breach, Prospective Inability and The Golden Victory” (n 68).



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 355

the contract’s early termination. Specifically, it was argued that, rather than formally shifting the onus of proof on the question of “recoupment”, there should, at most, be an “assumption” of recoupment simply to provide an evidentiary starting point in making a finding on the issue so that the promisor is only required to demonstrate the possibility of non-recoupment before a court will require the promisee affirmatively to establish, on the balance of probabilities, the financial position it would have occupied “but for” the breach. But if, contrary to this, a “presumption” of recoupment is to be recognised by Australian law, it is important that the promisor’s burden in discharging this onus should not extend beyond disproving recoupment in relation to the benefits that were contractually promised. So far, so good, but what about cases like Amann where the promisee’s entire commercial strategy involved making a calculated loss on the initial contract in the hope of securing a (speculative) consequential benefit upon the contract’s completion, either in the form of a renewal of its initial arrangement with the promisor, as in Amann itself, or on some other basis, such as (say) by building a positive reputation that leads to future profitable contracts with other parties? Leaving aside situations, of which Amann was arguably an example, where the promisee is not itself “ready, willing and able” to perform its future contractual obligations, it is recognised that cases in the category just described do raise the possibility of injustice for the promisee if, in the face of insuperable evidential uncertainty as to what would have happened “but for” the breach, the promisee is left entirely to bear the loss of any reasonably wasted expenditure.82 The solution that Professor McLauchlan proposes is to ask a simple question: did the promisor’s breach cause the relevant pre-breach expenditure to be wasted (or would it have been wasted in any event)?83 If the answer is “yes”, the wasted expenditure should be recoverable. According to McLauchlan, such an approach is defensible on the basis that it attempts to give effect directly to the Robinson v Harman principle’s stated aim of putting the promisee, “so far as money can do it … [into] the same situation … as if the contract had been performed”. However, as McLauchlan does recognise and the Amann case demonstrates, the “real, and difficult, issue” in applying this approach is where to place the burden of proof in relation to the question of recoupment when there is significant evidential uncertainty as to what would have happened “but for” the repudiation.84 One of the principal arguments made here has been that it would be a mistake formally to place the onus of proof in relation to this fact on the defendant-promisor, particularly if the burden in discharging this onus extends to disproving recoupment even in relation to speculative consequential benefits that this party has not (expressly or impliedly) promised to provide. However, the fact that at least some common law jurisdictions seem to have adopted this position is somewhat understandable given that the common law presently has 82 Note that even on McHugh J’s analysis Amann had incurred, or would incur, $9,526,464 in reasonable wasted expenditure as a result of the contract’s early termination, but was awarded only $3,989,899 in damages meaning that it was still left to bear a sizeable shortfall of $5,536,565 = ($9,526,464 - $3,989,899). 83 McLauchlan, “Reliance Damages for Breach of Contract” (n 2) 448. 84 McLauchlan, “Reliance Damages for Breach of Contract” (n 2) 448.

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no mechanism for apportioning a promisee’s reasonable wasted expenditure between the two contracting parties having regard, possibly amongst other considerations, to their respective contributions in bringing about the contract’s early termination, and the law’s corresponding tendency to produce “all or nothing outcomes” in such cases.85 It therefore can be said that, in addition to the difficulty of which party should bear the onus of proof in relation to the recoupment (or nonrecoupment) of reasonably wasted expenditure, there is arguably a further difficulty arising from McLauchlan’s approach. This difficulty is that a strict causation-based analysis of which party should bear responsibility for the promisee’s wasted expenditure following the promisor’s repudiation also tends to produce “all or nothing” outcomes in relation to which of the two parties must bear the cost of the promisee’s reasonable wasted expenditure, failing to allow for the possibility that, as in Amann, both parties may have contributed to the contract’s premature termination. In recognition of this difficulty, Professor Seddon has suggested that a court should be able to apportion the promisee’s reasonable wasted expenditure between the two parties in circumstances where it is not possible to determine with sufficient certainty what profits or losses the promisee would eventually have made “but for” the relevant breach and it can be said that both parties have contributed to the contract’s early termination. If such a proposal were to be adopted, a further consideration that might be relevant to such an apportionment, in addition to the parties’ respective contributions to the contract’s premature conclusion, may be whether either party has acted in “bad faith” or “unconscionably” in bringing about the contract’s early termination in accordance with relevant common law or statutory standards of conduct.86 If such a mechanism was to be developed another important question that would need to be answered, which was not discussed in Amann and cannot be considered here, is precisely what makes pre-breach expenditure “reasonable” in the relevant sense. It seems likely that the answer will be along the lines of whether the expenditure is necessary to enable the promisee to perform its contractual obligations. Again, however, an issue would arise as to which party should bear the onus in relation to the proof of this fact. Consistently with the argument of this chapter, it is suggested that the onus of proof should be on the promisee.87 Not only is this party best placed to prove whether the expenditure was necessary to enable it to perform its contractual obligations, but this would also help to avoid the danger of the promisor being made to indemnify the promisee for expenditure incurred in the pursuit of some highly 85 See Seddon (n 2) 208. 86 It is recognised, however, that this is quite a controversial suggestion in light of English law’s general policy of ignoring a contracting party’s moral culpability in breach. The point made here is simply that it may be appropriate for a legislature to allow a decision-maker to take such a matter into consideration in apportioning loss in this context, particularly given that this is done in other contexts such as, eg the application of the statutory doctrine of “contributory negligence”. See eg Law Reform (Miscellaneous Provisions) Act 1965 (NSW) s 9(1). 87 A full analysis of this issue is beyond the scope of this article but it seems likely that this would be the appropriate position for the reason given in the text.



Ch 15  Commonwealth v Amann Aviation Pty Ltd 25 Years On 357

speculative business venture or perhaps even for some other purpose altogether such as, for example, to obtain and perform future contracts with other parties, or minimise its tax liability.

Conclusion Twenty five years after the decision in Amann, many important and difficult questions raised by the case remain unanswered. The main purposes of this chapter were to isolate these questions and make some progress towards their resolution. It has also been argued that, of the reasons delivered in the High Court, only McHugh J’s analysis can be defended in its entirety. After a brief review of the facts and the lower court decisions, the various High Court judgments were examined, with the objective of identifying those aspects of their Honours’ reasoning that are supportable, either as a matter of authority or fundamental legal principle, and those which are not. This process led to the identification of, and an attempt to defend, a number of propositions. Perhaps chief amongst these propositions was the notion that, if awards for reasonable wasted expenditure are understood simply as a particular application of the Robinson v Harman principle, as indeed they should be, the promisee should not, in the face of evidential uncertainty as to whether it would eventually have profited from the contract’s performance, have the benefit of a rebuttable “legal presumption” that it would have recouped this expenditure. Rather, the promisor’s onus should at most be merely “evidentiary”, requiring it only to raise some doubt as to the likelihood of recoupment before the promisee is formally required to establish that recoupment was likely. If, however, the legal “presumption of recoupment” is to become part of Australian law, the promisor’s burden in discharging this onus should not extend to needing to prove non-recoupment even in relation to speculative consequential benefits that the promisee hopes will result from the contract’s performance but which the promisor has not (expressly or impliedly) promised to provide. In addition to these claims in relation to the existence and scope of any legal “presumption of recoupment”, two further (and relatively uncontroversial) claims about the calculation of the promisee’s “expectation damages” in circumstances of evidential uncertainty were defended. The first of these claims was that a denial of the aforementioned legal “presumption of recoupment” is not inconsistent with allowing the promisee to recover damages for any sufficiently certain lost chance of realising a financial benefit than can be causally attributed to the promisor’s breach. The second was that, in accordance with the principles laid down in Malec v JC Hutton Pty Ltd, and Sellars v Adelaide Petroleum NL, in calculating such damages, an appropriate discount must be made to reflect any countervailing, non-negligible contingencies that reduced the likelihood of recoupment, in accordance with the approaches taken by McHugh and Deane JJ. In addition to these claims, two further propositions were advanced. The first was that, whatever position is taken in relation to the so-called “presumption of recoupment”, a promisee’s entitlement to recover its reasonably wasted expenditure should depend upon its own readiness and willingness

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prospectively to perform.88 The second and more controversial proposition advanced was that, if the promisee cannot establish with sufficient certainty that it would have recouped its reasonably wasted expenditure, consideration should be given to the development of a mechanism that allows a court to attribute to the promisor responsibility for some or all of the promisee’s reasonably wasted expenditure having regard (at least) to the parties’ respective contributions in bringing about the contract’s early termination. Precisely how any such apportionment might be done of course raises its own difficulties and unfortunately there was not space properly to consider such difficulties here. However, in addition to having regard to the parties’ relative contributions in bringing about the contract’s early conclusion, it was suggested that, when making any such apportionment, it may be appropriate also to have regard to certain other potentially relevant considerations such as whether one or other party has acted in “bad faith” or “unconscionably” in accordance with well-established common law or statutory standards of conduct. But whatever the precise mechanism employed, it is difficult to dispute the notion that its availability would have the potential to reduce the perceived injustice that can arise in cases like Amann where, due to significant uncertainty as to what would have happened if the promisor’s repudiatory breach had not occurred, one or other party to the contract is effectively forced to bear the cost of any reasonable expenditure that the promisee has outlaid, but not recouped, in preparing for the contract’s performance.

88 Significantly, however, it was recognised that it may be appropriate to extend to the promisee the benefit of a rebuttable presumption that it would have so performed.

16

Equitable Estoppel as a Cause of Action: Neither One Thing Nor One Other Ben McFarlane*

Introduction Overview Australia and England are seemingly divided in their approaches to a common problem: when can equitable estoppel operate as a cause of action? At first glance, it might seem that each has taken a different fork in the road: the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher1 boldly recognised that equitable estoppel can operate to give B a right where B has relied to his or her detriment on a belief, for which A is responsible, that B had or would acquire a right against A; in England, meanwhile, the traditional restriction has been maintained and the doctrine can operate as an independent cause of action only where B’s belief relates to identified property, usually land, of A.2 On further examination, however, the contrast is not quite so clear. In Australia, and New South Wales in particular,3 it has been argued that Waltons Stores can be seen as simply an application of conventional principles, and so does not provide authority for the extension of equitable estoppel beyond its

*

1 2 3

I am grateful to John Mee and to participants in the “Contracts in Commercial Law” conference. I have also benefited from discussing the issues in this chapter with Andrew Robertson, as well as with other members of the Melbourne Law School Obligations Group, and with members of the Private Law Discussion Groups at Leicester University and at University College London. (1988) 164 CLR 387 (HCA). Thorner v Major [2009] UKHL 18; [2009] 1 WLR 776 [61]. The views of Handley AJA on both the proper scope of promissory estoppel and the correct interpretation of Waltons Stores have clearly been influential: for extra-judicial statements of those views, see eg K Handley, “The Three High Court Decisions on Estoppel 1988–1990” (2006) 80 ALJ 724, 726 and K Handley, Estoppel by Conduct and Election (Sweet & Maxwell 2006). For a persuasive criticism of Handley’s analysis, see A Robertson, “Three Models of Promissory Estoppel” (2013) 7 Journal of Equity 226.

359

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original boundaries.4 As a result, it has recently been noted that: “[i]t is not yet finally resolved in Australia whether promissory estoppel can operate as a cause of action”.5 In England, there is first instance authority inconsistent with the idea that, when proprietary estoppel is based on a promise, that promise must be one that B has or will acquire a right in identified land,6 and academic contributions continue to cast doubt on the validity of that supposed limit.7 The approach adopted here is a simple one. As shown by relatively recent decisions of the highest courts in each of Australia8 and England,9 it is clear that, in the guise of a particular form of proprietary estoppel, equitable estoppel may operate as a cause of action. It is argued that the principle recognised in such cases, referred to in this chapter as ‘the principle’, is as follows: A may come under a liability to ensure that B suffers no detriment as a result of B’s reasonable reliance on a promise, made by A to B, that B reasonably understood as seriously intended by A. The question is as to the proper limits of that principle: in particular, is it capable of applying only where A’s promise relates to “identified property (usually land) owned (or, perhaps, about to be owned) by [A]”?10 The answer given here, in short, is No: there is no inherent aspect of the principle that prevents its wider operation; nor is there any convincing extrinsic concern which can justify placing an artificial limit on the principle. This conclusion depends on an analysis of the principle which sees it as distinct both from other principles making up the law of estoppels, and 4

See eg the analyses of Waltons Stores proposed in DHJPM v Blackthorn Resources [2011] NSWCA 348; (2011) 285 ALR 311 [48] (Meagher JA and Macfarlan JA), [122] (Handley AJA). The view that Waltons Stores is best seen as a proprietary estoppel case is however inconsistent with the fact, noted by Keane J in Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26 [134], that Mason CJ and Wilson J ((1988) 164 CLR 387, 404) identified Waltons Stores as a case of promissory estoppel. In Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274; [2002] 1 All ER 737 [98], Mance LJ suggested that, were the facts of Waltons Stores to arise in England, the same result might be reached via an estoppel by representation (on the basis of the reasoning of Deane and Gaudron JJ that A could be precluded from denying that exchange had occurred). 5 Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825 [769] (Edelman J), referring in particular to the discussion of the point by Bathurst CJ in Ashton v Pratt [2015] NSWCA 12 [115]–[140], a case in which resolution of the point was not required, as B could not satisfy the detriment requirement of an equitable estoppel. 6 See eg Motivate Publishing v Hello Ltd [2015] EWHC 1554 (Ch) [55]–[61] (Birss J) (application to intellectual property); Strover v Strover [2005] EWHC 860 (Ch); [2005] WTLR 1245 (application to distribution of insurance payout); Salvation Army Trustee Co Ltd v West Yorkshire Metropolitan CC (1981) 41 P & CR 149 (QBD) (application to promise to buy land from B). See too Sutcliffe v Lloyd [2007] EWCA Civ 153; [2007] 2 EGLR 13 where A’s promise related to the sharing of profits from the development of land, but was not a promise that B would necessarily acquire any rights in the land itself. 7 See eg B McFarlane and P Sales, “Promises, Detriment, and Liability: Lessons from Proprietary Estoppel” (2015) 131 LQR 610; N McBride, “A Fifth Common Law Obligation” (1994) 14 Leg S 35; D Nolan, “Following in their Footsteps: Equitable Estoppel in Australia and the United States” (2000) 11 KCLJ 202; J Moncrieff and J Neyers, “(Mis)Understanding Estoppel” [2003] LMCLQ 429. For an important earlier contribution, cited in Waltons Stores, see D Jackson, “Estoppel as a Sword” (1965) 81 LQR 223. 8 Sidhu v van Dyke [2014] HCA 19; (2014) 251 CLR 505. 9 Thorner (n 2). 10 Thorner (n 2) [61] (Lord Walker).



Ch 16  Equitable Estoppel as a Cause of Action 361

from the law of contract: in that sense, it is neither one thing nor one other. Its application to promises of future conduct distinguishes it from preclusive doctrines such as estoppel by representation, and its application to promises to confer a new right takes it beyond the doctrines making up promissory estoppel. The principle does not, however, allow detrimental reliance to substitute for consideration as a route to contractual enforcement: it may apply where other standard contractual requirements (and not only consideration) are absent and, in any case, it does not operate to impose an immediate duty on A to perform A’s promise. Rather, once the relevant facts have occurred, the principle operates to impose a liability on A: a court may be able to make an order against A dealing with the specific form of unconscionable conduct that consists of A’s leaving B to suffer a detriment as a result of B’s reasonable reliance on a promise of A which B reasonably understood as seriously intended by A. It will be argued here that, far from undermining contract law, the recognition of such a principle may play an important role in justifying the classical requirements of contract formation. Indeed, the principle may exemplify a more general point, also of interest when considering the law of restitution: the existence of such liabilities may be crucial in helping to justify the content of rules which operate to impose private law duties.

The commercial context It can be suggested that any concerns as to the operation of equitable estoppel as a cause of action are magnified in the commercial context. For example, where A and B have engaged in negotiations with a view to a contract, and no contract has resulted, equitable estoppel claims have frequently been denied;11 the concern has been expressed that the recognition of liability would be ‘likely to inhibit the efficient pursuit of commercial negotiations’.12 In the commercial context, the fear of intruding on the domain of contract law is not merely the abstract one of undermining the general requirements of a valid contract, it is also the practical one of allowing recovery by a party who acted on a promise which he or she knew not to be contractually binding. 11 See eg DHJPM (n 4) [56], where Meagher JA referred to the importance of the “nature of the relationship between the parties and whether they contemplate that any interest to be granted or promise to be performed is to be created by a binding contract” and illustrated this by the failure of B’s claim, in a commercial context, in Cobbe v Yeoman’s Row Management Ltd [2008] UKHL 55; [2008] 1 WLR 1752, in contrast with the success of B’s claim, in a non-commercial context, in Thorner. For a similar analysis of the difference between those two cases, see Thorner (n 2) [96]–[97] (Lord Neuberger). 12 Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619; [2012] 2 All ER 754 [133]. See too Cobbe (n 11) [68] (Lord Walker), drawing a distinction between the domestic context in which a claimant expects to acquire an interest in land and commercial cases in which “the claimant is typically a business person with access to legal advice and what he or she is expecting to get is a contract”. See too Crown Melbourne (n 4) at [143], where Keane J referred to the “need of commerce for certainty” as supporting a relatively strict approach to determining if a representation is clear enough to serve as the basis of a promissory estoppel. Note also the extra-judicial suggestion of Lord Neuberger, “The Stuffing of Minerva’s Owl? Taxonomy and Taxidermy in Equity” (2009) 68 CLJ 537, 542: “before he can establish a proprietary estoppel claim, a claimant must show that he acted in the belief that he has something which can be characterised as a legal right – at least in a commercial arm’s length context”.

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The argument to be made here is that the specific limits inherent in the principle applied in cases such as Sidhu and Thorner do not include any bar on the principle’s operation in the commercial context. Of course, in determining if the requirements of the principle have been made out, a court will have regard to the particular factual context of the parties’ dealings,13 but this does not require any rigid division between commercial and other cases.14 First, there is no shortage of commercial cases in which B has successfully invoked equitable estoppel as a cause of action.15 In Anaconda Nickel Ltd v Edensor Nominees Pty Ltd,16 for example, the Victorian Court of Appeal rejected the argument that equitable estoppel should not arise where a “promise was made in the course of commercial dealings between well-advised corporations, each concerned to advance its own interests”;17 rather, “unconscionability” was regarded as an underlying principle, and the “injustice” that would arise were A allowed to renege on a promise, thereby leaving B to suffer a detriment as a result of its reasonable reliance on that promise, was not nullified by the commercial nature of the parties’ dealings. Second, it would be a mistake to think that there is anything in the nature of commercial dealings which means that it could never “shock the conscience”18 of the court for A to leave B to suffer a detriment arising from B’s reliance on A’s non-contractual promise. After all, the requirements developed by common law for the formation of a valid contract apply both to commercial and noncommercial dealings. If commercial cases were to be treated differently, it would be necessary for judges to develop principled means of identifying such cases. It is simple, however, to think of facts on which it is difficult to come to a firm view as to whether or not the parties’ dealings are commercial:19 “[t]he 13 See eg Cobbe (n 11) and DHJPM (n 4); Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 (CA); Crown Melbourne (n 4) at [139] (Keane J) and [217] (Nettle J). A common obstacle for B is that B’s reliance occurred before negotiations reached a stage where any promise of A could be regarded as sufficiently certain so as to be reasonably understood by B as seriously intended as capable of being relied on: see B McFarlane, “Proprietary Estoppel and Failed Contractual Negotiations” [2005] Conv 501. 14 See N Hopkins, “The Relevance of Context in Property Law: A Case for Judicial Restraint?” (2011) 31 Leg S 175. 15 For English authorities allowing proprietary estoppel claims in a commercial context, see eg Hoyl Group Ltd v Cromer Town Council [2015] EWCA Civ 782; [2015] HLR 43; Herbert v Doyle [2010] EWCA Civ 1095; [2011] 1 EGLR 119; Sutcliffe (n 6). For further Australian authorities allowing equitable estoppel to operate as a cause of action in a commercial context, see eg Waltons Stores (n 1); EK Nominees Pty Ltd v Woolworths Ltd [2006] NSWSC 1172; ACN 074971109 Pty Ltd (as Trustee for the Argot Unit Trust) v The National Mutual Life Association of Australasia Ltd [2008] VSCA 247; (2008) 21 VR 351; Yarrabee Chicken Company Pty Ltd v Steggles Ltd [2010] FCA 394. Equally, as pointed out by Keane J in Crown Melbourne (n 4) at [153], it would cause injustice if equitable estoppel were to operate in an unconstrained way outside the commercial context. 16 [2004] VSCA 16; (2004) 8 VR 38. 17 Anaconda (n 16) [40]. 18 The phrase used by Lord Walker in Cobbe (n 11) [92] to describe the cases in which a proprietary estoppel claim arises. 19 See eg Clark v Clark [2006] EWHC 275 (Ch); [2006] 1 FCR 421: A and B were brothers who were also sole and equal shareholders in a company and carried on business from the land on which they also lived. The dispute in Ashton (n 5), according to Bathurst CJ at [139], “could be said to involve a commercial arrangement [but] it seems closer to a domestic arrangement”. Indeed, even in Thorner (n 2), the farm was a business and B, whilst related to A, did not live with A.



Ch 16  Equitable Estoppel as a Cause of Action 363

concept of a commercial case is … undefined and obscure, in the absence of any applicable statutory definition”.20 Third, a concern as to the chilling effect of possible liability for precontractual conduct accepts one of the premises of economic analyses of legal rules: the content of such rules may affect the parties’ behaviour. Such an analysis can, however, be used to support the ability of equitable estoppel to provide at least some protection to a party who has reasonably relied on a promise made in pre-contractual negotiations. The ability of A to make a promise which has some legal effect may in fact be of value to A, as it provides a means to encourage B to make investments which may benefit each of the parties.21 In some cases, such pre-contractual work may be required if the parties are to clarify the nature of the project to be carried out by the final contract.22 It might be thought that A and B could simply enter a collateral contract, under which, for example, A agrees to indemnify B for certain pre-contractual work should no contract eventuate. It may, however, be unrealistic or inappropriate to expect the parties to make such a collateral contract. To the extent that such contracts are not standard, B may feel that insisting on such protection would send unwelcome signals to A as to B’s suitability as a potential contracting partner.23 Moreover, and linked to this, it may be that such insistence would be inconsistent with the sense of trust which A and B attempt to establish when moving towards a complete contract.24 It is therefore unduly optimistic to suggest that a commercial party faces “no emotional or social impediment to insisting on some form of legally binding protection”25 before undertaking pre-contractual work.

Neither One Thing: The Principle Distinguished from Other Estoppels It is clear from the decisions in Sidhu and Thorner that equitable estoppel may operate as a cause of action. The inquiry here is as to the proper limit of the principle justifying those decisions. It should not be assumed that the principle necessarily underpins all cases that may fall under the heading of estoppel, or even of equitable estoppel. As Lord Denning MR once put it, there are: 20 Cavendish Square Holding BV v Talal El Makdessi; Parking Eye Ltd v Beavis [2015] UKSC 67; [2015] 3 WLR 1373 [168] (Lord Mance) rejecting counsel’s submission that the penalties doctrine should not apply in “commercial cases”. 21 In Sutcliffe (n 6) [5], reference was made to the view of the first instance judge that the precontractual work on the planned development carried out by B was “amazing”. In Leading Edge Events Australia Pty Ltd v Kiri Te Kanawa [2007] NSWSC 228, Bergin J similarly noted the potential benefits of B’s pre-contractual work in preparing for a concert from which A was to profit. For a more detailed economic analysis, see R Craswell, “Offer, Acceptance and Efficient Reliance” (1996) 48 Stan LR 481. 22 See eg A Schwartz and R Scott, “Precontractual Liability and Preliminary Agreements” (2007) 120 Harv LR 661. 23 See eg O Ben-Shahar and J Pottow, “On the Stickiness of Default Rules” (2006) 33 Fla State UL Rev 651, 682, arguing that: “unfamiliar terms may … raise suspicions and scare away potential counterparties”. 24 See R Scott, “A Theory of Self-Enforcing Indefinite Agreements” (2003) 103 Col LR 1641. 25 This suggestion was made extra-judicially by Lord Neuberger (n 12) 546.

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“estoppels and estoppels”.26 This point must be emphasised as the continued use of the word “estoppel” to describe the principle has caused confusion, even at the highest judicial level.

Preclusive estoppels Evidence of such confusion can be seen in the analysis of Lord Scott in Cobbe. On his Lordship’s view,27 the term “proprietary estoppel” is to be interpreted literally, and the doctrine is assumed to have the same, limited effect as an estoppel by representation: it determines the factual background28 against which the parties’ rights are to be decided, but does not provide a substantive principle which in itself determines those rights.29 Such a doctrine cannot avail B where he or she has relied on a promise as to A’s future action: B needs no assistance in proving the promise, and, in the absence of any substantive doctrine capable of providing protection where B has relied on a non-contractual promise, A can happily admit the promise, and B’s reliance, and still deny B any redress. The preclusive nature of an estoppel by representation means that, simply as “a matter of logic”,30 it cannot apply to a promise of future action, and this was recognised by courts of equity31 just as at common law. As an interpretation of preclusive estoppel, Lord Scott’s analysis is, therefore, faultless;32 yet that is precisely why it cannot account for the principle applied in cases such as Sidhu and Thorner, which is neither purely preclusive (as it is a substantive principle which in itself determines the parties’ rights) nor incapable of applying to promises of future conduct. Certainly, the mere addition of the adjective “proprietary” cannot convert a preclusive doctrine such as estoppel by representation into a cause of action. 26 Crabb v Arun District Council [1976] Ch 179 (CA) 187. 27 Cobbe (n 11) [14]. 28 As Lord Scott’s analysis makes clear, the background so determined can include a mixed matter of fact and law, such as the identity of an owner of goods, or the location of a boundary: see eg Pickard v Sears (1837) 6 A&E 469; 112 ER 179; Hopgood v Brown [1955] 1 WLR 213 (CA). 29 See eg E Peel, Treitel’s Law of Contract (13th ed, Sweet & Maxwell 2011) para 3.090, drawing the distinction between doctrines which prevent a party from establishing facts, and doctrines which determine the legal effects of a promise. 30 Waltons Stores (n 1) 459 (Gaudron J), pointing out that the limit of estoppel by representation to existing matters is: “not merely a matter of authority, but also a matter of logic – at least in so far as the representation gives rise to an assumption as to a future event. Because common law or evidential estoppel operates by precluding the assertion of facts inconsistent with an assumed fact, the assumption must necessarily be as to an existing fact and not as to a future event”. This provides a reason for the classic distinction, criticised by eg M Bryan and E Bant, “Fact, Future and Fiction: Risk and Reasonable Reliance in Estoppel” (2015) 35 OJLS 1, between representations as to an existing state of affairs and as to the future. 31 See eg Jorden v Money (1854) 5 HL Cas 185, which was an appeal to the House of Lords from a court of Chancery. See further JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, LexisNexis 2014) para 17.210. 32 Although Lord Scott also described proprietary estoppel as a sub-set of promissory estoppel and thus failed to distinguish between estoppel by representation and the quite different principles of promissory estoppel that will be discussed below under the heading, “Promissory estoppels”. Whilst part of Lord Scott’s analysis was cited with approval by Nettle J in Crown Melbourne (n 4) at [215], it is clear from Nettle J’s judgment as a whole (see eg at [216]) that promissory and proprietary estoppel are each to be regarded as capable of constituting a cause of action and so linked in that sense, rather than in the quite different sense stated by Lord Scott.



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This is the problem with the view of proprietary estoppel adopted by Lord Denning MR in Crabb v Arun District Council.33 His Lordship there referred to his own judgment in Moorgate Mercantile Co Ltd v Twitchings34 – a decision of the Court of Appeal which was shortly to be reversed by the House of Lords35 – to support the point that the effect of estoppel on a true owner of property may be that: “his own title to property, be it land or goods, has been held to be limited or extinguished, and new rights and interests have been created therein”.36 This analysis is of some importance as, in Thorner, Lord Walker invoked it when stating that: “[i]t is the relation to identified land of the defendant that has enabled proprietary estoppel to develop as a sword, and not merely as a shield”.37 The Court of Appeal’s decision in Moorgate Mercantile was, however, concerned with the application of the preclusive doctrine of estoppel by representation to A’s statement as to the present ownership of a car. As such a representation is as to a matter of fact, or mixed fact and law, it can lead to A’s being precluded from denying its truth. That preclusion can then assist B in establishing a claim against A. For example, in Knights v Wiffen,38 B, a subpurchaser from X of unascertained barley which A had contracted to sell to X, had relied on A’s representation that A held specific barley in its granary for X and would now hold that barley for B. In fact, no barley had been appropriated by A to the contract with X. On X’s insolvency, A refused to allow B to take any barley from the granary. B’s claim in conversion against A was successful: A was precluded from asserting the fact (the lack of appropriation of any barley to A’s contract with X) that prevented title passing to B. This example, however, merely demonstrates that the preclusive logic of estoppel may, in certain cases, prevent A from denying the truth of a matter that is crucial to B’s making a successful claim. This is not a unique attribute of proprietary estoppel: any preclusive estoppel may, in suitable circumstances, have such an effect. In Waltons Stores, for example, on the view of the facts adopted at first instance and accepted by Deane and Gaudron JJ,39 A was simply prevented from denying that a contract had already been concluded, by means of exchange, between A and B, and B was therefore able to establish a contractual claim.40 Equally importantly, the preclusive doctrine of estoppel by representation does not transform into a cause of action merely as a result of its application in a proprietary context. In Knights v Wiffen, for example, B’s success in a conversion claim against A did not mean that B had in fact acquired title to any barley: it is in the “very nature of

33 Crabb (n 26). 34 [1976] QB 225 (CA). The Court of Appeal judgment in Moorgate Mercantile was handed down on 18 June 1975, and that in Crabb on 23 July 1975. The House of Lords’ decision to reverse the Court of Appeal in Moorgate Mercantile was promulgated on 16 June 1976. 35 [1977] AC 890 (HL). 36 Moorgate (n 34) 242, cited in Crabb (n 26) 187. 37 Thorner (n 2) [61]. 38 (1869-70) LR 5 QB 660 (QBD). 39 See Waltons Stores (n 1) 436–41, 461–63. See too Baird Textile (n 4) [98] (Mance LJ). 40 See J Campbell, “Waltons v Maher: History, Unconscientiousness and Remedy – The ‘Minimum Equity’” (2013) 7 Journal of Equity 171, noting that the remedy ordered at first instance was made under s 68 of the Supreme Court Act 1970 (NSW), in lieu of specific performance.

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things”41 that a property right cannot exist in relation to unascertained goods, and no barley had in fact been appropriated to B’s contract. In such a case, B has only a “metaphorical title”:42 if a third party had carelessly damaged the barley in A’s granary, then B would have had no claim in tort, as the operation of an estoppel against A would give B no assistance as against the third party.43 The principle applied in cases such as Sidhu and Thorner cannot, therefore, be explained as simply the application of a preclusive estoppel in a proprietary context: it must have some other basis. In Cobbe, Lord Walker suggested that B’s reliance on a promise of future conduct by A can give rise to a proprietary estoppel claim only where B “believed that the assurance on which he or she relied was binding and irrevocable”.44 The decisions in Thorner and in Sidhu, however, are inconsistent with such a limit. In the former case, it was not suggested that, when choosing to work for A, B had believed that A was already under a binding duty to leave his farm to B. It would, on the facts, have been very difficult for B to show that he had reasonably held such a belief: given the “oblique and allusive”45 way in which A had communicated to B, it was not possible to identify a specific act of A that B could reasonably regard as giving rise to an immediately binding duty on A. Nonetheless, B’s claim succeeded. Similarly, in Sidhu, B’s claim was that she had relied on A’s promises that “he would transfer (or procure the transfer of) the Oaks property to her”, not that she had relied on a belief that A was already bound to do so.46 For example, when, some years after the first promises, B sought further reassurance from A as to the security of her position, she pressed A for confirmation not of any pre-existing duty, but rather of his “continued promise that the house would be [her] own”.47 If the principle applied in such cases were based on a form of preclusion, and if it were used to impose a duty on A, it would be logical to require that B relied on a belief that A was already under such a duty; yet, as shown by Sidhu and Thorner, the principle is not subject to such a limit.48 41 See C Blackburn, A Treatise on the Effect of the Contract of Sale (William Benning & Co 1845) 122 (Blackburn J was one of the judges in Knights v Wiffen). See Sale of Goods Act 1979 (UK) s 16; Sale of Goods Act 1923 (NSW) s 21. See too Lord Mustill in re Goldcorp’s Exchange Ltd [1995] 1 AC 74 (PC) 90: “common sense dictates that the buyer cannot acquire title until it is known to what goods the title relates”. 42 The term used by Devlin J in Eastern Distributors v Goldring [1957] 2 QB 600 (CA) 607, 611 (Devlin J), distinguishing the operation of estoppel from cases where B in fact acquires title as a result of an agent’s apparent authority. 43 See Lord Mustill in re Goldcorp’s Exchange (n 41) 94: “The most that the Knights v Wiffen line of authority can give to the purchaser is the pretence of a title where no title exists”. 44 Cobbe (n 11) [66]. See too DHJPM (n 4) [68] (Meagher JA). For full discussion of this suggested limit, and its rejection in Thorner, see J Mee, “The Limits of Proprietary Estoppel: Thorner v Major” (2009) 21 CFLQ 367. 45 Thorner (n 2) [3] (Lord Hoffmann). 46 See too Delaforce v Simpson-Cook [2010] NSWCA 8; (2010) 78 NSWLR 483: A’s promise was made as part of the notation at the end of a consent order. B was therefore aware that the notation was not part of the legally binding order. Nonetheless, a proprietary estoppel claim based on that promise was successful. 47 Sidhu (n 8) [15], referring to the first instance judgment: [2012] NSWSC 118 [66]. 48 Of course, if B in fact argues that he or she relied on a belief that a contract existed between A and B, then it will be necessary to ask if B could reasonably have believed that such an arrangement existed: see Ashton (n 5) [132], [237].



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It is worth noting that the same analysis applies in commercial cases: equitable estoppel claims have been permitted where B reasonably relied on A’s promise of future conduct, rather than on a belief that A was already under a duty to B.49 Indeed, in Sutcliffe v Lloyd,50 in an unsuccessful appeal against a judgment in favour of B, a builder and property developer, A, an entrepreneur, expressly argued that B’s proprietary estoppel claim should have failed as A had never suggested that his promise to B was legally binding. Wilson LJ, as he then was, rejected this contention as “misconceived in law”, making the crucial point that, as the doctrine does not in any case operate so as to make A’s promise immediately binding, there was no need for A to “mis-state the law in this regard”.51

Promissory estoppels Some recent authority, particularly in New South Wales, has challenged the view that Waltons Stores permits equitable estoppel to operate as a cause of action beyond the proprietary context. In Saleh v Romanous, for example, Handley AJA stated that: “[a] promissory estoppel is not enforced as a contract, but as an equitable restraint on the exercise or enforcement of the promisor’s rights”.52 On this analysis, a “promissory estoppel must be negative in substance”53 and so cannot operate as an independent source of rights. As has been judicially noted,54 this constitutes a direct challenge to the influential reasoning of Brennan J in Waltons Stores and, in particular, the assertion that there is no relevant distinction between a “change in legal relationships effected by a promise which extinguishes a right and a change in legal relationships effected by a promise which creates one”.55 It will be argued here that, as an interpretation of the principles applied in important promissory estoppel decisions such as Hughes v Metropolitan Railway Company56 and Central London Property Trust Ltd v High Trees House Ltd,57 the analysis of Handley AJA is correct.58 Conversely, the assertion of Brennan J does not provide a convincing reason for extending the traditional categories of promissory estoppel, as the content of rules regulating the loss or assertion of pre-existing rights often differs, with good reason, from the content of rules regulating the acquisition of new rights. Perhaps the clearest examples are the rules of waiver, and of election, which can operate to extinguish a claim-right or 49 50 51 52 53 54 55 56 57 58

See eg Anaconda (n 16); EK Nominees (n 15). Sutcliffe (n 6). Sutcliffe (n 6) [38]. Saleh v Romanous [2010] NSWCA 274; (2010) 79 NSWLR 453 [62] (Handley AJA with whom Giles JA and Sackville AJA agreed). DHJPM (n 4) [47], [93] (Meagher and Macfarlan JJA), [94] (Handley AJA). Ashton (n 5) [108]–[115] (Bathurst CJ). Waltons Stores (n 1) 425. (1877) 2 App Cas 439. [1947] KB 130. The analysis below will also support Handley AJA’s view that those principles (along with the principle underlying Sidhu and Thorner) are distinct from contract law, and so are not caught by the rule in Hoyt’s Pty Ltd v Spencer (1919) 27 CLR (HCA) 133 (this was the context, in Saleh (n 52), of Handley AJA’s observations on promissory estoppel).

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power of A as a result of conduct of A (eg acceptance of substitute performance by B;59 continued contractual performance by A)60 that could never, by itself, operate to give B a cause of action against A. Moreover, dealings between A and B may provide good grounds for equity to restrain A’s enforcement of a right acquired as a result of those dealings, even if such dealings, by themselves, do not impose a duty on A to B. Hughes provides an example:61 where A claims that particular conduct62 by B has given A a right, A may be prevented from enforcing that right if B’s conduct was undertaken in reliance on a belief, encouraged by A, that A would not in fact acquire or enforce that right, or would do so only on terms.63 Klimchuk has observed that the principle in Hughes is “equitable in Aristotle’s sense” [of correcting for the imprecision of the law] as it “expressly prevents persons from being sticklers in a bad way”.64 The principle in Hughes thus prevents A from taking advantage of the very legal rules which, triggered by B’s conduct, operate to give A a right65 and such a concern can never operate as a means to give B a claim-right against A.66 The principle in High Trees, despite Denning J’s best attempts to argue to the contrary, is distinct from that in Hughes.67 The hypothetical claim of A considered in High Trees was simply to enforce a pre-existing debt, not to assert a new right acquired as a result of conduct of B undertaken in reliance on any encouragement of A. The principle in High Trees seems instead, like rules of waiver and of election, to confer finality on a particular decision by A:68 in this case, a decision to accept substitute performance by B in discharge of a pre59 See eg Sale of Goods Act 1979 (UK) s 11(2); Bottiglieri di Navigazione SpA v Cosco Qingdao Ocean Shipping Co (The Bunga Saga Lima) [2005] EWHC 244 (Comm); [2005] 2 Lloyd’s Rep 1. 60 In the context of election, see eg Sale of Goods Act 1979 (UK) s 11(4) and s 35(4); The Northern Pioneer [2003] 1 WLR 1015 (CA) 1037 (Lord Philips MR): “If the shipowner continues to provide the services of his ship, or the charterer continues to make use of those services beyond such time as would reasonably be needed to react … the inference will normally be that he has decided not to exercise the right …”. 61 For further analysis of the Hughes principle, see B McFarlane, “Understanding Equitable Estoppel: From Metaphors to Better Laws” (2013) 66 CLP 267, 282–86. 62 Conduct here includes both action and/or inaction by B. 63 See too eg Inwards v Baker [1965] 2 QB 29 (CA). 64 D Klimchuk, “Equity and the Rule of Law” in L Austin and D Klimchuk (eds), Private Law and the Rule of Law (OUP 2014) 263. Although note that very similar principles apply at common law too: see eg Hickman v Haynes (1875) LR 10 CP 598; Minister of Health v Bellotti [1944] 1 KB 298 (CA) 305–06. 65 So eg in Legione v Hateley (1983) 152 CLR 406 (HCA), although of course it was found by a majority that the principle did not apply on the facts of the case, the principle was in play as if A could be said to have made a sufficiently clear promise that the time in which B had to pay would be extended, A could then have been prevented from exercising A’s contractual power to terminate arising from B’s failure to pay. 66 It would be a mistake to think that any case in which the Hughes principle applies can also be seen as one in which the principle in Sidhu and Thorner applies: first, the former principle can apply where A has encouraged a belief of B whereas the analysis in Thorner requires A to have made a promise (although this point is controversial, see eg Hoyl Group (n 15)); second, the former principle does not seem to require proof of detriment by B, as it is rather focused on A’s benefit: see eg Hughes (n 56) 449 (Lord O’Hagan) and the analysis of D Gordon, “Creditor’s Promises to Forego Rights” [1963] CLJ 222. 67 For further analysis of the High Trees principle, see McFarlane (n 61) 281–82. 68 In BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783, 811, eg Goff J described the effect of an election as based on the “need for finality in commercial transactions”.



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existing duty owed by B to A. Whilst distinct from Hughes, and from preclusive estoppel,69 the principle in High Trees is therefore also necessarily incapable of operating as an independent cause of action, as it regulates the question of whether a pre-existing right has been extinguished. Handley AJA therefore seems to be correct in concluding that the principles in each of Hughes and High Trees are necessarily negative in substance. This does not mean, however, that the overall conclusion of Handley AJA must be accepted, and that of Brennan J rejected. The crucial point is that correctly identifying the negative nature of the principles in each of Hughes and High Trees does not provide a convincing reason to limit the scope of other principles, such as that applied in Sidhu and Thorner.70 As Finn noted,71 a critical step, evident in a decision such as Crabb, was taken when proprietary estoppel was permitted to function not only as a means to prevent A’s assertion of a right against B, but also as a means to require A to confer a right on B. As a distinct strand of equitable estoppel has thus developed, there is no necessary reason why the inherent limits on the Hughes and High Trees principles must also apply to that principle. The real challenge to the view adopted by Handley AJA lies not in Brennan J’s argument that principles applying to cases involving the extinguishing of rights must also apply to cases involving their creation, but rather in the different argument, also made by Brennan J, that principles applied to promises to confer rights in property should also apply to promises to confer other forms of right.72

… Nor One Other: The Principle Distinguished from Contract The concern has been expressed that, were equitable estoppel to operate more widely as a cause of action, the law of contract in general, and the requirement

69 Note that the principle in High Trees does not seem to require the prospect of B’s suffering a detriment, as it depends instead on A’s acceptance of B’s substitute performance, which may in fact, as in High Trees itself, confer a benefit on B. It is therefore unfortunate that, owing to the confusion with preclusive estoppel, courts have often strained to find a detriment to B in cases covered by the High Trees principle: see eg Je Maintiendrai v Quaglia (1980) 26 SASR 101, 115–16; Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329; [2008] 1 WLR 643. 70 To that extent, the position taken here accords with the submission of B in Ashton (n 5) [107] that: “the principle stated in Saleh and DHJPM [does] not extend to equitable estoppel generally”. 71 See P Finn, “Equitable Estoppel” in P Finn (ed), Essays in Equity (Law Book Co 1985). 72 Waltons Stores (n 1) 426: “Moreover, unless the cases of proprietary estoppel are attributed to a different equity from that which explains the cases of promissory estoppel, the enforcement of promises to create new proprietary rights cannot be reconciled with a limitation on the enforcement of other promises. If it be unconscionable for an owner of property in certain circumstances to fail to fulfil a non-contractual promise that he will convey an interest in the property to another, is there any reason in principle why it is not unconscionable in similar circumstances for a person to fail to fulfil a non-contractual promise that he will confer a non-proprietary legal right on another?” That analysis was cited with approval by Nettle J in Crown Melbourne (n 4) at [216], where it was used to justify applying the same certainty test to promissory as to proprietary estoppel: see further n 84.

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of consideration in particular, would be undermined.73 The first point to note, however, is that this concern has not prevented proprietary estoppel’s operation as a cause of action, even in cases, such as Sidhu and Thorner, in which B’s claim is based on a promise made by A, and leads to B’s being put in the same position, as far as possible, as B would have been in had the promise been performed.74 It is important to ask if, in such cases, B’s detrimental reliance is being permitted to function, in the absence of consideration, as an alternative route to contractual enforcement. Atiyah, for example, argued that when a court permits the enforcement of an agreement on the grounds of proprietary estoppel, only “outmoded ideas about the purpose and nature of the doctrine of consideration” prevent the court’s acknowledging the true contractual basis of B’s claim.75 Similarly, in the United States, the heading given to s 90 in each of the Restatement (First)76 and the Restatement (Second)77 assumes that a promise complying with its requirements constitutes a contract. It is clear, however, that the principle as developed in proprietary estoppel cases does not depend on seeing detrimental reliance as an alternative to consideration. This is because the principle may operate even when other contractual requirements are also absent.78 First, and most obviously, there is no need to satisfy statutory formality requirements regulating the validity or enforceability of contracts for the sale or other dispositions of interests in land.79 It is notable that in Cobbe, Lord Scott was concerned that it would be “unacceptable” if proprietary estoppel were used “to render enforceable an agreement that statute has declared to be void”.80 This concern, however, was based on the view, discussed and rejected above, that the doctrine operates as 73 See eg Combe v Combe [1951] 2 KB 215 (CA); Crown Melbourne (n 4) at [133] – [141] (Keane J). Note too, the argument of A in Giumelli v Giumelli (1999) 196 CLR 101 (HCA) 121 (rejected by the High Court of Australia) that the measure of relief in equitable estoppel must be limited “lest the requirement for consideration to support a contractual promise be outflanked and direct enforcement be given to promises which did not give rise to legal rights”. Note also the fate of the now defunct equitable doctrine of “making representations good”: see eg F Dawson, “Making Representations Good” (1982) 1 Cant LR 329; Finn (n 71); and P Matthews, “The Words Which Are Not There: A Partial History of the Constructive Trust” in C Mitchell (ed), Constructive and Resulting Trusts (Hart Publishing 2009) 25–44. 74 In Sidhu (n 8), specific performance of the promise was impossible as the cottage initially promised to B had since been destroyed in a fire, but the High Court upheld the finding of the Court of Appeal of New South Wales that B was entitled to payment of a sum “measured by reference to the value of [B’s] disappointed expectation” (see [42]). 75 PS Atiyah, “When is an Enforceable Agreement Not a Contract? Answer: When it is an Equity” (1976) 92 LQR 174, 174. 76 Headed “Informal Contracts Without Assent or Consideration”. 77 Headed “Contracts without Consideration”. 78 For a recognition of this point in the American context, see eg Cyberchron Corp v Calldata Systems Development Inc 47 F 3d 39, 46 (1995), where the court expressly rejected A’s argument that promissory estoppel could operate only as a substitute for consideration. 79 See eg Crabb (n 26), Waltons Stores (n 1), Thorner (n 2), Sidhu (n 8). In some cases (see eg Yaxley v Gotts [2000] Ch 162 (CA); Kinane v Mackie-Conteh [2005] EWCA Civ 45; [2005] WTLR 345) reliance is placed on s 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989 (UK), which provides a specific exception for constructive trusts, but the better view is simply that s 2 is not even prima facie applicable, as a proprietary estoppel claim does not depend on the existence of a contract. 80 Cobbe (n 11) [29], referring to the Law of Property (Miscellaneous Provisions) Act 1989 (UK) s 2.



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a preclusive estoppel. In a proprietary estoppel case, B does not seek to prevent A’s invoking a formality rule, or otherwise denying that a contract exists. Rather, B invokes an independent cause of action, which does not depend on the existence of a contract.81 As Lord Neuberger has put it extra-judicially: “the fact that, if there was a contract, it would be void is irrelevant: indeed, the very reason for mounting the proprietary estoppel claim is that there is no enforceable contract”.82 Moreover, Lord Scott is mistaken in stating that the statute imposing the formality requirement operates to make an agreement void: it simply means that it cannot give rise to a contractual claim, and does not prevent other claims.83 Second, a proprietary estoppel claim may succeed even in the absence of intention to create legal relations, and even in the absence of an agreement that is sufficiently certain to be enforced as a contract.84 This point was confirmed in the influential,85 but unreported, judgment of Hoffmann LJ in Walton v Walton.86 It was accepted that A’s promise that B, her son, would inherit her farm was likely to have been subject to “unspoken and ill-defined qualifications” and so it could not have been reasonable for B to believe that A had intended to enter into a contract which “subject to the narrow doctrine of frustration, must be performed come what may”. Hoffmann LJ held that this uncertainty did not, however, prevent a claim based on proprietary estoppel87 as, in contrast to contract law, equitable estoppel:

81 See eg Waltons Stores (n 1) 408 (Mason CJ and Wilson J), 416 (Brennan J). See too Tipperary Developments Pty Ltd v State of Western Australia [2009] WASCA 126; (2009) 38 WAR 488 [137]–[140] (McLure JA). 82 Lord Neuberger (n 12) 546. 83 This is clear from the wording of each of s 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (UK) and s 54A of the Conveyancing Act 1919 (NSW). Indeed, in Cobbe (n 11) itself, Lord Scott permitted B’s personal claim for the value of B’s work rendered pursuant to the parties’ oral discussions. 84 As noted by Bathurst CJ in Ashton (n 5) [114], McPherson J in Riches v Hobgen [1985] 2 Qd R 292, 300–01 (in a passage cited by the plurality in Giumelli (n 73) 121) “appeared to accept that an equitable estoppel could be applied to give some effect to an agreement that for want of certainty or some other essential element falls short of constituting an enforceable contract”. In Thorner (n 2), Lord Neuberger suggested at [86] that an estoppel claim can arise even if A and B have each adopted reasonable, but different, interpretations of the content of A’s promise, which is not the case for the latter claim (see eg Raffles v Wichelhaus (1864) 2 Hurl & C 906; 159 ER 375). The position in relation to promissory estoppel is not so clear: see eg the differing views in Crown Melbourne (n 4) of Keane J (at eg [147], arguing that a more stringent certainty test applies to promissory as opposed to proprietary estoppel) and Nettle J (at [216], arguing that the same test applies in each case). On the analysis of this chapter, the approach of Nettle J is to be preferred, at least where a claim, whether in promissory or proprietary estoppel, is based on the principle identified here: as stated by Nettle J at [217]: “the notion that there is or should be some a priori distinction between the degree of objective certainty required to found a promissory estoppel compared to a proprietary estoppel runs counter to principle.” 85 It is relied on in Thorner (n 2) by each of [52]–[57] (Lord Walker) and [101] (Lord Neuberger). 86 Walton v Walton (CA, 14 April 1994). See further B McFarlane, “Proprietary Estoppel: The Importance of Looking Back” in J Pila and P Davies (eds), The Jurisprudence of Lord Hoffmann (Hart Publishing 2015). 87 This is not to say that the certainty of a promise is irrelevant to a proprietary estoppel claim. On the contrary, as seems to have been the case in Cobbe (n 11), it may prevent B’s showing that B reasonably understood A’s promise as seriously intended by A.

372 Contract in Commercial Law “does not look forward into the future and guess what might happen. It looks backwards from the moment when the promise falls due to be performed and asks whether, in the circumstances which have actually happened, it would be unconscionable for the promise not to be kept.”

The analysis in Walton is crucial to the argument made here.88 The principle applied in the proprietary estoppel cases, even if it requires a promise to be made by A to B, does not impose an immediately binding duty on A to honour that promise, but rather ensures that A is not free to “shock the conscience of the court” 89 by leaving B to suffer a detriment as a result of B’s reasonable reliance on that promise.90 This means, first, that, in contrast to the contractual position, there is no guarantee that a successful claim will lead to B’s receiving the value of A’s promise: at the very least,91 there will be cases in which, given the limited nature of B’s potential detriment, A will be able to avoid unconscionable conduct92 by paying a sum of money to B that will remove that prospect of detriment.93 Second, it may be possible for A to show that, as things turned out, it would not in fact be unconscionable for A to leave B to suffer at least

88 It is consistent too with Arfaras v Vosnakis [2016] NSWCA 65, in which the conclusion that there was no objectively ascertainable intention of A and B to enter into a binding legal contract (and also that there was no consideration to support A’s promise) ensured the failure of B’s contractual claim, but did not prevent a successful equitable estoppel claim. See too the key point made by McPherson J in Riches v Hogben [1985] 2 Qd R 292, 300–01 (in a passage approved in Giumelli (n 73) 121): “[w]hat distinguishes the equitable principle from the enforcement of contractual obligations is, in the first place, that there is no legally binding promise”. 89 The phrase used in Cobbe (n 11) [92] (Lord Walker) to describe the cases in which a proprietary estoppel claim arises. 90 See Waltons Stores (n 1) 423 (Brennan J) and also Commonwealth v Verwayen (1990) 170 CLR 394 (HCA) 454 (Dawson J) (approved in Giumelli (n 73) 121), stating that “the discretionary nature of the relief in equity marks a further reason why the fear of the common law that promissory estoppel would undermine the doctrine of consideration is unwarranted”. Hoffmann LJ’s analysis helps to explain the precise sense in which the equitable relief is discretionary, without being wholly at large. The idea that the avoidance of detriment is at the heart of estoppel was restated in Crown Melbourne (n 4) by French CJ, Kiefel and Bell JJ at [39], by Keane J at [139] and by Nettle J at [216]. 91 It can further be argued that protecting B’s expectation should not operate even as a prima facie outcome, and that in all cases the basic focus of the court should simply be to ensure that B suffers no detriment as a result of B’s reasonable reliance (although in some cases, such as Sidhu (n 8) and Thorner (n 2) the nature and extent of B’s detriment may be such that B should be given the value of A’s promise: see eg A Robertson, “The Reliance Basis of Proprietary Estoppel Remedies” [2008] 72 Conv 295; B McFarlane, The Law of Proprietary Estoppel (OUP 2014) paras 7.35–7.69). 92 See eg Campbell (n 40) 187–88 for the argument that the ultimate goal of equitable estoppel, as reflected in the remedy, is the prevention of unconscionable conduct. 93 See eg Verwayen (n 90) 442 (Deane J); Sidhu (n 8) [84]: “If [B] had been induced to make a relatively small, readily quantifiable monetary outlay on the faith of [A’s] assurances, then it might not be unconscionable for [A] to resile from his promises to [B] on condition that he reimburse her for her outlay” (for an example of such a case arising in practice, see eg Powell v Benney [2007] EWCA Civ 1283 and Young v Lalic [2006] NSWSC 18).



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some detriment:94 it seems that the range of factors (for example, the types of changed circumstances) which A may be able to invoke when making such an argument is wider than it would be if A’s promise were contractually binding.95 It is therefore possible to meet the concern that the principle in Sidhu and Thorner, if expanded beyond the proprietary context, would “overthrow” the requirement of consideration.96 Consideration is a requirement of contractual claims, and is not threatened by the recognition of non-contractual claims. Nor can it be said that no cause of action (even if non-contractual) can arise from a promise unaccompanied by consideration. Even if promises in deeds are put to one side, there remain a number of examples in which a promise without consideration can form a crucial part of a cause of action97 and, in some cases at least, the cause of action may lead to B’s being put, as far as possible, in the same position as B would have been in had the promise been performed.98 Indeed, it can be argued that the classical requirements of contract formation, such as the doctrine of consideration, can more easily be justified precisely because other doctrines may, in some circumstances, give some legal effect to A’s promise. First, a comparison can again be drawn with formality rules: the English Law Commission, when proposing the rule that a contract for the sale or other disposition of an interest in land must be made in writing signed by both parties, specifically adverted to proprietary estoppel as a means to deal with any injustice that might otherwise arise from the rule.99 Second, decisions which might otherwise seem to depend on extensions of, or exceptions to, the classical requirements of contract formation can instead be seen as applications of an independent principle imposing a liability to ensure that B suffers no detriment. In the proprietary context, for example, the identification of such a principle 94 In PW & Co v Milton Gate Investments Ltd [2003] EWHC 1994 (Ch), [2004] Ch 142 [201], Neuberger J invoked the notion of unconscionability in explaining why events occurring after B’s reliance may be taken into account in determining if an estoppel by convention has been established: “Estoppel is a doctrine designed to do justice, and, at least normally, it seems scarcely consistent with doing justice to ignore facts, which have occurred since the date upon which an action was taken in reliance upon the estoppel, and which may well impinge significantly, or even determinatively, on the issue of unconscionability”. 95 In Thorner (n 2), eg Lord Scott raised at [19] the question of A’s position if A had been required to sell A’s farm to fund his own medical care. It would seem, however, that the backwards-looking nature of proprietary estoppel means that it can react to such changes: see eg Uglow v Uglow [2004] EWCA Civ 987; [2004] WTLR 1183 [30] (Mummery LJ); Germanotta v Germanotta [2012] QSC 116 [141]–[148] (McMeekin J). The view on this point expressed by Handley AJA in Delaforce v Simpson-Cook (2010) 78 NSWLR 483 [85]–[89] may therefore be too narrow. Note too EA Farnsworth, Changing Your Mind: The Law of Regretted Decisions (Yale UP 1998) 85–88, arguing that a broader set of circumstances than those leading to frustration should be relevant when considering a non-contractual means of giving effect to a promise of future conduct. 96 [1951] 2 KB 215 (CA) 220. 97 See eg Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL) (gratuitous promise involving an assumption of responsibility giving rise to a duty of care); Yearworth v North Bristol NHS Trust [2009] EWCA Civ 37; [2010] QB 1 (gratuitous promise to take care of property as part of a gratuitous bailment). As in Cobbe (n 11), an express or implied promise of payment can form part of the basis under which B undertakes work for A and therefore support a restitutionary claim for the value of such work. 98 As is the case where a duty of care arises and where A’s promise is one to take reasonable care, as in Yearworth (n 97). 99 Law Commission, Formalities for Contracts for Sale etc of Land (Law Com No 164, 1987) para 5.2.

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can rebut Atiyah’s criticism100 that a case such as Crabb involves an implicit rejection of the traditional tests for consideration. If the principle operates more widely, it may also assist in explaining the operation of unilateral contracts in a case where B has begun, but not completed, performance.101 If there is some limit, in such a case, on A’s freedom to revoke A’s promise,102 it may be difficult to explain on standard models of consideration,103 as B has made no promise to complete performance, and partial performance was not requested by A.104 Rather than stretching such standard models of consideration, it may instead be possible to regard A, in such a case, as under an initial liability to ensure that B suffers no detriment as a result of B’s reasonable reliance on A’s promise, with A’s contractual duty arising only on B’s completion of performance.105 This analysis might seem to raise the spectre that the principle in Sidhu and Thorner, if extended, might “absorb the whole of contract law”.106 First, of course, it is important to note that B may acquire a contractual right even in the absence of reliance;107 many practically important contractual bargains are beyond the scope of any principle that requires reliance by B on A’s promise. Second, it is clear that, where a contract exists, A is under a duty to perform and so B has an entitlement to have his or her expectation protected on breach by A;108 in contrast, when the principle in Sidhu and Thorner applies there are at least some cases in which B will have to settle for lesser redress.109 Third, whilst it imposes a free-standing liability, the principle analysed here is a second-order one, as in assessing whether the prospect of detriment arises, any other rights 100 P Atiyah, “When is an Enforceable Agreement Not a Contract? Answer: When it is an Equity” (1976) 92 LQR 174. 101 Where performance is completed, the significance of there being a unilateral contract is that A is under an immediate duty to perform A’s promise to B, rather than under a liability to ensure that B suffers no detriment as a result of B’s reasonable reliance. 102 As was accepted in eg Schweppe v Harper [2008] EWCA Civ 442; [2008] BPIR 1090 [44]–[45] (Waller LJ) and in Errington v Errington and Woods [1952] 1 KB 290 (CA) 295; [1952] 1 All ER 149, 153 (Denning LJ). 103 Note that E Peel, Treitel’s Law of Contract (13th ed, Sweet & Maxwell 2011) 3–158 includes such unilateral contracts as one of the ‘special cases’ in which consideration may be found even if not present in the classic sense. 104 The analysis of the Full Federal Court in Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475, 501–06 is persuasive in rejecting any “universal proposition that an offeror is not at liberty to revoke the offer once the offeree ‘commences’ or ‘embarks upon’ performance of the sought act of acceptance”. 105 This is consistent with the approach of the Full Federal Court in Mobil Oil Australia (n 104) where it is also noted that B will have an alternative means of protection if A can be shown to have made a collateral contractual promise (for which consideration was provided) not to revoke A’s offer. 106 The phrase used by S Waddams, Dimensions of Private Law (CUP 2003) 67 in considering the argument in G Gilmore, The Death of Contract (Ohio State UP 1974). 107 As in the case of an executory contract. In contrast, as noted by McPherson J in Riches v Hogben [1985] 2 Qd R 292, 300–01 (in a passage approved in Giumelli (n 73) 121): “the equitable principle has no application where the transaction remains wholly executory on the plaintiff ’s part”. 108 Even if, as in eg Williams Bros v Ed T Agius Ltd [1914] AC 510 (HL); Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1, this results in B’s ending up in a better position than B would have been in had the contract been performed. 109 See eg Jennings v Rice [2002] EWCA Civ 159; [2003] 1 FCR 501; Henry v Henry [2010] UKPC 3; [2010] 1 All ER 988; Sullivan v Sullivan [2006] NSWCA 312; ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) v National Mutual Life Association of Australasia Ltd [2008] VSCA 247.



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or claims available to B must first be taken into account.110 Certainly, if a valid contract exists between A and B, the existence of B’s claim-right, arising as soon as that contract is concluded, can be seen as a countervailing benefit that removes the prospect of any detriment to B.111 An analogy can be drawn with restitutionary liability, as the contractual rights and duties of A and B must first be considered before any such liability may arise.112 Fourth, the recognition of the principle may in fact enrich our understanding of contract law in certain cases.113 For example, in determining A’s duty where a contract has been breached, B should be free to claim reliance-based damages (capped of course to ensure B does not receive more than the value of B’s right to performance),114 as B should not be any worse off than a party relying on the principle in Sidhu and Thorner. In such a case, establishing reliance loss is not simply an indirect means to protect B’s expectation by establishing what A must do to put B in the position that B would have been in had the contract been performed,115 but rather justifies a distinct form of contractual damages.116 110 See eg the analysis of Deane J in Waltons Stores (n 1) 453–54. 111 See McPherson J in Riches v Hogben [1985] 2 Qd R 292 at 300–01 (in a passage approved in Giumelli (n 73) 121: “[i]f there is [a contractually binding promise], then the plaintiff must resort to the law of contract in order to enforce it, it being the function of equity to supplement the law not to replace it”. The better explanation for this result depends on the second-order nature of the principle itself, rather than on a broader point about equity. That second-order nature also seems to be the best explanation of Lloyd’s Bank plc v Carrick [1996] 4 All ER 630 (CA): as a valid contract existed between A and B, B was prevented from instead arguing that a right had arisen through proprietary estoppel (B wished to make such an argument as a registration requirement applying under the Land Charges Act 1972 (UK) to an estate contract would not have applied to an equitable interest acquired through proprietary estoppel). Further, in assessing the detriment requirement in estoppel by representation, it seems that if B’s reliance also gives B the benefit of a change of position defence to an unjust enrichment claim by A, that benefit can eliminate B’s detriment and so prevent an estoppel’s arising: Scottish Equitable v Derby plc [2001] EWCA Civ 369; [2001] 3 All ER 818 [47]. 112 See eg Lumbers v W Cook Builders Pty Ltd (in liquidation) [2008] HCA 27; (2008) 232 CLR 635. 113 See too Planche v Colburn (1831) 8 Bing 14; 131 ER 305: a principle focussed on B’s reliance on A’s promise provides a ready explanation for B’s recovery of remuneration for services provided to A without, for example, requiring an artificial finding that B’s work benefitted A. 114 See eg Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm); [2011] 2 All ER 155; Commonwealth of Australia v Amann Aviation Pty Ltd (1992) 174 CLR 64 (HCA). The principle in Sidhu (n 8) and Thorner (n 2) is also subject to the qualification that A cannot be made to do more than ensure B is put in the position that B would have been in had A’s promise been performed: B can have no complaint if A does so, so must bear any greater reliance loss: see eg Watson v Goldsbrough [1986] 1 EGLR 265 (CA); Parker v Parker [2003] EWHC 1846 (Ch); [2003] NPC 94. 115 As noted by G Treitel, “Damages for Breach of Contract in the High Court of Australia” (1992) 108 LQR 226, 232, it is necessary to distinguish between the separate reliance and expectation measures in order to explain, eg the willingness of a court (as in Amann (n 114)) to take account of the possibility of A’s renewal of a contract in deciding that A cannot establish that B’s reliance expenditure would have been wasted even if A’s promise had been performed, when such a possibility would (as noted by Mason CJ and Dawson J in Amann (n 114) 93) not in general be considered when calculating the extent of any claim for expectation damages. Treitel (n 115) 229 notes the “kind of verbal trick” involved in the device of presuming that reliance losses are at least equal to the value to B of A’s promise: “[t]o weld two principles into one with the aid of a presumption can scarcely conceal the fact that two different methods of compensating the plaintiff are involved”. 116 It is therefore possible to support both the result reached by Teare J in Omak Maritime (n 114) and the analysis of Treitel (n 115), rejected in Omak, that reliance and expectation damages have fundamentally different bases.

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Conclusion The nature and function of the principle It has been argued here that decisions such as Sidhu and Thorner rest on a particular strand of equitable estoppel that does not depend simply on restraining A’s assertion of a fact or a right, and which does not operate to make a promise immediately binding. The principle underlying those cases can be seen as “backwards-looking”:117 it imposes a liability on A such that a court can intervene to prevent the particular form of unconscionable conduct which consists of A’s leaving B to suffer a detriment as a result of B’s reasonable reliance on a promise of A which B reasonably understood as seriously intended by A. There is thus a clear separation between contract law as a duty-imposing doctrine and a principle which instead imposes a liability, concretised as a duty only if and when a court ascertains what is required of A in the particular case. This model is consistent with the notion that, prior to any such court order being made in B’s favour, B has an “equity by estoppel”;118 even if, for example as in Thorner, that equity will be satisfied by an order that A convey particular land to B, it would not be accurate to say that, prior to such an order, A already had a duty to make that transfer. Such a conclusion would be premature, given the backward-looking nature of the principle.119 An analogy can be drawn with the argument of Stephen Smith, that, where A commits a breach of contract or a tort, A does not come under an immediate duty to pay damages to B, but is instead subject to a liability.120 In the case of proprietary estoppel, however, the liability is not a secondary one, depending on a preexisting duty of A and arising in response to a breach of that duty. Rather, the liability is a primary one,121 imposed in order to prevent a particular form of unconscionable conduct by A. The closer parallel, at this abstract level of course, may be with restitutionary claims, which may also arise in the absence of any breach of duty by A, as when, for example, A is the recipient of B’s mistaken payment. As Smith has noted, it is often difficult to think of A as being under a duty to make restitution as soon as payment is received: at that stage, A may be entirely 117 Following the analysis of Hoffmann LJ in Walton v Walton (CA, 14 April 1994). 118 See eg Land Registration Act 2002 (UK) s 116(a). 119 It is important to emphasise, as noted in Walden v Atkins [2013] EWHC 1387 (Ch); [2013] BPIR 943 [45], that the backwards-looking nature of the principle does not mean that B has no right at all before a court order. A court may for example have to establish the nature of B’s right at some point prior to the court’s order. Where, for example, property was transferred by A to C, and B wishes to make a claim against C, the court needs to establish whether B had any rights in that property at the time of the transfer to C. This can be done by asking if, had A’s liability been given effect to at that point in time, that would have been done by ordering A to grant B a property right rather than, for example, paying money to B. See further McFarlane (n 91) paras 8.80–8.117. 120 S Smith, “Duties, Liabilities, and Damages” (2012) 125 Harv LR 1727. 121 A Robertson, “Estoppels and Rights-Creating Events: Beyond Wrongs and Promises” in J Neyers et al (eds), Exploring Contract Law (Hart Publishing 2009) makes the important point that equitable estoppel can give rise to a right of B even in the absence of any wrongful conduct of A; see eg Repatriation Commission v Tsourounakis [2007] FCAFC 29; Walden (n 119).



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unaware of the payment.122 Instead, A might be described as being liable to make restitution. There is also a backwards-looking aspect to the operation of such a liability: the change of position defence provides one example of a later change of circumstances which may limit or even extinguish the liability. Indeed, the focus of the court’s inquiry is on whether it would now be unconscionable for A to resist a claim for restitution. In Australian Financial Services Ltd v Hills Industries Ltd,123 for example, the operation of the change of position defence was considered by Hayne, Crennan, Kiefel, Bell and Keane JJ under the heading of: “[t]he relevant enquiry: whether retention of monies unconscionable”. Indeed, a parallel was expressly drawn between the basis of the change of position defence and the concept of detriment within equitable estoppel, both as to the method of assessment124 and at the more abstract level that “both estoppel and the defence are grounded in that body of equitable doctrine that prevents the unconscientious assertion of what are said to be legal rights”.125 Certainly, it is no surprise that the principle considered here is associated with equity, as it can be seen as preventing A from taking opportunistic advantage of the strict legal position. The crucial development, evident in decisions such as Crabb v Arun DC,126 and noted by Finn,127 is that the courts have extended that rationale from cases where A actively seeks to assert a right against B128 to cases where A instead simply seeks to assert a liberty not to confer a benefit on B. In such cases, A is not seeking to rely positively on any particular legal rules as a means of asserting a right, or retaining a benefit; rather A points to those rules of property law or contract law that B has not satisfied, in order to show that A is under no duty to B. Smith has suggested that principles recognising a liability rather than a duty are “not responses to failures by defendants; they are responses to imperfections in the legal system itself ”.129 When equitable estoppel gives rise to such a liability, the “imperfection in the legal system” must then lie in the generality of the rules of property law or contract law: whilst adequate in the vast majority of cases, they leave open the possibility that, in a rare case,130 their application to deny B redress might allow A to “shock the conscience of the court”.

122 See S Smith, “A Duty to Make Restitution” (2013) 26 Can J L Juris 157 and S Smith, “The Restatement of Liabilities in Restitution” in C Mitchell and W Swadling (eds), The Restatement Third: Restitution and Unjust Enrichment – Critical and Comparative Essays (Hart Publishing 2013). 123 (2014) 253 CLR 560 [65]–[76]. 124 Australian Financial Services (n 123) [88], where reference was made to Gillett v Holt [2001] Ch 210 (CA). 125 Australian Financial Services (n 123) [86]. 126 Crabb (n 26). 127 Finn (n 71). 128 See eg The Earl of Oxford’s Case (1615) Chan Rep 1; 21 ER 485; Inwards (n 63). 129 S Smith, “A Duty to Make Restitution” (n 122) 170. See too B McFarlane, “Unjust Enrichment, Rights and Value” in D Nolan and A Robertson (eds), Rights in Private Law (Hart Publishing 2009). 130 See H Smith, “Property, Equity, and the Rule of Law” in L Austin and D Klimchuk (eds) (n 64) for the view that a characteristic form of equitable intervention consists in preventing A from taking opportunistic advantage of rules that work very well in the vast majority of cases.

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The limits of the principle It may be that an unjustified fear of undermining the law of contract (along with a failure properly to distinguish the strand of proprietary estoppel applied in cases such as Sidhu and Thorner from those based on A’s acquiescence in a mistaken belief of B, or on A’s representation of a matter of fact, or mixed fact and law)131 has deterred courts from emphasising that, if equitable estoppel gives rise to a cause of action in a case where B has relied simply on a belief as to A’s future conduct, A must have made a (express or implied) promise to B. An insistence on an express or implied promise by A can, for example, be discerned in the House of Lords’ decisions in Cobbe and Thorner.132 In Cobbe, it was clear that A had in fact encouraged B in his belief that A’s land would be sold, yet this did not suffice for a claim. In Thorner, each of the three courts hearing the case insisted on a promise or on an assurance by A and the House of Lords’ decision ultimately depended on the simple point that there had been insufficient basis for the Court of Appeal to overturn the finding of the first instance judge that such a promise could be found. It is clear, after all, that A is under no general duty or liability to ensure that B suffers no economic loss through reliance on A. The making of a commitment by A is crucial in ensuring that responsibility for B’s detriment can be reasonably allocated to A rather than to B. It is therefore unfortunate that formulations of equitable estoppel often suggest that it is sufficient if A simply encouraged B to believe that A would act in a particular way in the future.133 The main point made here is that, once the principle applied in Sidhu and Thorner is identified, and seen as independent both from preclusive or promissory estoppels and from contract law, there is no reason why its ability to give rise to a cause of action should be limited to cases where A’s promise is to give B a right in relation to identified property of A.134 An emphasis on the need for a seriously intended promise by A may play an important role in meeting fears as to the effect of allowing the principle to operate more widely. A more difficult question is whether, in line with the suggestion of Brennan J in Waltons,135 the principle should be limited to cases where A’s promise was that a particular legal relationship did or would exist between A and B, and that A would not be free to withdraw from that relationship. It could be argued that, just as the suggested restriction to property rests on a misguided view of the principle as based on preclusive estoppel, so does this suggestion depend on a confusion between the principle and those forms of promissory estoppel that prevent A acquiring or asserting a right against B.136 Certainly, as the principle can impose a free-standing liability on A, it need not piggy-back on any other form of legal relationship. This can be seen from the fact 131 For discussion of the distinct strands of proprietary estoppel, see McFarlane (n 91) ch 1. 132 See further McFarlane (n 91) paras 2.80–2.113. 133 See eg Hoyl Group (n 15) 43 relying on the formulation in C Harpum et al (eds), Megarry & Wade: The Law of Real Property (8th ed, Sweet & Maxwell 2012) para 16.001. See too DHJPM (n 4) [48], [94]. 134 See too McFarlane and Sales (n 7). 135 Waltons Stores (n 1) 428. 136 See above, “Promissory estoppels”.



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that, where the principle applies, the liability imposed on A may have different consequences to those of the envisaged legal relationship.137 Moreover, it might seem arbitrary if the principle can apply, for example, where A promises to make a contract with B to paint B’s house (a promise of a binding legal relationship) but not if A simply promises to paint B’s house. Further, as Robertson has shown, a number of Australian authorities are inconsistent with such a limit.138 An argument in favour of such a restriction could, however, be made by focussing on the nature of the principle as a liability-imposing rule. It may be that liability-imposing rules can be seen, as a group, as not required by freestanding corrective justice, but rather as necessary to support the functioning of such primary rules, and thus as having a second-order element, dealing with dangers posed by the legal system itself. A promise-based proprietary estoppel case such as Sidhu or Thorner could be said to reveal the dangers to B of A’s power to make an inter vivos or testamentary transfer of land to B, and of B’s reliance on that power. The liability arising in such a case mitigates the dangers of such a power to B. The same can be said in a case where A promises to exercise a different legal power (the power to contract) in B’s favour, but not when A simply promises to perform an act for B’s benefit, as A’s power to perform the act does not derive, in any meaningful sense, from legal rules.139 If, then, the function of the principle in Sidhu or Thorner is to depend on its nature as a liability-imposing rule, there may be an argument for limiting its operation to cases where the prospect of detriment to B depends not only on A’s promise but on the presence of a legal rule conferring a power on A. An analogy can be drawn with restitutionary liability.140 In a case where, rather than mistakenly conferring a right on A, B mistakenly performs a pure service for A, it seems reasonably clear that the classic strict-liability restitutionary model does not apply.141 Similarly, it is not clear that the model applies where, rather than directly exercising a legal power to confer a benefit on A, B sets in train a series of events which leads to A’s acquiring such a

137 See the examples given in n 109. 138 Robertson (n 3) 240–43, referring to eg W v G (1996) 20 Fam LR 49; EK Nominees (n 15); ACN 074971109 (n 15). 139 It is possible that the facts of W v G (n 138) could be brought within this model, as A’s promise can be seen as relating to A’s legal power to assume particular parental responsibilities. A point raised in argument in Crown Melbourne (n 4) was whether a proprietary estoppel claim can arise where A’s promise is to make an offer to grant a lease to B rather than directly to grant a lease: such a promise, as it relates in any case to a legal power of A, would fall within both the narrower and wider models. Similarly, a promise to transfer a burial licence (as in Arfaras (n 88)) falls within each model, even if such a licence does not confer a genuinely proprietary right. 140 Compare the suggestion that the law of unjust enrichment plays an “apparently second order” role: R Stevens, “Is There a Law of Unjust Enrichment?” in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law (Lawbook Co 2008) 11, 23. 141 See eg Blue Haven Enterprises Ltd v Tully [2006] UKPC 17; JS Bloor Ltd v Pavilion Developments Ltd [2008] EWHC 724 (TCC); [2008] 2 EGLR 85; Brand v Chris Building Co Pty Ltd [1957] VR 625 (SC); S Degeling and B Edgeworth, “Improvements to Land Belonging to Another” in L Bennett Moses et al (eds), Property and Security: Selected Essays (Lawbook Co 2010) 277. For a contrary view, see eg HW Tang, “An Unjust Enrichment Claim for the Mistaken Improver of Land” [2011] Conv 8; C Mitchell et al (eds), Goff & Jones: The Law of Unjust Enrichment (8th ed, Sweet & Maxwell 2011) para 9.04.

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benefit from a third party.142 The crucial question in such cases can be seen as one of extrapolation from the core case of the mistaken payment: is the key feature of that case B’s causing a benefit to be conferred on A or, more narrowly, is it the operation of legal rules to ensure that the same event caused both a loss of a right by B and a gain of a right by A?143 From the standpoint of first principle, it may seem arbitrary to distinguish between different means by which B may factually cause a benefit to be acquired by A, just as it seems arbitrary to distinguish between A’s promise to enter a contract with B, and A’s promise to perform an act for B. If, however, the underlying liability is not itself based on first principles, but rather functions to deal with risks caused by the presence of legal rules, the distinction between those cases may be justified. It is not, however, the purpose of this chapter to decide whether equitable estoppel’s ability to operate as a cause of action should be restricted to cases where A’s promise relates to a legal power of A. The crucial point is rather that, in establishing the limits of the principle applied in Sidhu and Thorner, a court should not regard that principle as a form of preclusive or promissory estoppel, or as a means of giving contractual effect to promises unsupported by consideration, but should rather focus on the inherent nature and function of the principle itself.144

142 For recent analysis of this point, referring to the academic and judicial debate as to the correct test for establishing if A’s enrichment is at the expense of B, see Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66; [2016] AC 176 [28]–[35] (Lord Clarke), [65]–[73] (Lord Neuberger). 143 An argument in favour of the narrower view is made by McFarlane (n 129). 144 It has been argued here that the principle is currently applied in the guise of each of promissory and proprietary estoppel and so, consistently with the approach of Nettle J in Crown Melbourne (n 4) at [216]-[218], the principle should be applied in the same way whether the promissory or proprietary label applies. This does not mean, however, that the whole of the two doctrines should be unified, as each of promissory and proprietary estoppel also includes further, distinct principles: see further McFarlane (n 61). This may help to explain the apparent lack of enthusiasm in Crown Melbourne for a wholesale unification of equitable estoppel: see eg French CJ, Kiefel and Bell JJ at [37]-[38] and Keane J at [139].

17

The Mechanics of  Equitable Assignments: One Engine or Two? CH Tham

1. Introduction What happens when a legal or equitable chose in action is equitably assigned?1 There are at least two ways of looking at the issue. First, some have suggested that equitable assignments operate by way of “transfer” of property rights. For example, in Burton v Camden London Borough Council, Lord Millett observed as follows:2 “My Lords, the word ‘assignment’ is not a term of art. It denotes any conveyance, transfer, assurance or other disposition of property from one party to another. The essence of an assignment is that it operates to transfer its subject matter from the ownership of the assignor to that of the assignee. …”

This may be read as suggesting that, for Lord Millett, “assignments” effect a “transfer” of a pre-existing property interest from the assignor to the assignee through extinction of the assignor’s entitlements against the obligor, coupled with a simultaneous revesting by the obligor of similar entitlements against himself in the assignee. Consequently, on this model of assignment, it would be as if the assignor had “dropped out” and no longer had any legal or equitable relationship with the obligor, whereas the assignee had stepped into the shoes of the assignor and had taken the assignor’s place in relation to the obligor.

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The discussion in this chapter will focus on equitable assignment, leaving aside consideration of statutory assignment which, in England, arises pursuant to s 136 of the Law of Property Act 1925 (UK). This is the modern-day equivalent of s 25(6) of the Supreme Court of Judicature Act 1873 (UK). The Australian equivalents may be found in the Civil Law (Property) Act 2006 (ACT) s 205; Conveyancing Act 1919 (NSW) s 12; Law of Property Act (NT) s 182; Property Law Act 1974 (Qld) s 199; Law of Property Act 1936 (SA) s 15; Conveyancing and Law of Property Act 1884 (Tas) s 86; Property Law Act 1958 (Vic) s 134; and Property Law Act 1969 (WA) s 20. For reasons of brevity, this chapter will also leave aside consideration of the various statutory modes of assignment applicable to specified types of choses in action, eg copyright, patents, and insurance contracts. Burton v Camden London Borough Council [2000] 2 AC 399 (HL) 408.

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Similar views may be found in the secondary literature.3 For example, in Professor Bridge’s account of what happens when a debt (that is, a legal chose) is equitably assigned:4 “In this example, [B] is the debtor, [A] the assignor and C the assignee. Assignment means that [A] may transfer the debt, owed by [B], to C without obtaining the prior permission of [B]; C may then call upon [B] to pay him instead of [A]; and C may then give [B] a good discharge for payment of the debt initially owed to [A]. The effect of assignment is to transfer [A’s] payment entitlement to C. In consequence, a relationship of debtor and creditor between [B] and C is substituted for the earlier debt relationship between [B] and [A]. The debt owed previously by [B] to [A] has been transferred by [A] to C in the same way as [A] might have sold to C an antique clock or a secondhand car earlier acquired from [B].”

Crucially, these two statements of how equitable assignments effect a “transfer” suppose that some kind of extinction and re-grant is involved: that is, when effectually made, an equitable assignment of a chose in action entails extinction of the assignor’s entitlements against the obligor as obligee to that chose in action, coupled with a re-grant by the obligor to the assignee of those entitlements. Indeed, Bridge suggests the effect of an equitable assignment of a debt is akin to the effect of a conveyance of the legal title to tangible personalty whereby the disponor effects a unilateral substitution of the disponee in place of herself. Since these accounts of how an equitable assignment effects a “transfer” appear to suppose that some kind of extinction and re-grant is entailed: that is, when effectually made, an equitable assignment of a chose in action entails an extinction of the assignor’s entitlements as obligee to that chose in action, coupled with a re-grant to the assignee of entitlements to those the assignor had prior to the assignment,5 the analogy, therefore, is with conveyances of the legal fee simple in land where the effect of such conveyance is to substitute the disponee in place of the disponor. And so, as Baron Parke noted: “[t]he word ‘assign’ does not mean ‘heir’; it means the person substituted for another by an act of some kind or other …”.6 Others have suggested that equitable assignments do not entail such transfers by way of extinction and re-grant. Instead, they operate by way of a trust – at least to some extent. For example, in Gorringe v Irwell India Rubber and Gutta Percha Works, Fry LJ observed that by writing to the appellants that they would henceforth hold certain sums for the appellants’ benefit until their indebtedness to the appellants was extinguished, the respondents had made themselves, 3

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See also: JG Starke, Assignments of Choses in Action in Australia (Butterworths, 1972) 10; FC Tudsbery, The Nature, Requisites and Operation of Equitable Assignments (Sweet and Maxwell 1912). MG Bridge, Personal Property Law (4th ed, OUP 2015) 231. See also: Starke (n 3) 10: “An assignment of a chose in action is a transaction or disposition which has the effect, in general, of immediately transferring the right in question from the party in whom it is vested to another party”. Tudsbery (n 3) 1: “An assignment is a transfer or making over to another of the whole of any property, whether real or personal, in possession or in action, or any estate or right therein”. Doe d Lewis v Lewis (1842) 9 M & W 662, 664; 152 ER 280, 281.



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“a trustee of the debt for the Appellants, and therefore it is equivalent to an equitable assignment”.7 Some writers have accepted this to be the case. For example, Smith and Leslie take the position that an equitable assignment of a legal chose in action is appropriately understood as entailing the constitution of a trust over the benefit of that chose;8 although they seem to accept that that would not be true of an equitable assignment of an equitable chose in action. On their reading of the cases: “where the whole interest in an equitable chose has been vested in the assignee, equity permits the assignee to sue in his own name without joining the assignor. This is because – provided the whole interest has been assigned – the assignee is the sole owner and no interest remains in the assignor.”9

Smith’s and Leslie’s analysis, above, requires us to accept that equitable assignments of legal choses in action operate by means of a mechanism different from that which operates when an equitable chose has been assigned, without clearly explaining what that different mechanism is. This is problematic, since, not only are Smith and Leslie inconsistent in their application of that view,10 but also because that view is plainly contradicted by the authorities.11 Writing in the Law Quarterly Review, Justice Edelman12 and Dr Elliott argue that the law of Australia and England are at one on this issue: the trust conception of equitable assignment applies to equitable assignments of both legal and equitable choses, and statements to the contrary in some of the more recent cases should be cause for concern. But they, too, acknowledge that the assignor of an equitable chose, though an intermediate bare trustee, nevertheless “drops out”,13 largely for the same reasons as relied upon by Smith and Leslie.14 Thus, Justice Edelman and Dr Elliott suggest that: “On the trust conception of equitable assignment, cases involving equitable assignment can be explained only on the basis that an intermediate bare trustee ‘drops out’. In other words, if A (assignor) holds on trust for B (assignee), and B holds on bare trust for C (sub-assignee), then, if C wishes to sue, C does not need to join B because B has ‘dropped out’ of the picture. This was the dominant view held in the 19th century, and persisting into the 20th century,

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Gorringe v Irwell India Rubber and Gutta Percha Works (1886) 34 Ch D 128 (CA) 136. Marcus Smith and Nico Leslie, The Law of Assignment (2nd ed, OUP 2013) paras 11.09–11.18. Smith and Leslie (n 8) para 11.05. But see comments below, at text to n 21. Eg Smith and Leslie (n 8) para 4.03 suggest that the reason why the assignor of an equitable chose “drops out of the picture” post-assignment is because by such assignment, the assignor’s beneficial interest in the chose assigned will have passed to the assignee; yet such “transfer” of beneficial interest necessarily entails the assignor retaining her entitlements vis-a-vis the equitable obligor to the chose assigned as a trustee of those entitlements. Smith’s and Leslie’s bifurcated view is more fully explored below in Part 2(a). Supreme Court of Western Australia: the article was written prior to Edelman J’s appointment to the Federal Court of Australia. James Edelman and Steven Elliott, “Two Conceptions of Equitable Assignment” (2015) 131 LQR 228, 246. The three principal English authorities stating how an equitable assignee steps into the shoes of the assignor and may therefore bring proceedings in equity against the obligor without joining the assignor are discussed below, at text at, and following, n 25.

384 Contract in Commercial Law when it was thought that the assignee[15] who assigns an equitable interest ‘has no interest in the subject matter’.”16

The suggestion in this chapter is that there is another way to square the circle, beginning with the realisation that we may have assumed (wrongly) that the “trust” concept provides sufficient explanatory force for the multiple effects observed when a legal or equitable chose is equitably assigned. While equitable assignments have effects not dissimilar to those which would arise when a bare trust is constituted over the chose in question – these are the “trust” effects arising by a “trust” mechanism – equitable assignments also produce effects not dissimilar to those which would arise where an agent has been appointed but has also been released from the typical fiduciary obligations owed by an agent to its principal. Though such an agency relationship would be atypical, it cannot be doubted that it is, in principle, perfectly possible: so far as a principal is owed fiduciary obligations by her agent, the principal has the power to release her agent from those obligations, leaving the agent free to invoke those delegated powers as he pleased – rather as the Romans are said to have recognised to be the case with a cessio actionum.17 Consequently, the entitlements of the principal which have been delegated to the “agent” may be invoked by that “agent” as the “agent” pleases. For the purposes of this chapter, these will be referred to as the “agency” effects arising by the “agency” mechanism underpinning equitable assignments. This chapter proposes that the trust mechanism may be applied without distinction to equitable assignments of either legal or equitable choses in action. But this is not the only mechanism driving equitable assignments, and the agency mechanism explains why an equitable assignee of an equitable chose may deal directly with the obligor to the equitable chose assigned, bypassing or “leap-frogging” his assignor – for example, by bringing judicial proceedings in equity against a defaulting obligor in the assignee’s own name, without having to join the assignor.18

2. Equitable Assignments of Equitable Choses in Action Operate by Means of a Trust Over the Chose Assigned Since the discussion of how equitable assignments of legal choses in action (such as a contract debt) must operate by means of a trust over the chose 15 Given the context, it would appear that the authors were referring to B, the assignee of A. The point, however, is that B had ‘sub-assigned’ her interest to C and so, had ‘dropped out’. 16 Edelman and Elliott (n 13) 246, citing the authority of Cator v Croydon Canal Co (1843) 4 Y & C Ex 593; 160 ER 1149; Redman v Permanent Trustee Company of New South Wales Ltd (1916) 22 CLR 84 (HCA), and Fulham v McCarthy (1848) 1 HLC 708; 9 ER 937 (on appeal from the Irish High Court of Chancery). However, Redman is not independent authority for the proposition since the sole reference on point was made by Isaacs J, obiter in Redman, 95, relying on the authority of Fulham v McCarthy. Even so, Edelman and Elliott recognise that their thesis that the “dropping out” of such “trustee” would appear to have been contradicted by dicta in Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358; [2008] 1 EGLR 59 [57]. 17 This is discussed further in Part 3, below. 18 As in Cator (n 16) and other cases to similar effect – these are discussed in Part 2(a), below.



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assigned is fairly well trodden, no attempt will be made herein to retrace these steps.19 Instead, this Part will show that the authorities have consistently accepted that equitable assignments of equitable choses also operate by means of the same sort of trust.20 Consequently, Smith’s and Leslie’s treatment of such assignments as operating by some different mechanism is inconsistent with authority.

(a) The view that equitable assignments of equitable choses in action operate differently from equitable assignments of legal choses in action Despite the antiquity of the authorities,21 little academic attention has been paid to the mechanism(s) underpinning an assignment of an equitable chose. As noted above, Smith and Leslie suggest that while equitable assignments of a legal chose entail the constitution of a trust over that legal chose (or, perhaps, an effect akin to the constitution of such a trust),22 the same is not true of equitable assignment of equitable choses in action: “The assignment of a chose in action by an assignor to an assignee implies the outright transfer of the chose from the former to the latter. But this can be true only of equitable choses in action. So far as legal choses in action are concerned, there is a barrier to the outright transfer of the chose, because a legal chose in action cannot be transferred at common law … and equity cannot effect such a transfer. Any attempt to transfer title to a legal chose by equitable means must have the legal estate vested in the original holder.”23

19 For an ample summary of the most significant secondary sources, see Edelman and Elliott (n 13). Key English cases stipulating that this is so include: The Wasp (1867) LR 1 A&E 367 (High Court of Admiralty) 369; Re Steel Wing Company, Ltd [1921] 1 Ch 349 (Ch) 356; Warner Bros Records Inc v Rollgreen Ltd [1976] 1 QB 430 (CA) 443–44; Bexhill UK Ltd v Razzaq [2012] EWCA Civ 1376 [58]; and Roberts v Gill & Co [2010] UKSC 22; [2011] 1 AC 240 [68]. 20 It is, of course, entirely possible for a trust to be constituted over an equitable interest or chose: see Re Barney [1892] 2 Ch 265, 272 (Ch) (Kekewich J). 21 In Squib v Wyn (1717) 1 P Wms 378, 381; 24 ER 432, 433, in connection with a dispute arising in a spes successionis (ie an equitable chose in action), Lord Cowper, LC observed that, “choses in action are assignable in equity, though not at law …”. Similar sentiments were expressed by Lord King LC in Duke of Chandos v Talbot (1731) 2 P Wms 601, 608; 24 ER 877, 880: “that though a chose in action, as a bond, &c, was not in strictness of law assignable, yet in equity it was, as every day’s experience shewed …”. It seems, however, that no distinction was drawn between the assignability in equity of legal or equitable choses in action; and this was accepted to be the case in Lord Carteret v Paschal (1733) 3 P Wms 197, 199; 24 ER 1028, 1029 (see n 33). 22 It is suggested that such trust should not be taken to be constructive, else equitable assignments of subsisting equitable choses would not have to comply with the formalities imposed by s 53(1 (c) of the English Law of Property Act 1925, which would come as a shock to generations of students who have pored through the minutiae of Grey v Inland Revenue Commissioners [1960] AC 1 (HL). The equivalent provision in Australia may be found in the Civil Law (Property) Act 2006 (ACT) s 201; Conveyancing Act 1919 (NSW) s 23C; Law of Property Act (NT) s 10; Law of Property Act 1936 (SA) s 29; Conveyancing and Law of Property Act 1884 (Tas) s 60(2); Property Law Act 1969 (WA) s 34. In Queensland, dispositions of subsisting equitable interests need only be evidenced in writing: Property Law Act 1974 (Qld) s 11(1)(c). 23 Smith and Leslie (n 8) para 11.09.

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In somewhat similar vein, Professor Tolhurst observes that: “The assignee of an assignment of an equitable interest that subsists at the time of the assignment can sue in his or her own name and give a good discharge, as the assignee alone is regarded as having an interest in the subject matter assigned. However, where the equitable assignment is of only part of an equitable interest, then as a procedural safeguard, the assignor must be joined in any action. In either case, there can be no doubt that there is a true transfer of the equitable interest. The assignee becomes the owner (in equity) of the relevant interest and is owed the relevant duty. There is both a transfer of title and actual transfer of the subject right.”24

These accounts of the assignor’s position suggest that once the entirety of the assignor’s interest in an equitable chose is assigned to an assignee, the assignor will then no longer have any interest in that equitable chose because the assignor’s interest will have been extinguished; whilst in its place, an equivalent interest in the equitable chose will have been vested in the assignee, and who alone is thereafter regarded as having an interest in the subject matter assigned – and so, the obligor becomes duty-bound to the assignee,25 whilst the assignor “drops out”. Logically, it would therefore seem that this “dropping out” analysis must entail rejection of the trust analysis for such assignments. The impetus for Smith’s and Leslie’s bifurcated analysis appears to stem from three old cases. Chief of these is Cator v Croydon Canal, as to which Smith and Leslie take26 the following passage from the judgment of the Lord Chancellor to be key: “It was said that, as these proceedings were instituted by the assignee, the assignor ought to have been made a party to the suit. It is quite clear that, where the assignor has a legal title and he assigns his interest, and any proceedings are taken by the assignee with respect to the property so assigned, the assignor must be a party to the suit, because, by his assignment, he does not part with the legal estate, and the person having the legal estate must be before the Court. But the principle clearly does not apply to the facts of this case. There was no sum awarded specifically to this gentleman, Mr Scott. All that he had was an equitable interest – an equitable title to be paid the sum of money if he made out his title to the land. That equitable interest and right he assigned before the suit; he parted, therefore, with all interest, and, having parted with all interest of every description, of course it was not necessary that he should have been a party to these proceedings.”27

Smith and Leslie also refer to two other decisions in support of their proposition.28 One of these is Donaldson v Donaldson, where Page Wood V-C noted that: “[i]n the case of an assignment of the equitable interest in stock standing in the names of trustees, the deed of assignment passes the whole equitable 24 GJ Tolhurst, The Assignment of Contractual Rights (Hart Publishing 2006) para 4.03. 25 In Packer v Wyndham (1715) Prec Cha 412, 415; 24 ER 184, 186 counsel submitted that, “any disposition by Cestuique Trust is binding upon the trustee in a court of equity, and even at law”. The report does not record whether the Lord Chancellor agreed with this submission. 26 Smith and Leslie (n 8) para 11.07. 27 Cator (n 16) 593–94; 1149–50. 28 Smith and Leslie (n 8) para 11.07, fn 7.



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 387 interest of the donor, and the donee may go with that deed to the trustees, and say, transfer to me the interest in this sum of stock; and I think that in such a case it would not even be necessary to make the donor a party to a suit to enforce a gift[;]”29

Smith and Leslie also cite the authority of Fulham v McCarthy, where Lord Cottenham LC said of the assignment before the court: “It is not an assignment of a legal right, it is an assignment in equity of a purely equitable interest; in which case, as Mr Turner very properly admitted at the bar, the course of practice of Courts of Equity is to file a bill, not by the assignor, who, if the assignment be valid, has no longer any interest in the property assigned, but by the party claiming as assignee.”30

This conception of the operation of an equitable assignment is not limited to academic commentators. Similar sentiments can be found in some of the cases, though usually, the cases are careful to stipulate that any “change” in the parties to whom an obligor is duty-bound by reason of an equitable assignment arises only when such obligor has received notice of the assignment. For example, in Société Genérale de Paris v Tramways Union Co,31 Cotton LJ opined that: “[w]here there is an assignment, available only in equity, of an interest in personalty vested in a trustee, or of a debt due to the assignor, there notice is necessary, for until notice is given, the trustee can pay to his original cestui que trust, and the debtor may pay to this creditor. But after notice the trustee holds the fund in trust for the assignee, and the debtor cannot obtain a good discharge without the concurrence of the transferee. In equity, without any further act done by the assignor there is, as against the trustee or debtor, a change of the person entitled to be considered the cestui que trust or creditor, and disregard of the assignment will, in equity, make the trustee or the debtor liable.”

The difficulty with these “transfer” conceptions of equitable assignment (even if limited to instances of assignments of equitable choses in action), is that they appear to require us to accept that so far as such “transfer” is taken to entail an extinction and a re-grant, and so far as it is postulated such extinction would lead to the entitlements of the assignor being entirely extinguished following the assignment (upon notice to the obligor), the end-result is the unilateral variation of the obligations which an obligor to a chose in action had voluntarily undertaken without his assent to the same. If we conceive equitable assignments to operate in the manner of a trust, however, the concern as to unilateral variation of an obligor’s obligation will recede. 29 Donaldson v Donaldson (1854) Kay 711, 718–19; 69 ER 303, 307. 30 Fulham (n 16) 717–18; 943–44. 31 Société Générale de Paris v Tramways Union Co (1884–85) 14 QBD 424 (CA) 446 (emphasis added). Though the decision of the Court of Appeal was upheld on appeal – Société Générale de Paris v Walker (1885) 11 App Cas 20 (HL), the House of Lords did not specifically address this conception of the operation of equitable assignment. It may be noted, however, that Cotton LJ’s analysis was a minority view. Neither Brett MR nor Lindley LJ adopted it and each of their views are consistent with the proposition that receipt of notice of the assignment leads the obligor to become liable as a constructive trustee for the assignee in a manner akin to that of a third party who has dishonestly assisted in the commission of a breach of trust or fiduciary duty. This point is further discussed below, at n 66.

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So far as an equitable assignment of a legal chose is taken to operate in a manner akin to a bare trust having been constituted over that chose, such a trust clearly effects no change in the obligor’s obligations pursuant to that chose. So the issue of unilateral change to those obligations without his assent does not arise. And notwithstanding initial appearances otherwise, the same is true where an equitable assignment of an equitable chose is concerned. If we consider the case of a bare trust (which, in a sense, is the “core” case of an equitable chose), although a bare trustee’s duties to his trust beneficiary may be unilaterally changed by the beneficiary to a limited extent, since no one is compelled to accept the office of a bare trustee, in failing to disclaim such office, one will necessarily have assented to the incidents of such office. Inter alia, these incidents include the liability to have one’s duty to be changed from preservation of the trust property until the trust beneficiaries invoke their power to require complete execution of the trust, to having to dissipate that trust property when duly instructed to fully execute such trust by conveying one’s title in such property to the beneficiaries’ order. The analysis is broadly similar where the trust is a special trust. A trustee holding trust property on special trusts may be liable to his trust beneficiaries invoking the doctrine of Saunders v Vautier32 so as to collapse the special trust constituted by the settlor to a bare trust, thereby gaining the powers as a beneficiary to such bare trust to require its full execution. Yet both the powers of a beneficiary to a bare trust and the powers of beneficiaries to special trusts under the doctrine in Saunders v Vautier are ultimately instances where the trustees thereto had, in essence, agreed to such variability of their duties, in advance: it is, in short, what they signed up for when they assented to undertake the office of bare/special trustee. Accordingly, the invocations by trust beneficiaries of their powers to change their trustee’s duties in these contexts should not be taken to be instances of unilateral – in the sense of “un-agreed to” – alteration of what it was that their trustee had agreed he would be duty-bound to do. Consequently, where an equitable chose against a trustee holding assets on a special trust is equitably assigned, on a “trust” analysis of equitable assignment, such assignor would have encumbered her entitlements vis-à-vis her trustee as if she had constituted herself to be bare trustee of those entitlements for the assignee’s benefit. Those entitlements would include her powers to invoke the doctrine of Saunders v Vautier to collapse the special trust to a bare trust, and thereafter, her powers under that bare trust to require her trustee to fully execute the trust by conveying the trust property to her direction. Consequently, so far as the assignor might be regarded as holding these powers on bare trust for her assignee’s benefit by reason of the equitable assignment, her assignee could direct her to invoke these powers against her trustee in such manner as her assignee pleased. This would, indeed, lead to a change in the trustee’s 32 Saunders v Vautier (1841) 4 Beav 115; 49 ER 282. It may be noted that some jurisdictions have rejected this doctrine. For a brief account of the position adopted by most jurisdictions within the United States, see Paul Matthews, “The Comparative Importance of the Rule in Saunders v Vautier” (2006) 122 LQR 266, 282–87. The rule has also been legislatively modified in the Canadian provinces of Alberta and Manitoba, an account of which may be found in DWM Waters, Mark R Gillen and Lionel D Smith, Waters’ Law of Trusts in Canada (4th ed, Carswell 2012) 1258–62.



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obligations – but as outlined above, this was what the trustee had signed up for when he assented to the office in the first place. So even in this connection, the trust analysis does not contravene the prohibition against unilateral variation of obligations without the obligor’s assent. There has been a long and consistent string of authorities which apply to equitable assignments of equitable choses in action the same “trust” analysis as has been applied to equitable assignments of legal choses in action, chiefly, to explain how a gift of an equitable chose in action or interest by way of equitable assignment may be made. The most significant of these will be discussed, below.

(b) The cases revealing the trust mechanism underpinning equitable assignments of equitable choses in action Lord Carteret v Paschal (1733)33 One begins with the case of Lord Carteret v Paschal which Smith and Leslie accept as authority for the proposition that an equitable assignment of a chose in action may be validly effected without consideration.34 On his marriage, Sir Thomas Bromsall covenanted to settle £500 a year on his intended wife for her life. Soon after the marriage, Sir Thomas died. His widow, Lady Bromsall, brought proceedings before Lord Chancellor Cowper in equity for the covenant to be specifically enforced. She was successful, and, inter alia, the Lord Chancellor decreed that the tenants to certain realty forming part of Sir Thomas’s estate should henceforth pay their arrears of rents and future rents to Lady Bromsall in satisfaction of Sir Thomas’s covenant. Consequently, the tenants were, by this decree, duty-bound to Lady Bromsall in equity to pay the rents arising from their tenancies to her while she lived in satisfaction of Sir Thomas’s covenant: by this decree, an equitable chose had arisen between the tenants and Lady Bromsall. Some time later, Lady Bromsall re-married. Under the rules of coverture as were applicable at the time, on her re-marriage, Lady Bromsall ceased to have any separate legal personality distinct from that of her second husband, Doctor Herbert. This meant that all Lady Bromsall’s realty and personalty vested in Doctor Herbert on their marriage. Were Doctor Herbert to pre-decease Lady Bromsall, title to such realty and personalty which he had reduced into his possession before his death would pass as part of his estate; but where he had not reduced any such property into his possession, such property would revert to Lady Bromsall on his death and form part of her separate estate as a feme sole by way of survivorship, since on Doctor Herbert’s death, Lady Bromsall would be discovert, once more.35 In 1714, the Master reported that £4,527 15s 7d was due for arrears of the rent payable to Lady Bromsall by reason of the Lord Chancellor’s decree. 33 Lord Carteret v Paschal (1733) 3 P Wms 197; 24 ER 1028; affd Paschall v Thurston (1734) 2 Bro PC 10; 1 ER 759. The facts of the case are more clearly set out in the report of the appeal to the House of Lords. 34 Smith and Leslie (n 8) para 13.82; but they do not attempt to explain why this should be so. 35 For a summary of the law on coverture, see Viscount Simonds (ed), Halsbury’s Laws of England (3rd ed, Butterworths 1957) vol 19 “Husband and Wife”.

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In June 1729, Doctor Herbert, assigned the said arrears, all subsequent arrears, and the benefit of Lord Chancellor Cowper’s decree, to Lord Carteret and Sir Clement Cotterell by deed of indenture to hold on various trusts: that, after Lady Bromsall’s death, they should pay £500 to Sir Thomas Cross, and £3,900 to Lady Granville out of the debt arising from Lord Chancellor Cowper’s decree, and as to the surplus, to pay to such persons, and in such manner, as he by his deed or will should appoint. Doctor Herbert died intestate in October 1729, and Lady Bromsall survived him by a few months before dying in April 1730. The issue before the court in Lord Carteret v Paschal was whether Doctor Herbert had, by his assignment, so reduced his wife’s equitable chose in action arising from Lord Chancellor Cowper’s decree in favour of Lady Bromsall into his possession so as to prevent any part of it from enuring to Lady Bromsall when she survived him and became discovert. The problem was particularly acute as to Doctor Herbert’s voluntary assignment to Lord Carteret and Sir Clement of the surplus.36 If the assignment as to the surplus was invalid, then it would follow that Doctor Herbert would not have sufficiently reduced this part of his wife’s equitable chose in action into his possession, and so, by the doctrine of survivorship, it would form part of Lady Bromsall’s estate when she became discovert by surviving him. Significantly, it was, “admitted on all sides that if a man in his own right be entitled to a bond or other chose in action, he may assign it without any consideration”.37 This led Lord Chancellor King to hold that the assignment as to the surplus was valid, notwithstanding Dr Herbert having only held the chose in respect of his wife by reason of the doctrine of coverture and his assignment of it having been voluntary. Consequently, the surplus of the arrears was not to be distributed as part of Lady Bromsall’s estate; and this case came to be accepted as authority for the proposition that equitable assignments were effective, even if made voluntarily without consideration – though the doctrinal explanation for this result would only be gradually revealed in the subsequent case law. Sloane v Cadogan (1808)38 Some inkling of the doctrinal basis for the proposition that equitable assignments of equitable choses in action or interests could be validly effected by way of gift may be found in the decision of Sir William Grant MR in Sloane v Cadogan. In this case, William Cadogan, son of the Earl of Cadogan, had an equitable reversionary interest in a fund that had been vested in the trustees of the Earl’s marriage settlement. Prior to his own marriage to Jane Cadogan, William 36 In contrast, as Dr Herbert had previously been indebted to both Sir Thomas Cross and Lady Grenville, it was accepted that the assignments to Lord Carteret and Sir Clement in respect of Sir Thomas Cross and Lady Granville had been made for value: Carteret (n 33) 198, 1029. 37 Carteret (n 33) 199; 1029. 38 Sloane v Cadogan (1808) reported in Sir Edward Sugden, A Practical Treatise of the Law of Vendors and Purchasers of Estates (11th ed, S Sweet 1846) 1119. Neither Smith and Leslie (n 8), nor AG Guest and YK Liew, Guest on The Law of Assignment (2nd ed, Sweet and Maxwell 2015) refer to this key case. Unsurprisingly, given that it is concerned with the assignment of an equitable chose, it is not discussed in Tolhurst (n 24) either.



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 391

Cadogan assigned his equitable reversionary interest in the fund to other trustees on special trust for various volunteers, reserving to himself certain powers of appointment; and if he were to die leaving no issue before exercising those powers, his trustees were to make a gift over of his interest in the fund to his father, the executors of his father’s estate, or his or their assigns, as the case might be. William died without issue without exercising his power of appointment. Jane, his widow, then commenced proceedings against the executors of the Earl, arguing that William had failed to completely constitute a trust over his equitable interest in the fund arising from the Earl Cadogan’s marriage settlement because the assignment of that equitable interest to William’s intended trustees was voluntary and thus ineffective. Counsel for the widow argued, therefore, that William had not divested himself of his interest in the fund: it remained part of his assets. If so, that equitable interest fell to be distributed to her in accordance with William’s will. Sir Edward Sugden, counsel for the widow, argued as follows: “To constitute an actual settlement, so as to enable a volunteer to claim the benefit of it, it is absolutely necessary that the relation of trustee and cestui que trust should be established. Here Mr C [ie William Cadogan] did all he could; but that is not enough. The trustees in whom [the fund] was vested would not have been authorised in transferring it of their own authority to the trustees of Mr C’s settlement. If a man is seised of the legal estate, and agree to make a voluntary settlement, it cannot be enforced. Can it make any difference that the legal estate happens to be outstanding? Certainly not. As the settlement therefore was not completely perfected, the Earl could not enforce it.”39

Rejecting counsel’s argument, Sir William Grant MR held as follows: “The Court will not interfere to give perfection to the instrument, but you may constitute one a trustee for a volunteer. Here the fund was vested in trustees [of the Earl’s marriage settlement]: Mr W Cadogan had an equitable reversionary interest in that fund, and he assigned it to certain trustees, and then the first trustees are trustees for his assigns[40] and they [the assigns] may 39 Sloane (n 38) 1124–25 (emphasis in original). 40 Some care should be taken over this phrase. Where a trust beneficiary (“A”) equitably assigns her equitable beneficial interest in the equitable chose against her trustee (“T”) arising from the terms of that express trust to an assignee (“C”), T’s obligations so far as the express trust is concerned remain completely unchanged: T remains duty-bound and liable to A, A remains the beneficiary under that trust, and C does not become beneficiary under that trust in place of A, absent a suitably-worded power of appointment in the terms of the express trust. This is necessarily so, so far as equitable assignments operate as though A had constituted herself bare trustee of her equitable interests arising from the express trust for C’s benefit. If, however, C were also authorised by A to invoke A’s entitlements vis-à-vis T vide the express trust as if he were A and was authorised by A to do so as C pleased, the effect of such a wide-ranging agency arrangement would be to create the semblance of T having become trustee “for C” insofar as T would become liable to C invoking A’s powers vis-à-vis T, by reason of A’s authorisation of C. As explained below, this “agency effect” forms part of the mechanics underpinning the operation of equitable assignment: it, alongside the “trust effect” are what drive the institution of equitable assignment. And so, via such “agency effect”, it will seem as if T had become trustee for C, even though the “trust effect” would mandate that T must remain trustee for A. This reasoning is consistent with that of Knight Bruce LJ in Kekewich v Manning (n 43) as discussed in the main text which follows.

392 Contract in Commercial Law come here, for when the trust is created no consideration is essential, and the Court will execute it though voluntary.”41

The critical point in Sir William Grant’s judgement is highlighted above: that the reason why the trustees of the Earl’s marriage settlement were “trustees for his [William Cadogan’s] assigns” was because William Cadogan had already constituted a trust in respect of his equitable interest – and given that he had done nothing else apart from execute the deed of assignment, that trust must have been manifested by way of that very same deed.42 And the next case provides clear confirmation that this is indeed the doctrinal explanation underlying the result in Sloane v Cadogan. Kekewich v Manning (1851)43 In Kekewich v Manning, the question was also whether an equitable interest could be effectively conveyed by way of gift. The decision of the Court of Appeal in Chancery was that it could.44 Delivering the judgment of the court, Knight Bruce LJ reasoned as follows: “Suppose stock or money to be legally vested in A as a trustee for B for life, and, subject to B’s life interest, for C absolutely; surely it must be competent to C in B’s lifetime, with or without the consent of A, to make an effectual gift of C’s interest to D by way of mere bounty, leaving the legal interest and legal title unchanged and untouched. Surely it would not be consistent with natural equity or with reason or expediency to hold the contrary, C being sui juris, and acting freely, fairly and with sufficient advice and knowledge. If so, can C do this better or more effectually than by executing an assignment to D? It may possibly be thought necessary to the complete validity of such a transaction, that notice should be given to A. Upon that we do not express an opinion.”45

Two paragraphs later, he continued: “It is probably or certainly in some instances the course of this jurisdiction to decline acting at the suit of those it terms ‘volunteers,’ though within that description a person claiming directly, and merely, under a gratuitous 41 Sloane (n 38) 1126 (emphasis added). 42 William’s “trust” had to consist of two trusts. First, William had to have constituted himself to be trustee of his equitable interest in the Earl’s marriage settlement, for the benefit of his intended trustees, but those intended trustees were, in turn, to hold that benefit on the terms of the trust constituted by William for the benefit of his intended donees. This is explained in greater detail below, in text following n 57. 43 Kekewich v Manning (1851) 1 De G M&G 176; 42 ER 519. The report states that argument was heard before the Lord Justices on 6 November 1851, and the decision was handed down on December 15th, 1851. This tells us that the decision must have been handed down by the Court of Appeal in Chancery (constituted in 1851 to hear appeals from decisions of the ViceChancellors and the Master of the Rolls). This court comprised of the Lord Chancellor and two Lord Justices, the first two of whom were Sir John Knight-Bruce and Lord Cranworth, both of whom were appointed to that office in October 1851: Alan C Bruce, The Late Lord Justice of Appeal the Right Hon Sir James Lewis Knight Bruce: An Essay (Faithfull & Head 1867) 9. 44 Without engaging with its reasoning, Smith and Leslie (n 8) paras 13.81, 13.82 accept that this case stands as authority for the proposition that equitable assignments of equitable choses in action may be made by way of gift. 45 Kekewich (n 43) 188–89; 524.



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 393 promise, oral or not under seal, which is nudum pactum, may be thought perhaps hardly to come, for such a person has in effect had no promise at all. In effect no contract has been made with him. But whatever rule there may be against ‘volunteers’ it does not apply to the case of one who, in the language of this Court, is termed a cestui que trust, claiming against his trustee. For that which is considered by this jurisdiction a trust may certainly be created gratuitously. So that the absence of consideration for its creation is in general absolutely immaterial.”46

Knight Bruce LJ clearly accepted that English law permitted the holder of an equitable interest (such as the interest of a remainderman under the terms of a trust), while sui juris, to make a gift of that interest by way of an equitable assignment. And significantly, as to whether consideration was required for such equitable assignment to be effective, Knight Bruce LJ pointed out that “whatever rule there may be against ‘volunteers’ it does not apply to the case of one who … is termed a cestui que trust, claiming against his trustee. For that which is considered by this jurisdiction a trust may certainly be created gratuitously”. From this, it is plain that Knight Bruce LJ considered an equitable assignment of an equitable interest to be effective, even absent any consideration, because by such assignment, a relation of trustee and cestui que trust had been created, and in respect of such trust, once validly constituted, the absence of consideration was of no import. Voyle v Hughes (1854)47 The proposition that an equitable assignment by way of gift is effective because it entails the creation of a relationship of trustee and beneficiary was repeated in Voyle v Hughes. This case was also concerned with the validity of a voluntary equitable assignment of yet another equitable interest arising from a share in a fund held by trustees under a marriage settlement. Dismissing the notion that such assignments could only ever be effective if given for consideration, Sir John Stuart V-C held: “The argument which treats the deed of assignment as a mere agreement or executory instrument rests on this, that the property is not transferable at law. But if that be a reason for treating the deed not as an actual conveyance, which it purports to be, why should it not as well apply to all conveyances of equitable interests in real or personal estate, which are not transferable or even conusable[48] at law? The deed of assignment being a perfect instrument, there is no room for the argument against its effectiveness founded on the doctrine that an incomplete gift is invalid in equity. … As to treating an assignment by deed as a declaration of trust, or refusing to it any operation because it cannot be properly treated as a declaration of trust, there seems no legitimate ground for such an argument. If a deed of actual 46 Kekewich (n 43) 189–90; 524–25. 47 Voyle v Hughes (1854) 2 Sm&G 18; 65 ER 283. Smith and Leslie (n 8) make no reference to this case. 48 That is “cognizable”: Lesley Brown (ed), The New Shorter Oxford English Dictionary: On Historical Principles (4th ed, OUP 1993) vol 1, 500.

394 Contract in Commercial Law assignment of an equitable interest has any operation in equity as divesting the assignor of his equitable right, it is an operation no more [sic][49] in the nature of declaring a trust than any other actual conveyance of an equitable estate or interest in real or personal property.”50

Harding v Harding (1886)51 The doctrinal explanation for the validity of equitable assignments of equitable choses in action by way of gift, set out in Kekewich and Voyle, was followed in Harding v Harding. The defendants in this case were testamentary trustees appointed under the will of James Harding. In his will, James Harding had made a testamentary gift of part of the residue of his estate to George Harding, who lived in Australia. The defendants sent George Harding an account of the sum that would be distributed to him, upon realising the estate. George Harding received this document in Australia, and on 4 September 1884, wrote at the foot of it the words, “I hereby instruct the trustees in power to pay to my daughter, Laura Harding, the balance shewn in the above statement, less the ten pounds received by me in Australia”. This document, with his annotation at its foot, was sent to his daughter, Laura Harding, in England. Laura Harding presented this letter to the defendants in October 1885. The defendants attempted to contact George Harding, but failed. The defendants also wrote to Laura Harding’s solicitors stating that they would comply with the direction to pay Laura Harding if they were satisfied that she could give them a proper receipt. Ultimately, following continued non-payment, Laura Harding successfully obtained judgment against them in the county court for the amount. The defendants then appealed to the Queen’s Bench, but it was dismissed by Wills and Grantham JJ. It is sufficient to focus on Wills J’s judgment, with whom Grantham J agreed. On the facts, it seems likely that George Harding had effected a statutory assignment of his equitable interest in the residue of James Harding’s estate in favour of his daughter pursuant to the provisions set out in s 25(6) of the Judicature Act 1873. Wills J appears to have accepted that that was indeed the case.52 Therefore, it followed that Laura Harding could give a good receipt

49 In the context, given that the Vice-Chancellor was disagreeing with the proposition that an assignment by deed ought not to be treated as a declaration of trust, the Vice-Chancellor’s point might have been more clearly made had he said that so far as a deed of assignment of an equitable interest operates in equity to divest the assignor of his equitable right, “it is an operation no less in the nature of declaring a trust than any other actual conveyance of an equitable estate or interest in real or personal property”. 50 Voyle (n 47) 29; 288 (emphasis added). 51 (1886) 17 QBD 442 (QB). Smith and Leslie (n 8) para 13.83, fn 128 appear to have taken this to be a case concerning an equitable assignment of a legal chose in action arising by way of debt. Though Wills J referred to the subject-matter of the assignment as a “debt” in his judgment (Harding, 445), in the context, it is clear that Wills J was referring to an equitable chose in action, being George Harding’s equitable entitlement as a legatee to the testamentary trust arising under James Harding’s will. 52 Harding (n 51) 445.



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 395

for payment.53 The defendants were not justified, therefore, in their refusal to execute their trust by tendering payment to Miss Harding. But Wills J also discussed the position, had the assignment been equitable. Wills J’s statement of the position in equity is telling. The key issue was whether the donor had done everything within his power to complete the gift: “The rule in equity amounts to this; that so long as a transaction rests in expression of intention only, and something remains to be done by the donor to give complete effect to his intention, it remains uncompleted, and a Court of Equity will not enforce what the donor is under no obligation to fulfil. But when the transaction is completed, and the donor has created a trust in favour of the object of his bounty, equity will interfere to enforce it.”54

On the facts before the court, Wills J recognised that: “[i]n the present case it was proposed to assign a sum of money due from the trustees, the defendants; and probably before the Judicature Act it would have been impossible to give a legal title to Laura Harding, so as to enable her to sue in her own name in respect of this right of action; she could have maintained a suit in equity, but the legal title could not have been completed in her. Now it can be done; and it seems to me that the legal title has been so completed by the notice signed by George Harding and sent by him to the plaintiff. [Though i]f it is to be regarded as an equitable assignment, he has done all that he could to make it complete; [but] if as a legal assignment, he has completed it; and under s 25(6) of the Judicature Act, 1873, the assignee of a chose in action may sue in his own name, the law as to the necessity for a consideration not applying, as it seems to me, if the assignment is completely made.”55

Read together, these passages indicate that, had it been necessary to consider the position purely in equity, Wills J was of the view that George Harding had done all he could do to complete the assignment, and in so doing, he had created a trust in favour of his daughter. So this decision, too, lends supports to the trust analysis. Re Spark’s Trusts (1904)56 Turning to the 20th century, the analysis in Kekewich, Voyle, and Harding still holds good. As Kekewich J observed in Re Spark’s Trusts (another case concerning the voluntary assignment of an equitable interest): “There is an assignment by the husband to a trustee of all his share and interest under the will of his grandmother upon trust to pay the annual interest and proceeds thereof to the wife for life, and from and after her decease to divide the same between the existing children of the marriage who should attain twenty-one, or, being daughters, marry under that age. That is a perfectly good 53 Pursuant to s 25(6) of the Judicature Act 1873 (UK), whereby the “power to give a good discharge” shall “pass and transfer” to the statutory assignee. This is preserved in s 136(1)(c) of the Law of Property Act 1925 in England and Wales, and the equivalent provisions in Australia are listed at n 1. 54 Harding (n 51) 444 (emphasis added). 55 Harding (n 51) 445 (emphasis added). 56 Re Spark’s Trusts [1904] 1 Ch 451 (Ch). Smith and Leslie (n 8) make no reference to this case.

396 Contract in Commercial Law voluntary settlement within all the authorities, of which Kekewich v Manning is one; so that there is a perfect trust, declared and binding on the husband, of his share under his grandmother’s will, vesting that in the trustee, and giving him [the trustee] a right to sue for the share, to give a receipt for it, and to hold the money received on the trusts.”57

Kekewich J’s observation that the husband was duty-bound to the trustee to whom he had assigned “all his share and interest under the will of his grandmother” is significant. As Lady Farrington had done in Kekewich v Manning, and as observed by Sir John Stuart VC in Voyle, the donor of an equitable interest “conveys” his or her interest by way of encumbering him – or herself, binding him- or herself to another. Where the donee is to benefit through a trustee, the “conveyance” to the intended trustee involves, therefore, the creation of a duty which is owed by the donor to that intended trustee. So the constitution of the trust between the intended trustee and the intended donee simultaneously imposes a duty on the donor which is owed to the intended trustee – and, in light of Kekewich, Voyle and Harding, this duty arises because there is also a trust arising between donor and intended trustee. And so in Professor McFarlane’s words: “[t]he rules on equitable assignment do not contradict the basic rule that a standard chose in action cannot be transferred; they rather answer the different question of whether [the assignor] has come under a duty to [the assignee] in relation to the chose in action that [the assignor] continues to hold against [the obligor to the chose in action assigned]”.58 Re Spark’s Trusts provides clear 20th century authority for the proposition that an equitable assignment of an equitable chose in action entails the assignor holding the benefit of the chose assigned on trust for the benefit of the assignee. Further, as Richardson v Richardson59 also makes clear, the reasoning relied upon by the court in Kekewich was then extended to apply to equitable assignments of legal choses in action. In consequence, equitable assignments of equitable or legal choses in action operate via the same mechanism of trust, contrary to what appears to have been asserted elsewhere. That being the case, we now turn to address the chief shortcoming of the “trust” model: that it cannot address the case law which allows for an equitable assignee of an equitable chose to bring proceedings in the court’s equitable jurisdiction against the equitable obligor directly without the need to join the equitable assignor. But the failure of the trust mechanism to explain such phenomena does not mean that equitable assignments do not entail the constitution of trusts. It merely tells us that the trust mechanism alone cannot account for these other effects: something else is required.

57 Re Spark’s Trusts (n 57) 454 (emphasis added). 58 Ben McFarlane, “Understanding Equitable Estoppel: From Metaphors to Better Laws” (2013) 66 CLP 267, 279. 59 (1867) LR 3 Eq 686.



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 397

3. “Leap-frogging”, the Shortcomings of the “Trust” Analysis, and Agency Reasoning Although equitable assignments cannot entail the “dropping out” of the assignor because such assignments entail an effect akin to the constitution of a bare trust over the benefit of the chose assigned, the position of an assignee of an equitable interest vis-à-vis the equitable obligor is not merely that of a subbeneficiary to a sub-trust constituted over the equitable chose in action that had been assigned – for an assignee of an equitable chose in action is empowered to invoke the assignor’s entitlements as obligee to that chose in action directly without having to go through the assignor.60 In other words, an equitable assignment of an equitable chose in action has an additional “leap-frogging” aspect: an equitable assignee may act as if he were the assignor vis-à-vis the obligor to the chose assigned, enabling the assignee to bypass the assignor so as to deal directly with the obligor. But how might such “leap-frogging” be achieved, if not by extinction and re-grant? The solution is not, it is suggested, particularly obscure. One could start from Sir Thomas Erskine Holland’s observations in The Elements of Jurisprudence: “The transfer of a ‘right in personam’ ‘by act of party’, is still of more restricted application. Its possibility is indeed flatly denied by the older theories of law. ‘Obligations’, says Gaius, ‘however contracted, admit of nothing of the sort’;[61] and it was an axiom of the English common law that ‘choses in action are not assignable’. The practical inconveniences resulting from this rule led to its gradual relaxation. It is no doubt possible by consent of all concerned to substitute a new debtor or new creditor in place of the person of inherence or of incidence[62] as the case may be. This is however a cumbrous process, and is obviously not an assignment, but an extinction of the original right, followed by a contract creating a new right in substitution for the old one. It is an example of what the Romans called ‘novatio’.[63] The first step taken towards the assignment of an obligation was taken by allowing a stranger to it to bring an action upon it in the name of the party entitled under it, and to retain the proceeds for himself. This was the process known in Roman law as ‘cessio actionum’. The assignor was held to be a trustee for the assignee, or to have constituted the assignee his agent for the purpose of bringing actions. The English Court of Chancery, following the later Roman law, went so far as to allow the assignee to sue in his own name, provided that he had given consideration for the assignment,[64] and that the 60 See Donaldson (n 29). The same was accepted to be the case in Cator (n 16), so far as the court there recognised that the assignees in that case had validly required the Croydon Canal Co to fully execute the trust on which they held the funds in question and could bring proceedings in equity against the Croydon Canal Co for its failure to do so in their own names without needing to join the assignor. 61 See G 2.38 in Francis De Zulueta (tr), The Institutes of Gaius: Part I Text with Critical Notes and Translation (Clarendon Press 1946) 75. 62 Holland (n 67) 92 “It will be convenient to call the person entitled ‘the person of inherence’; and the person obliged, ‘the person of incidence’”. 63 See G 2.39 in Zulueta (n 62) 75. 64 But see discussion above in Part 2(b).

398 Contract in Commercial Law debtor had had notice of it,[65] subject however, to all defences which would be good against the assignor…”66

Leaving aside concerns as to maintenance and champerty, perhaps the core reason why the courts of common law could not countenance the “transfer” of a legal chose in action save by way of a novation was because it recognised that such “chose” is a relation between persons. As Professor Ames explained: “A right of action in one person implies a corresponding duty in another to perform an agreement or to make reparation for a tort. That is to say, a chose in action always presupposes a personal relation between two individuals. But a personal relation in the very nature of things cannot be assigned. Even a relation between a person and a physical thing in his possession … cannot be transferred. The thing itself may be transferred, and, by consent of the parties to such transfer, the relation between the transferor and the thing may be destroyed and replaced by a new but similar relation between the transferee and the res. But where one has a mere right against another, there is nothing that is capable of transfer. The duty of B to A, whether arising ex contractu or ex delicto, may, of course, be extinguished and replaced by a new and coextensive duty of B to C. But this substitution of duties can be accomplished only in two ways: either by the consent of B, or, without his consent, by an act of sovereignty … When the substitution of duties is by consent, the consent may be given either after the duty arises or contemporaneously with its creation. In the former case the substitution is known as a novation, unless the duty relates to land in the possession of a tenant, in which case it is called an attornment. A consent contemporaneous with the creation of the duty is given whenever an obligation is by its terms made to run in favour of the obligee and his assigns, as in the case of annuities, covenants, and warranties before mentioned, or to order or bearer, as in the case of bills and notes and other negotiable securities. Here, too, on the occasion of each successive transfer, there is a novation by virtue of the obligor’s consent given in advance; the duty to the transferor is extinguished and a new duty is created in favour of the transferee. … [But the field for the substitution of duties by consent was therefore extremely limited, and in the great majority of cases a creditor would have found it impossible to give another the benefit of his claim had not the ingenuity of our ancestors devised another expedient, namely, the letter of attorney. By such a letter, the owner of a claim appointed the intended 65 Receipt of notice of assignment by the obligor to the chose in action assigned is not essential for the assignment to be valid as between assignor and assignee. However, receipt of notice by the obligor to the chose generally leads to such obligor being fixed with knowledge (actual and/or constructive) as would render the obligor to become additionally duty-bound in equity to the assignee not to act in such a way as would dishonestly assist the assignor in committing a breach of her equitable duties to the assignee arising from such assignment. The significance of notice, therefore, insofar as it leads to, say, a debtor paying his creditor “at his peril” (to borrow a phrase used in Walter & Sullivan Ld v J Murphy & Sons Ld [1955] 2 QB 584 (CA) 588), is that it leads to a form of liability in equity for having committed an equitable wrong. The point was made by Harlan F Stone, “The Nature of the Rights of the Cestui Que Trust” (1917) 17 Col LR 467, 485; and has also been noted in passing elsewhere, see CH Tham, “Notice of Assignment and Discharge by Performance” [2010] LMCLQ 38, 52, fn 79. 66 Thomas Erskine Holland, The Elements of Jurisprudence (13th ed, Clarendon Press 1924) 314–15 (emphasis added).



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 399 transferee as his attorney, with power to enforce the claim in the appointor’s name, but to retain whatever he might recover for his own benefit. In this way the practical advantage of a transfer was secured without any sacrifice of the principle of the inalienability of choses in action.”67

Consequently, Professor Ames concluded that: “[T]he so called assignment of a chose in action is, in reality, a power of attorney for the attorney’s own benefit, ie the procuratio in rem suam of the Roman law.”68

What Professor Ames’ account leaves aside, however, is that equitable choses in action are just as much personal relations as legal choses in action. As a result, the relation between the equitable obligor and his obligee cannot be “transferred” to another without the obligor’s assent. But such assent may be given at the time of the proposed “transfer”, or “in advance”, at the time when the obligation was originally undertaken, as explained above in Part 2(a) in connection with the obligations of a trustee to a bare or special trust. How, then, do we account for equity’s seeming readiness to give effect to assignments of equitable choses so much so that the assignee of an equitable chose may deal directly with the equitable obligor without any need for the assignor’s further co-operation? The reason may be that equity came to regard all assignments as necessarily entailing the kind of grant of authority one would associate with grants of powers of attorney to effect an “assignment” of the benefit of a legal chose in action at law. It co-opted “agency” reasoning to form part of the institutional conception of “equitable assignment”. So far as courts of equity were concerned, an equitable assignee of any chose in action was, by virtue of that assignment, empowered by virtue of the equitable assignment to bring judicial proceedings in respect of the assignor’s entitlements against the obligor to the chose as if he were the assignor. So far as the judicial proceedings in question were equitable – because the subjectmatter of the assignment had been an equitable chose – then nothing further would be required for the assignee to bring such proceedings. But where the judicial proceedings in question were to be legal – because the subject-matter of the assignment had been a legal chose (such as a common law debt) – then equity would give effect to its recognition of the assignee’s entitlement to bring proceedings in right of the assignor by recognising that the assignee would have been empowered by the equitable assignment to require the assignor to effect a power of attorney as would allow the assignee to bring an action at law in respect of the legal chose assigned, and would further support such power by standing ready to grant equitable remedies such as an injunction to compel the assignor to comply with such a request if and when made. 67 JB Ames, Lectures on Legal History and Miscellaneous Legal Essays (HUP 1913) 211–13 (and reproduced in JH Wigmore (ed), Select Essays in Anglo-American Legal History (CUP 1907) vol III, 580); being a revised version of JB Ames, “The Disseisin of Chattels – III. Inalienability of Choses in Action” (1890) 3 Harv LR 337. 68 JB Ames, A Selection of Cases on the Law of Trusts with Notes and Citations (2nd ed, Harv LR Pub 1893) 61, restating a point previously made in JB Ames, “The Disseisin of Chattels – Part III” (n 67) 340–41, fns 1, 2.

400 Contract in Commercial Law

Support for the above proposition may be found in Shadwell VC’s judgment in Hammond v Messenger, a case where a common law debt had been equitably assigned to an assignee: “If this case were stripped of all special circumstances, it would be simply a bill filed by a plaintiff who had obtained from certain persons to whom a debt was due a right to sue in their names for the debt.”69

We may note that the Vice-Chancellor observed that the plaintiff-assignee had obtained from the assignor-creditor a right to sue in their names for their debt. It is difficult to see how such a right could have been a common law right: the assignee was not privy to the debt, nor had he been appointed as the assignor’s agent to bring such proceedings. All that had happened, so far as the pleadings on the bill disclosed, was that there had been an equitable assignment of the debt to the assignee. The plaintiff-assignee’s “right” to sue in the assignor’s names for the debt – which could only be sued for in an action at law in debt – must therefore have been an equitable right; and that such equitable right arose from the equitable assignment of the debt. This would be entirely consistent with the analysis of Blackstone, for example, who tells us that an equitable assignment entails something in the nature of a trust plus a power in the assignee to sue in the name of the assignor.70 But what would it mean for the plaintiff to have obtained an equitable right to sue at common law in the assignor’s names? Since a court of equity has no power to override the jurisdictional rules of a court of common law, all a court of equity may do is to recognise that an assignee of a legal chose in action has an equitable power to require the assignor to execute a power of attorney as would be recognised by a court of common law so as to enable legal proceedings to be brought by the assignee in respect of the legal chose assigned in right of the assignor. And if the assignor failed to comply with such a request or intimated that it would refuse to comply with such a request by the assignee if it were made, then a court of equity would grant a mandatory injunction to compel the assignor to do that which it was obligated to do. And this is precisely the kind of reasoning which was resorted to in Hammond. Inter alia, the plaintiff-assignee in Hammond prayed for an order that, “the Plaintiff may be at liberty to use the name of the Defendants, Wilks & Wooler [the assignors], in an action at law to be brought by him against Messenger [the debtor]”.71 But this was refused by the Vice-Chancellor. On the bill before the court, the Vice-Chancellor concluded that no such order should be granted since it had not been pleaded on the bill that the 69 Hammond v Messenger (1838) 9 Sim 327; 59 ER 383, 385 (emphasis added). 70 WM Blackstone, Blackstone’s Commentaries on the Laws of England (1765-1769) Bk 3, 442: “the form of assigning a chose in action is in the nature of a declaration of trust, and an agreement to permit the assignee to make use of the name of the assignor, in order to recover the possession”. Even earlier, we find much the same point in Thomas Wood, An Institute of the Laws of England: or, the Laws of England in their Natural Order, According to Common Use (8th ed, Henry Lintot 1754) 297: “A Thing in Action, as a Statute, Bond, a Just Debt, is vulgarly said to be assignable over: But then One must Sue for the same in the Name of the Assignor. So that in Reality, it amounts to little more than a Letter of Attorney, to Sue in His Name”. 71 Hammond (n 70) 337; 387.



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 401

assignors had, “at all interfered to prevent, or that they intend[ed] to prevent the Plaintiff from using their names at law”. So there was not even any intimation of an intended breach by the assignors of their equitable obligation as would arise if the plaintiff-assignee were to invoke his power as equitable assignee to require them to execute a suitably worded power of attorney as would then permit him to commence proceedings at law against the debtor. Thus, since none was pleaded, there were no grounds for the court to grant a mandatory injunction to compel them to do their equitable duty as would arise if a power of attorney were to be requested. The Vice-Chancellor could not but uphold the demurrer by the defendants to the claim, and so the plaintiff-assignee’s suit failed. But tellingly, he was at liberty to re-apply – presumably, if the appropriate pleadings could be made. For present purposes, Hammond tells us the following. In order to give effect to the equitable right granted to an assignee of a chose in action to bring proceedings on that chose in the assignor’s name, where the chose assigned was legal (and so proceedings would have to be brought at law), the courts of equity would recognise a power in the assignee to require the assignor to execute a suitable power of attorney to bring such proceedings at law in respect of the legal chose to allow the assignee to bring such proceedings. This step is required because a court of law would not recognise the equitable assignment to have such effect at law.72 And since a legal chose in action could only be brought into possession by bringing an action at law, an indirect means of allowing the assignee to bring such legal chose in action into possession would be necessary. But the source of this entitlement is equitable in origin. It derives from the equitable assignee’s entitlement to sue in right of the assignor by reason of the equitable assignment. Consequently, where the chose assigned is equitable, and not legal, the need to interpolate a power to execute a power of attorney in order to give effect to the equitable assignee’s entitlement to sue in right of the assignor falls away. The cases above show that a court of equity would recognise an equitable assignment as having the effect of causing the assignor to become obligated to her assignee in a manner akin to that arising between a bare trustee and her beneficiary. This is the “trust effect” which underpins equitable assignments of either legal or equitable choses. But an equitable assignment has further effects in equity which enable the assignee to “leap-frog” the assignor so as to invoke the assignor’s entitlements as obligee to the chose assigned as if the assignee 72 Although by the time of Dawson v Great Northern and City Railway Company [1905] 1 KB 260 (CA) 272–73, the Court of Appeal had taken the position that an equitable assignee of a legal chose in action could bring an action in her own name, joining the assignor as co-plaintiff or co-defendant as necessary, “for the conveyance [of the chose by the assignment] confers on the plaintiff an irrevocable power to sue in the name of Blake [the assignor], and any defect in the constitution of this action might be cured by adding him as a co-plaintiff. Further, the power is such as … to entitle the plaintiff [as Blake’s assignee] to give receipts in the name of Blake for anything that may be recovered in the action, and in this way the defendants would be protected against any claim by him thereafter”. This, of course, led the way to the decision of the Privy Council in Vandepitte v Preferred Accident Insurance Corpn of New York [1933] AC 70 (PC, Supreme Court of Canada), which clearly approved this form of procedural shortcut to avoid the necessity of bringing two separate proceedings, one in Equity, and the other, at common law.

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were the assignor and as the assignee pleased. This includes the power to bring judicial proceedings in respect of the chose assigned against the obligor to that chose. Where the subject-matter of the dispute falls entirely within the ambit of equity, as in the case of an equitable assignment of an equitable chose in action, there is no need to initiate separate judicial proceedings in another jurisdiction. Thus, “leap-frogging” cases like Cator tell us that the courts of equity do recognise equitable assignments to have an “agency effect” such that the assignee of an equitable chose in action may invoke the assignor’s powers and other entitlements as obligee to the equitable chose assigned as if he were the assignor. Though the Chancery courts could have adopted the approach applied by the common law by which every conveyance of title to property would entail a simultaneous extinction and re-vesting of entitlements in the disponor and disponee, respectively, the case law reveals it did not do so. Instead, the Chancery courts may be seen to have adopted a dual-pronged approach by considering every equitable assignment to take effect as if a bare trust had been constituted over the benefits of the chose in action assigned, whilst simultaneously regarding the assignee as having been empowered to invoke the powers of the assignor in a manner akin to the assignee’s having been appointed as the assignor’s agent, but freed from the usual constraints imposed on agents to act for the benefit of their principals. It is possible, therefore, to explain how equitable assignments operate by recognising that there are two mechanisms which underpin the operation of equitable assignment, not just one.

4. Conclusion The tentative suggestion in this chapter has been that to understand how equitable assignments of choses in action work, we do not have to accept that such assignments work by way of a trust only insofar as the chose assigned is legal, leaving it a mystery as to how such assignments operate when the chose assigned is equitable. Rather, it is proposed that an equitable assignment operates by means of two mechanisms: trust and agency. This is not to say that the type of agency relationship created between assignor and assignee is a typical one; but then, agency is a flexible doctrine – or at least, it is a flexible mode of thought. In this context it is, indeed, atypical, in that the assignor-principal releases the assignee-agent from the typical fiduciary obligations owed by an agent to his principal such that the agent is free to invoke his principal’s entitlements in relation to the chose in question as if he were the principal and as the agent pleased. But it is through this combination of trust and agency that we effect the “transfer” of the chose in action that has been assigned, whilst still recognising and honouring the fundamental principle that obligations, once undertaken, ought not to be susceptible to unilateral variation by the obligee without the obligor’s consent. As Professor Powell pithily observed, an authority coupled with an interest is really a transfer of property73 – and so, the competing conceptions of 73 Raphael Powell, The Law of Agency (2nd ed, Pitman 1961) 388, fn 5.



Ch 17  The Mechanics of Equitable Assignments: One Engine or Two? 403

equitable assignment, one as a “transfer”, and the other as “trust”, may not be so far apart after all. If we recognise that equity simulates a “transfer” by coupling a trust with a grant of a special form of authority in the assignee, and that such equitable transfer by way of equitable assignment entails no extinction and re-grant (as occurs with a transfer or conveyance of legal title in realty or tangible personalty), it becomes less difficult to speak of equitable assignments as “transfers”. And that, perhaps, is how equitable assignments work.

18

Excluding Exclusion Clauses: Judicial and Statutory Techniques, Freedom of Contract and Public Policy Andrew Bell

Introduction Questions concerning the efficacy of contractual exclusion clauses lie at the heart of much litigation, including much commercial litigation. This, moreover, is scarcely a recent phenomenon and large topics in the field of contract law such as the formation of contracts, the incorporation of terms and the contra proferentem doctrine have been worked out (and continue to be worked out)1 in the specific context of considering the application in any given case of an exclusion or limitation of liability clause or clauses which directly or indirectly may have that effect, such as “no reliance” and “entire agreement” clauses.2 This latter category of clause may have the effect of precluding liability for precontractual representations, for example, by “negat[ing] one or more elements of a claim” and thus “prevent[ing] the liability from arising in the first place”.3 In common law jurisdictions, there are some surprising (and not always subtle) differences in judicial approach to the interpretation of exclusion and limitation clauses, and those approaches have varied greatly over time.4 1

2

3 4

See eg Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165; Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219; (2015) 324 ALR 355, being cases where the anterior determination of what documents comprised the contract was a critical first step in considering whether an exclusion clause was even engaged. In respect of entire agreement clauses operating with exclusionary effect, see E Macdonald, “Unfair Contract Terms Act – Thirty Years On” in A Burrows and E Peel (eds), Contract Terms (OUP 2007); J Cartwright, “Excluding Liability for Misrepresentation” in Burrows and Peel, Contract Terms; A Trukhtanov, “Exclusion of Liability for Pre-contractual Misrepresentation: A Setback” (2011) 127 LQR 345. See also on such clauses more generally D McLauchlan, “The Entire Agreement Clause: Conclusive or a Question of Weight?” (2012) 128 LQR 521. Cartwright (n 2) 213. For a more general comparative law account of civil and common law approaches to contract interpretation, see S Vogenauer, “Interpretation of Contracts: Concluding Comparative Observations” in Burrows and Peel, Contract Terms (n 2).

405

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It famously took the House of Lords at least two attempts over more than a decade to quash Lord Denning’s doctrine of fundamental breach5 and, even then, as shall be seen, occasional signs of its revival have been identified from time to time. Even when and where principles have been clearly stated and doctrinal controversies apparently settled, one not infrequently encounters a measure of lip service being paid as judges grapple with the often perceived injustice that may flow from the enforcement of an exclusion or limitation clause in accordance with its terms. The bolder the drafting of such clauses in terms of what is excluded, whether expressly or indirectly, the more creative common law judges invariably become in the interpretation afforded to the exclusion or limitation clause in question. Examples of such ingenuity, outside of the reach of statutory regimes introduced to mollify the harshness of the rigid application of contractual exclusions such as the Unfair Contract Terms Act 1977 (UK) and Contracts Review Act 1980 (NSW), are also given later in this chapter. There is, of course, an obvious danger in judges making assessments as to whether or not a particular exclusion or limitation clause is fair or whether its invocation would be in some way “unjust” because the court will not always be equipped with all of the material facts including the extent to which the allocation of risk implicit in an exclusion or limitation clause has been reflected in the contract price. Differences in approach may also be discerned in the statutory responses of leading common law jurisdictions to such clauses. In some, the focus is on particular classes or categories of contract; in others, more general statutory norms are engaged. In some jurisdictions, of which the United Kingdom is perhaps the clearest example, law reform was led by the judiciary, and Lord Denning, in particular, rather than the legislature. It was surely no coincidence that the revolutionary Unfair Contract Terms Act 1977 (UK) was enacted only three years before the House of Lords’ decision in Photo Production Ltd v Securicor Transport Ltd,6 which saw the controversial doctrine of fundamental breach given its ultimate judicial quietus. The Australian Trade Practices Act 1974 (Cth), whose reach, in most respects and in its misleading or deceptive conduct provisions, in particular, was not confined to consumer or any other class of relational contracts, had been passed only six years earlier.7 A consequence of statutory control of exclusion clauses is that, within their sphere of operation, such statutes with criteria such as “reasonableness” and “unfairness” inevitably operate to undermine the certainty that exclusion and limitation clauses are plainly intended to confer. The content of such criteria is sometimes itself made the subject of statutory guidance but this is inevitably open-ended and non-exhaustive. One of the purposes of this chapter is to highlight the differences that exist across various common law jurisdictions in common law and statutory approaches to exclusion and limitation clauses. This is not purely an exercise 5 6 7

Suisse-Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 (HL); Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL). Photo Production (n 5). Compare the Contracts Review Act 1980 (NSW).



Ch 18  Excluding Exclusion Clauses 407

in comparative law, however, for, in an ever more integrated global economy in which transnational contracts are increasingly common, these differences may assume great strategic significance in any given case. This is because the efficacy of an exclusion or limitation clause may depend on the governing law of the contract (and the approach that that particular law takes to the interpretation of exclusion clauses). It may also depend on the jurisdiction in which a dispute is being litigated, whose mandatory law or public policy may override or qualify an otherwise valid or effective contractual exclusion or limitation. In proceedings commenced in Australia following the explosion of an engine on an A380 aircraft off Singapore, the invocation of the Australian Trade Practices Act 1974 (Cth) by Qantas, coupled with an anti-anti suit injunction in anticipation of Rolls Royce relying on a well-drawn limitation of liability clause in a contract with an English law and English exclusive jurisdiction clause, is a dramatic illustration of this phenomenon.8 In that case, which ultimately settled, the contractual certainty apparently afforded to Rolls Royce by a clause limiting its liability for defective manufacture was imperilled by the fact that alleged precontractual misleading or deceptive conduct in Australia attracted the potential operation of the Trade Practices Act 1974 (Cth), remedies under which included the setting aside or varying of contractual provisions including the limitation of liability clause itself. The jurisdictional “twist” in this case lay in the fact that the Trade Practices Act 1974 (Cth) would almost certainly not have been applied had the proceedings been heard in England where the contractual limitation of liability would have been given effect according to its terms.

Freedom of Contract and Economic History Fully understanding the doctrinal development of principles concerning the construction and treatment of exclusion clauses requires an appreciation of the social and economic history of the late 19th century and the emergence of both the welfare state and post-war mass consumerism in the 20th century. But in the great sweep of history, it may also be observed that the traditionally weak perceived position of the consumer and his or her lack of bargaining power has changed again significantly in the last two to three decades with the rise of the internet and social media providing powerful consumer platforms, as well as the advent in many jurisdictions of class actions9 coupled with the growth of consumer protection legislation. Some 140 years ago, in Printing and Numerical Registering Co v Sampson, a case concerning a contract to sell a yet-to-be-acquired patent, Sir George Jessel MR described freedom of contract as “the paramount public policy” and rejected any broad usage of public policy as a means of defeating the enforcement of contracts: “[I]f there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and 8 9

Qantas Airways Ltd v Rolls-Royce plc [2010] FCA 1481. For the position in Australia, see M Legg and R McInnes, Annotated Class Actions Litigation (LexisNexis 2014).

408 Contract in Commercial Law voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider – that you are not lightly to interfere with this freedom of contract. Now, there is no doubt public policy may say that a contract to commit a crime, or a contract to give a reward to another to commit a crime, is necessarily void. The decisions have gone further, and contracts to commit an immoral offence, or to give money or reward to another to commit an immoral offence, or to induce another to do something against the general rules of morality, though far more indefinite than the previous class, have always been held to be void. I should be sorry to extend the doctrine much further. I do not say there are no other cases to which it does apply; but I should be sorry to extend it much further.”10

Seven years later, in Wallis v Smith, the same Master of the Rolls said that: “I have always thought, and still think, that it is of the utmost importance as regards contracts between adults – persons not under disability, and at arm’s length – that the Courts of Law should maintain the performance of the contracts according to the intention of the parties; that they should not overrule any clearly expressed intention on the ground that Judges know the business of the people better than the people know it themselves. I am perfectly well aware that there are exceptions, but they are exceptions of a legislative character.”11

One legislative intervention that emerged in the decades following Wallis was the enactment of the Carriage of Goods by Sea Act 1924 (UK) which gave effect to the Hague Rules, described by Lord Steyn as “intended to reign in the unbridled freedom of contract of owners to impose terms which were ‘so unreasonable and unjust in their terms so as to exempt from almost every conceivable risk and responsibility’”.12 This legislation was vigorously and, in Lord Roskill’s words, almost hysterically opposed by Lord Justice Scrutton who regarded it as an unwarranted and dangerous assault on the freedom of contract of British ship-owners.13 It was, of course, Scrutton LJ who, in the last year of his life, famously authored the leading and much-debated judgment in L’Estrange v F Graucob Ltd,14 where an exclusion in small print of, inter alia, all implied warranties (including relevantly, a warranty that the machinery purchased was fit for purpose) was upheld by the Court of Appeal. Scrutton LJ said that “when a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he had read the document or not”.15 This judgment was strongly endorsed 70 years later by the High Court of Australia in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,16 an important decision on exclusion clauses, and which is discussed more fully later in this chapter. 10 11 12 13

Printing and Numerical Registering Co v Sampson (1874–75) LR 19 Eq 462 (Ch) 465. Wallis v Smith (1882) 21 Ch D 243 (CA) 266. Effort Shipping Co Ltd v Linden Management SA (The Giannis NK) [1998] AC 605 (HL) 621. Lord Roskill, “Legislative History of the Carriage of Goods by Sea Act and the Travaux Préparatoires of the Hague Rules” (1992) 108 LQR 501, 501–02. 14 L’Estrange v F Graucob Ltd [1934] 2 KB 394 (KB). 15 L’Estrange (n 14) 403. 16 Toll (n 1).



Ch 18  Excluding Exclusion Clauses 409

The corollary of freedom of contract and party autonomy in its purest form was judicial indifference to exploitation of superior bargaining power so long as that exploitation did not meet the stringent tests of fraud, duress or undue influence.17 It has been noted that “opportunities for strong parties to impose harsh and oppressive terms upon weak and unsuspecting parties multiplied as the standard form contract became the principal vehicle to facilitate the distribution of goods and services”18 and one can readily detect in a 20th century survey of common law jurisprudence in relation to exclusion clauses an increasing and almost intuitive judicial antipathy to clauses which excluded or limited liability for what, ex hypothesi, will have been breaches of contract or negligent acts leading to damages for which the affected party will not have been responsible. Contracts of adhesion, as that pejorative term connoted, formed a sharp focus for reconsideration of the paramountcy of freedom of contract as a value. Professor Kessler’s famous article – “Contracts of Adhesion – Some Thoughts about Freedom of Contract”19 – was significant in this regard. Solicitude for those perceived to be vulnerable and unable in substance to negotiate in the face of “take it or leave it” standard terms began to be reflected in many jurisdictions with legislative activity. In certain jurisdictions, of which England was perhaps most prominent, that ground-breaking legislative activity was preceded by strong judicial activism. Common law courts gave effect to their antipathy to exclusion and limitation clauses through a variety of techniques of construction which, from time to time, have strained the apparently clear language in which contracts have been drafted; other techniques involved development of doctrines such as fundamental breach which were sought to be elevated to the status of a “rule of law”. Resort was also had to public policy so as to limit the enforcement of exclusion clauses, although this was not always explicit. On occasion, this was done through examining the reasonableness of the exclusion (and not enforcing unreasonable or “unconscionable” clauses); or identifying types of conduct said to be per se incapable of exclusion such as gross negligence, deliberate misconduct and actions undertaken in bad faith. In an interesting historical footnote to L’Estrange, the successful counsel in that case, a 35-year-old AT Denning, was later to become the progenitor of the doctrine of fundamental breach by reference to which an exclusion clause was to be treated as incapable of excluding liability for fundamental breach of contract. Some 48 years after L’Estrange, Lord Denning signed off on his own judicial career in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd,20 in which he memorably described the common law’s engagement with exclusion clauses 17 See also a similar phenomenon in relation to the doctrine of penalties as noted in Austin v United Dominions Corporation Ltd [1984] 2 NSWLR 612, 626, cited by the High Court of Australia in Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30; (2012) 247 CLR 205 [14]. 18 C Edwards, “Freedom of Contract and Fundamental Fairness for Individual Parties: The Tug of War Continues” (2009) 77 UMKC LR 647, 664. 19 F Kessler, “Contracts of Adhesion – Some Thoughts about Freedom of Contract” (1943) 43 Col LR 629. 20 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284 (CA).

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over the course of much of the 20th century. Under the heading “The heyday of freedom of contract”, and in his own inimitable style, his Lordship wrote: “None of you nowadays will remember the trouble we had – when I was called to the Bar – with exemption clauses. They were printed in small print on the back of tickets and order forms and invoices. They were contained in catalogues or timetables. They were held to be binding on any person who took them without objection. No one ever did object. He never read them or knew what was in them. No matter how unreasonable they were, he was bound. All this was done in the name of ‘freedom of contract’. But the freedom was all on the side of the big concern which had the use of the printing press. No freedom for the little man who took the ticket or order form or invoice. The big concern said, ‘Take it or leave it’. The little man had no option but to take it. The big concern could and did exempt itself from liability in its own interest without regard to the little man. It got away with it time after time. When the courts said to the big concern, ‘You must put it in clear words’, the big concern had no hesitation in doing so. It knew well that the little man would never read the exemption clauses or understand them. It was a bleak winter for our law of contract. It is illustrated by two cases, Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41 (in which there was exemption from liability, not on the ticket, but only in small print at the back of the timetable, and the company were held not liable) and L’Estrange v F Graucob Ltd [1934] 2 KB 394 (in which there was complete exemption in small print at the bottom of the order form, and the company were held not liable).”21

Lord Denning continued, this time under the sub-heading “The secret weapon”: “Faced with this abuse of power – by the strong against the weak – by the use of the small print of the conditions – the judges did what they could to put a curb upon it. They still had before them the idol, ‘freedom of contract’. They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called ‘the true construction of the contract’. They used it with great skill and ingenuity. They used it so as to depart from the natural meaning of the words of the exemption clause and to put upon them a strained and unnatural construction. In case after case, they said that the words were not strong enough to give the big concern exemption from liability; or that in the circumstances the big concern was not entitled to rely on the exemption clause. If a ship deviated from the contractual voyage, the owner could not rely on the exemption clause. If a warehouseman stored the goods in the wrong warehouse, he could not pray in aid the limitation clause. If the seller supplied goods different in kind from those contracted for, he could not rely on any exemption from liability. If a shipowner delivered goods to a person without production of the bill of lading, he could not escape responsibility by reference to an exemption clause. In short, whenever the wide words – in their natural meaning – would give rise to an unreasonable result, the judges either rejected them as repugnant to the main purpose of the contract, or else cut them down to size in order to produce a reasonable result. This is illustrated by these cases in the House of Lords: Glynn v Margetson & Co [1893] AC 351; London and North Western Railway Co v Neilson [1922] 2 AC 263; Cunard Steamship Co Ltd 21 George Mitchell (n 20) 296–97.



Ch 18  Excluding Exclusion Clauses 411 v Buerger [1927] AC 1; and by Canada Steamship Lines Ltd v The King [1952] AC 192 and Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 in the Privy Council; and innumerable cases in the Court of Appeal, culminating in Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69. But when the clause was itself reasonable and gave rise to a reasonable result, the judges upheld it; at any rate, when the clause did not exclude liability entirely but only limited it to a reasonable amount. So where goods were deposited in a cloakroom or sent to a laundry for cleaning, it was quite reasonable for the company to limit their liability to a reasonable amount, having regard to the small charge made for the service. These are illustrated by Gibaud v Great Eastern Railway Co [1921] 2 KB 426; Alderslade v Hendon Laundry Ltd [1945] KB 189 and Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400.”22

The growing judicial antipathy to exclusion clauses in the 20th century coincided unmistakably with the post-war advent of consumerism in the developed world and judicial law reform, masked by the employment, but in truth the manipulation, of well-established judicial techniques, presaged more widespread legislative intervention in the last quarter of the 20th century. When George Mitchell reached the House of Lords, Lord Diplock observed: “[T]he passing of … the Unfair Contract Terms Act 1977 had removed from judges the temptation to resort to the device of ascribing to words appearing in exemption clauses a tortured meaning so as to avoid giving effect to an exclusion or limitation of liability when the judge thought that in the circumstances to do so would be unfair.”23

That legislation still left for the courts in England, however, the need to grapple with broadly-drawn exclusion clauses in settings not captured by the Unfair Contract Terms Act 1977 (UK) or Misrepresentation Act 1967 (UK). Thus, while Photo Production rejected the doctrine of fundamental breach, the House of Lords still reserved the right not to give effect to an exclusion clause where its effect would be to deprive the agreement of the legal characteristics of a contract, by conferring on one party the liberty to ignore his obligations with impunity. In these circumstances, the House held that the exclusion may be held to be repugnant to the contract and of no effect. As shall be seen, it was the absence of similar legislation in Canada to the Unfair Contract Terms Act 1977 (UK) (and Contracts Review Act 1980 (NSW) and Trade Practices Act 1974 (Cth), in Australia) that saw the Supreme Court of Canada continue to flirt with the doctrine of fundamental breach and to reserve for the courts a power not to enforce exclusion clauses in circumstances where that was not fair and reasonable, or was unconscionable (in the Canadian sense of that term). A valuable historical perspective on the relationship between the emergent judicial and legislative regulation of exclusion of liability and the economic history of the late 19th and 20th centuries in the United States is provided by Professor Edwards in her article “Freedom of Contract and Fundamental Fairness for Individual Parties: The Tug of War Continues”.24 It is interesting 22 George Mitchell (n 20) 297–98. 23 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 (HL) 810. 24 Edwards (n 18).

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to observe that the judicial activism of Lord Denning in England in the 1950s and 60s was paralleled in the United States by the adoption of the Uniform Commercial Code (UCC) throughout various States in the United States in those same decades.25 Key elements of the UCC related to the doctrine of good faith26 and the doctrine of unconscionability as a basis for refusing the enforcement or the wholesale enforcement of a contract.27 The open-textured nature of the twin notions of good faith and unconscionability under the UCC lent itself to incremental development by the courts and permitted “different visions of the contract relationship and of the role of courts in contract affairs” to develop in the United States.28 In New York, as Kalisch-Jarcho Inc v City of New York29 illustrates, explicit considerations of public policy have driven the jurisprudence.30 The position was summarised by the New York Court of Appeals as follows: “But an exculpatory agreement, no matter how flat and unqualified its terms, will not exonerate a party from liability under all circumstances. Under announced public policy, it will not apply to exemption of willful or grossly negligent acts (cf, eg, Gross v Sweet, 49 NY 2d 102, 106, with Ciofalo v Vic Tanney Gyms, 10 NY 2d 294, 297; see, generally, 15 Williston, Contracts [3d Jaeger ed], § 1750A; 5 Corbin, Contracts, § 1068; Restatement, Contracts 2d, § 195). More pointedly, an exculpatory clause is unenforceable when, in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing. This can be explicit, as when it is fraudulent, malicious or prompted by the sinister intention of one acting in bad faith. Or, when, as in gross negligence, it betokens a reckless indifference to the rights of others, it may be implicit (Matter of Karp v Hults, 12 AD 2d 718, affd 9 NY 2d 857). In either event, the policy which condemns such conduct is so firm that even when, in the context of the circumstances surrounding the framing of a particular exculpatory clause, it is determined, as it was by one of the interrogatories here, that the conduct sought to be exculpated was within the contemplation of the parties, it will be unenforceable (see Peckham Rd Co v State of New York, 32 AD 2d 139, 141-42, affd 28 NY 2d 734; Johnson v City of New York, 191 App Div 205, affd 231 NY 564).”31

Somewhat surprisingly, New York law appears to uphold arguments based upon certain forms of exclusion clause including “no reliance clauses” as answers to claims of fraud, an approach that would not be accepted in either England or Australia. Thus, in Citibank NA v Allan R Plapinger,32 the New York Court 25 26 27 28 29 30

Edwards (n 18) 649. UCC s 1-203 and UCC s 1-304 (revised). UCC s 2-302 and see Edwards (n 18). Edwards (n 18) 653. Kalisch-Jarcho, Inc v City of New York, 58 NY 2d 377, 384–85; 448 NE 2d 413, 416–17 (1983). See also Corinno Civetta Construction Corp v City of New York, 67 NY 2d 297, 309, 493 NE 2d 905, 909–10 (Court of Appeals of New York 1986); AHA General Construction Inc v New York City Housing Authority, 92 NY 2d 20, 15; 699 NE 2d 368, 374 (1998). 31 Kalisch-Jarcho (n 29) 384–85 (footnotes omitted). See also Banc of America Securities LLC v Solow Building Co II LLC, 847 NYS 2d 49, 53; 47 AD 3d 239, 244 (SC New York 2007). 32 Citibank NA v Allan R Plapinger, 66 NY 2d 90; 485 NE 2d 974 (1985).



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of Appeals held that, although there was sufficient evidence to raise a triable issue of fraudulent inducement into a guarantee, a disclaimer in the guarantee was sufficiently specific to bar consideration of that defence to a call on the guarantee. The court said: “[T]he rule that fraud in the inducement vitiates a contract [was] subject to exception where the person claiming to have been defrauded has by his own specific disclaimer of reliance upon oral representations himself been ‘guilty of deliberately misrepresenting [his] true intention’ …”33

The court was plainly influenced by the fact that, in the instant case, there had been “extended negotiations between sophisticated business people” and that what had “been hammered out is a multimillion dollar personal guarantee proclaimed by defendants to be ‘absolute and unconditional’”.34 Explicit recognition and invocation of public policy avoids the truth, described by Karl Llewellyn in this very context, that “Covert tools are never reliable tools”.35 So, too, the rejection of the doctrine of fundamental breach in the United Kingdom recognised that, although motivated by a concern to avoid perceived unjust outcomes, the approach was overbroad and capable of judicial manipulation in the characterisation of the breach which in turn did nothing to engender respect for the rule of law and for the courts. Similar observations may be made in relation to strained interpretations of language or over-eager deployment of the contra proferentem approach to contractual interpretation in the context of reading down exclusion clauses. Having noted, in the course of the above discussion, the approaches to exclusion clauses historically taken in England as well as the explicitly public policy approach taken in New York, it is a valuable exercise to consider some further jurisdictions.

Other Common Law Jurisdictions Canada The approach of Canadian courts to the treatment of exclusion clauses may be seen through a trilogy of Supreme Court decisions: Hunter Engineering Company Inc v Syncrude Canada Limited36 (“Hunter Engineering”); Guarantee Co of North America v Gordon Capital Corp;37 and Tercon Contractors Limited v British Columbia (Transportation and Highways)38 (“Tercon”). In Hunter Engineering, the exclusion/limitation clause provided that: “Notwithstanding any other provision of this contract or any applicable statutory provisions neither the Seller nor the Buyer shall be liable to the other 33 Citibank NA (n 32) 94; 976. 34 Citibank NA (n 32) 95; 977. 35 KN Llewellyn, “The Standardization of Commercial Contracts in English and Continental Law” (1938–1939) 52 Harv LR 700, 703. 36 Hunter Engineering Company Inc v Syncrude Canada Limited [1989] 1 SCR 426 (SC Canada). 37 Guarantee Co of North America v Gordon Capital Corp [1999] 3 SCR 423 (SC Canada). 38 Tercon Contractors Limited v British Columbia (Transportation and Highways) 2010 SCC 4; [2010] 1 SCR 69 (SC Canada).

414 Contract in Commercial Law for specific or consequential damages or damages for loss of use arising directly or indirectly from any breach of this contract, fundamental or otherwise or from any tortious acts or omissions of their respective employees or agents and in no event shall the liability of the Seller exceed the unit price of the defective product or of the products subject to late delivery.”39

Dickson CJ, with whom La Forest J agreed, observed that: “In the face of the contractual provisions, Allis-Chalmers can only be found liable under the doctrine of fundamental breach”.40 Dickson CJ expressed an “inclination” to follow Photo Production and to treat fundamental breach as a matter of contract construction. He said that: “In my view, the courts should not disturb the bargain the parties have struck, and I am inclined to replace the doctrine of fundamental breach with a rule that holds the parties to the terms of their agreement, provided the agreement is not unconscionable.”41

Dickson CJ observed that not all exclusion clauses are unreasonable and that that fact was ignored by the “rule of law approach” to fundamental breach.42 The parties bargain for the consequence of deficient performance, his Lordship said, and “[i]n the usual situation, exclusion clauses will be reflected in the contract price”.43 After stating that he was “much inclined to lay the doctrine of fundamental breach to rest and, where necessary and appropriate, to deal explicitly with unconscionability”,44 he went on to say that, in his view: “[T]here is much to be gained by addressing directly the protection of the weak from over-reaching by the strong, rather than relying on the artificial legal doctrine of ‘fundamental breach’. There is little value in cloaking the inquiry behind a construct that takes on its own idiosyncratic traits, sometimes at odds with concerns of fairness. This is precisely what has happened with the doctrine of fundamental breach … Only where the contract is unconscionable, as might arise from situations of unequal bargaining power between the parties, should the courts interfere with agreements the parties have freely concluded … Explicitly addressing concerns of unconscionability and inequality of bargaining power allows the courts to focus expressly on the real grounds for refusing to give force to a contractual term said to have been agreed to by the parties.”45

Dickson CJ and La Forest J expressly disagreed with the different approach advocated by Wilson J, with whom L’Heureux-Dubé J agreed. Wilson J eschewed an approach that assessed whether the exclusion clause in question was unfair or unreasonable per se. Rather, she advanced the view that, even if the exclusion clause in question was clear and unambiguous, it was for the courts to determine whether, in the context of the particular breach that occurred, it was fair and reasonable to enforce the clause in favour of the party that had 39 40 41 42 43 44 45

Hunter Engineering (n 36) 450. Hunter Engineering (n 36) 451. Hunter Engineering (n 36) 455–56. Hunter Engineering (n 36) 461. Hunter Engineering (n 36) 461. Hunter Engineering (n 36) 462. Hunter Engineering (n 36) 462.



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committed the breach. Moreover, she advocated an approach which reserved to the court a residual power to withhold its assistance on policy grounds in appropriate circumstances.46 Although the precise purport of the judgment is, with respect, somewhat elusive, it appears that those circumstances would be present where a court considers it would be “unfair or unreasonable” to give effect to the exclusion clause. Earlier, she had stated that, in the absence of legislation such as the Unfair Contract Terms Act 1977 (UK): “Canadian courts must continue to develop through the common law a balance between the obvious desirability of allowing the parties to make their own bargains and have them enforced through the courts and the obvious undesirability of having the courts used to enforce bargains in favour of parties who are totally repudiating such bargains themselves.”47

In Guarantee Co North America v Gordon Capital Corp,48 the Supreme Court of Canada, according to Binnie J’s later judgment in Tercon, “breathed some life into the dying doctrine of fundamental breach”.49 In that decision, the court had stated: “The only limitation placed upon enforcing the contract as written in the event of a fundamental breach would be to refuse to enforce an exclusion of liability in circumstances where to do so would be unconscionable, according to Dickson CJ, or unfair, unreasonable or otherwise contrary to public policy, according to Wilson J.”50

Binnie J noted in Tercon that the more general ideas of “unfair and unreason­ able” seemingly conferred on the courts a very broad “after-the-fact discretion”.51 Some convergence of approach was secured in Tercon (although the court split on the question whether the exclusion clause was engaged on its proper construction). The court, through the decision of Binnie J, articulated a three stage approach to be followed when a plaintiff seeks to escape the effect of an exclusion clause. His Lordship stated the test as follows: “The first issue, of course, is whether as a matter of interpretation the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract. If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, “as might arise from situations of unequal bargaining power between the parties” (Hunter at 462). This second issue has to do with contract formation, not breach. If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an 46 47 48 49 50 51

Hunter Engineering (n 36) 517. Hunter Engineering (n 36) 510. Guarantee Co (n 37). Tercon (n 39) [113]. Guarantee Co (n 37) 448. Tercon (n 38) [113].

416 Contract in Commercial Law overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.”52

Australia After the House of Lords’ final rejection of Lord Denning’s fundamental breach doctrine in Photo Production, which had never established a foothold in Australia, the only clearly discernible difference in approach between the English and Australian courts in this area was in relation to clauses that limited but did not exclude a contracting party’s liability. In Darlington Futures Ltd v Delco Australia Pty Ltd,53 a unanimous High Court of Australia stated that: “[T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity. Notwithstanding the comments of Lord Fraser in Ailsa Craig, the same principle applies to the construction of limitation clauses.”54

The court saw considerable force in the point made by the Chief Justice of South Australia in the court below, namely that a limitation clause may be so severe in its operation as to make its effect virtually indistinguishable from that of an exclusion clause. This lack of distinction in approach between exclusion and limitation clauses remains the orthodoxy in Australia, although, in the context of attempts to escape limitation of liability clauses by reference to the misleading or deceptive conduct provisions of the Trade Practices Act 1974 (Cth) and its successor, the Australian Consumer Law, some judges of the Supreme Court of New South Wales have suggested that a distinction can and should be drawn between exclusion and limitation clauses. It is a well-established principle of Australian law that a party is not permitted to “contract out” of the Trade Practices Act 1974 (Cth) and its analogues, whether directly in the form of an exclusion clause, or indirectly in the form of “entire agreement” and “no reliance on previous representation” clauses: see Henjo Investments v Collins Marrickville where Lockhart J stated: “Otherwise the operation of the Act, a public policy statute, could be ousted by private agreement. Parliament passed the Act to stamp out unfair or improper conduct in trade or in commerce; it would be contrary to public policy for special conditions such as those with which this contract was concerned to deny or prohibit a statutory remedy for offending conduct under the Act.”55

52 Tercon (n 38) [122]–[123]. 53 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500. 54 Darlington (n 53) 510 (footnote omitted). Precisely how the High Court of Australia defines and identifies ambiguity in the context of contractual construction, and the relevance of surrounding circumstances (if any) to that process remains unclear (and unsatisfactory): see, most recently, Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37; (2015) 325 ALR 188 [109]–[113], [120]. 55 Henjo Investments v Collins Marrickville (1988) 39 FCR 546, 561.



Ch 18  Excluding Exclusion Clauses 417

In Firstmac Fiduciary Services Pty Ltd v HSBC Bank of Australia Ltd, Sackar J observed that “a distinction clearly needs to be drawn between a contractual term purporting for example to bar a statutory remedy altogether and one that purports to impose a monetary or temporal limit on the extent of the remedy”.56 The case in point concerned a clause that purported to restrict the time period within which a statutory claim could be brought; it did not seek to place any monetary limit of recovery for the statutory tort, and thus the observation insofar as it applied to monetary limits was obiter dictum. It is doubtful whether, at least as concerns monetary limits, a contractual limitation in respect of statutory liability would be held to be effective in the face of a finding of misleading or deceptive conduct. One interesting and often passed-over aspect of the court’s judgment in Darlington is the statement that: “[T]he principle, in the form in which we have expressed it, [viz that ‘the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract …’] does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises.”57

On one view of the matter, the court seemed to be at least reserving the possibility in this passage that a different approach may be available in noncommercial contracts and that, in that different context, considerations of reasonableness or fairness may govern or at least inform the judicial approach to both exclusion and limitation clauses. That possible judicial “hint” has never, to my knowledge, been taken up again by the court58 and the broad openended type of inquiry contemplated by various judges in the Supreme Court of Canada in Hunter Engineering, for example, decided three years after the decision in Darlington, has not found traction in Australia. This is probably because, in the area of consumer contracts, the Contracts Review Act 1980 (NSW) and the Trade Practices Act 1974 (Cth) and its analogues and successors have supplied a statutory basis for the exclusion or modification of exclusion and limitation clauses. Another difference in approach between the Australian and Canadian courts can be illustrated by the decision of the High Court of Australia in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.59 That case involved a question of the efficacy 56 Firstmac Fiduciary Services Pty Ltd v HSBC Bank of Australia Ltd [2012] NSWSC 1122 [38]. See also Owners SP 62930 v Kell & Rigby Pty Ltd [2009] NSWSC 1342; cf Omega Air Inc v CAE Australia Pty Ltd [2015] NSWSC 802 [31]. 57 Darlington (n 53) 510–11 (emphasis added). 58 This may well have been because of the availability of statutory protections in both consumer contracts under the Trade Practices Act 1974 (Cth) and in the context of insurance policies, by reason of the passage of the Insurance Contracts Act 1984 (Cth), only two years prior to the decision in Darlington (n 53). 59 Toll (n 1).

418 Contract in Commercial Law

of an exclusion clause contained on printed terms of a contractual document signed by the party that sought to escape or overcome the effect of the exclusion clause. In that case, Alphapharm argued by reference to the decision of the Ontario Court of Appeal in Tilden Rent-A-Car Co v Clendenning that, even in the case of a signed contract, an exclusion clause would not bind a party if sufficient notice of its terms had not been supplied.60 In rejecting this approach, the High Court applied without reservation the decision of Scrutton LJ in L’Estrange61 and placed paramount emphasis on the significance of signature. It was not to the point, the court held, that the officer signing the document did not realise that there were conditions upon the back of the contractual document, let alone conditions which radically affected the contract in terms of excluding liability of the carrier. The court held that, where a contract had been signed, there was no occasion for transposing the reasoning of the so-called ticket cases to import a requirement that the party relying on the exclusion clause has taken steps or reasonable steps to point it out to the counter-party. Of particular interest in the unanimous joint judgment in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd is the court’s statement that: “In most common law jurisdictions, and throughout Australia, legislation has been enacted in recent years to confer on courts a capacity to ameliorate in individual cases hardship caused by the strict application of legal principle to contractual relations. As a result, there is no reason to depart from principle, and every reason to adhere to it, in cases where such legislation does not apply, or is not invoked.”62

Toll thus reflects in many respects a strong contemporaneous commitment to freedom of contract.63 The key point of contrast, however, between that court’s commitment to freedom of contract and that of Sir George Jessel and Lord Justice Scrutton in the late 19th and early 20th centuries is that it was made at a time and in a context where there is an increasing array of statutory protections available to parties who may be seen to be vulnerable or without equal bargaining power. In this context, the Australian Parliament has very recently passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) which extends the court’s powers to declare provisions of certain

60 61 62 63

Tilden Rent-A-Car Co v Clendenning (1978) 83 DLR (3d) 400, 406–09 (C A Ontario). L’Estrange (n 14). Toll (n 1) [48] (footnote omitted). The High Court’s commitment to freedom of contract in Toll (n 1) accords with earlier observations made by the Court in Ringrow Pty Ltd v BP Australia Pty Limited [2005] HCA 71; (2005) 224 CLR 656 [32] in the context of penalties:



“Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged ‘extravagant and unconscionable in amount’. It is not enough that it should be lacking in proportion.”

The clarity of this position may now be in question after the decision in Andrews (n 17) and pending the hearing of the appeal in Paciocco v Australian and New Zealand Banking Group Limited (Case number M219/2015 & M220/2015, appealed from [2015] FCAFC 50).



Ch 18  Excluding Exclusion Clauses 419

standard form contracts64 unfair where one of the parties to the contract has fewer than 20 employees and the contract in question has an up-front value of up to $300,000 or, if it extends more than three years, an up-front value of up to $1,000,000. The first example given in s 25 of the Australian Consumer Law (contained in Sch 2 of the Competition and Consumer Act 2010 (Cth)) of a term that “may be unfair” and thus void under s 23 is “a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract”. As an interesting counterpoint in the area of legislative activity in Australia, and very much against the legislative trend, the provisions of the Civil Liability Act 2002 (NSW) and its analogues in other States operate in certain circumstances to uphold exclusion clauses and contractual waivers. Thus s 5N of that Act, which is addressed to the subject of recreational activities and was introduced in response to the so-called insurance crisis at the turn of the century, relevantly provides: “(1) Despite any other written or unwritten law, a term of a contract for the supply of recreation services may exclude, restrict or modify any liability to which this Division applies that results from breach of an express or implied warranty that the services will be rendered with reasonable care and skill. (2) Nothing in the written law of New South Wales renders such a term of a contract void or unenforceable or authorises any court to refuse to enforce the term, to declare the term void or to vary the term. (3) A term of a contract for the supply of recreation services that is to the effect that a person to whom recreation services are supplied under the contract engages in any recreational activity concerned at his or her own risk operates to exclude any liability to which this Division applies that results from breach of an express or implied warranty that the services will be rendered with reasonable care and skill. (4) In this section, ‘recreation services’ means services supplied to a person for the purposes of, in connection with or incidental to the pursuit by the person of any recreational activity.”

64 The definition of a “standard form contract” in s 27 of the Australian Consumer Law (contained in Sch 2 of the Competition and Consumer Act 2010 (Cth)) is not what one would expect from the use of that term in everyday parlance. It is as follows: “(1) If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise. (2) In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following: (a) whether one of the parties has all or most of the bargaining power relating to the transaction; (b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; (c) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented; (d) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1); (e) whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction; (f) any other matter prescribed by the regulations.”

420 Contract in Commercial Law

In areas not touched by statutory overlay, Australian courts will be inclined to uphold and give effect to broadly drawn exclusion clauses. This orthodoxy is well reflected in the important decision of Jacobson J in Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No 4).65 There his Honour held that it is open to the parties to a contract to exclude or modify the operation of fiduciary duties and that, while it “may well be that a fiduciary cannot exclude liability for fraud or deliberate dereliction of duty”, beyond that: “[T]there appears to be no restriction in the law to prevent a fiduciary from contracting out of, or modifying, his or her fiduciary duties, particularly where no prior fiduciary relationship existed and the contract defines the rights and duties of the parties.”66

Jacobson J observed that “the ordinary rules of construction of contracts” would apply to such a clause.67 Professor McDonald has pondered, if and to the extent that the Canada Steamship rules or guidelines continue to apply in Australia (a matter considered immediately below), whether or not (and if not, why not) such rules should also be applied equally to exclusions of fiduciary obligations as opposed to being confined to purported exclusions of liability for negligence.68 In this context, a potential and perhaps more subtle continuing difference between the approaches of Australian and English courts to clauses relied upon to exclude negligence has been noted,69 and that relates to the continuing role to be played in Australia by the so-called Canada Steamship principles after Darlington. These principles were traditionally stated as follows: “(1)If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called ‘the proferens’) from the consequence of the negligence of his own servants, effect must be given to that provision … (2) If there is no express reference to negligence, the Court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against the proferens … (3) If the words used are wide enough for the above purpose, the Court must then consider whether ‘the head of damage may be based on some ground other than that of negligence’ to quote again Lord Greene in the Alderslade case. The ‘other ground’ must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it: but subject to this qualification, which is no doubt to be implied from Lord Greene’s words, the existence of a possible head of damage other than that 65 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No 4) [2007] FCA 963; (2007) 160 FCR 35. 66 Citigroup Global (n 65) [276]–[281], [601]. 67 Citigroup Global (n 65) [81]. 68 B McDonald “Contractual Exclusions and Indemnities of Liability for Negligence” in G Tolhurst and E Peden (eds), Commercial Issues in Contract Law (Ross Parsons Centre of Commercial, Corporate and Taxation Law 2008) 24. 69 McDonald (n 68).



Ch 18  Excluding Exclusion Clauses 421 of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants.”70

Professor McDonald points out a possible tension between the third of the Canada Steamship principles and the vanilla approach to the construction of exclusion clauses mandated in Darlington. If that vanilla approach is taken, and the words employed are wide enough to cover negligence, then it is difficult to see why the court, consistent with Darlington, should consider whether there is any other head of liability that could possibly be excluded other than negligence, and conclude, if such a head existed, that the clause did not apply effectively to exclude negligence. As Professor McDonald observes, “[s]uch a rigid rule does not sit well with an overarching principle of construction which aims always to discern the ‘intention’ of the parties by reference to the particular contract, implying that the same words could have different meanings in different contracts”.71 There is certainly Australian authority which suggests that the Canada Steamship rules did not survive and cannot be reconciled with the approach to the construction exclusion clauses articulated in Darlington: see, for example, Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd;72 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993);73 Brambles Ltd v Wail.74 There are, however, Australian cases (including very recent cases) that see a continuing role for the Canada Steamship rules or guidelines, as they are sometimes referred to: see, for example, Graham v The Royal National Agricultural and Industrial Association of Queensland.75 The very recent decision of the New South Wales Court of Appeal in Alameddine v Glenworth Valley Horse Riding Pty Ltd76 suggests that there is no difference in approach as between Australia and the United Kingdom. Macfarlan JA, with whom Simpson JA and Campbell AJA agreed, said, conformably with although not referring to the Canada Steamship decision, that: “A further reason for concluding that the respondents did not, as a matter of contract, exclude their liability to the appellant is that exclusion clauses are not ordinarily construed so as to extend to the consequences of the defendant’s negligence unless the clause refers to that basis of liability.”77

In National Westminster Bank Plc v Utrecht-America Finance Co,78 the English Court of Appeal did not apply the Canada Steamship rules to the construction of a “no reliance clause”. Clarke LJ drew something of a distinction between a clause that in terms excluded liability in negligence (in relation to which he 70 Canada Steamship Lines Ltd v The King [1952] AC 192 (PC) 208 (emphasis added). 71 McDonald (n 68) 15. 72 Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 (SC) 845–46. 73 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206 (CA) 242. 74 Brambles Ltd v Wail [2002] VSCA 150; (2002) 5 VR 169. 75 Graham v The Royal National Agricultural and Industrial Association of Queensland [1989] 1 Qd R 624 (SC) 630. 76 Alameddine (n 1). 77 Alameddine (n 1) [55]. 78 National Westminster Bank Plc v Utrecht-America Finance Co [2001] EWCA Civ 658; [2001] 3 All ER 733.

422 Contract in Commercial Law

contemplated the Canada Steamship principles may have some continuing operation) and one such as that under consideration in the case before the Court of Appeal, whose effect was to achieve such an exclusion by an anticipatory release of any liability to make disclosure of material non-public information in a sale transaction. On the question of exclusion of liability for negligence, neither Australian nor English law adopts the approach of New York, for example, in precluding reliance on an exclusion clause in circumstances where gross negligence has been established but purportedly excluded.79

Recent English decisions A consideration of some recent English decisions concerning the interpretation of exclusion clauses illustrates that, outside the operation of consumer protection statutes, a variety of interpretive techniques continue to be employed by judges to the construction of exclusion clauses to narrow down their operation. Some of these cases also illustrate that controversy and uncertainty still exist in what one might otherwise have expected to be a settled area of commercial law. The first case to consider is the 2012 decision of the Supreme Court in Geys v Société Générale, London Branch,80 where, in an employment context, the defendant Bank sought to rely on an extremely broad exclusion clause in a contract with a senior employee entered into following his dismissal and under which he obtained termination payments. The exclusion clause coupled with an express warranty that Mr Geys’ alleged claims against the Bank following his dismissal would be foregone in return for the termination payment was relied upon by the Bank in order to preclude a claim for damages for wrongful dismissal and breach of a contractual term requiring the bank to make any payments “tax effective”. Although the decision of Lord Hope DP ultimately turned upon an extremely close reading of contractual correspondence, he called strongly in aid not only the Canada Steamship principles and the contra proferentem doctrine but also adopted as relevant the reasoning of the primary judge to the effect that, on the Bank’s construction, the result was “wholly unreasonable”,81 requiring the employee to give up his claim for the losses he suffered (for wrongful dismissal and breach of the tax efficiency obligation) in return for securing his contractual termination payments to which he would equally have been entitled if the contract had been terminated lawfully. Lord Hope DP, with whom the other justices relevantly agreed, purported to summarise and apply the Canada Steamship principles. Lord Hope DP’s summary was as follows: “In summary, these principles are (1) that if the clause expressly exempts the party in whose favour it is made (the proferens) from liability for negligence, effect must be given to it; (2) if there is no express reference to negligence, the court must consider whether the words used are wide enough to cover it; and 79 See eg Colnaghi USA Ltd v Jewelers Protection Services Ltd, 81 NY 2d 821, 823–24; 611 NE 2d 282, 283–84 (1993). 80 Geys v Société Générale, London Branch [2012] UKSC 63; [2013] 1 AC 523. 81 Geys (n 80) [31].



Ch 18  Excluding Exclusion Clauses 423 (3) if a doubt arises on this point it must be resolved in favour of the other party and against the proferens.”82

What is most interesting about this summary is that it appears to de-emphasise and arguably exclude the third of the Canada Steamship principles which were noted earlier in this chapter.83 Lord Hope DP’s restatement appears to be remarkably close to the statement of interpretive approach to exclusion clauses in commercial contractual settings articulated by the High Court of Australia in Darlington.84 On the application of the Canada Steamship principles, as re-summarised, to the facts of the case in Geys, Lord Hope DP opined that: “The position in this case was that the terms of the employment contract were the product of negotiation between the parties. Nevertheless the exclusion clause was conceived in favour of the bank. The provisions under which the claimant was required to waive all contractual and statutory claims against it, and thus to exempt the bank from any liability in damages for breach of contract, are at first sight all embracing. But they are not without qualification. The critical words are those that indicate that the draft termination agreement in Schedule 1 may be amended to take account of payments ‘due to you under this letter’. In order to be effective to achieve what the bank says it was meant to achieve the agreement had to be clearly expressed. At the very least for the claimant, for the reasons given above, the wording that was chosen was ambiguous. In this situation the ordinary principle must be applied. Any doubt that the wording gives rise to must be construed in favour of the claimant and against the bank.”85

This decision illustrates the extent to which English courts, even at the ultimate appellate level, will strive to avoid what they perceive to be an unreasonable outcome even in the face of what Lord Hope DP was constrained to concede was an apparently “all embracing” exclusion. I very much doubt that the High Court of Australia, applying Darlington and Toll, would have reached a similar decision on the same facts as Geys. That old (construction) habits appear to die hard in England is also illustrated by the approach adopted by the Court of Appeal to the construction of an “entire agreement” clause in AXA Sun Life Services Plc v Campbell Martin Ltd.86 In that case, an “entire agreement” clause provided that “this agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you and us …”.87 The Court of Appeal held that, that apparently broad clause was not sufficiently broad to preclude raising a case of pre-contractual misrepresentation. The court interpreted the phrase “representations” as confined to collateral warranties. The mode of analysis was similar to that adopted in BSkyB Ltd v HP Enterprise Services UK Ltd.88 As has been observed, “[t]he search for an alternative meaning and the ingenuity in finding it to deny effectiveness to the intended exclusion 82 83 84 85 86 87 88

Geys (n 80) [37]. Text to n 70. Text (n 54). Geys (n 80) [39]. AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133; [2011] 2 Lloyd’s Rep 1. AXA Sun (n 86) [13]. BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC); [2010] BLR 267.

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bear all the hallmarks of the approach to exclusionary clauses spawned by Canada Steamship Lines Ltd v The King”.89 The approach to construction adopted by the Court of Appeal was strained and artificial. The familiar enough language of the “entire agreement” clause was more consistent with an objectively ascertainable contractual intent on the part of commercial parties to exclude collateral liability in its entirety. I turn now to some recent first instance decisions that are of interest not so much for their precedential value, which is little, but for how they illustrate the various ways in which English courts continue to seek to circumvent the operation of exclusion clauses by interpretive technique. Notwithstanding Photo Production’s clear rejection of the fundamental breach doctrine, strains of it have re-emerged from time to time in the United Kingdom. In Internet Broadcasting Corporation Limited (trading as NETTV) v MAR LLC (trading as MARHedge),90 the suite of exemption and limitation provisions applicable to the parties’ agreement was as follows: “16. Nothing in this Agreement shall operate to exclude or limit either party’s liability for death or personal injury caused by its default or negligence, any breach of the terms implied by the sale of goods and supply of goods and services legislation, fraud, or any other liability that cannot be excluded or limited under applicable law. 17. Subject to clause 16 neither party will be liable to the other for any damage to software, damage to or loss of data, loss of profit, anticipated profit, revenues, anticipated savings, goodwill or business opportunity, or for any indirect or consequential loss or damage. 18. Subject to clause 17, NETTV’s aggregate liability in respect of claims based on events relating to this Agreement shall not exceed the total amount of cash fees paid by the Client to NETTV in connection with this Agreement or any collateral contract, whether in contract or tort (including negligence). NETTV shall not be liable for the value of media contributed by the Client as part of this Agreement.”91

There was no legislation that limited the ability of either party to rely on an exemption clause in that case. Notwithstanding the apparent breadth of this clause, Gabriel Moss QC, sitting as a Deputy High Court Judge, concluded that clause 17 of the agreement did not cover a deliberate personal repudiatory breach of agreement. He commenced his analysis by observing that: “It seems odd at first impression that a party who deliberately repudiates a contract should at the same time be able to rely on a clause in that contract containing an exemption from liability in respect of the loss caused to the other party to the contract as a result of such repudiation. The normal anticipation of commercial parties is that a party who repudiates his contractual obligations should be liable to compensate the other party for the loss caused.”92 89 Trukhtanov (n 2) 347. 90 Internet Broadcasting Corporation Limited (trading as NETTV) v MAR LLC (trading as MARHedge) [2009] EWHC 844 (Ch); [2010] 1 All ER (Comm) 112. 91 Internet Broadcasting Corporation (n 90) [11]. 92 Internet Broadcasting Corporation (n 90) [13].



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Whilst acknowledging that he was, of course, bound by Photo Production, the highly experienced Deputy High Court Judge reviewed a number of authorities, noted the “rejection of literalism”93 in the construction of commercial contracts, in particular where the literal interpretation clashed with commercial commonsense, and having noted that insurance was readily available for deliberate wrongful conduct, then proceeded to articulate seven principles which he had deduced from his review of the authorities. These principles were as follows: “(1) There is no rule of law applicable and the question is one of construction. (2) There is a presumption, which appears to be a strong presumption, against the exemption clause being construed so as to cover deliberate, repudiatory breach. (3) The words needed to cover a deliberate, repudiatory breach need to be very ‘clear’ in the sense of using ‘strong’ language such as ‘under no circumstances …’. (4) There is a particular need to use ‘clear’, in the sense of ‘strong’, language where the exemption clause is intended to cover deliberate wrongdoing by a party in respect of a breach which cannot, or is unlikely to be, covered by insurance. Language such as ‘including deliberate repudiatory acts by [the parties to the contract] themselves …’ would need to be used in such a case. (5) Words which, in a literal sense, cover a deliberate repudiatory breach will not be construed so as to do so if that would defeat the ‘main object’ of the contract. (6) The proper function between commercial parties at arm’s length and with equal bargaining power of an exemption clause is to allocate insurable risk, so that an exemption clause should not normally be construed in such cases so as to cover an uninsurable risk or one very unlikely to be capable of being insured, in particular deliberate wrongdoing by a party to the contract itself (as opposed to vicarious liability for others). (7) Words which in a literal sense cover a deliberate repudiatory breach cannot be relied upon if they are ‘repugnant’ – I have not dealt with this in detail because it is not relevant to this case.”94

The presumption identified in the second of these principles was the Deputy High Court Judge’s starting point in his analysis of the exclusion clause. He observed that he could not imagine that any reasonable businessman would understand the words of clause 17 of the agreement to cover deliberate wrongdoing, let alone the deliberate, personal and repudiatory wrongdoing. The literal meaning of the words used, he opined, would defeat the main object of the contract. Internet Broadcasting Corporation was the subject of sustained criticism by Justice Flaux in AstraZeneca UK Ltd v Albermarle International Corporation who did not mince his words describing the conclusion of the Deputy Judge as “wrong on the modern authorities” and as effectively seeking “to revive the doctrine of fundamental breach … albeit under the guise of ‘deliberate

93 Internet Broadcasting Corporation (n 90) [25]. 94 Internet Broadcasting Corporation (n 90) [33].

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repudiatory breach’”.95 It was, he held, “heterodox and regressive and does not properly represent the current state of English law”.96 The particular attack was on the presumption which Moss QC had sought to identify as having been derived from both Photo Production and the earlier decision in Suisse Atlantique:97 “What the learned Deputy Judge appears to have done’ said Justice Flaux ‘is to quote selectively from the speeches on those cases, whereas full consideration of the relevant speeches demonstrates that the cases do not support the [presumption]”.98 He observed that the notion of there being any such presumption was “wholly inconsistent”99 with the speech of Lord Wilberforce in Photo Production. Justice Flaux noted that, in the subsequent development of the law after Photo Production, “courts [had been] more inclined than ever to eradicate anomalous categories of case or obsolete principles which might then lend credence to the survival of the doctrine [of fundamental breach]”.100 He cited in support of this argument the example of the treatment of the deviation cases in maritime law that had previously been treated as a sui generis category in which even clearly worded exclusion clauses did not apply to loss caused as a result of a deviation in the passage of a vessel.101 In Shared Network Services Limited v Nextiraone UK Limited, Lewison LJ noted that he had granted leave to appeal the decision of Flaux J, observing that, although he considered that Flaux J’s decision was right, the conflict of authority that had emerged between Flaux J, in AstraZeneca UK, on the one hand and Gabriel Moss QC in Internet Broadcasting Corporation, on the other hand, should be resolved by the Court of Appeal.102 No report of the appeal in that case has been located and it is to be inferred that the matter was resolved (and thus the clash between the approaches of Moss QC and Flaux J left unresolved). The decision of Flaux J in AstraZeneca was referred to in passing by Carr J in Fujitsu Services Limited v IBM United Kingdom Limited.103 Although not referred to in terms, some reinforcement of Internet Broadcasting Corporations’s invocation of presumptions in the construction of exclusion clauses is supplied by the Court of Appeal’s decision in Kudos Catering (UK) Limited v Manchester Central Convention Complex Limited.104 At first instance, it had been held that the effect of the very broadly drawn exclusion clause wholly excluded the respondent’s liability for the appellant’s claimed loss of profit following the appellant’s acceptance of the respondent’s repudiation of the contract. On appeal, Tomlinson LJ rejected the argument to the effect that the literal construction of the exclusion clause did not prevent the appellant from 95 AstraZeneca UK Ltd v Albermarle International Corporation [2011] EWHC 1574 (Comm), [2011] 2 CLC 252 [289]. 96 AstraZeneca (n 95) [301]. 97 Suisse Atlantique (n 5). 98 AstraZeneca (n 95) [290]. 99 AstraZeneca (n 95) [297]. 100 AstraZeneca (n 95) [298]. 101 AstraZeneca (n 95) [298]–[300]. 102 Shared Network Services Limited v Nextiraone UK Limited [2012] EWCA Civ 1171 [1]. 103 Fujitsu Services Limited v IBM United Kingdom Limited [2014] EWHC 752 (TCC) [31], [48]. 104 Kudos Catering (UK) Limited v Manchester Central Convention Complex Limited [2013] EWCA (Civ) 38; [2013] 2 Lloyd’s Rep 270.



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seeking specific performance of the contract. That was for a range of reasons. A consequence of specific performance not being either available or feasible was that, if the primary judge’s construction of the exclusion clause were adopted, the contract would, in those circumstances, be “effectively devoid of contractual content since there is no sanction of non-performance by the respondent”.105 Tomlinson LJ observed that it was “inherently unlikely that the parties intended the clause to have this effect” given that the “parties thought that they were concluding a mutually enforceable agreement”.106 His Lordship drew on the dictum of Lord Wilberforce in Suisse Atlantique as follows: “[An exception clause] must … reflect the contemplation of the parties that a breach of contract, or what apart from the clause would be a breach of contract, may be committed, otherwise the clause would not be there; but the question remains open in any case whether there is a limit to the type of breach which they have in mind. One may safely say that the parties cannot, in the contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent.”107

Tomlinson LJ also referred to the presumption that had been referred to by Lord Clarke in Rainy Sky SA v Kookmin Bank,108 namely that “neither party to a contract intends to abandon any remedies for its breach arising by operation of law”.109 In the event, Tomlinson LJ held that the words “in relation to this Agreement” in a clause in which the contractor acknowledged that the company: “shall have no liability whatsoever in contract, tort (including negligence) or otherwise from any loss of goodwill, business, revenue or profits, anticipated savings or wasted expenditure (whether reasonably foreseeable or not) or indirect or consequential loss suffered by the Contractor or any third party in relation to this agreement”

meant that all liability was excluded ‘in relation to the performance of this Agreement.110 As such, the extraordinarily broadly drafted exclusion clause was construed as not extending to losses suffered in consequence of a refusal to perform or to be bound by the agreement. His Lordship rejected the not unsurprising submission that this approach represented an objectionable resort to the discredited doctrine of fundamental breach of contract. His Lordship characterised his approach as: “a legitimate exercise in construing a contract consistently with business common sense and not in a manner which defeats its commercial object. It is an attempt to give effect to the presumption that parties do not lightly abandon the remedy for breach of contract afforded them by the general law.”111

105 106 107 108 109 110 111

Kudos (n 104) [19]. Kudos (n 104) [19]. Suisse Atlantique (n 5) 431–32. Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900. Kudos (n 104) [21]. Kudos (n 104) [27]. Kudos (n 104) [28].

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The presumption that neither party intends to abandon any remedies for breach by the other arising by operation of law, and that clear words are required to be used in order to rebut that presumption, has also been relied on in a number of recent English cases apart from Kudos: see, for example, Fujitsu Services;112 Transocean Drilling UK Limited v Providence Resources plc.113

UNIDROIT Principles In the course of surveying the contemporary approaches to the construction of exclusion clauses across various jurisdictions, it is also useful to note how the issue is dealt with by the UNIDROIT Principles of International Commercial Contracts, designed as these have been to be able to be selected by international contracting parties as a neutral form of governing law in transnational contracts. Article 5.2.3 of the UNIDROIT Principles provides that “the conferment of rights in the beneficiary includes the right to invoke a clause in the contract which excludes or limits the liability of the beneficiary”. Article 7.1.6 provides, however, that: “A clause which limits or excludes one party’s liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract.”

The Official Commentary to the Principles states that: “The reason for the inclusion of a specific provision on exemption clauses is that they are particularly common in international contract practice and tend to give rise to much controversy between the parties. Ultimately, this Article has opted in favour of a rule which gives the court a broad discretionary power based on the principle of fairness. Terms regulating the consequences of nonperformance are in principle valid but the court may ignore clauses which are grossly unfair.”114

The Commentary, after nodding to the doctrine of freedom of contract recited in art 1.1 of the Principles, goes on to elaborate as to what is meant by “grossly unfair” within the meaning of art 7.1.6. Thus it is said that: “This will above all be the case where the term is inherently unfair and its application would lead to an inherent imbalance between performances of the parties. Moreover, there may be circumstances in which even a term that is not in itself manifestly unfair may not be relied upon: for instance, where the non-performance is the result of grossly negligent conduct or when the aggrieved party could not have obviated the consequences of the limitation or exclusion of liability by taking out appropriate insurance. In all cases regard must be had to the purpose of the contract and in particular what a party could legitimately have expected from the performance of the contract.”

112 Fujitsu (n 103). 113 Transocean Drilling UK Limited v Providence Resources plc [2014] EWHC 4260 (Comm); [2015] 2 All ER (Comm) 557. 114 Comment 1 to art 7.1.6.



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No power is given under the Principles for the modification of exemption clauses. In Vogenauer’s Commentary on the UNIDROIT Principles of Inter­ national Commercial Contracts, the point is made that the consequence of an exemption clause being “grossly unfair” is that it cannot be relied upon at all.115 That is to say, there is no scope for reading such a clause down so that it is ineffective, for example, insofar as it attempts to exclude gross negligence or intentional conduct, on the one hand, but remains effective insofar as it excludes all liability for ordinary negligence or breach of contract. The criterion of “gross unfairness” as the basis for the displacement of an exclusion clause looks to the effect of the clause as opposed to the particular quality of conduct that is purportedly excluded. Thus it is pointed out in Vogenauer that, in the first drafts of the provisions that ultimately became art 7.1.6, exemption clauses were only deemed to be invalid if they excluded or limited liability for “‘intentional or reckless conduct’ or for ‘deliberate breach’”.116 Thus it is only in the Official Commentary to the Principles, rather than the text of art 7.1.6 itself, that it is stated that an exemption clause cannot be relied upon if the non-performance was the result of grossly negligent conduct. Also of potential relevance is art 3.2.7, headed “Gross disparity”. This Article provides that: “(1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to (a) the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and (b) the nature and purpose of the contract. (2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing …”117

Also of potential relevance is art 2.1.20 which relevantly provides that “[n]o term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party”. This seems to involve explicit acceptance of the particular term in question. Such a term may, of course, be exclusionary in its nature. Article 2.1.20 seems to leave open the possibility, contrary, for example, to Toll and L’Estrange, that the mere fact that a contract had been signed and standard terms and conditions incorporated would not necessarily lead to a specific surprising exclusion clause being binding, unless the aggrieved party had their attention specifically drawn to it. 115 S Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd ed, OUP 2015) 863. 116 Vogenaurer (n 115) 860 (emphasis omitted). 117 Emphasis added.

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Exclusion Clauses – A Transnational Case Study A most interesting case study is provided by the contracts of insurance the subject of consideration by the House of Lords, the New York Court of Appeals and the Federal Court of Australia in HIH Casualty & General Insurance Limited v Chase Manhattan Bank;118 Chase Manhattan Bank v AXA Reinsurance UK plc119 and Reinsurance Australia Corporation Limited v HIH Casualty & General Insurance Limited (in liq) (“Reinsurance Australia”).120 The insurance policy contained the following clause which came to be known in the litigation as the “Truth of Statements” clause: “[T]he Insured will not have any duty or obligation to make any representation, warranty or disclosure of any nature, express or implied (such duty and obligation being expressly waived by the insurers) and shall have no liability of any nature to the insurers for any information provided by any other parties and any such information provided by or nondisclosure by other parties including, but not limited to, Heath North America and Special Risks Ltd (other than Section I of the Questionnaire) shall not be a ground for avoidance of the insurers’ obligations under the Policy or the cancellation thereof.”121

In New York, Judge Gammerman, citing decisions including those noted above,122 had held at first instance, in a decision upheld by the Court of Appeal, that detailed disclaimers “preclude a claim of fraud based on misrepresentations within the scope of the disclaimers”123 and declined to read into the contractual language limitations not stated in the plain text in the parties’ agreements. As such, as a matter of New York law, it appears that Judge Gammerman was prepared to uphold exclusions of liability for fraudulent conduct including fraudulent non-disclosure. In the related English litigation, it was accepted that a party could not exclude liability for fraud. The situation was thus different from that in New York as stated by Judge Gammerman. Rather, the issue in England was whether or not it was open to exclude liability for the fraud of a party’s agent. At first instance, Aikens J held that it was.124 When the matter reached the House of Lords, the House left the question open on the basis that, even if it were possible, it did not consider that, notwithstanding the breadth of the language employed in the clause, it was wide enough to exclude such liability. Lord Bingham said that: “It is clear that the law, on public policy grounds, does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract. The insurers have throughout contended for a similar rule in relation to the fraud of agents acting as such. After a very detailed examination of 118 HIH Casualty & General Insurance Limited v Chase Manhattan Bank [2003] UKHL 6; [2003] 1 All ER (Comm) 349. 119 Chase Manhattan Bank v AXA Reinsurance UK plc, 752 NYS 2d 17; 300 AD 2d 16 (Supreme Court 2002). 120 Reinsurance Australia Corporation Limited v HIH Casualty & General Insurance Limited (in liq) [2003] FCA 56; (2003) 254 ALR 29. 121 Reinsurance Australia (n 120) [90]. 122 Text to n 31. 123 HIH (n 118) [17]. 124 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2001] 1 All ER (Comm) 719.



Ch 18  Excluding Exclusion Clauses 431 such authority as there is, both the judge (para 35) and the Court of Appeal (para 109) decided against the existence of such a rule.”125

His Lordship went on to express the opinion that, although not ultimately necessary to decide the point, if it were possible to exclude such liability for the ordinary consequences of fraudulent or dishonest misrepresentation or deceit by an agent, acting as such, inducing the making of the contract, the insured (in that case, Chase) would need to do so “in clear and unmistakable terms on the face of the contract”.126 He continued: “The decision of the House in Pearson v Dublin Corp does at least make plain that general language will not be construed to relieve a principal of liability for the fraud of an agent: see in particular the speeches of Lord Loreburn LC at 354, Lord Ashbourne at 360 and Lord Atkinson at 365. General words, however comprehensive the legal analyst might find them to be, will not serve: the language used must be such as will alert a commercial party to the extraordinary bargain he is invited to make. It is no doubt unattractive for a contracting party to propose a term clearly having such effect, because of its predictable effect on the mind of the other contracting party, and this may explain why the point of principle left open in Pearson v Dublin Corp has remained unresolved for so long.”127

Lord Bingham drew an interesting contrast with the approach of New York’s Judge Gammerman in related litigation, quoting him as observing: “The clauses are drafted with great precision. Each sentence and word within each clause serves a separate function. Some portions of the clauses are limited to representations/omissions about the risk, while others are not. Given the sophistication of the parties, I decline to read into the contractual language limitations that are not stated in the plain text of the parties’ agreements.”128

His Lordship concluded that he could “see no persuasive argument for varying or relaxing our domestic rule which, as it seems to me, serves to encourage an open and cards-on-the-table (face upwards) approach to the making of contracts”.129 Lord Hoffman, agreeing with Rix LJ in the Court of Appeal, stated that fraud was quite different from negligence: “Here again I agree with Rix LJ that fraud is quite different from negligence: ‘Parties contract with one another in the expectation of honest dealing’, particularly in an insurance context. I think that in the absence of words which expressly refer to dishonesty, it goes without saying that underlying the contractual arrangements of the parties there will be a common assumption that the persons involved will behave honestly. As Lord Loreburn LC said of the exempting clauses in S Pearson & Son Ltd v Dublin Corporation [1907] AC 351, 354, ‘They contemplate honesty on both sides and protect only against honest mistakes’.”130 125 126 127 128 129 130

HIH (n 118) [16]. HIH (n 118) [16]. HIH (n 118) [16]. HIH (n 118) [17]. HIH (n 118) [17]. HIH (n 118) [68].

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Although the English courts did not go as far as the New York courts, it was accepted that the clause was effective to exclude liability for negligent misrepresentation. The effect of the trans-Atlantic interpretations of the Truth of Statements clause was summarised by Jacobson J of the Federal Court of Australia in Reinsurance Australia as follows: “Thus, the position in the United Kingdom is that the ability of insurers (including reinsurers whose contracts follow the terms of the underlying insurance contracts) to seek to avoid the contracts of or for insurance or to claim damages is heavily qualified by the truth of statements clause. In the USA, the truth of statements clause provides a complete answer to a claim for misrepresentation or non-disclosure. It is well established that such a clause does not preclude a claim under the Trade Practices Act if the agreement itself was induced by misleading conduct; see for example Leda Holding Pty Ltd v Oraka Pty Ltd [1998] ANZ ConvR 582; (1998) ATPR 41-601.”131

It is well established that conduct under the Trade Practices Act 1974 (Cth) may be misleading or deceptive if that is its objective effect, even if that effect were not intended. Thus even innocent misrepresentation may sound in an award of statutory damages. As in Qantas Airways Ltd v Rolls-Royce plc,132 there was evidence before Jacobson J in Reinsurance Australia that, as a matter of English conflict of laws principles (including principles of characterisation), were the case to be heard in England, the Trade Practices Act 1974 (Cth) would not be “picked up” as part of any governing law, with the consequence that the statutory remedies of either damages or contractual avoidance under that Act would be likely to be precluded by the operation of the exclusionary elements of the Truth of Statements clause. Jacobson J noted the substantial differences between English law relating to misrepresentation and non-disclosure and the law applicable in Australia under the Trade Practices Act 1974 (Cth), the principal differences relevantly being that, under the Trade Practices Act 1974 (Cth), a representation may be as to a future matter, innocent misrepresentation may sound in damages, there is a reversal of onus with respect to future matters and it is not possible to contract out of liability and concluded that “[a]ccordingly, under English law the remedies which would be open to ReAc and Monde Re are more restricted than in a claim under the Trade Practices Act”.133 This greater restriction was driven by a combination of the operation of English conflict of laws principles as well as key differences between the operation of the Misrepresentation Act 1967 (UK) and the Australian Trade Practices Act 1974 (Cth), in turn reflecting different policy responses to contractual clauses excluding liability for misrepresentation. One interesting aspect of the approach taken in both Qantas and Reinsurance Australia was the implicit assumption that the provisions of the Trade Practices Act 1974 (Cth) would apply potentially to alter or adjust contractual liability irrespective of the law governing the particular contract. This assumption

131 Reinsurance Australia (n 120) [19]. 132 Qantas (n 8). 133 Qantas (n 8) [322].



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amounted to characterising that Act as a mandatory law of the forum,134 and to treating, in the Qantas case, the English exclusive jurisdiction clause, insofar as its enforcement would have had the effect of depriving Qantas of the statutory protection afforded by the Trade Practices Act 1974 (Cth), as an element in the contractual limitation of liability. In Commonwealth Bank of Australia v White; ex p the Society of Lloyd’s, Byrne J of the Supreme Court of Victoria made this very point in the context of a claim against a Lloyd’s name: “It is undesirable that parties should, by entering into an exclusive jurisdiction agreement, be able to circumvent a legislative scheme established by Parliament to protect investors purchasing interests or prescribed interests. Put more positively, the statutes creating these standards of commercial behaviour for persons doing business in this jurisdiction do not exempt foreign corporations. Moreover, the policy behind them would not be served if exemption might be achieved by inserting stipulations as to foreign law or forum.”135

A more nuanced approach to the statutory control of exclusionary provisions in a transnational setting is supplied by the Australian Insurance Contracts Act 1984 (Cth). Section 52(1) of that Act which provides: “Where a provision of a contract of insurance (including a provision that is not set out in the contract but is incorporated in the contract by another provision of the contract) purports to exclude, restrict or modify, or would, but for this subsection, have the effect of excluding, restricting or modifying, to the prejudice of a person other than the insurer, the operation of this Act, the provision is void.”

This central provision is qualified, however, by s 8 of the Act which provides as follows: “(1) Subject to section 9, the application of this Act extends to contracts of insurance and proposed contracts of insurance the proper law of which is or would be the law of a State or the law of a Territory in which this Act applies or to which this Act extends. (2) For the purposes of subsection (1), where the proper law of a contract or proposed contract would, but for an express provision to the contrary included or to be included in the contract or in some other contract, be the law of a State or of a Territory in which this Act applies or to which this Act extends, then, notwithstanding that provision, the proper law of the contract is the law of that State or Territory.”

The effect of this section is that the Act will only apply to contracts of insurance that, setting aside any express choice of law by the parties, would have been governed by Australian law according to Australian common law choice of law principles for ascertaining the proper law of the contract. Thus, for example, if, according to those principles, a policy of insurance would have been governed by English law because that was the inferred choice of the parties or because England or semble English law had the closest and most real connection with 134 M Davies, A Bell and PLG Brereton, Nygh’s Conflict of Laws in Australia (9th ed, LexisNexis 2014) paras 19.39–19.49. 135 Commonwealth Bank of Australia v White; ex p the Society of Lloyd’s [1999] VSC 262; [1999] 2 VR 681 [89].

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the contract,136 then s 52(1) of the Insurance Contracts Act 1984 (Cth) would not apply to preclude reliance on a contractual exclusion or limitation of coverage.137

Conclusion The rigidity of approach to the construction of exclusion and limitation clauses that, less than a hundred years ago, so appealed to Sir Thomas Scrutton, frequently hailed as one of England’s greatest commercial judges, has been supplanted in common law jurisdictions by a combination of statutory overlay and the deployment of judicial techniques of contractual interpretation that strain against the exclusion or limitation of liability. Freedom of contract is no longer paramount and, in truth, has not been for many years. The contractual certainty so cherished by late 19th and early 20th century judges has not been achieved and case law abounds and continues to multiply apace. It is as though the judges are in a continuous struggle with sophisticated commercial drafters for the title of “most ingenious”. Economists would decry this as a grossly inefficient cost of business, and the desire to strive for what appears to be a “just outcome” has, as has been seen, often been at the cost of legal coherence in contractual interpretation. The explicit public policy decisions taken by legislatures since the late 1960s, when the Misrepresentation Act 1967 (UK) was first passed in England, and the advent of statutes such as the Unfair Contract Terms Act 1977 (UK) and, in Australia, the Trade Practices Act 1974 (Cth), have led to greater transparency, although these enactments have themselves generated their own extensive libraries of interpretative case law. Outside the reach of such statutory provisions, however, judges can still be seen to resort to the at-times casuistic techniques of interpretation deployed over so many years by Lord Denning before the passage of consumer protection legislation in England. The realm of exclusion clauses is not, of course, the only area of law in which freedom of contract competes with other public policy goals or virtues. Other familiar examples include the doctrine of unreasonable restraint of trade and the law relating to penalties. Unlike the doctrine of restraint of trade, however, the open-ended criterion of “reasonableness” has never been advanced, at least in the case of written and signed contracts, as a common law criterion of, or for the legitimacy of, exclusion or limitation clauses in Australia. Indeed, that would be fundamentally inconsistent with Darlington. The position in other common law jurisdictions is perhaps not so clear cut. Finally, as this chapter has sought to highlight through its comparative focus, there is no uniformity of approach in either statutory or judicial responses to the attempt to exclude or limit contractual liability. In a transnational context, that lack of uniformity provides the platform and occasion for jurisdictional manoeuvring in cases where the stakes are sufficiently high.

136 Davies, Bell and Brereton (n 134) paras 19.22–19.38. 137 Akai Pty Ltd v People’s Insurance Company Ltd (1996) 188 CLR 418.

19

Illegality as a Defence in Contract Andrew Burrows The English law on illegality as a defence in the law of obligations is in a confused state.* Far from cutting through the confusion, three recent decisions of the UK Supreme Court have compounded some of the difficulties. Given the theme of this book, this chapter will focus on illegality as a defence in contract but there will be sidelong glances to illegality in tort and in unjust enrichment not least because, ideally, and as stressed by the High Court of Australia under the buzz-word of “coherence”,1 there should be a consistent approach across the law of obligations. What this chapter seeks to do is to explain why illegality is such a challenging topic before moving on to explore ways through the English quagmire. Although the Australian law on illegality in contract is not in the same mess as English law, I hope that what I have to say will be of general interest. Indeed, as we shall see, English law would do well to look across to the Australian approach.

Why is illegality such a difficult topic? At least five reasons may be suggested. Although my focus is on contract, most of these difficulties apply to illegality as a defence across the law of obligations. (i) At a high level of generality, the impact of illegality on contract represents a clash of values and policy concerns. The law of contract lies at the heart of private law and is concerned with justice as between the parties. At least on the face of it, its values do not rest on wider public policy goals. Yet illegality, at least if we focus on criminal conduct, plainly rests on very different public policy concerns from interpersonal justice. It is concerned with the state’s protection of its citizens rather than ensuring justice between the parties. In other words, the law of illegality in contract raises a fundamental clash of values between private and public law. If one were concerned purely with justice as between the parties one would simply ignore illegality in the realm *

This chapter must now be read in the light of the Supreme Court’s enlightened reasoning in Patel v Murza [2016] UKSC 42 (see n 19). 1 In Miller v Miller [2011] HCA 9; (2011) 242 CLR 446 [26], it was said that the law on illegality in tort, which was in issue in that case, must be coherent with the law on illegality in contract (and trusts).

435

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of contract, leaving contract law to operate in the same way as it would if there had been no illegality involved. But the judges and the legislature have felt compelled not to ignore the public policy concerns. The law has thereby committed itself to provide an answer to the complex question of how the clashing private and public law values are to be reconciled. (ii) A second reason for complexity is that both common law and legislation tend to be involved. Most criminal offences are contained in legislation. There are many hundreds of crimes set out in primary, and increasingly in secondary, legislation. Even long-established serious crimes which were developed at common law are often now “codified” in statutory form (for example, sexual offences such as rape). The significance of this is that the relevant legislation may itself prescribe, expressly or impliedly, what the impact of the criminal conduct on a contract will be. However, in general, legislation creating offences does not expressly or impliedly deal with that impact which instead has to be worked out at common law and cannot realistically be viewed as simply a matter of statutory interpretation. (iii) There is uncertainty as to what counts as “illegality”. In other words, there is uncertainty as to the scope of the enquiry. This is not a problem so long as one is confining oneself to criminal conduct. What constitutes a crime is well-defined.2 This of course is not to deny that the range of conduct covered by the criminal law is very wide and extends from, on the one hand, the most serious offences such as murder and rape, to relatively trivial offences such as exceeding the speed limit. However, once one departs from criminal conduct, there are difficulties in determining where the enquiry ends. So the conduct may involve civil but not criminal wrongdoing, in particular a tort (such as the tort of defamation which even if committed deliberately normally has no criminal counterpart); or the conduct may be “contrary to public policy” without involving a crime or a civil wrong, such as where the conduct involves an unreasonable restraint of trade or sexual immorality or an interference with the administration of justice. There is then the area of what may be described as “state unlawfulness” where the powers of the state to enter into certain types of contract are limited by, for example, EU controls.3 Gaming and wagering contracts used to provide another example of a type of contract that did not involve illegal conduct as such but was made void by statute for reasons of public policy.4 There are other legislative provisions that, in a specific context, render a contract term (or a contract) void or unenforceable even though this does not involve any conduct that is prohibited. Good examples are contracts which render void or unenforceable attempts by a party to contract out of legislative provisions.5 2 3 4 5

A crime is conduct that is punishable in the criminal courts. See eg the many cases on restitution from the Revenue of overpaid tax heralded by Woolwich Equitable Building Soc v IRC [1993] AC 70 (HL). The law has recently been reformed by the Gambling Act 2005 (UK) which repealed the Gaming Act 1845 (UK) s 18. For example, Commercial Agents (Council Directive) Regulations 1993 (UK), SI 1993/3053, reg 19 which reads, “the parties may not derogate from regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires”.



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On the other side of the line, there are some contracts that are void or voidable or unenforceable or partly unenforceable for what, in one sense, may be regarded as public policy reasons but which we do not conventionally regard as an aspect of “illegality and public policy”. This is because we are able to articulate more specific reasons, often concerned with ensuring that the parties have truly consented or that the contract is procedurally or substantively fair, that explain the law’s intervention. These include the formal requirements for certain types of contract, such as writing and signature, the law on misrepresentation, undue influence and duress, the law on penalties, and the striking down of unfair terms under, for example, the Unfair Contract Terms Act 1977 (UK) and the Consumer Rights Act 2015 (UK). As the Law Commission said, in defining the ambit of illegality for the purposes of its consultation paper on Illegal Transactions:6 “we do not intend our project to deal with transactions which fail on the grounds of (i) non-compliance with formalities; (ii) inequality or unfairness, for example misrepresentation, undue influence, duress, unconscionability or inequality of bargaining power, and (iii) lack of capacity. Although in general terms one might say that these transactions are void, voidable, or unenforceable because it would be contrary to public policy to recognise or enforce them, in each case there are more specific reasons for invalidating the transaction. There is, for example, a large body of case law relating to when a contract is voidable for undue influence. But contracts vitiated by undue influence are not generally, if ever, classed as ‘illegal’ and we do not intend to deal with them in this project.”

In the Supreme Court in Les Laboratoires Servier v Apotex Inc,7 Lord Sumption recast this scope question as being one that focuses on the type of turpitude that may count for the purposes of the illegality defence. Within that, he included criminal conduct and what he termed – and here one worries about the apparent imprecision of the terminology – “quasicriminal” conduct.8 (iv) Although many textbooks purport to make this distinction, there is a difficult divide between, on the one hand, describing a contract as illegal and, on the other hand, describing the effects of an illegal contract. The two tend to elide because to describe a contract as illegal already gives the impression that a decision has been made that one effect is that the contract is unenforceable. To avoid this elision, it seems preferable to talk of the relevant conduct, rather than the contract, being illegal. This leaves open the effect on the contract of that conduct. One can then go on, without having pre-judged the question, to consider what effect is in issue. It may be that one is looking at the enforceability of the contract; but, alternatively, one may be looking at the quite different question of “unwinding the contract” so as to award restitution of (the value of) benefits conferred 6 7 8

Law Commission, Illegal Transactions: The Effect of Illegality on Contracts and Trusts (Law Com CP No 154, 1998) para 1.7 (footnotes omitted). [2014] UKSC 55; [2015] AC 430. Les Laboratoires (n 7) [25], [28]. It is perhaps significant that by the time of Jetivia SA v Bilta (UK) Ltd [2015] UKSC 23; [2015] 2 WLR 1168 [63], his Lordship’s preferred terminology was “illegal or immoral acts”.

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under it. That is, one may be looking at the law of unjust enrichment rather than the law of contract. (v) Finally, the subject is difficult because the courts have not adopted a consistent approach and, similarly, the textbooks adopt markedly different approaches. This makes understanding what is going on that much more difficult. It is also true that, even accounting for the uncertainty, the treatments within many books and judgments are more complex and long-winded than they need to be. It would seem that, despite all the decisions of judges and all the ink that has been spilt by commentators, we are barely the wiser. Until very recently, illegality as a defence in contract was as problematic in Australia as in England. The reason for that may indeed have been that Australian law had not broken free from the English precedents. In the contract case of Fitzgerald v FJ Leonhardt Pty Ltd9 Kirby J said:10 “Illegality, and the associated problems of statutory construction and public policy, have been described as a ‘shadowy’11 and ‘notoriously difficult’12 area of the law where there are ‘many pitfalls’.13 Many of the authorities on the point are difficult to reconcile.14 Commentators claim that some of them are marked by ‘obscurities, supposed distinctions and questionable techniques of decision’.15 They suggest that this is an area of the law which is ‘intensely controversial and confused’.”

It is strongly arguable that recent decisions of the High Court of Australia – such as Fitzgerald itself, Nelson v Nelson16 with its penetrating and enlightened rejection of the reliance rule applied by the House of Lords in Tinsley v Milligan,17 and Equuscorp Pty Ltd v Haxton18 on illegality and unjust enrichment – have put Australian law on the right track. To appreciate why that may be so, we now need to consider how one can overcome the difficulties posed by the illegality defence in contract.

The Core Contractual Question and the Distinction between Legislative and Common Law Effects To avoid being distracted by side issues, I want to narrow the range of enquiry by focussing on the core contractual question: what is the impact of criminal conduct on the enforceability of a contract? So I am putting to one side first, the 9 (1997) 189 CLR 215 (HCA). 10 Fitzgerald (n 9) 231, citing Andrew Phang, “Of Illegality and Presumptions – Australian Departures and Possible Approaches” (1996) 11 JCL 53, 53. See also NC Seddon and MP Ellinghaus, Cheshire and Fifoot’s Law of Contract (9th Aust ed, Butterworths 2008) 905 who describe the area as “complex and obscure”; and JW Carter et al, Contract Law in Australia (5th ed, Butterworths 2007) 545 who refer to it as “one the least satisfactory branches of contract law”. 11 Citing Nelson v Nelson (1995) 184 CLR 538 (HCA) 595. 12 Citing Ross v Ratcliff (1988) 91 FLR 66 (HCA) 67. 13 Citing Archbold’s (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 (CA) 393. 14 Citing the lower court in Fitzgerald v FJ Leonhardt Pty Ltd (1995) 5 NTLR 76 (SC) 83 (Angel J). 15 Citing Walter Gelborn, “Contracts and Public Policy” (1935) 35 Col LR 679, 679, cited in Hugh Stowe, “The ‘Unruly Horse’ has Bolted: Tinsley v Milligan” (1994) 57 MLR 441, 442–43. 16 Nelson (n 11). 17 [1994] 1 AC 340 (HL). 18 [2012] HCA 7; (2012) 286 ALR 12.



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impact of non-criminal conduct even though that conduct constitutes a civil wrong or is “contrary to public policy” and, secondly, that part of the law of unjust enrichment concerned with the restitution of benefits conferred under a contract affected by criminal conduct (which includes withdrawal during the locus poenitentiae (“opportunity for repentance”)).19 As has already been flagged, in examining this question one may need to consider both legislation and common law. There is a critical distinction between two separate exercises (or stages). Given that most of criminal law is laid down in legislation, it is too blunt and misleading to refer to those two separate exercises as dealing with “statutory illegality” and “common law illegality” respectively. It is the statutory or common law effect on a contract that is being referred to, not whether the illegality arises under a statute or at common law. So the two separate exercises are as follows. The first is a matter of ordinary statutory interpretation and considers whether a legislative provision has expressly or impliedly dealt with the effect on a contract of the relevant criminal conduct in question. The second is to consider the effect of criminal conduct on a contract at common law. This second exercise is applicable either where there is no legislation in play because the offence is at common law or, much more commonly, where the legislation in play does not deal with the effect of the criminal conduct on a contract. The distinction between those two separate exercises (or stages) has been made clear in several of the leading Australian cases, including in Justice Mason’s judgment in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd20 and Justice Kirby’s in Fitzgerald v FJ Leonhardt Pty Ltd21 (albeit that what I am referring to as the common law exercise was described by Justice Kirby as being concerned with applying “public policy”). We shall consider each of these two exercises (or stages) in turn. The first, the legislative effect, is relatively straightforward and will be dealt with briefly. That there are two separate exercises does not deny that the sort of considerations that here underpin the effect at common law are likely to inform the judges when embarking on statutory interpretation, and vice versa, so that there is a continuum rather than a sharp distinction between the two exercises.22 It will be 19 I am therefore putting to one side any discussion of Patel v Mirza [2014] EWCA Civ 1047; [2015] Ch 271, on which an appeal has very recently been heard by the Supreme Court. That concerned restitution of money paid for failure of consideration and the withdrawal doctrine. The withdrawal doctrine almost always arises where, as in Patel v Mirza, the party seeking to withdraw claims restitution. On illegality in the law of unjust enrichment, see Andrew Burrows, The Law of Restitution (3rd ed, OUP 2011) ch 19, pp 588–601; Andrew Burrows, A Restatement of the English Law of Unjust Enrichment (OUP 2013) 107–10, 136–41. Although not discussed in this chapter, it could conceivably, if rarely, have a role where a party seeks to withdraw from an executory contract that would otherwise be enforceable despite the involvement of illegal conduct. 20 (1978) 139 CLR 410 (HCA). 21 Fitzgerald (n 9). 22 The continuum is made particularly clear if, under the second exercise, the purpose of the statute is crucial. Indeed on one very wide understanding of “statutory interpretation” (associated with the old idea of the “equity of the statute”) one might regard there as being just one exercise of statutory interpretation (other than where one is dealing with a common law offence). On the “equity of the statute” in this context see Deane and Gummow JJ in Nelson (n 11) [48]–[51]; and see generally Edelman J in Burragubba v State of Queensland [2015] FCA 1163.

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apparent that, in line with the supremacy of legislation, a court should consider the legislative effect first but, where it concludes that there is no legislative effect, it will need to go on to consider the effect at common law.

The legislative effect of criminal conduct on a contract To reiterate, we are here considering whether a legislative provision has expressly or impliedly dealt with the effect on a contract of the relevant criminal conduct in question. An excellent case example of legislation which prohibits a contract (and therefore necessarily makes it unenforceable) is Re Mahmoud and Ispahani.23 A wartime order, made by delegated legislation, prohibited the purchase or sale of linseed oil without a licence from the Food Controller. The claimant (who had a licence) contracted to sell linseed oil to the defendant, who did not have a licence, although the claimant was told by the defendant that he had. The defendant refused to accept the oil but the claimant’s action for damages for non-acceptance failed because the contract was prohibited by the legislation and was therefore unenforceable by either party. A modern example of a contract being prohibited by statute is the Human Tissue Act 2004 (UK), s 32. This prohibits commercial dealings in human parts or material for transplantation other than by someone who has been authorised by the Human Tissue Authority. So a contract to sell a human kidney by an unauthorised person is prohibited and cannot be enforced by either party. In contrast, it was decided in the well-known case of St John Shipping Corp v Joseph Rank Ltd24 that the statute that prohibited the overloading of a ship did not also prohibit contracts of carriage where the performance involved overloading. That was carefully considered as a matter of statutory interpretation. As we shall see below,25 Devlin J also considered the effect of the criminal overloading at common law (as he was bound to do given his decision on the legislative effect) and decided that, at common law too, the contract was enforceable and that illegality was not a defence.26 23 [1921] 2 KB 716 (CA). 24 [1957] 1 QB 267 (QBD). See also Archbold’s (n 13) (contract for carriage of third party’s whisky between A and B, where carrier (B) used lorries that did not have correct statutory licence to carry third party’s goods, was not prohibited by the statute (and nor was the illegality a defence at common law to a claim for damages by A against B for breach of contract in not taking care of the whisky which had been stolen)). In Hounga v Allen [2014] UKSC 47; [2014] 1 WLR 2889 it was decided that the fact that the claimant was an illegal immigrant was not a defence to her claim for the statutory tort of racial discrimination. But the assumption was made by the Supreme Court (and the lower courts) that an illegal immigrant would not be able to enforce a contract of employment (including by bringing proceedings for unfair dismissal). In other words, it was assumed that any claim for breach of contract by the claimant would have failed by reason of the illegality. The best explanation for this contrast between contract and tort is precisely that the relevant statute prohibited a contract of employment and necessarily therefore rendered the contract of employment unenforceable by either party. That is, the Immigration Act 1971 (UK) s 24 makes it a criminal offence to enter the UK without an appropriate visa (or, without reasonable excuse, to contravene a condition as to work). It would seem that, by necessary implication, a contract of employment entered into by such a person is prohibited and cannot be enforced by either party. See Lord Sumption in Jetivia (n 8) [102]. 25 Text to n 68. 26 The distinction between the legislative effect and the effect at common law was not sharply divided.



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Turning to some Australian examples, in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd27 the claimant had been carrying on an unauthorised banking business under which it had entered into contracts of loan, secured by mortgages. It was held by the High Court of Australia that, as a matter of statutory interpretation, the statute which prohibited the carrying on of an unauthorised banking business did not, expressly or impliedly, prohibit the secured loan contracts so as to make them illegal and unenforceable by the claimant (or, vice versa, by its customers). As covered below, it went on to decide that, at common law too, the effect was not to render the contracts unenforceable. Again in Fitzgerald v FJ Leonhardt Pty Ltd28 the High Court of Australia decided that, as a matter of statutory interpretation, the prohibition on a landowner drilling for water without a licence did not prohibit a contract for drilling entered into between the defendant landowner, who did not have a licence, and the claimant who had carried out drilling work. As we shall see, at common law too, the contract was held enforceable by the claimant who was seeking payment of the agreed contract price for the drilling work done. All those examples can be regarded as exemplifying the statutory prohibition of a contract and hence its implied unenforceability. But, of course, legislation may expressly lay down that, by reason of the criminal conduct in question, a contract or a contract term is unenforceable by one or either party (or void). For example, the Equality Act 2010 (UK), s 142(1) provides that “a term of a contract is unenforceable against a person in so far as it constitutes, promotes or provides for treatment of that or another person that is of a description prohibited by this Act”. And ss 26–30 of the Financial Services and Markets Act 2000 (UK), which deal with unauthorised investment business, investment business transacted through unauthorised intermediaries, and investment business resulting from unlawful financial promotion, lay down that the relevant contract is “unenforceable against [the customer]” albeit that there is discretion to enforce the contract if a court is satisfied that it is “just and equitable in the circumstances of the case”. Although there are many hundreds of legislative criminal offences, it is relatively rare that the legislation has anything to say (even impliedly) about the effect on contract of the relevant conduct. For example, the legislation on sexual assault has nothing to say about contracts to commit sexual assault or about contracts whose purpose or performance involves sexual assault. The legislation on theft says nothing about contracts to commit theft or contracts whose purpose or performance involves theft. The legislation on speeding offences says nothing about contracts to commit a speeding offence or whose purpose or performance involves a speeding offence. This is not at all surprising. However, it does mean that, in most situations, the effects on a contract of conduct that is made criminal by legislation are governed by the common law, considered below, and not by legislation (and hence not by statutory interpretation). And naturally only the common law is in play where the offence is a common law offence, such as murder or common assault. 27 Yango (n 20). 28 Fitzgerald (n 9).

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The effect of criminal conduct on a contract at common law: the most recent English case law For the reason just explained, it is the common law effect on a contract that is usually in issue. The most important recent English case directly on this common law effect in contract is the Court of Appeal’s decision in ParkingEye Ltd v Somerfield Stores Ltd.29 We shall consider that case first, before looking at the trilogy of recent Supreme Court decisions on the illegality defence which, although not directly concerned with the enforcement of a contract, are of central importance. In ParkingEye v Somerfield, the parties entered into a contract under which ParkingEye operated a number of Somerfield’s supermarket car parks and dealt with the “fines” for those who outstayed their free parking time. Somerfield repudiated that contract. This would have constituted a repudiatory breach, entitling ParkingEye to contractual damages of £350,000, were it not for the possible defence of illegality. The illegality in question was that ParkingEye had been chasing up customers who had failed to pay parking fines with letters that were not merely aggressive but contained deliberately false statements; and it transpired that ParkingEye had intended from the outset to send out such letters. At first instance that criminal illegality was held not to be a defence and that was upheld by the Court of Appeal. ParkingEye was held entitled to the £350,000 damages. Sir Robin Jacob (with whom Laws LJ agreed) and Toulson LJ adopted an approach of looking at a range of factors in order to determine whether to deny ParkingEye its contractual damages was a proportionate response to the illegal conduct. In doing so, they referred both to the recommendations of the Law Commission – which had ultimately favoured this type of balancing approach as being within the interpretative reach of the courts without the need for legislation – and to the Court of Appeal’s judgment of Etherton LJ (this was prior to the appeal to the Supreme Court) in Les Laboratoires Servier v Apotex Inc.30 Applying that approach, it was held that to deny ParkingEye its damages of £350,000 would have been out of all proportion to the relatively trivial and tangential illegal conduct that it had used. It is important to stress that, despite the House of Lords’ support in Tinsley v Milligan31 for a rigid reliance rule in the context of illegality and proprietary rights under a trust, the overtly flexible approach in ParkingEye was not unexpected. Several judgments on contract and illegality over the years had indicated the need for a flexible approach. For example, in Hardy v Motor Insurers Bureau32 Diplock LJ had said, “[t]he court has to weigh the gravity of the anti-social act and the extent to which it will be encouraged by enforcing the right sought to be asserted against the social harm which will be caused if the right is not enforced”.33 And, drawing on developments in tort law,34 29 30 31 32 33 34

[2012] EWCA Civ 1338; [2013] QB 840. Les Laboratoires (n 7) [66], [73] and [75]. Tinsley (n 17). [1964] 2 QB 745 (CA). See also, eg Devlin J in St John Shipping (n 24). Hardy (n 32) 768. For example Saunders v Edwards [1987] 1 WLR 1116 (CA).



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the English courts in the early 1990s35 accepted, in contract as well as tort, a discretionary test of whether in all the circumstances it would be an affront to the public conscience to afford the claimant the relief sought. That “shocking the public conscience” test was rightly rejected, not least for being far too vague, by the House of Lords in Tinsley v Milligan but their Lordships’ approval instead of the reliance rule, led in turn to the work of the Law Commission which favoured a more flexible approach. That was subsequently judicially accepted and applied in the context of contract in ParkingEye v Somerfield. Turning now to the trilogy of Supreme Court cases, it was unanimously decided in Hounga v Allen36 that the claimant’s position as an illegal immigrant was not a defence to her claim for the statutory tort of unlawful racial discrimination. Lord Wilson (with whom Lady Hale and Lord Kerr agreed) openly saw the issue as turning on a consideration of various public policy factors. There was a particular focus on preserving the integrity of the legal system which was in turn said to involve examining whether the claimant had profited from the wrongdoing and deterrence. Lord Hughes (and Lord Carnwath) agreed with most of Lord Wilson’s reasoning essentially differing only on the weight placed on upholding the public policy against human trafficking. In focussing on preserving the integrity of the legal system, Lord Wilson expressly referred to the Supreme Court of Canada’s use of that idea in the illegality tort case of Hall v Hebert.37 His Lordship could equally well have referred to the High Court of Australia’s decisions in the illegality tort case of Miller v Miller38 or the illegality unjust enrichment case of Equuscorp Pty Ltd v Haxton39 in both of which the same idea was expressed in the language of maintaining “coherence in the law”.40 Had one stopped the clock there, one might have been forgiven for thinking that all was becoming clear in English law and that there was a degree of welcome uniformity of approach being adopted in the highest courts in the United Kingdom, Canada and Australia. Unfortunately, a very different approach41 was favoured, without Hounga v Allen even being mentioned, in the reasoning of the majority of the Supreme Court (Lord Sumption, with whom Lord Neuberger and Lord Clarke agreed) only three months later in the appeal in Les Laboratoires Servier v Apotex Inc.42 The claim was for damages under a cross-undertaking in damages given by Servier who had been granted an injunction against Apotex to restrain 35 36 37 38 39 40

See, especially, Howard v Shirlstar Ltd [1990] 1 WLR 1292 (CA). Hounga (n 24). [1993] 2 SCR 159 (SCC). Miller (n 1) [26]. Equuscorp Pty (n 18) [38], [45]. The importance of coherence in the law was first articulated as an idea by the High Court of Australia in deciding whether there was a duty of care owed under the tort of negligence (nothing to do with illegality) in Sullivan v Moody [2001] HCA 59; (2001) 207 CLR 562 [42], [53]–[55]. See also in that context CAL No 14 Pty Ltd v Motor Accidents Insurance Board [2009] HCA 47; (2009) 239 CLR 390 [39]–[42]. 41 But see the valiant attempt by Sales LJ in R (Best) v Chief Land Registrar [2015] EWCA Civ 17; [2016] QB 23, to reconcile the two. 42 Les Laboratoires (n 7).

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infringement of a patent. It transpired that Servier should not have been granted that injunction because it had no valid patent in this jurisdiction. The question was whether Apotex’s illegality, by acting in breach of Servier’s valid Canadian patent, constituted a defence to Apotex’s claim for damages under the cross-undertaking. As we have mentioned, in the Court of Appeal in that case, Etherton LJ had applied the approach of seeking to reach a proportionate response to the illegality taking into account various factors and his approach was heavily relied on by the Court of Appeal in ParkingEye v Somerfield. While the Supreme Court unanimously upheld the decision of the Court of Appeal that the illegality should not be a defence, Lord Sumption for the majority arrived at that conclusion by very different reasoning from Etherton LJ. Lord Sumption’s reasoning was as follows:43 “(i)  One must separate out two distinct questions. First, what conduct constitutes turpitude for the purposes of the defence; and, secondly, what relationship must the turpitude have to the claim. A third question – should the turpitude of an agent be attributed to its principal? – was also articulated as sometimes being in play but was not raised in this case. (ii) The answer to the first of those questions was that the relevant turpitude must comprise conduct that is criminal or quasi-criminal; and here one was concerned with the commission of a tort which (unless involving dishonesty) was neither.44 The defence therefore failed and it was unnecessary to go on to answer the second question. (iii) However, the correct approach to answering the second question was laid down in Tinsley v Milligan which remains binding (even in cases not involving, as that did, the creation of proprietary rights). Applying Tinsley v Milligan, one does not apply a discretionary range of factors approach and Etherton LJ had been wrong to do so in the Court of Appeal. Rather a reliance rule applies whereby the question as to whether a claim is barred by illegality is answered by asking whether the claimant needs to rely on (ie to assert, whether by way of pleading or evidence) facts which disclose the illegality.”

Not surprisingly, given his work at the Law Commission and his application in ParkingEye v Safeway of Etherton LJ’s range of factors approach, Lord Toulson, while agreeing with the decision, dissociated himself from Lord Sumption’s criticism of Etherton LJ. He rightly pointed out that the majority’s preference for a rule-based approach was inconsistent with the Supreme Court’s own approach in Hounga v Allen which Lord Sumption did not mention. Les Laboratoires Servier v Apotex Inc openly reveals, therefore, a clear split of approach between two camps marshalled by Lord Sumption, on the one hand, and Lord Toulson on the other. It has left the English law on illegality in a state of disarray. That the Supreme Court is by now only too aware of this has been made clear in the final case of the trilogy, which concerned Lord Sumption’s third 43 See also Lord Sumption’s summary in Jetivia (n 8) [63] where he preferred to talk of “illegal and immoral acts” rather than “turpitude”. 44 See also Lord Sumption in Jetivia (n 8) [100]: “ordinary private wrongs, sounding in tort or contract, do not give rise to the illegality defence”.



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“attribution” question. In Jetivia SA v Bilta (UK) Ltd45 claims were brought by a company against its directors in respect of a VAT fraud seeking compensation for, inter alia, breach of fiduciary duty, the tort of unlawful means conspiracy, and dishonest assistance. The question at issue was whether the company’s claims were met by the illegality defence: that is, did the illegal conduct of the directors mean that the company itself was acting illegally so as to trigger the illegality defence to the company’s claims? The seven-man Supreme Court unanimously decided that the illegality defence was inapplicable in this situation because the illegal conduct of the directors could not be attributed to the company (and, per Lords Toulson and Hodge, to deny the claim would defeat the policy behind the legal rules in question). While recognising the inconsistency of approach to illegality between Hounga v Allen and Les Laboratoires – and while Lords Toulson and Hodge, on the one hand, and Lord Sumption, on the other, made clear their strong preference for a flexible “balancing” approach and a rulebased approach respectively – their Lordships expressed the view that this was not an appropriate case for considering the general approach to the illegality defence. They expressed the hope that the court would have an opportunity in the near future to address that central and important question. In the words of Lord Neuberger (giving the joint judgment of himself, Lord Clarke and Lord Carnwath):46 “W]hile the proper approach to the defence of illegality needs to be addressed by this court … as soon as appropriately possible, this is not the case in which it should be decided. We have had no real argument on the topic: this case is concerned with attribution, and that is the issue on which the arguments have correctly focussed. Further, in this case, as in the two recent Supreme Court decisions in the Les Laboratoires and Hounga, the outcome is the same irrespective of the correct approach to the illegality defence.”

What is the Best Approach to the Effect of Criminal Conduct on a Contract at Common Law? Three possible approaches What has clearly emerged, therefore, is that in England and Wales the law on the effect at common law of illegality in contract is, to use that hackneyed phrase, at a crossroads. The recent cases reveal a split between two main approaches. First, there is the view, derived from Tinsley v Milligan47 and supported by Lord Sumption in Les Laboratoires Servier v Apotex Inc that everything turns

45 Jetivia (n 8). 46 Jetivia (n 8) [15]. For similar sentiments, see Lord Mance at [34] and Lords Toulson and Hodge at [174]. See also Sharma v Top Brands [2015] EWCA Civ 1140; [2016] PNLR 12 [38] (Sir Terence Etherton C). 47 Before that, see also Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 (CA).

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on a rule of reliance.48 A party cannot enforce a contract if it has to rely on criminal conduct in pleading or establishing its claim. However, if it can plead or establish its claim without relying on criminal conduct it will succeed. As Nicholas Strauss QC put it in Watts v Watts49 the reliance rule has become the modern interpretation of the Latin maxim ex turpi causa non oritur actio (“no action arises from a disgraceful cause”). A second approach, as applied in the context of contract by ParkingEye Ltd v Somerfield Stores Ltd, and deriving general support from Hounga v Allen, is that a more flexible “range of factors” approach is preferable and is attainable by the courts without legislation. Although the High Court of Australia has not applied a range of factors approach as such, it has adopted a very flexible approach which firmly rejects the reliance rule and sets up a starting point of non-enforceability which is then subject to a number of flexible exceptions. This emerges from, for example, Nelson v Nelson50 and Fitzgerald v FJ Leonhardt Pty Ltd.51 In the former, McHugh J, having said that the reliance rule would produce results that were “essentially random”, went on as follows:52 “The [reliance] rule has no regard to the legal and equitable rights of the parties, the merits of the case, the effect of the transaction in undermining the policy of the relevant legislation or the question whether the sanctions imposed by the legislation sufficiently protect the purpose of the legislation. Regard is had only to the procedural issue; and it is that issue and not the policy of the legislation or the merits of the parties which determines the outcome. Basing the grant of legal remedies on an essentially procedural criterion which 48 A variant of the reliance rule that has been sometimes been applied especially in tort cases, eg Cross v Kirby (CA, 18 February 2000) is a causal-type test which asks whether the claim is “inextricably linked” with the illegality. For consideration of this test, see Hounga (n 24) [31]– [41] and [55]–[59]. For clarification that this would widen the scope of the illegality defence as compared to the reliance test, see Lord Sumption in Jetivia (n 8) [102]. See also the reference by Lord Goff in Tinsley v Milligan to Dering v Earl of Winchelsea (1787) 1 Cox 318, 319–20; 29 ER 1184–85. For the proposition that the illegal conduct must have “an immediate and necessary relation” to the claim which was summarised by Lord Sumption in Les Laboratoires (n 7) [18] as a test of whether the claim was tainted by a “sufficiently close factual connection with the illegal purpose”. See also Sharma (n 46) [43]–[47]. For reservations about the “inextricably linked test” (and with Lord Hoffmann preferring the equally opaque language of causation) see the tort case of Gray v Thames Trains Ltd [2009] UKHL 33; [2009] 1 AC 1339 [54] (illegality defence where claimant sought compensation for the effects of his criminal conduct brought about by the injury negligently inflicted by the defendant). For a more typical example of a tort case (claimant involved in criminal conduct being injured in a traffic collision) where the causation reasoning on illegality was opaque, see McCracken v Smith [2015] EWCA Civ 380; [2015] PIQR P19. For justified criticism of the Australian approach to illegality in tort (albeit written before Miller (n 1) where the High Court held that duty of care was owed towards passenger engaged in joint criminal activity but only after she had asked to be let out of the car) see James Goudkamp, “The Defence of Joint Illegal Enterprise” (2010) 34 MULR 425. For the position being made even worse by the Australian tort statutes, see James Goudkamp, “A Revival of the Doctrine of Attainder? The Statutory Illegality Defences to Liability in Tort” (2007) 29 SLR 445. 49 [2014] EWHC 3056 (Ch) [126]. 50 Nelson (n 11). For the correct approach, including the exceptions, see McHugh J at 604–05. 51 Fitzgerald (n 9). For the approval of McHugh J’s approach and exceptions in Nelson, see McHugh and Gummow JJ at text between nn 28–34. 52 Nelson (n 11) [27].



Ch 19  Illegality as a Defence in Contract 447 has nothing to do with the equitable positions of the parties or the policy of the legislation is unsatisfactory, particularly when implementing a doctrine that is founded on public policy.”

In the latter case, in a brilliant exposition, Kirby J said:53 “Whatever may be the position in England following the decision of the House of Lords in Tinsley v Milligan, in Australia it must be accepted, from decisions of this court,54 that the rule against enforcement is not inflexible. Clearly it should not be so. It would be absurd if a trivial breach of a statutory provision constituting illegality, connected in some way with a contract or contracting parties, could be held to justify the total withdrawal of the facilities of the courts.55 It would be doubly absurd if the courts closed their doors to a party seeking to enforce its contractual rights without having regard to the degree of that party’s transgression, the deliberateness or otherwise of its breach of the law and its state of mind generally relevant to the illegality. Similarly, it would be absurd if a court were permitted, or required, to consider the refusal of relief without careful regard to the relationship between the prohibited conduct and the impugned contract. Thus, different considerations may exist where the contractual rights being enforced arise directly from the illegality, as distinct from those which arise only incidentally or peripherally.56 It is one thing for courts to respond with understandable disfavour and reluctance to attempts to involve them and their processes in an inappropriate and unseemly way effectively in the advancement of illegality and wrong-doing. It is another to invoke a broad rule of so-called ‘public policy’ which slams the doors of the court in the face of a person whose illegality may be minor, technical, innocent, lacking in seriousness and wholly incidental or peripheral to a contract which that person is seeking to enforce.”

A flexible range of factors approach is, of course, open to the criticism that it is hopelessly vague and discretionary and that it is simply a rehash of the discredited “shocking the public conscience”57 test. The Law Commission sought to render the approach more certain, initially by advocating a statutory “structured discretion”, and subsequently favouring an approach attainable without legislation, under which certain factors were specified as ones that the courts should openly articulate and consider. So if one were to give flesh to the bones of the “range of factors” approach, what would be the full range of factors that might be relevant and what would the overall aim be? I would suggest the following as a possible concretisation of the approach. If the formation, purpose or performance of a contract involves conduct that is criminal, the contract is unenforceable by one or either party if to deny enforcement would be an appropriate response to that conduct, taking into account where relevant –

(i) how serious the criminal conduct was; (ii) whether the party seeking enforcement knew of, or intended, the conduct;

53 54 55 56 57

Fitzgerald (n 9) 249. He here referred to Yango (n 20); and Nelson (n 11). He here referred to St John Shipping (n 24) 280–81, 288–89 (Devlin J). He here referred to St John Shipping (n 24) 284, 289–90, 292–93. See above, text to n 35.

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(iii) how central to the contract or its performance the conduct was; (iv) how serious a sanction the denial of enforcement is for the party seeking enforcement; (v)  whether denying enforcement will act as a deterrent to criminal conduct; (vi)  whether denying enforcement will ensure that the party seeking enforcement does not profit from the conduct; (vii) whether denying enforcement will further the purpose of the rule which the conduct has infringed; (viii) whether denying enforcement will avoid inconsistency or incoherence in the law thereby maintaining the integrity of the legal system.

This formulation sets out all the factors that a consideration of past decisions indicates might be taken into account in deciding whether the denial of enforcement of the contract is an appropriate response to the illegal conduct.58 Those factors were largely spelt out in ParkingEye v Somerfield (especially the judgment of Toulson LJ). The list also includes the factors spelt out by the Law Commission in its two consultation papers. It is not clear that all the factors (for example, the first four) can be accurately described as “policy factors” except in the loose sense that they are together seeking the best answer to a policy question. Clearly not all those factors would be in play in every case. Rather the approach would require the courts to consider the relevance of those factors to the particular facts and to spell out those factors that are considered important and decisive in arriving at the conclusion that to deny enforcement would, or would not, be an appropriate response to the conduct. Something further should be said about the last two of those factors. As regards the last, this was said to be of primary importance by the Supreme Court in Hounga v Allen following the emphasis given to it by the Supreme Court of Canada in the tort case of Hall v Hebert. Moreover, as we have already noted, the “coherence” of the law was stressed in the recent Australian cases of Miller v Miller and Equuscorp v Haxton. This is the same idea as not “stultifying the law” which was the language used by Lord Radcliffe in Boissevain v Weil59 and formed the basis of influential work by Professor Birks on illegality in the context of unjust enrichment.60 However, at least in difficult cases, it is not at all clear how practically useful this idea is. It operates at such a high level of generality that it leaves open what one means by consistency or coherence. It could justify almost any approach to the defence of illegality. Some would say that there is only inconsistency in a very narrow range of cases as, for example, where the criminal law has imposed one sanction (imprisonment or payment of a fine) and then an award of damages would contradict that (by giving the claimant damages in contract 58 Many past cases, including those applying a rule-based approach, have had one or more of these factors in mind. In other words, one might say that this approach is best viewed as bringing to the surface what has often, albeit covertly, underpinned this area of the law. 59 [1950] AC 327 (HL). 60 Peter Birks, “Recovering Value Transferred under an Illegal Contract” (2000) 1 Theoretical Inq L 155; Unjust Enrichment (2nd ed, Clarendon Press 2005) 247–53.



Ch 19  Illegality as a Defence in Contract 449

or tort for having been in prison or having paid that fine). Others would say that the very approach of weighing up several different factors so as to achieve an appropriate response is designed to ensure that there is no inconsistency in the law. So while this factor has been included in the list, it is doubtful that it operates on the same level as the other factors. A similar observation can probably be made about the penultimate factor: the purpose of the rule. One can argue that this lies behind other relevant factors and that it will normally need fleshing out in order to be of practical use. In other words, like coherence, it normally operates at a higher level of generality than the other specified factors. Lest it be thought that the reliance rule and the range of factors approach are the only two approaches that one can detect in the English case law, it is important to add that, prior to Tinsley v Milligan, a more traditional approach in contract – and of course Tinsley involved a trust not a contract – was to focus on rules that distinguished between illegality in formation and illegality in performance. One plausible interpretation of the cases was that the following two basic rules applied (which for shorthand purposes will be referred to as “the formation rule” and “the performance rule” respectively): 61 “A contract which had as its purpose, or was intended to be performed in a manner that involved, criminal conduct was unenforceable (a) by either party if both parties knew of that purpose or intention; or (b) by one party if only that party knew of that purpose or intention. If that first rule was inapplicable because it was only the performance of a contract that involved conduct that was criminal, the contract was unenforceable by the party who performed in that objectionable way but was enforceable by the other party unless that party knew of, and participated in, that objectionable performance.”

Although criticisms could be, and were, made of those rules, it is important not to lose sight of them in particular because those who argue against a “range of factors” approach, and yet can see the objections to a reliance rule, may be tempted to argue in favour of a different set of rules. One must therefore bear in mind that a different set of rules has already been tried. Before I turn to examine precisely why, in my view, the “range of factors” approach is be preferred to either the reliance rule or the rules as to formation and performance, it may be helpful in understanding the different approaches to consider how they would apply to some hypothetical examples. This is in line with my general belief, as regards methodology, that, because law is ultimately a practical discipline, all legal analysis is sharpened by being tested on the anvil of real or hypothetical cases.

61 For these types of rules in contract, see HG Beale (ed), Chitty on Contracts (32nd ed, Sweet & Maxwell 2015) paras 16-11, 16-16–16-20.They may be regarded as deriving from, eg Anderson Ltd v Daniel [1924] 1 KB 138 (CA), esp Atkin LJ (vendor of fertiliser that, contrary to statute, did not specify in an invoice the percentage of chemicals, held unable to enforce the contract so as to recover the price); Archbold’s (n 13) esp Devlin LJ (for the facts, see n 24 above); and Ashmore Benson Peace & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828 (CA) (for the facts, see n 64 below).

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Applying each of the three approaches to some hypothetical examples I want to start with the easy case where the effect of the illegality is clear whichever approach one takes. This is the case where there is a contract to commit a crime. That is, the purpose of the contract is to commit a crime and that that intent is clear on the face of the contract. Both parties inevitably know that that is the purpose. For example, D contracts with C to murder or rape D’s wife, or to steal a car for D, or to supply cocaine to D or to provide D with a false passport. If C performs the contract, and claims the agreed contract price from D, it seems obvious that that claim will fail and that D will have the defence of illegality. Similarly, if C fails to perform the contract and D sues C for damages for breach of contract it would again seem obvious that C will have the defence of illegality and that the claim will fail. If we apply any of the three approaches, one arrives at that intuitively obvious result. Applying the reliance rule, C and D will have to rely on the illegality in order to establish that there is a contract and a breach of that contract. Applying the rules as to formation and performance, the contract is illegal as made, as is known by both parties, and therefore cannot be enforced by either of them. And applying a “range of factors” approach, to allow such claims would amount to the law of contract encouraging the commission of crimes. Indeed the making of the contract would in these situations itself constitute the crime of conspiracy to commit those offences and to enforce the contract would be to enforce a criminal conspiracy. Nothing could be more contradictory and inconsistent than the law of contract being directly used to encourage or enforce the commission of a crime.62 However, although they may tend to dominate classroom discussion, the cases that raise the difficulties in practice are not of that extreme kind. Rather they are ones where the contract does not on its face reveal any criminal conduct. Criminal conduct is involved because one of the parties is entering into the contract with a criminal purpose in mind or the way in which the contract is performed involves a crime. Take the following two examples. In Example 1, C and D enter into a contract by which D is to hire a car to C which C intends to use to commit an armed robbery. D finds out that that is C’s purpose and refuses to deliver the car to C. C sues D for damages for breach of contract (to cover the much higher cost C has had to pay to hire a replacement car). In Example 2, there is a contract for the carriage of goods by land between C and D. C delivers the goods at their destination but does so by speeding for a short section of the motorway. D refuses to pay the agreed sum and C sues. It is submitted that the desirable answer in Example 1 is that C’s claim against D for non-delivery of the hire car should fail because of C’s intended criminal 62 Put another way, it cannot be right to insulate the justice as between the parties from the wider policy issues raised by the criminal law: private law and public law cannot clash in this extreme way.



Ch 19  Illegality as a Defence in Contract 451

conduct and D’s knowledge of that (that is illegality should be a defence); and that the desirable answer in Example 2 is that C’s claim should succeed for the agreed sum in carrying the goods (that is illegality should not be a defence). But if one applies the reliance rule, one comes to the incorrect (that is undesirable) answer in Example 1 albeit the correct (or, desirable) answer in Example 2. In neither example does C need to rely on the illegality in order to make out its contractual claim. All that C has to show is the contract and that the other party is in breach of that contract. In contrast, if one applies the rules as to formation and performance, one comes to the correct answer in Example 1 but the incorrect answer in Example 2. As regards Example 1, the formation rule means that C cannot enforce the contract because C knew of the illegal purpose. As regards Example 2, the performance rule means that the contract is unenforceable by C as the party who performed in the way that involved criminal conduct. Of the three approaches we are considering, only the “range of factors” approach enables one to reach the correct answer in both Example 1 and Example 2. In particular, it can take into account the seriousness of the illegality and the knowledge of the parties in Example 1 and the triviality of the illegality and its non-centrality in Example 2. Applying those factors, the appropriate response to the illegality is to refuse C’s claim in Example 1 but to allow C’s claim in Example 2. The conclusion to be reached from these examples is that, despite the certainty that the reliance rule and the rules as to formation and performance supply, the most satisfactory outcome – because it can take into account a number of variables so as to reach the desired outcome – is produced by the “range of factors” approach. I now turn to articulate more fully the advantages of a range of factors approach by offering six criticisms of a rule-based approach.

Six criticisms of a rule-based approach (i) The central problem with the reliance rule is that it can produce different decisions depending on the procedural technicality, which has nothing to do with the policies in question, of whether the claimant needs to plead or establish the illegality or not. Although the claim was not one in contract but was instead based on the law of trusts, it is most helpful here to refer to Tinsley v Milligan.63 Fortuitously the reliance rule produced the desired result on the facts of Tinsley v Milligan. However, even though the illegality involved would be identical, a different result would have been reached on those facts if the parties had been father and daughter. So in Tinsley v Milligan itself, C and D were same sex partners who had both provided the money for the purchase of a house. Under an agreement between them, the house was registered solely in C’s name so that D could make false benefit claims to the Department of Social Security. C and D fell out and C moved out. C brought a claim for possession of the house as hers alone. D counterclaimed that she was jointly entitled under a presumed 63 Tinsley (n 17).

452 Contract in Commercial Law

resulting trust. Applying the reliance rule, D’s counterclaim succeeded because, as there was a presumed resulting trust. D did not have to rely on the illegal scheme to establish her proprietary rights. But although the policies involved would be exactly the same, a different result would be reached if, instead of being partners, D was the father of C so that there was no presumed resulting trust but rather a presumption of advancement. In that situation, to apply the reliance rule would mean that the counterclaim would fail because D would have to rely on the illegal scheme to rebut the presumption of advancement. As was made clear in Nelson v Nelson (which involved analogous facts with a presumption of advancement operating between a mother and her children), this difference in result is irrational and bears no relation to the policies in play. (ii) Turning to the rule of formation set out above, the leading case exposing some of the difficulties with that rule is ParkingEye v Somerfield. The illegality in that case went to the contract as formed: that is, the claimant intended from the outset to perform the contract by sending out to customers letters that contained some deliberate inaccuracies. In rejecting the validity of the rule of formation, the Court of Appeal pointed out that that rule was flawed in not allowing for any differentiation between trivial and serious illegality or between peripheral and central illegality.64 Jacob LJ65 cited with approval the following paragraph of the Law Commission’s (second) Consultation Paper on The Illegality Defence:66 “[I]t clearly cannot be in every case that a contract is unlawfully performed, even where this was the original intention, that the offending party loses his or her remedies. Such a proposition would result in the widespread forfeiture of contractual remedies as a result of minor and incidental transgressions.”



As the Law Commission had earlier said in its (first) consultation paper, Illegal Transactions: the Effect of Illegality on Contracts and Trusts:67 “A major criticism of the present rules … is that they take little account of the seriousness of the illegality that is involved. So, for example, it would appear that there is no difference in the rules applied where a party enters into a contract intending to commit murder in its performance, and where a party enters into a contract in the knowledge that he or she will have to commit a parking offence in order to perform it.”

64 The idea of “participation” in the performance rule is also unclear. In Ashmore (n 61), the claimant’s goods were loaded onto a lorry that was not licensed to carry goods of that weight. It was held that the contract could not be enforced by the claimant (his goods had been damaged when the lorry toppled over during the journey) because the claimant had seen the goods being loaded and that that amounted to “participation” in the illegal performance. It is hard to see why standing by, doing nothing, amounts to participation. 65 ParkingEye (n 29) [32]. At [33] Jacob LJ also thought that there was “something distinctly odd about the supposed ‘intention from the outset’ rule”. This was because if the intention had only been formed after execution of the main contract, the performance rule and not the formation rule would apply (and that would then require consideration of “participation” by the party seeking enforcement). 66 Law Commission, The Illegality Defence: A Consultative Report (Law Com CP No 189, 2009) para 3.31. 67 Law Commission, Illegal Transactions (n 6) para 7.30.



Ch 19  Illegality as a Defence in Contract 453

(iii) As with the main criticism of the rule of formation, the reference to performance that involves illegal conduct in the rule of performance set out above fails to reflect the important fact that the varieties of illegal performance can vary hugely from trivial infractions of a statutory offence to serious criminal illegality. If the rule of performance were accurate, it would mean, for example, that a party who performs a contract of carriage by speeding on the motorway for 100 metres would be unable to sue for the agreed contract price on delivery of the goods. No doubt for this sort of reason, several important cases appear to contradict this rule. So, for example, in St John Shipping Corp v Joseph Rank Ltd,68 which we have earlier considered in respect of the legislative effect of criminal conduct, a shipping company performed a contract of carriage by overloading the ship thereby committing an offence. The master was fined and prosecuted for that offence. Having considered both the legislative and common law effects of that criminal conduct, Devlin J concluded that the company’s claim for the agreed price should succeed. Similarly, in Shaw v Groom,69 a landlord committed an offence by failing to provide his tenant with a proper rent-book but that did not preclude him from recovering the rent. (iv) More generally, while a purported advantage of a rule-based approach (as opposed to a more flexible approach) is its certainty, there are cases that do not fit any of those rules. In truth, the courts have often sought ways round the rigid rules because they do not like the results reached by applying them. This led the Law Commission to argue that the problems of the traditional approach were not merely that it produced undesirable results but also that the law was uncertain. The implication is that the flexible approach would not only produce more acceptable results but would in practice be no less certain than a rule-based approach. (v) It is sometimes suggested, as if a defence of a rule-based approach, that the fact that it produces undesirable outcomes is irrelevant because, as made clear as long ago as 1775 by Lord Mansfield in Holman v Johnson,70 the illegality defence operates as a rule of policy and is not designed to achieve justice between the parties. Certainly it is correct, as was made clear at the start of this paper, that the illegality defence is not designed to achieve justice as between the parties: if it were, there should be no illegality defence and the parties’ normal rights and remedies would apply. However, that does not mean that any result, however arbitrary, is acceptable: one should surely be striving for the most desirable policy outcome and it may be that that is best achieved by taking into account a range of factors rather than applying a fixed rule. (vi) It may be argued that, if there are deficiencies in rules that have so far been developed, the way forward is to refine those rules so as to remove those deficiencies rather than departing from the rules altogether. As someone who passionately believes in the importance of clear legal rules 68 St John Shipping (n 24). 69 [1970] 2 QB 504 (CA). 70 (1775) 1 Cowp 341, 343; 98 ER 1120, 1121.

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and principles, that would be my natural starting point. However, it is a daunting task to try to redraw the rules, so as to cater for exceptions, and it appears to be one that no judge or commentator has successfully accomplished.71 It is submitted that there is a fundamentally important reason for this. Unless one is to take the extreme view that illegality should (almost) never be a defence or should (almost) always be a defence, the relative importance of the factors that rationally ought to be in play vary greatly from case to case. In particular, the seriousness of the illegality can vary hugely but other obvious variables are the intentions of the parties, the centrality of the illegality to the contract or its performance, the effect of denying the defence, and the sanctions that the law already imposes. Similarly it is difficult to assess other than on a case by case basis how far the purpose behind a particular illegality will or will not be served by allowing the defence or how far it is desirable to use the illegality defence in contract as a deterrent. In other words, to reach the best result in terms of policy the judges need to have the flexibility to consider and weigh a range of factors in the light of the particular facts of the case before them.72 It is true that in private law, it may be thought unusual for the courts overtly to adopt a range of factors approach (or a structured discretion), rather than applying one or more rules, except where that has been laid down in a statute

71 It has been suggested to me that the approach of Tony Weir, teaching in Cambridge, has much to commend it. He argued that two rules were applicable: (i) that you cannot be sued for not committing a crime; and (ii) you cannot sue someone to be paid for committing a crime. But these rules may produce undesirable results in situations where the performance has involved central and serious criminality. Say, eg C contracts with D to carry D’s goods. C does so but is only able to do so by using a lorry that is unroadworthy or by using a lorry that is specifically stolen for the purpose. D finds out about that illegal mode of performance and, although the goods have been delivered, refuses to pay. The Weir rules would seem to say that D must pay and that the illegality is not a defence. But, in my view, the illegality is so central to the performance and, at least where the lorry has been stolen, the illegality is so serious that the illegality should be a defence. Or to take another example, say A contracts with B for B to obtain planning permission to develop certain land. B does so but only by bribing officials. A discovers this and refuses to pay B. If one were to allow B to recover (as the Weir rules would appear to do) B would be rewarded for corruption. It is hard to see that it makes much sense to distinguish (as the Weir rules do) between that case and one where A contracts with B for B to obtain planning permission by bribing officials and B does so and claims the agreed sum. I am very grateful to Nick McBride for drawing my attention to the Weir rules and for subsequent emails on their application. 72 This is not to suggest that the central aspects of the previous rules are irrelevant but rather that those aspects should be flexibly weighed up against others rather than being straightjacketed into fixed rules. It has also been pointed out to me that a further advantage of a flexible approach is that relief may be granted on terms as in Nelson (n 11) (claimant held entitled to enforce the resulting trust against her daughter but on condition that she paid to the State the housing subsidy that she had illegally (ie fraudulently obtained)).



Ch 19  Illegality as a Defence in Contract 455

(as, for example, in s 33 of the Limitation Act 1980 (UK)).73 But a “balancing” approach is well-established in public law.74 And, as was explained at the start of this chapter, illegality is so difficult not least because it involves a clash between public and private law. It is therefore not surprising that, in resolving that clash, an unusual approach for private law turns out to be the best route forward.

Conclusions My central conclusions may be summarised as follows. (i) Illegality as a defence in the law of contract is a difficult topic for several reasons. They include: that there is a clash here between public and private law values; that both common law and legislation tend to be involved; that there is uncertainty as to what counts as “illegality” and hence as to the scope of the enquiry; that there is an unhelpful pre-judgmental tendency to label the contract, rather than the conduct, as illegal; and that neither the courts nor commentators have adopted a convincing and consistent approach to the issues. (ii) In seeking to overcome the difficulties, it is helpful to focus on the core question: what is the impact of criminal conduct on the enforceability of a contract? (iii) In answering that question, there is a critical distinction between the legislative and the common law effect of criminal conduct on a contract. The former is a matter of ordinary statutory interpretation and is relatively straightforward. It is the latter – working out the effect at common law – which is so difficult. (iv) The most recent English case law reveals a marked split of judicial approach between those favouring a reliance rule and those favouring a “range of factors” approach. Traditionally a third approach in contract was to apply rules focusing on illegality in formation and in performance. (v)  There are significant deficiencies with a rule-based approach. It is preferable instead to apply a range of factors approach, such as that applied by the Court of Appeal in ParkingEye v Somerfield. This is at root 73 It was for this reason that, initially, I was very doubtful whether the judges could bring about the necessary reform in its area. Hence my earlier preference for a statutory structured discretion. In Burrows, The Law of Restitution (n 19) 601, I wrote as follows about the final recommendation of the Law Commission: “A problem for the largely non-statutory reform now favoured by the Law Commission is that it is clearly somewhat unusual for the courts, at common law, to articulate and balance policies in the way recommended; and it is unclear, for example, whether one would need to wait for the Supreme Court to signal this as the correct judicial approach”. Similar scepticism about a non-statutory solution was put forward by Lord Sumption in a lecture to the Chancery Bar Association: “Reflections on the Law of Illegality” 23 April 2012. This was subsequently published in (2012) RLR 1. Note that, even in private law and without a statute, some courts have favoured a multifactorial approach: see eg the use of a multifactorial approach in deciding whether a duty of care was owed in a novel situation in Caltex Refineries (Qld) Pty Ltd v Stavar [2009] NSWCA 258. 74 See eg the judgment favouring a multifactorial approach of French J in the High Court of Australia in Clarke v Commissioner of Taxation [2009] HCA 33; (2009) 240 CLR 272. See generally Jacco Bomhoff, Balancing Constitutional Rights: the Origins and Meanings of Postwar Legal Discourse (CUP 2013).

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preferable because the relative importance of the factors that rationally ought to be in play varies greatly from case to case. It may also be that this is the most natural way of reflecting the public law values involved. I have two final thoughts. First, I have said virtually nothing about the effect of non-criminal conduct on contract. What should count as relevant objectionable conduct is an interesting question that, not least in the light of Lord Sumption’s tantalising notion of “quasi-criminal” conduct, deserves further exploration. I have long found it surprising, for example, that the courts should ever in this context be concerned with what is described as “sexual immorality” unless criminal offences are being committed. But the important point is that a “range of factors” approach can very easily deal with forms of conduct other than criminal conduct precisely because the fact that the conduct is non-criminal goes to its seriousness which is a relevant factor. In contrast, a rule-based approach cannot accommodate the relative degrees of turpitude: in that sense it is all or nothing and the initial question as to what counts as “turpitude” assumes overriding significance. Secondly, I have said very little about illegality as a defence in tort and unjust enrichment. However, if a range of factors approach is the best for contract, it is almost certainly also the best approach for tort and unjust enrichment, thereby ensuring a desirable coherence across the law of obligations.

20

Doctrinal Approaches to the Law of Penalties: A PostAndrews Intention-based Defence of Relief against Fixed Contractual Penalties Nicholas A Tiverios1

Introduction Andrews v Australia and New Zealand Banking Group Ltd 2 elucidates one possible answer to what courts and commentators have observed as a fundamentally unresolved question: what is the doctrinal rationalisation for the penalties doctrine? Put another way, on what basis can the curial process use the penalties doctrine to legitimately strike down or substantively alter consensually created rights and obligations? Although Andrews has been met with some3 (albeit not universal)4 academic criticism, this chapter argues that the High Court of Australia’s decision in Andrews is welcome because it opens the way for the law of penalties to be developed along coherent principles which will make equity’s intervention in this area justifiable. This chapter argues that post-Andrews, the penalties doctrine in Australia ought to be understood as a species within the wider genus of the law relating to security rights. Where, applying orthodox principles of interpretation, A has a right against B which is acquired for the limited purpose of securing a particular primary outcome (that is, the “primary stipulation” or “real purpose of the bargain”), the assertion of that right is necessarily controlled by the primary outcome.5 If this analysis 1

2 3 4

5

My thanks to Ben McFarlane, Charles Mitchell, Dave Heaton, Long Pham and Clare McKay for their suggestions. I would also like to thank the various conference attendees that took the time to discuss this chapter with me. [2012] HCA 30; (2012) 247 CLR 205. See JW Carter and others, “Contractual Penalties: Resurrecting the Equitable Jurisdiction” (2013) 30 J Con L 99; and Edwin Peel, “The Rule Against Penalties” (2013) 129 LQR 152. See Paul Davies and PG Turner, “Relief Against Penalties Without a Breach of Contract” (2013) 72 CLJ 20; and Ben McFarlane, “Penalties and Forfeiture” in John McGhee (ed), Snell’s Equity (33rd ed, Sweet & Maxwell 2014). See also McFarlane (n 4) para [13.001].

457

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were to be adopted, Andrews creates an opportunity for the law of penalties to be understood and developed in a manner which gives fidelity to, or at the very least is consistent with, the parties’ objectively discerned intentions. This approach rests on an “intention-based” rationale, as it requires a penal clause to first be interpreted (or construed) as a security right for the penalties doctrine to be engaged. Viewed this way, for the doctrine of penalties as enunciated in Andrews to be enlivened, there must be a collateral right (the penalty) which, applying the principles of contractual interpretation, is objectively intended to operate as a security right to ensure performance of a related “primary” contractual stipulation (or obligation).6 Where the collateral right is characterised as being in the nature of a security right, the court will restrain the exercise of that collateral right to ensure that it is only enforced to the extent necessary to secure performance of the related primary stipulation (or the stipulation’s monetised equivalent). As partial enforcement of the collateral “security” right may be all that is required to achieve performance of the “secured” primary stipulation, the court may provide for a “scaled down” or “pro tanto” enforcement of the collateral right. This analysis and understanding of the penalties doctrine stands in sharp contrast to trite observations that the penalties doctrine is necessarily antagonistic to the parties’ “freedom of ”, or “power to”, contract (referred to throughout this chapter as the “power to” contract). This chapter develops my thesis in three parts. The first part places the issue discussed in context and provides a brief descriptive analysis of the High Court’s decision in Andrews. The second part sets out the intention-based rationale for the penalties doctrine and a series of competing rationales. The third part argues that the intention-based rationale provides the best understanding of the Australian law of penalties post-Andrews and provides a framework for reconciling the intention-based rationale with existing jurisprudence.

Part I – Background Andrews – formulation and decision In Andrews, the High Court of Australia delivered a unanimous judgment which fundamentally changed the accepted understanding of the law of penalties. The Andrews litigation (still active at the time of writing with there being a pending appeal from a recent decision of the Full Court of the Federal Court of Australia back to the High Court of Australia)7 involves a class action brought by bank customers claiming, inter alia, that various bank fees levied on personal, business and credit card accounts constitute penalties. In an interlocutory first instance decision, Gordon J held that only those fees imposed upon a customer’s breach of contract were capable of being characterised

6 7

This chapter uses the broader term “stipulation” throughout. Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50; (2015) 321 ALR 584. The High Court of Australia heard the appeal on 4 and 5 February 2016. Judgment was reserved at the time of writing this chapter.



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as penalties.8 Justice Gordon was bound9 by the Court of Appeal of the New South Wales Supreme Court’s decision in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd,10 which was authority for the proposition that the penalties doctrine was not enlivened on the happening of a specific event other than breach of a contractual duty. Similarly, the House of Lords’ decision in Export Credits Guarantee Department v Universal Oil Products Co11 is authority for the position in English law that a breach of contract is required to enliven the penalties doctrine (recently reaffirmed by the Supreme Court of the United Kingdom in Cavendish Square Holding BV v Makdessi12 and ParkingEye Ltd v Beavis13). Justice Gordon also referred to a utilitarian justification for the breach requirement: by limiting the penalties doctrine to cases involving breach of contract the doctrine is necessarily confined, thereby restricting the doctrine’s potential to abrogate impermissibly the parties’ powers to create mutually binding rights and obligations.14 Accordingly, Gordon J held that of the bank fees being challenged only late payment fees on credit card accounts were capable of being characterised as penalties (being the only impugned fees imposed upon a breach of contract).15 Conversely, her Honour held that bank fees such as honour, dishonour, nonpayment and over credit limit fees were not capable of being characterised as penalties as they were not levied on breach of contract, but were conditions triggered on specified circumstances which the customer was under no legal duty to avoid. Justice Gordon’s decision was appealed to the Full Court of the Federal Court of Australia and the matter was then removed, before the appeal was heard, to the High Court of Australia. The gravamen of the appeal concerned the question whether a breach of contract was a necessary precondition to enliven the doctrine to relieve against penalties. The High Court in Andrews unanimously recognised that the penalties doctrine does not hinge upon breach of a contractual obligation. The importance of the High Court’s decision to this chapter necessitates that the court’s formulation of when the penalties doctrine is engaged be set out in full: “In general terms, a stipulation prima facie imposes a penalty on a party (‘the first party’) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second 8 9 10 11 12 13 14 15

Andrews v Australia and New Zealand Banking Group Ltd [2011] FCA 1376; (2011) 211 FCR 53 [77]–[80]. Andrews (n 2) [29]. [2008] NSWCA 310; (2008) 257 ALR 292 [99], [134]. [1983] 1 WLR 399 (HL) 402–04. [2015] UKSC 67; [2015] 3 WLR 1373 [12]. The appeals in Cavendish and ParkingEye were heard conjointly and have the same neutral and report citation. [2015] UKSC 67; [2015] 3 WLR 1373 [12]. Andrews Trial (n 8) [78]–[79]. Andrews (n 2) [21]–[22].

460 Contract in Commercial Law party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.”16

The High Court’s removal of the breach requirement and its reformulation of the law of penalties rested on a twofold historical justification (which the Supreme Court of the United Kingdom17 has since criticised). The first justification was that the modern penalties doctrine developed from the Lord Chancellor’s equitable jurisdiction to relieve against penalties, which predated the emergence of assumpsit for nonfeasance and the modern law of contract. Put shortly, the history of the doctrine was anchored in Chancery’s prevention of the unconscionable enforcement of obligations created under bonds (specifically conditional bonds)18 where relief did not, and could not, depend upon a breach of contract (discussed in more detail in Part III below). Considering that the common law (c 1670s)19 and statute20 (with the enactment of the statutes of William (1696–97)21 and Anne (1705))22 followed equity in providing relief against the unconscionable enforcement of bonds, it also followed that limiting relief to cases where there is a breach of contract was inconsistent with the historical origins and development of the penalties doctrine.23 The second justification was that the creation and expansion of common law and statutory jurisdictions to relieve against penalties did not abolish the related equitable jurisdiction (so that the penalties doctrine became exclusively a rule of common law). Such developments made equitable relief generally unnecessary but not wholly obsolete.24 Accordingly, the appeal was 16 Andrews (n 2) [10] (footnotes omitted). 17 Cavendish (n 12) [42]. The Supreme Court’s criticism of Andrews is fourfold: (i) the conditional bond cases relied upon by the High Court of Australia still required the bond to be conditional on the performance of a contractual obligation and such cases necessarily posit a breach of that contractual obligation for relief from the penalty to be granted; (ii) there was no significant trace of a conceptually distinct equitable rule against penalties in the jurisprudence since the “fusion” of law and equity with the enactment of the Judicature Acts 1873–5; (iii) the High Court’s formulation may be difficult to apply in cases where there is no breach of contract; and (iv) “the High Court’s decision does not address the major legal and commercial implications of transforming a rule for controlling remedies for breach of contract into a jurisdiction to review the content of substantive obligations”. 18 For an overview of how a conditional bond works see the text to n 150. 19 AWB Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit (Clarendon Press 1987) 122. 20 Simpson (n 19) 118–23. 21 Administration of Justice Act 1696 (8 & 9 Will 3 c 11). The Statute of William permitted judgment to be entered for a plaintiff but relevantly limited the plaintiff ’s actual recovery (ie the execution of the judgment was limited) to the quantum of assessed damages (the judgment for the full sum would continue to stand as security for ongoing obligations which B’s owed to A). See Collins v Collins (1759) 2 Burr 820; 97 ER 579 and Murray v Earl of Stair (1823) 2 B & C 82. 22 The Administration of Justice Act 1705 (4 & 5 Anne c 16). The Statute of Anne conferred on the court a power to discharge an obligor on a bond who bought into court the: (a) principal sum; (b) interest; and (c) the obligee’s costs that were due on the money bond. AWB Simpson described the broad affect of these statutes on the law as being to reconcile the position in the common law courts with that in the Chancery: See Simpson (n 19) 118–23. For the differences between these statutes (and the types of bonds which fell under each) see Andrews Trial (n 8) [22]–[25]. 23 Andrews (n 2) [40]–[45]. 24 Andrews (n 2) [61]–[63].



Ch 20  Doctrinal Approaches to the Law of Penalties 461

allowed and the matter remitted to Gordon J to determine the issues at trial in accordance with the High Court’s reasons.25 The High Court’s reformulation governs a vital question that affects consumer, commercial and government contracting: when will a court refuse to enforce a contractual right because it penalises a party to the contract? It has recently been observed that the ramifications of Andrews are not yet apparent.26 Another, more critical, academic analysis of Andrews has suggested that the case has repositioned the entirety of the law of penalties.27 While I welcome the court’s repositioning of this doctrine, the decision in Andrews requires further analysis for at least two broad reasons. First, the High Court’s formulation of when the penalties doctrine is enlivened, and its departure from the breach requirement, was based on a historical analysis. The reasoning has been criticised for relying too much on legal history and failing to provide a clear rationale28 for reformulating the law. Indeed, Professor Peel has gone so far as to criticise Andrews as being a history lesson which simply begs the question: why have a penalties doctrine at all?29 The purpose of Part III of this chapter is to defend the Andrews formulation by providing a missing analytical link between the court’s historical analysis and a clear doctrinal rationale. Second, given the limited nature of the appeal before the High Court,30 there was understandably little elucidation of how the court’s reformulation of the law of penalties will apply in future cases, thus leaving its implications to be developed incrementally. Accordingly, the decision has led to some confusion amongst legal professionals. Indeed, one aspect of academic criticism of the decision is expressed in terms of commercial uncertainty and a perceived interference with the parties’ powers to contract.31 It follows that providing a framework for the operation of the penalties doctrine has become of the first importance. For example, in the Andrews formulation, much of the work has to be done by identifying the collateral and primary stipulations contained in a contract. However, the High Court provided little express legal or empirical analysis as to how this process is to be undertaken. As one academic text has posited, “the distinction between collateral and alternative [primary] 25 Subsequently, Gordon J held that a $35 late payment fee levied by A on B for B’s failure to make minimum credit card repayments on time constituted a penalty. However, Gordon J held that “honour” or “dishonour” fees of between $35–38 levied by A on B when B attempted to draw funds which would overdraw his savings or business accounts did not constitute penalty; and (ii) a fee levied by A on B when B exceeded a set credit limit on a credit account also did not constitute a penalty, see: Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35; (2014) 309 ALR 249. In the Paciocco Appeal (n 7), the Full Court of the Federal Court of Australia reversed Gordon J’s decision that the late payment fees on credit cards are penalties: Paciocco Appeal (n 7) [52]. The Full Court upheld Gordon J’s decision that honour and dishonour fees on bank accounts and over limit fees on credit cards do not constitute penalties. 26 Katy Barnett and Sirko Harder, Remedies in Australian Private Law (CUP 2014) 306. 27 Carter (n 3) 99. 28 Carter (n 3) 128. 29 Peel (n 3) 152. 30 The appeal was from a first instance interlocutory decision concerning the arguable availability, and not the application, of the penalties doctrine: Andrews (n 2) [15]. 31 See Carter (n 3) 111–12; and Richard Manly, “Breach No Longer Necessary: The High Court’s Reconsideration of the Penalty Doctrine” (2013) 41 ABLR 314, 331–36.

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stipulations is not easy to draw”.32 Part III of this chapter demonstrates that an intention-based rationalisation of Andrews can be reconciled with the outcomes in existing jurisprudence to provide clearer guidance for delineating between collateral (in the sense of a security) and primary stipulations.

Two doctrines or one? Authorities applying the Andrews formulation conflict as to whether it constitutes a unified33 penalties doctrine (originating in equity) or whether the formulation represents the current state of a separate “equitable” doctrine (and a distinct “common law”34 penalties doctrine remains). The analysis in this chapter is premised on there being a unified penalties doctrine as enunciated by the High Court in Andrews which originated in equity. The “unified” approach constitutes the best understanding of the High Court’s decision in Andrews for two reasons. The first reason is that in Andrews the High Court, in well considered obiter dicta, staunchly rejected the proposition (accepted by the Court of Appeal of the Supreme Court of New South Wales in Interstar) that the penalties doctrine in Australia35 is a conceptually distinct rule of common law not equity.36 The second reason is that, if Andrews is read as entrenching two distinct rules against penalties, then contracts will need to be read in an “unnecessarily complex” and bifurcated manner.37 This would require switching between equitable and legal spectacles when reading one instrument in order to make sense of the parties’ rights and obligations.38 Similarly, Professor McFarlane has observed that a bifurcated approach of applying conceptually distinct “common law” and “equitable” penalties doctrines to the same fixed sum clause: “may seem to make the law unnecessarily complex, and it could instead be argued that there is only one penalties doctrine, originating in equity, and that some previous decisions, rather than setting out the boundaries of a distinctly common law doctrine, instead adopted an unduly narrow view of [the penalty doctrine’s] operation.”39 32 Barnett and Harder (n 26) 306; a similar point is also made in Manly (n 31). 33 See Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825 [470] (Edelman J). 34 See the first instance decision of Gordon J from the remitted Andrews litigation: Paciocco Trial (n 25) [11]–[17] (Gordon J). See also Paciocco Appeal (n 7) [19]. 35 This position stands in stark contrast to the Supreme Court of the United Kingdom’s recent holding that the penalties doctrine in England is wholly a common law rule: Cavendish (n 12) [6]–[10]. 36 Andrews (n 2) [63]. Justice Edelman in Mineralogy (n 33) [470] cites the High Court’s references to the “unified” administration of law and equity as illustrating a unified doctrine. The rejoinder to this argument is that elsewhere in Andrews the High Court emphasised that the implementation of the Judicature system was procedural: Andrews (n 2) [68]. 37 McFarlane (n 4) para [13.007]. Further, Professor Burrows has observed that there is no reason to create a new category of case where the common law and equity give different answers to the same question as to do so creates an incoherent and fractured body of jurisprudence, see Andrew Burrows, “We Do This at Common Law But That in Equity” (2002) 22 OJLS 1, 5. 38 Further, whether the doctrine is a rule of “equity”, “common law” or “both” might create uncertainty in practice as lower courts only have those specific aspects of the Chancellor’s jurisdiction which legislatures have imbued them with. Thus lower courts with a limited “equitable” jurisdiction may not have the power to apply a purely equitable penalties doctrine. This issue was discussed in the context of proprietary estoppel in Bushby v Dixon Holmes du Pont Pty Ltd [2010] NSWSC 234; (2010) 78 NSWLR 111. 39 McFarlane (n 4) para [13.007].



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If a reason were to be given as to why two distinct penalties doctrines ought to be retained it would be this: as detailed below, the equitable and common law rules appear to have different underlying rationales and therefore it is possible that they can coexist. The equitable rule concerns fixed sum clauses which are characterised as being in the nature of security rights (this characterisation can be reached either as a narrow question of contractual interpretation or, more broadly, as a question of construction which goes beyond the linguistic meaning attributed to the contract). This rule prevents rights or interests taken or retained by way of security from being enjoyed beyond the function or purpose of security. Whereas the common law rule regulates the parties’ ability to determine the quantum of the secondary obligation that arises upon breach of a primary contractual obligation.40 The common law rule prevents fixed sum clauses which derogate impermissibly from the default remedy41 available for a breach of contract (ie the primary contractual obligation, breach of which gives rise to a secondary right to damages enforceable by A against B). However, just because the rationales for these rules appear to be distinct, it does not follow that both rules should be retained; nor does it follow that the rationale underpinning the common law rule is desirable. If my assumption that Andrews constitutes a unified penalties doctrine is wrong and, contrary to my position, separate common law and equitable doctrines remain, what influence will this have on my thesis? The answer is that the rationalisation put forward in this chapter will still remain relevant as the best rationalisation for the existence of a distinct post-Andrews “equitable” rule against penalties rather than as a justification for a “unified” rule. As a purely pragmatic point, until this issue is resolved, prudent practitioners may wish to plead the existence of a penalty both at common law and in equity to ensure that the outcome of any litigation does not turn on any real or perceived distinctions between these rules (eg equitable principles which enable relief to be tailored in specific circumstances such as unclean hands might result in different answers being given at common law and in equity).

Part II – Competing Rationalisations Significance of the question The purpose of this section is to sketch out nine competing rationales for the penalties doctrine. At the outset, it is important to appreciate that there is no universally acknowledged or endorsed rationale for the penalties doctrine. Rather, the case law and academic literature proffer multiple, sometimes overlapping and sometimes antagonistic, normative rationalisations for the doctrine. In this connection, Diplock LJ in Robophone Facilities Ltd v Blank42 expressly refrained from attempting to add to unsuccessful attempts to rationalise the law of penalties. Rather than theorising as to the nature 40 This explains the breach of contract requirement to enliven the common law rule: See Robert Stevens, “Rights Restricting Remedies” in Andrew Robertson and Michael Tilbury (eds), Divergences in Private Law (Bloomsbury, 2016) 159, 171–77. See also the text from n 96. 41 Which is imposed as a secondary obligation by the court. 42 [1966] 1 WLR 1428 (HL) 1446. For the same sentiment expressed more recently see Cavendish (n 12) [3].

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of the penalties doctrine, his Lordship preferred to treat the doctrine as a sui generis rule. This uncertainty as to the basis for the doctrine is not a recent development. In 1880, Bramwell LJ opined that attempting to define the basis for the penalties doctrine resulted in a “somewhat vague” formulation.43 More recently, Mason and Wilson JJ echoed this sentiment regarding the equitable jurisdiction to relieve against penalties by noting both the dynamism in the prejudicature system jurisprudence and the difficulty of reconciling contemporary developments with legal history.44 Indeed, some academics have opined that clearly articulating a justification for the law of penalties based on historical development is “unprofitable” and potentially “impossible”.45 Such concerns reflect the common view that the rule against penalties might have to be “treated as a mere artefact of legal history” with no clear conceptual basis.46 With respect, such sentiments are unsatisfactory. Given that the doctrine exists, a better approach is to, if possible, find a workable justification for the doctrine. Understanding the rationale for the penalties doctrine is not merely a theoretical or academic question. The proper theory underlying a court granting relief against a penal contractual47 provision changes the way cases are argued, considered and decided. Further, uncertainty as to what the penalties doctrine seeks to achieve feeds a number of common criticisms concerning the doctrine. They include: first, that the penalties doctrine is an anomalous exception to the parties’ powers to create mutually binding rights and obligations. The authorities48 and commentary49 are replete with references to this criticism. Second, the doctrine may detract from the certainty expected in the law of contract.50 Indeed, submissions were unsuccessfully made before the Supreme Court of the United Kingdom in Cavendish51 that the penalties doctrine should be overruled in its entirety (or at least in its application to commercial contracts). This submission was made on the basis that, inter alia, the doctrine is fundamentally uncertain and therefore detracts from the certainty which parties expect under the English law of contract. Finally, without a clear rationale to explain why the penalties doctrine exists, it is not possible to properly assess its broader utility as a legal principle.52 43 44 45 46 47

48 49

50 51 52

Protector Endowment Loan and Annuity Company v Grice (1880) 5 QBD 592 (CA) 596. AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 183. Carter (n 3) 109. Jonathan Morgan, Great Debates in Contract Law (2nd ed, Palgrave Macmillan 2015) 234. See further AMEV-UDC (n 44) 183 (Mason and Wilson JJ); and Carter and others (n 3) 109. Although this chapter focuses on the application of the penalties doctrine to contracts, as the High Court’s historical analysis in Andrews makes clear, given that the breach of contract requirement has been removed, there is nothing in principle preventing the application of the penalties doctrine to other written instruments. See Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656 [31]–[32]; Andrews Trial (n 8) [4]; and Cavendish (n 12) [33]. See Mindy Chen-Wishart, “Controlling the Power to Agree Damages” in Peter Birks (ed), Wrongs and Remedies in the Twenty-First Century (Clarendon Press 1996) 271; Carter (n 3) 111–12; and JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, LexisNexis Butterworths 2015) para [18.005]. Phillips Hong Kong v A-G of Hong Kong (1993) 61 BLR 41 (PC) 59; and Cavendish (n 12) [33]. See Cavendish (n 12) [36]–[39], [126], [162]. The court’s reasoning on this point was largely pragmatic, noting that the rule is a long-standing feature of English law. Jeremy Bentham, A Comment on the Commentaries and a Fragment on Government (first published 1776, Athlone Press 1977) 416.



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Rationale 1: Intention-based and unconscionable exercise of legal rights The first rationalisation, and that advocated by this chapter, is that the penalties doctrine as enunciated in Andrews is best understood as a species within the wider genus of law relating to security rights. In short, and given its most narrow operation, the Andrews formulation provides an analytical framework for discerning whether A and B’s objectively manifested intentions can be characterised in either of two ways. First, that an impugned right (that is, the penalty clause) exists for the limited, and sole, purpose of securing performance of an agreed stipulation with the effect that A can only enforce the right against B to the extent necessary to secure performance of a related primary stipulation (or the stipulation’s monetised equivalent). Or, alternatively, the impugned right is enforceable outright and not merely by way of security, such that the penalties doctrine has no work to do in restraining A from exercising her rights against B. On this intention-based approach, for the penalties doctrine to be enlivened there must be a “collateral” right (the penalty) which is objectively intended to operate as a security right to ensure performance of a “related” or “primary” contractual stipulation. So understood, the strength of the Andrews formulation is that it becomes consistent with, and does not derogate from, the objective interpretation of the impugned clause, for the characterisation of there being a right in the nature of security is an essential prerequisite for the doctrine to be engaged. This rationale is often referred to as equity’s prevention of the unconscion­ able exercise of legal rights.53 However, by focusing on the interpretation of the impugned contract as containing a right that is properly construed as a security right (or a right in the nature of a security right), recourse to the notoriously vague concept of what is unconscionable becomes unnecessary to explain the existence of the doctrine aside from building historical continuity. At first blush this rationalisation may appear somewhat novel. However, Part III of this chapter defends this as the best post-Andrews explanation of the penalties doctrine. It also demonstrates that the intention-based rationalisation constituted one understanding of the Lord Chancellor’s jurisdiction to relieve against penalties and illustrates why, so understood, the Andrews formulation can fit with existing penalties jurisprudence.

Rationale 2: Deterrence The second potential rationale for the existence of the penalties doctrine is that non-compensatory liquidated damage clauses are “likely to be regarded as penal because their function is to act as a deterrent”.54 The prevention of contractual provisions that deter departure from the terms of the bargain is an unsatisfactory rationale for the doctrine. This is for two reasons. 53 DEC Yale, Lord Nottingham’s Chancery Cases (Vol 2) (B Quaritch 1957–61) 15; McFarlane (n 4) para [13.001]; Paciocco Appeal (n 7) [103] (Allsop CJ). 54 Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 (Comm); [2014] 2 All ER 125 [120], rev’d Cavendish (n 12). See also Murray v Leisureplay Plc [2005] EWCA Civ 963; [2005] IRLR 946 [111].

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First, recourse to “deterrence” or the prevention of contractual provisions that seek to “deter” proscribed conduct simply proves too much. Deterrence is an inherent feature of many valid “fixed sum” clauses.55 As Professor Williams and the then late Sir John Salmond observed: “It is not, indeed, to be supposed that a term in a contract providing for the payment of a fixed sum upon default in performing some other obligation is to be regarded as providing for a penalty merely because it operates as a deterrent to such a default.”56

Take, for instance, the fixed sum clause upheld in the seminal case of Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited.57 That clause stipulated that New Garage pay a fixed sum of £5 for every item supplied by Dunlop that New Garage sold below a prescribed price. The clause was clearly intended to give force to Dunlop’s anticompetitive retail price maintenance scheme, thereby deterring New Garage from undermining the scheme. The speeches in the House of Lords make clear that “deterrence” was not the universal concern of the penalties doctrine. Rather, their Lordships held that the clause was not a penalty for at least two reasons (which can be seen as alternatives)58: (i) the court was unable to determine the loss which Dunlop would suffer if New Garage departed from the prescribed prices, and therefore it was appropriate to defer to the fixed sum;59 and/or (ii) Dunlop had a commercial justification for having a retail price maintenance scheme as it served to preserve the integrity of Dunlop’s wholesale distribution system60 (this aspect of their Lordships’ speeches was cited in Cavendish as being an early manifestation of the more recent “commercial justification” or “legitimate interest” test to determine whether a contractual term is a penalty notwithstanding whether or not the sum fixed by the term is a genuine preestimate of loss).61 Similarly, although decided under the English law of penalties,62 in ParkingEye63 a parking fee levied on motorists when vehicles were parked beyond two hours in an otherwise free car park was held to be valid as it had a “commercial justification” or “legitimate interest”, notwithstanding that one of the principal purposes of the fee was deterring motorists from parking beyond two hours (the relevant “justification” or “interest” being: (i) facilitating increased consumer turnover in a related retail premises; and (ii) enabling the parking services provider to properly administer the free parking scheme). Second, in many contexts involving wrongs, the law uses deterrence against breaching a legal duty as a reason why relief should be awarded. Similarly, if the 55 See Cavendish (n 12) [28]. 56 John Salmond and James Williams, Principles of the Law of Contracts (2nd ed, Sweet & Maxwell 1945) 580–81. 57 [1915] AC 79 (HL). 58 Cavendish (n 12) [23]–[25]. 59 Dunlop (n 57) 88–89 (Lord Dunedin), 91 (Lord Atkinson), 103 (Lord Parmoor). 60 Dunlop (n 57) 88 (Lord Dunedin), 91–93 (Lord Atkinson), 97–99 (Lord Parker). 61 Paciocco Appeal (n 7) [99]; and Cavendish (n 12) [32]. 62 The same result should follow under the Australian law of penalties as the right would not be classified as being a mere security right. 63 ParkingEye (n 13) [98]–[99].



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general law, at least sometimes, allows courts to provide for restitutionary64 or disgorgement65 damages as a contractual remedy (generally accepted in England but contested in Australia)66, why should the doctrine of penalties limit the enforcement of penalty clauses to a compensatory sum when the general law is willing to provide remedies that seek to deter wrongdoing? In Attorney-General v Blake,67 the House of Lords held that the remedy of account of profits, or disgorgement damages, was available “in exceptional circumstances” for breach of contract. This remedy has the function of deterring a breach of contract by stripping profits from the defendant.68 While this argument has less relevance in Australia where Blake has not been followed or properly considered at a final appellate level, it ought to be noted that any doctrinal basis for the law of penalties must account for, and operate in a manner that is intellectually consistent and coherent with, the remedies available generally in the law of obligations, particularly the remedies available for breach of contract. In this connection, Professors Burrows and McFarlane have both observed that one approach to reconciling the penalties doctrine with the availability of contractual remedies that seek to deter breach (for example, disgorgement damages) would be to allow the parties to agree to a fixed remedy with a similar effect to disgorgement in those “exceptional circumstances” where the general law provides for such relief.69 This view is surely right. If A is entitled to a sum of $X as damages for B’s breach of contract (even if the sum of $X constituted profit stripping disgorgement damages) then it would be an amazing law if a fixed sum clause, providing that B must pay A the sum of $X as a result of the same breach of contract, was considered to be penal and therefore unenforceable.70

Rationale 3: Preserving substantive fairness The third potential rationalisation for the penalties doctrine is that it ensures that contracts are substantively fair.71 However, this rationalisation is not a plausible explanation for the cases. Two reasons are illustrative. First, in applying the penalties doctrine, courts do not attempt to “balance” whether a contract or transaction was, in global terms, substantively fair by assessing whether adequate consideration exists to justify the inclusion of a penal 64 See James Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing 2002) 65–67. 65 Attorney-General v Blake [2001] 1 AC 268 (HL). 66 Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157 [157]–[159]; and Heydon, Leeming and Turner (n 49) para [26.075]. 67 Blake (n 65). 68 James Edelman, “Exemplary Damages for Breach of Contract” (2001) 117 LQR 539, 543. This view is challenged in Lionel Smith, “Deterrence, Prophylaxis and Punishment in Fiduciary Obligations” (2013) 7 Journal of Equity 87. 69 Andrew Burrows, Remedies for Torts and Breach of Contract (3rd ed, OUP 2004) 444–45; and McFarlane (n 4) para [13.013]. 70 Unless one considers that a normative difference exists in circumstances where the court decides that the sum of $X is due as opposed to the parties, see the text at n (76). 71 See David Ibbetson, A Historical Introduction to the Law of Obligations (OUP 1999) 255–57; and Hugh Collins, The Law of Contract (3rd ed, CUP 2003) 377.

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clause.72 Second, under both the pre-Andrews and post-Andrews formulations the parties can draft around the operation of the doctrine. For example, under the pre-Andrews, and current English position, the parties could prevent the penalties doctrine from being engaged by creating a penalty which is levied on the occurrence of a fact other than a breach of contract. Similarly, even the Andrews formulation does not prevent parties from utilising drafting techniques to mitigate the doctrine’s operation. As the High Court in Andrews said, alternative “primary” stipulations that constitute a fee for a further contractual right or benefit are not penalties (as such stipulations are clearly not intended to operate as security rights).73 Thus it might be possible to recast a potential penal provision as constituting a fee levied by A on B to give B some new contractual right or benefit (for example, framing a late payment credit card fee levied by A as conferring on B a new right to continue using the account, rather than simply being a fee levied for late payment, discussed in Part III below).74 By framing a fee as the price for A’s conferral of a new right or benefit on B, the penalties doctrine would be avoided because the impugned fee would not operate in the nature of a security, but would constitute a legitimate fee for a further contractual right or benefit (that is there is nothing wrong in principle about allowing the parties, if they so wish, to choose a second, or indeed a third, fourth etc …, primary stipulation).

Rationale 4: Prevention of punishment The fourth potential rationalisation for the penalties doctrine is that it prevents private individuals from utilising courts and the common law to punish a contractual counterparty for their own benefit. That is, punishment is a function that typically attaches to breaches of public duties and not private duties. 75 This justification has an institutional dimension, as it concerns the role of the curial process in quelling private controversies. This rationalisation for the doctrine is eloquently stated in the dissenting opinion of Frankfurter J in Priebe & Sons Inc v United States76 where his Honour said that: “the basic reason for this doctrine is that the infliction of punishment through courts is a function of society and should not inure to the benefit of individuals”.77 Professor Collins has questioned whether this rationalisation is convincing, because in the typical case where a “penal” clause simply results in B paying too much

72 73 74 75

Ringrow (n 48) [37]–[38]. Andrews (n 2) [79]–[82]. See Alan Tyree, “Fees and Penalties” (2014) 25 JBFLP 43, 46. Grice (n 43) 596; James Edelman, “Penalties and Forfeitures” in John McGhee (ed), Snell’s Equity (32rd ed, Sweet & Maxwell 2010) para [13.002]; Andrews (n 2) [9]; Heydon, Leeming and Turner (n 49) para [18.025]. Note before delineation existed between criminal and general law the latter punished: Ibbetson (n 71) 1–72. 76 332 US 407 (1947). 77 Priebe (n 76) 418.



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to A for the rights and benefits received under the impugned bargain,78 is this really apt to be characterised as “punishment”? Professor Collins’ observation is made more pertinent by the fact that the law is generally ambivalent towards individuals making improvident bargains79 even if they lead to financial ruin and bankruptcy, and that, as noted, there nonetheless remains the potential for the parties to draft around the penalties doctrine. Similarly, Dr Morgan has observed that while it makes sense to limit the private capacity to punish by the use of force and imprisonment, it is “less obvious” that monetary contractual incentives and disincentives raise the same policy considerations.80 While the ability of the parties to draft around the penalties doctrine is a weakness of many of the competing rationales, it is a strength of the intention-based rationale advocated by this chapter. Indeed, the cases are typically illustrative of a judicial reticence to depart from the terms of the parties’ bargain (thus the doctrine of penalties affords the parties a generous margin of appreciation to set their own contractual terms).81

Rationale 5: Contractual risk calculation and bargaining position The fifth potential rationalisation for the penalties doctrine is that it alleviates the fact that humans are systematically over-optimistic and fail to properly calculate risk when entering into contracts.82 This rationalisation is strongest in the context of standard-form and consumer contracting, where there is strong evidence “that the classical model of [rational] contracting parties does not accurately reflect the [actual] decision-making process of consumers”.83 This rationalisation is premised on a behavioural economic analysis of the law. Put shortly, behavioural economics studies individual decision-making using observations drawn from empirical human behaviour to better understand economic decision-making. Two observations of behavioural economics on contractual decision-making are relevant. 78 Although the Supreme Court of the United Kingdom recently held that terms stipulating that (i) B was obliged to sell remaining shares in a company to A for a price exclusive of goodwill; and (ii) B was disentitled to receive final payments for shares already sold to A, were not penal. Both these contingencies resulted from B’s breach of anti-competition covenants. The court reasoned, inter alia, that such clauses were properly characterised as price adjustment clauses which altered the primary obligations under the sale agreement and did not create obligations equivalent to contractual alternatives to a common law damages claim: see Cavendish (n 12) [74]–[76], [81]–[82], [181]–[186], [278], [281]. The court also observed that such clauses served A’s ‘legitimate interest’ in preserving the value of the goodwill in the company. 79 Export Credits (n 11) 403. 80 Morgan (n 46) 236. 81 Ringrow (n 48) [31]–[32]. 82 William Loyd, “Penalties and Forfeitures: Before Peachy v The Duke of Somerset” (1915) 29 Harv LR 117, 129; Robert Hillman, “The Limits of Behavioural Decision Theory in Legal Analysis: The Case of Liquidated Damages” (2000) 85 Corn LR 717, 723–28; and Morgan (n 46) 239–40. 83 Jeannie Paterson, “The Australian Unfair Contract Terms Law: The Rise of Substantive Unfairness as a Ground for Review of Standard-Form Contracts” (2009) 33 MULR 934, 953. See also Stewart Macaulay, “An Empirical View of Contract” (1985) 3 Wisc LR 465, 467–69; Jay Feinman, “The Significance of Contract Theory” (1990) 58 U Cin LR 1283, 1305–08.

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First, consumers are less proficient at making decisions the greater the number of factors they are required to consider.84 Consequently, in entering into standard-form contracts, consumers will typically focus on price, quality or other key characteristics, paying little attention to the remainder of the bargain (which may include a penalty clause).85 Second, consumers are generally limited in their ability to assess risks associated with a particular contract term, even if those risks are purportedly incorporated into a decision-making process.86 Several factors impact on consumers’ inability to assess risks accurately, such as the propensity to be overly optimistic about one’s ability to perform a contract without engaging a penal clause. Behavioural economics has undoubtedly been an influential factor in the recent creation of statutory regimes providing protection from unfair contract terms (enacted in Australia and the United Kingdom).87 However, the ability of contracting parties to adequately assess risk does not provide a plausible rationalisation for the cases, as the doctrine operates irrespective of the parties’ capacity to properly calculate risk. Further, the related issue of the inequality of the parties’ bargaining power is insufficient in and of itself to enliven the penalties doctrine.88

Rationale 6: Preserving liberty of action A sixth rationalisation for the penalties doctrine is that the law might be concerned with limiting the ability of an individual to bind their future selves in a manner that derogates significantly from that individual’s liberty of action (this has also been termed “preventing indirect specific enforcement”).89 Put colourfully, the law puts limits on the extent to which individuals can bargain away their freedom, with the most extreme manifestation being an individual effectively selling himself or herself into slavery. A similar idea might be seen as underlying the public policy rule that the courts will not specifically enforce employment contracts.90 However, there are three problems with this rationalisation. First, where A has the benefit of a penal fixed sum clause against B, B only binds herself to pay money, so the clause in question is conceptually no more an interference with her liberty than any other money obligation which may or may not ultimately lead to financial ruin. Second, as Professor 84 85 86 87

Paterson (n 83) 952–54. Paterson (n 83) 952–54. Paterson (n 83) 952–54. See Unfair Contract Terms Act 1977 (UK); Unfair Terms in Consumer Contracts Regulations 1999 (UK); Australian Securities and Investments Commission Act 2001 (Cth) s 12BG; and Competition and Consumer Act 2010 (Cth) Sch 2 “Australian Consumer Law”, s 23. 88 President Kirby stated, albeit with regret, that the status of the parties is a criterion that is “irrelevant” to the application of the penalties doctrine: Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1, 23. See also Jeancharm Ltd v Barnet Football Club [2003] EWCA Civ 58 [20]; and Hugh Beale, “Damages” in Hugh Beale (ed), Chitty on Contracts: Volume 1 General Principles (31st ed, Sweet & Maxwell 2012). cf AMEV-UDC (n 44) 194 (Mason and Wilson JJ). John Cartwright, Unequal Bargaining: A Study of Vitiating Factors in the Formation of Contracts (Clarendon Press 1991) 210–14, suggests that while the penalties doctrine does not solely respond to inequality of bargaining power, such inequality might provide one relevant criterion (see further, Cavendish (n 12) [34], [152]). 89 Collins (n 71) 377; Morgan (n 46) 236; and Mindy Chen-Wishart, Contract Law (5th ed, OUP 2015) 585. 90 JC Williamson Ltd v Lukey [1931] HCA 15; (1931) 45 CLR 282, 297–98.



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Collins has observed, this rationalisation might explain why a court may refrain from enforcing some penal clauses but it is an inapt basis for relief in most cases concerning the law of penalties, particularly in commercial cases.91 For example, preventing a party from unduly binding herself might make sense in circumstances where A and B are in an employment relationship and the contract stipulates that B is paid a wage of $Y per day but that if B fails to attend work on a given day, B is obliged to pay A the sum of $Y×10. However, the preservation of liberty and freedom of action does not seem to be a tenable rationalisation for relief against a clause in a “carefully constructed commercial agreement”.92 As Dr Morgan has observed, “[i]t seems melodramatic to suggest that commercial parties agreeing to a penalty clause are enslaving themselves”.93 Third, the penalties doctrine applies equally to natural persons, corporate persons and public bodies. If the penalties doctrine is truly concerned about preserving personal autonomy and freedom of action, it appears unclear why the doctrine should operate in a manner that avails corporate juristic persons (including public bodies), as opposed to natural persons, of their obligations, particularly as corporate juristic persons have their liberty of action nonetheless partially limited by their constitutional documents (which, in the case of private and public corporations, are contractual in character as between the company and its members)94 and/or the purposes for which the corporate entity was created.95

Rationale 7: Protecting the “compensation” for breach of contract principle The seventh potential rationalisation for the penalties doctrine is that it is a rule of “public policy” designed to give effect to the compensatory principle of contractual damages.96 In short, whenever B breaches a contractual duty owed to A, that breach typically97 enlivens a secondary obligation, imposed by the court, that results in B owing a duty to pay A compensatory damages.98 On this approach, in order to preserve the compensatory principle (or more generally the state’s jurisdiction to impose a remedy for breach of contract), the penalties doctrine does not allow the parties to depart too far from the common law default rules concerning contractual damages, thereby limiting the extent to 91 92 93 94 95

Collins (n 71) 377. Collins (n 71) 377. Morgan (n 46) 236. See Corporations Act 2001 (Cth) s 140. This argument maintains its relevance notwithstanding that the doctrine of ultra vires in Australia was abolished by statutory reforms to the corporations law in 1983 and 1985 insofar as the doctrine of ultra vires applied to registered companies. See RP Austin and IM Ramsay, Ford’s Principles of Corporations Law (15th ed, LexisNexis Butterworths 2013) paras [12.050]–[12.170]. See, for contracting involving government entities, Nicholas Seddon, Government Contracts: Federal, State and Local (4th ed, Federation Press 2009) para [2.22]. 96 See Citicorp (n 88) 30 (Mahoney JA); Burrows (n 69) 451; and Carter and others (n 3) 119–24. 97 Where a plaintiff seeks damages for breach of contract, the usual response is compensation: Robinson v Harman (1848) 1 Ex 850; 154 ER 363. Alternative remedies include injunction, specific performance, nominal damages and, more controversially, restitutionary and disgorgement damages. 98 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) 848–49 (Lord Diplock).

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which the parties can require B to pay a non-compensatory fixed sum to A on a breach of contract (that is, a sum that exceeds a genuine pre-estimate of loss that could potentially be recoverable from the relevant breach). Put shortly, whatever force the compensation for breach rationalisation may have had, it was expressly rejected in Andrews as the High Court specifically held that the Australian penalties doctrine does not hinge upon breach of contract (although if a separate common law rule against penalties remains in Australia, this would be the most tenable rationale for such a rule). The court held that although a contractual clause operating in the nature of a security right can, of course, function to secure performance of B’s contractual duty to A, there is no logical reason why such a right cannot function to secure a nonpromissory contractual provision.99 The corollary to this observation being that commentators who believe that the penalties doctrine is about policing the common law compensatory principle of contractual damages suggest that this is precisely why Andrews was incorrectly decided.100 Further, the Supreme Court of the United Kingdom recently reaffirmed the correctness of this “public policy” rationale in Cavendish and ParkingEye. Lord Neuberger and Lord Sumption (with whom Lord Clarke and Lord Carnwath agreed) held that the penalties doctrine is wholly a rule of common law that relieves a contractbreaker from the consequences of a fixed sum clause not because the objective of the clause could be secured in another way, but because the objective of the clause is contrary to public policy and should therefore be given no effect.101 Their Lordships went on to cite with approval102 Lord Roskill’s observation in Export Credits that: “the main purpose, of the law relating to penalty clauses is to prevent a plaintiff recovering a sum of money in respect of a breach of contract committed by a defendant which bears little or no relationship to the loss actually suffered by the plaintiff as a result of the breach by the defendant. But it is not and never has been for the courts to relieve a party from the consequences of what may in the event prove to be an onerous or possibly even a commercially imprudent bargain.”103

The debate about the relevance of this “public policy” rationale can largely be put to one side for present purposes, as this chapter’s purpose is to rationalise the Australian law of penalties post-Andrews. However, notwithstanding the binding status of the ratio decidendi in Andrews, for completeness it is worth setting out four further difficulties with the “compensation for breach of duty” rationale. First, it has recently been demonstrated that the breach requirement to enliven the penalties doctrine was an accident of history.104 The limitation was not based on a conscious judicial policy to limit the scope of the penalties doctrine but stems from an incorrect enunciation of principle contained in a 1926 ex tempore judgment of Salter J in the Divisional Court of England and 99 100 101 102 103 104

McFarlane (n 4) para [13.009]. See Carter and others (n 3). Cavendish (n 12) [7]–[14]. See also at [129]–[130] (Lord Mance) and [241] (Lord Hodge). Cavendish (n 12) [12] (emphasis added). Export Credits (n 11) 403. Heydon, Leeming and Turner (n 49) paras [18.040]–[18.045].



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Wales which eventually crystallised into principle.105 Second, Lord Denning powerfully observed in Bridge v Campbell Discount Co Ltd106 that hinging the application of the penalties doctrine on breach of contract created an “absurd paradox” whereby a wrongdoer in breach of contract may be afforded relief from a penalty whereas such relief was unavailable to a contractual party that kept her bargain.107 His Lordship’s objection to the rule of penalties based on the arbitrary distinction between circumstances when the compensatory principle is enlivened is robbed of its force when the relevant inquiry post-Andrews for the doctrine to be enlivened is the question of whether A’s right against B is a mere security right. Third, it is unclear why the general law would insist on making the compensatory principle a mandatory rule but then allow the parties to contract out of certain other default rules concerning the quantification of loss for breach of contract (for example, rules concerning remoteness and mitigation).108 Finally, the need to give fidelity to the compensatory principle may become an incoherent rationalisation for the penalties doctrine to the extent that exceptions from the compensatory principle for breach of contract become accepted and potentially swallow the rule. The difficulties concerning the availability of restitutionary and disgorgement damages for breach of contract have been dealt with above. Similarly, the potential availability of awards of substitutive or vindicatory damages for breach of contract might also undermine the coherence of a compensatory damages rationalisation (although such awards are imperfectly understood in themselves).109 One recent example suffices to demonstrate that in claims for breach of contract for the sale of goods, damages may be awarded to put the plaintiff in a better position than if the contract had been properly performed. In Clark v Macourt,110 despite reasoning on the basis of the compensatory principle, the High Court of Australia awarded the plaintiff $1m for breach of warranty, in a contract for sperm straws to assist in running her reproductive technology clinic.111 The value of the plaintiff ’s damages award was not limited to compensation for loss but was determined by the value of the right to performance which the plaintiff contracted to receive. This sum was awarded despite the plaintiff not suffering any actual loss, as she had passed the costs incurred in mitigating her loss on to her clients. Put simply, to the extent that there are ever awards for breach of contract that go beyond compensation for actual loss (for example, 105 106 107 108 109

Elsey & Co Ltd v Hyde (Divisional Court, 9 June 1926). [1962] AC 600 (HL) 629. Such an arbitrary distinction might also feed a freestanding objection to the rule against penalties. Burrows (n 69) 446–47; and Morgan (n 46) 237. See Robert Stevens, “Damages and the Right to Performance” in Jason Neyers, Richard Bronaugh and Stephen Pitel, Exploring Contract Law (Hart 2009) 171; and David Winterton, Money Awards in Contract Law (Hart 2015). 110 [2013] HCA 56; (2013) 253 CLR 1. 111 In England, such claims are governed by the Sale of Goods Act 1979 (UK). Where damages are awarded under s 53(3) for breach of warranty of quality, the sum awarded reflects the difference in value between the goods contracted for and the goods received. Relevantly, damages are recoverable irrespective of whether the plaintiff would have made up the loss suffered by passing on any breach to sub-purchasers: Williams Bros v Aguis Ltd [1914] AC 510 (HL) cf Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA).

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a substitutive award for damages for non-delivery of goods where as between date of delivery under contract and date of trial the price has fallen), then the idea that you only compensate for a breach of contract is not a solid foundation for extrapolation.

Rationale 8: Economic efficiency The eighth potential rationalisation is utilitarian; the penalties doctrine produces more “benefits” than “costs” as it facilitates the creation of greater economic wealth in global terms by enabling “efficient” breaches of contract.112 The theory of efficient breach is premised on compensatory damages being the most economically beneficial measure of damages. The theory rests on the assumption that by limiting contractual damages to the sum required to return the plaintiff to the position in which they would have been had the contract been performed, there is an incentive for parties to breach contracts and pursue opportunities that create greater net wealth if they arise. So, if B can put A in as good a position as if the contract has been performed by paying compensatory damages, B should then be free to pursue additional opportunities that might maximise B’s wealth or minimise B’s losses.113 There are two problems with using efficient breach as a rationalisation for the penalties doctrine. First, the existence of a penalty clause does not prevent the parties from achieving an economically efficient outcome. This is because even if B decides that she wishes to efficiently breach a contract with A to pursue a more profitable opportunity with C, it should not be assumed that A will insist on strict performance of his right to a fixed sum (the penalty) against B. This is because it is still open for A and B to negotiate or “bargain” around the fixed sum clause so that an economically efficient solution is nonetheless reached between A and B in which efficiency gains from B’s potential bargain with C can be divided between A and B (or where A can acquiesce to B’s gains).114 This observation is most pertinent where there are no significant transactional costs (for example, negotiation costs) in A and B reaching an agreement that allows B to depart from the terms of the contract. As Professor Burrows observes such transactional cost impediments are unlikely.115 The second problem with the economic efficiency rationale is its circularity. If economic efficiency is the correct rationale for the penalties doctrine, then the law is effectively creating a default rule that parties cannot contract out of the compensatory principle, because as rational actors, they ought to have “known better” and understood that to do so is inefficient. However, Posner J observed two problems with this argument in Lake River v Carborundum Co:116 (i) the argument wholly overlooks the fact that the penal provision may have made a transaction appear credible, thus such a provision can contribute to the creation of a “value-maximising” contract; and (ii) the argument does not explain, in 112 See MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC 283 (Comm) [111]. 113 David Campbell and Donald Harris, “In Defence of Breach: A Critique of Restitution and The Performance Interest” (2002) 22 Leg S 208, 218. 114 Burrows (n 69) 450–51. 115 Burrows (n 69) 450–51. 116 769 F2d 1284, 1289 (1985). See also Morgan (n 46) 238–39.



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circumstances where the parties have calculated the utility117 of a fixed sum remedy, why the court should displace what the parties have expressly agreed. In any event, and more generally, economics does not seek to justify its claim to control the law, when the law must balance multiple interests, approaches and outcomes aside from being concerned with the most economically efficient or rational allocation of resources.

Rationale 9: Preventing perverse contractual incentives The ninth rationalisation for the penalties doctrine is that the law has an aversion to penalty clauses because, insofar as they are “non-compensatory”, they may provide an incentive for A to induce B to trigger the penalty and pay a “non-compensatory” fixed sum.118 There are three difficulties with this rationalisation. First, even if A wanted to stymie B’s contractual performance, she must subject herself to significant, and often unjustifiable, commercial risks (for example, reputational damage, litigation expenses, a counterclaim from B and the costs of interfering with B’s performance).119 Second, as Dr Morgan suggests, a potential counter-argument might be to focus on the parties’ exercise of their powers to contract: “the parties must be taken to have weighed the benefits of the penalty against the costs of possible opportunisms”.120 Put shortly, it is wrong to artificially dissect the bargain as the parties pay an amount (or varying amounts) for all contingent and immediate rights and obligations.121 Finally, juridical concerns about the opportunistic exercise of penal clauses cannot explain the cases where courts uphold non-compensatory (that is, more than a genuine pre-estimate of loss) fixed sum clauses provided there is a commercial justification or legitimate interest for the imposition of the fixed sum.122 Put shortly, this is because “commercially justifiable” or “legitimate” fixed sum clauses are valid notwithstanding the potential for A’s opportunistic exercise of the right to the fixed sum.

Part III – A “New” Post-Andrews Intentionbased Rationalisation The purpose of Part III of this chapter is to demonstrate that the intentionbased rationalisation forms a strong working hypothesis for the existence of the penalties doctrine post-Andrews. The significance of this conclusion is that, far from being inconsistent with the contractual parties’ powers to create mutually binding rights and obligations, Andrews opens the way for the law of 117 See Beale (n 88) [26-171]. 118 Burrows (n 69) 450–51. 119 NC Seddon, RA Bigwood and MP Ellinghaus, Cheshire and Fifoot Law of Contract (10th ed, LexisNexis Butterworths 2012) 1178, suggest that A preventing B’s performance may limit the enforcement of A’s right to the fixed sum. Further, A may breach her general duty to cooperate in the performance of the contract. 120 Morgan (n 46) 239. 121 Although this observation has more force in a commercial context than consumer context for the reasons discussed above at the text to (n 82). 122 Paciocco Appeal (n 7) [99] (Allsop CJ).

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penalties to ultimately be developed along coherent principles which reconcile the doctrine with the classical power to contract critique. Four reasons support this view. The first reason is that the intention-based rationalisation can fit with the Andrews formulation. The second reason is that the intention-based rationale forms one understanding of why equity historically intervened to restrain the enforcement of penalties contained in conditional bonds. The third reason is that the Andrews formulation depends on either the proper interpretation or construction of the parties’ substantive rights and obligations in order to be engaged. The fourth reason is that the intention-based rationale provides a coherent path for reconciling the “threshold” issue of when the penalties doctrine is engaged with existing penalties jurisprudence.

Reason one – the intention-based rationalisation “fits” The first reason why the “intention-based” rationale is a strong justification for the penalties doctrine post-Andrews is that it “can fit” the High Court’s formula­ tion for when the penalties doctrine is engaged. The court’s formulation does not simply require there to be a contractual stipulation which imposes any additional detriment upon the failure of some other contractual stipulation. Rather, as the court observed, there must be a “collateral” stipulation, which was described as “in the nature of a security for and in terrorem of the satisfaction of the primary stipulation”.123 For the penalties doctrine as enunciated in Andrews to be enlivened, A must have a “collateral” right (the penalty) against B which is objectively intended to operate as a mere security right to ensure performance of a related “primary” contractual stipulation. Further, as Edelman J has outlined, the conscious emphasis in the Andrews formulation on the Roman origins of the term “stipulation” (or “stipulatio”) is best understood as referring to a security stipulation on the basis, inter alia, of the common use of a stipulatio as a unilateral contract binding a third party guarantor to secure a sum owed by a principal debtor.124 Where the collateral right is characterised, on the orthodox principles of contractual interpretation (discussed below), as being in the nature of a security right,125 the court will restrain A’s exercise of the collateral right to ensure that it is only enforced to the extent necessary to secure performance of the related primary stipulation or the primary stipulation’s monetised equivalent. Accordingly, as partial enforcement of the collateral “security” right may be all that is required to achieve performance of the primary stipulation, the court may provide for a “scaled down” or “pro tanto” enforcement of A’s “security” right.126 Where the Andrews formulation is satisfied, the court is simply treating the penalty clause in a manner that is conceptually similar to other rights acquired 123 Andrews (n 2) [10], [79]; Paciocco Appeal (n 7) [95]; Mineralogy (n 33) [478]–[484]. 124 Andrews (n 2) [37]; Mineralogy (n 33) [482]–[485]. 125 The opposite view was expressed by Deane J in AMEV-UDC (n 44) 200. Justice Deane referred to such a right being a penal sanction or, alternatively, a security right. See also Heydon, Leeming and Turner (n 49) paras [18.025] and [18.075], who refer to stipulations meant to punish or secure performance. The difficulty with this approach is that in Andrews (n 2) [10], the Court did not frame stipulations intended to punish or secure performance as alternatives. 126 cf the UK position that a penalty is void: Beale (n 88) para [26.188]; and Cavendish (n 12) [87].



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for the limited purpose of securing a primary obligation.127 It is for this reason that Professor McFarlane has observed that the Andrews formulation reflects the circumstances when a court will grant relief against the forfeiture of an asset or right which is held by A to secure an obligation owed by B.128 The effect of the Andrews formulation is that, strictly speaking, no “penal” clause in itself constitutes a “penalty”.129 Rather, it is A’s enforcement of the clause beyond what is actually necessary to satisfy the “secured” primary stipulation in specific circumstances which constitutes the “penalty”. From a historical perspective this result can be explained on the basis of equity restraining A’s “unconscionable” exercise of a legal right.130 However, the problem with justifying the existence of the penalties doctrine on the basis of unconscionability or the prevention of the unconscionable exercise of legal rights is that, as the High Court has observed, “the statement that enforcement of [a] transaction would be ‘unconscionable’ is to characterise the result rather than to identify the reasoning that leads to the application of that description”.131 The central point that the High Court appears to be making is that an abstract principle, in this case the label “unconscionability”, cannot be sensibly understood unless the abstraction is ultimately referable to specific criteria that give rise to a cause of action and/or engage the relevant legal principle. 132 Even as a doctrinal rationalisation for the rule against penalties, recourse to “unconscionability” alone simply proves too much. If preventing “unconscionability” were used as a sole justification for every case that fell within settled principles, it would be possible to say, in every case, that the opposite conclusion would be unconscionable or that every legal rule can be justified on the basis of preventing “unconscionability”.133 Rather than focusing on “unconscionability”, a better approach is to focus on the specific threshold requirement in the Andrews formulation (termed the 127 Andrews (n 2) [12]: it should be noted that the Andrews formulation does not require the primary stipulation or the relevant ‘penalty’ to be payment of money. 128 McFarlane (n 4) para [13.003] draws the connection between the Andrews formulation and the description of the “paradigm” case for relief against penalties as enunciated by Lord Neuberger in the advice of the Privy Council in Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2; [2015] 2 WLR 875 [90]. Indeed, McFarlane takes this connection further and suggests that “there is no obvious doctrinal or policy reason for maintaining English law’s clear distinction between penalties and forfeiture jurisdictions”. For the contrary view why the doctrines remain conceptually distinct see Heydon, Leeming and Turner (n 49) para [18.220]; AMEV-UDC (n 44) 199 (Deane J). In a minimalistic spirit, it suffices to note that thesis advocated by this chapter does not depend on wholly collapsing the distinction between penalties and forfeiture. 129 cf Citicorp (n 88) 40 (Priestley JA). 130 AMEV-UDC (n 44) 198–200 (Deane J); McFarlane (n 4) para [13.001]. 131 Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 [34]. See also Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 [43]; and Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315 [23]–[26]. 132 Jeremy Bentham referred to this process as paraphrasis: the need to explain fictitious entities (substantive nouns referring to abstractions) by the process of explaining such abstractions with recourse to things that exist in the physical world, that are perceivable or that could be inferred to exist: see Philip Schofield, Utility & Democracy: The Political Thought of Jeremy Bentham (OUP 2006) 8–9, 23–24. 133 Peter Birks, “Equity in Modern Law: An Exercise in Taxonomy” (1996) 26 Univ WAL Rev 1, 97. See also Nicholas Tiverios, “Raiders of the Secured Asset: The Doctrinal Rationalisation for the Liquidator’s Lien or Charge Over a Secured Asset Post-Stewart v Atco” (2015) 23 Insolv LJ 101, 106–07.

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“anterior” stage of analysis in the court’s reasons)134 that A has a contractual right against B which is objectively intended to secure performance of a related “primary” contractual stipulation. Thus the reason why it is “unconscionable” for A to exercise the collateral right beyond what is required to secure performance of the related primary stipulation is that it goes beyond how a reasonable person in A and B’s position “objectively” intended the collateral right to function on the failure of the secured stipulation. That is, the court is simply giving effect to an objective interpretation and refusing to enforce a contractual term beyond its purported function or purpose. Viewed this way, it is the objective interpretation of the impugned clause and not unconscionability which does the substantive work in the Andrews formulation. Now, it must be acknowledged that there are broadly two ways in which A’s right can be characterised as being a security right. First, and that advocated by this chapter, is that the contract itself does not allow A to fully enforce his right. A second, and alternative, analysis is that once A’s right is characterised as a security right, it would be an abuse of the right in question for it to be used in a particular way (that is, a set of equitable default rules apply once a contractual right is construed as being in the nature of a security right). The first approach depends on interpretation, being the linguistic meaning of the contract which can include reading the text in light of shared normative and community values. The second approach depends on construction, being the ultimate legal effect that the court is willing to attach to the linguistic meaning of the contract. The adoption of this second approach would require some further normative basis as to why the court would depart from the linguistic meaning of the contract (several competing rationales have been set out in Part II of this chapter).135 One concession does, however, need to be made regarding the above analysis. That is, the analysis adopted here puts little weight on the High Court’s use of the term “in terrorem of ” which, in the court’s formulation, is tethered to the more important term “security for” by use of the conjunction “and”.136 The reason for this approach is that it remains unclear what the additional term in terrorem adds, if anything, to the concept of a right also being described as in the nature of a security. As Lord Radcliffe persuasively observed, the use of the term in terrorem provides little elucidation as to what constitutes a “penalty” as such clauses may be agreed by parties who are not at all terrorised by the possibility of full enforcement.137

Reason two – historical pedigree One of the most strident academic criticisms of the High Court’s formulation in Andrews has been that it “turned back time” to some “golden age of 134 Andrews (n 2) [15]. 135 This second approach fits the analysis in McFarlane (n 4). For an overview as to how normative values influence the interpretative process see Stephen Smith, Contract Theory (OUP 2004) 274–79. For an overview of the interpretation and construction distinction see Lawrence Solum, “The Interpretation-Construction Distinction” (2010) 27 Constitutional Commentary 95. 136 cf Heydon, Leeming and Turner (n 49) para [18.025], suggest that the in terrorem requirement is important because it captures the central idea of a penalty: meant to punish. 137 Bridge (n 106) 622.



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equity” in which “freedom of contract was curtailed even in relation to [contractual] payments not activated by breach”.138 However, the same authors note an “unexplained paradox”: the High Court’s decision in Andrews is contemporaneously (i) based on historical reasoning, and (ii) “based on cases decided at a time when it was generally considered that freedom of contract counted for more than it does today”.139 The criticism boils down to this: the High Court purportedly “had its cake and ate it too” regarding its use of legal history. This is because on the one hand it expanded the penalties doctrine by removing the breach of contract requirement, utilising old authorities to do so.140 On the other hand, many of those authorities are from the 18th and 19th centuries when laissez faire notions of classical liberalism and the related concept of the power to contract reached their zenith.141 It is submitted that this criticism is perhaps overstated. This is because a strong working hypothesis for why, in the mature post-Restoration equity jurisprudence, relief was granted against penalties was the need to give fidelity to the parties’ intentions (the intention-based rationale). This is the missing analytical link between the High Court’s historical reasoning and a clear doctrinal rational underpinning the penalties doctrine. In this connection, Fredrick Pollock, writing in 1878, outlines the centrality of the parties’ intentions in the application of the penalties doctrine: “penal provisions inserted in instruments to secure the payment of money or the performance of contracts will not be literally enforced, if the substantial performance of that which was really contemplated can be otherwise secured. […] Here again the original ground on which equity interfered was to carry out the true intention of the parties.”142

Similarly, the first edition of Story (1836) refers to the true basis for relief against penalties being in the first instance the construction of a right in favour of A in the impugned contract or instrument as being a mere security right, coupled with the unconscionableness of A insisting on the full enforcement of that right against B in the circumstances of the case.143 What is essential to appreciate for present purposes is that the Andrews reformulation does not necessarily return the penalties doctrine to a “golden age” where equity freely cut down consensually created rights and obligations. As Professor Ibbetson has observed, the penalties doctrine was emasculated in the 19th century by virtue of the intention-based rationalisation: “a clause was only treated as a penalty clause if it could not have represented the true intention of the parties”.144 The doctrine was then expanded in the early 20th century, culminating in the House of Lords’ seminal decision in Dunlop.145 Indeed,

138 139 140 141 142 143

Carter and others (n 3) 131. Carter and others (n 3) 112. Andrews (n 2) [10]–[11], [40]–[44], [53]–[57]. PS Atiyah, Essays on Contract (OUP 1988) 355. Fredrick Pollock, Principles of Contract: at Law and in Equity (2nd ed, Stevens & Sons 1878) 445–46. Joseph Story, Commentaries on Equity Jurisprudence: As Administered in England and America (Hilliard Gray 1836) 106. 144 Ibbetson (n 71) 255–56. 145 Ibbetson (n 71) 255–56.

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PS Atiyah, albeit on broader terms than those advocated in this chapter,146 viewed the common law’s “traditional refusal” to enforce penalty clauses as being a question of intent: “an intuitive understanding that such clauses are not genuine contractual promises or obligations”.147 Moving from general principles to a specific example, a consistent theme as to why the Chancery ultimately developed a fully formed jurisdiction to relieve against the enforcement of conditional bonds by around the time of the Restoration (1660) was that the Lord Chancellor was giving fidelity to the parties’ primary intentions. To make good this observation, some space needs to be dedicated to explaining the development of the origins of relief against the “unconscionable” enforcement of bonds. Appreciating the significance of this development lies in the centrality of the bond in commercial life of the medieval and early modern periods148 and the fact that relief against bonds developed in stages and there was thus not necessarily a consistent or coherent theorisation as to why the Chancery was providing relief. In the later medieval and early modern periods the bond became the dominant method149 of recording agreements. A simple bond is a unilateral promise contained in a deed binding its maker to do something (for example, pay a fixed sum or perform an act) by a set date. A conditional bond is the same as a unilateral bond, aside from it being accompanied by a condition (termed a condition of defeasance) that, if satisfied, extinguished the primary obligation of the bond.150 For example, A lends £20 to B. In doing so A makes B execute a deed obliging B to pay A the sum of £40 (the penalty) by date X subject to a condition of defeasance (normally written on the back of the bond) that B pay A the sum of £25 by date X − 1. The common law’s approach to bonds has been aptly described as “tough law”.151 In the context of the conditional bond, common law courts until the mid 1670s allowed the full enforcement of the primary obligation and, although the defendant could plead the existence of performance of the conditional defeasance performance had to be strict. The common law position with respect to simple bonds was so plaintiff-friendly it has been termed “irresistible”.152 The irresistibility stemmed from the mere production of the simple bond proving the existence of the primary obligation (that is, the debt owing) and, from the common law’s reticence towards parol evidence; it was not open for the defendant to enter a plea that they had performed the primary obligation. The defendant was supposed to ensure that “the bond was cancelled or destroyed, or obtain an acquittance or release under seal” on performance.153 146 As Atiyah (n 141) 369–74, suggests the parties do not intend to be bound at all by such agreed remedies clauses. He argues that the penalties doctrine essentially gives effect to the parties’ intentions on the fundamentals of the contract, at the expense of the full enforcement of the penalty clause. 147 Atiyah (n 141) 369. 148 Joseph Biancalana, “The Development of the Penal Bond with Conditional Defeasance” (2007) 26 J Legal Hist 212. 149 Ibbetson (n 71) 28–30. 150 Ibbetson (n 71) 28–30. 151 AWB Simpson, “The Penal Bond with Conditional Defeasance” (1966) 82 LQR 392, 411. 152 Edith Henderson, “Relief from Bonds in the English Chancery: Mid-Sixteenth Century” (1974) 18 Am JLH 298, 300. 153 Simpson (n 151) 402–03.



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The common law’s rigidity led to defendants in common law bond cases becoming Chancery’s plaintiffs. AWB Simpson identifies three periods of development.154 First, during the reign of Edward IV (1442–83), Chancery provided relief in cases where the debtor had performed an obligation contained in a simple bond but had failed to take the necessary steps to gain a release. Second, during the reign of Elizabeth I (1558–1603), Chancery expanded the circumstances in which a defendant could be afforded relief on a conditional bond to circumstances where the defendant had suffered an accident or extremity or had only made a trifling default, provided the defendant compensated the plaintiff for any loss suffered. Finally, after the Restoration (1660), Chancery would grant relief to a defendant on a conditional bond if, within a short time from non-performance, he paid to the plaintiff the conditional defeasance, interest and any legal costs. It is submitted that a plausible hypothesis as to the rationale for the development of equity’s mature jurisdiction for providing relief in conditional bond cases is consistent and coherent with the thesis advocated by this chapter (an intention-based rationale). As Macclesfield LC observed in the seminal decision of Peachy v Duke of Somerset,155 the real basis for relief against penalties and forfeiture was: “the original intent of the case, where the penalty is designed only to secure money, and the court gives him all he expected or desired”.156 In the latter authority of Sloman v Walter,157 Thurlow LC expanded this formulation by extending it to apply to penalties contained in conditional bonds that secured performance of non-monetary stipulations. His Lordship explained that the reason why equity provides relief is that the parties themselves insert the penalty in the bond (the collateral stipulation in the Andrews sense) simply to ensure that the conditional defeasance (the primary stipulation in the Andrews sense) is performed. In penalties cases, equity was ensuring that the bondholder was only using his legal rights insofar as they were required to secure the enjoyment of a primary object of the transaction on the particular facts of a given case. Thus in any given case the plaintiff was only required to pay the bondholder for damage actually incurred (as quantified by either a Master in Chancery or jury trial).158 Similarly, in Grice, Bramwell LJ articulated, although not without difficulty, an intention-based rationale for the penalties doctrine: “A definition of the principle may possibly be that where a sum is payable as a punishment for a default, or by way of security, and the realization of that sum is not within the original intention of the parties, the sum is a penalty; but when it forms part of the original intention, that upon default a sum otherwise payable at a future period, shall become forthwith payable, it is no longer a penalty.”159

154 155 156 157

Simpson (n 151) 416–18. (1721) 1 Str 447; 93 ER 626. Peachy (n 155) 453. (1783) 1 Bro CC 418; 28 ER 1213. The same conceptual approach can be seen in Hardy v Martin (1783) 1 Cox Eq 26; 29 ER 1046. 158 Ibbetson (n 71) 213–14. 159 Grice (n 43) 596. See also Baggallay LJ at 595.

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The salient point is that in the typical post-Restoration conditional bond case where the court provided relief against the strict performance of a penal obligation contained in a conditional bond, the court was treating the form of the conditional bond transaction as not reflective of the parties’ true intentions. This “intent based” understanding of the early equity cases was also acknowledged by Lord Neuberger and Lord Sumption (with whom Lord Clarke and Lord Carnwath agreed) in Cavendish: “equity regarded the real intention of the parties as being that the [conditional] bond should stand as security only”.160 This meant that in substance, the bond was being treated as a mere security device, a transaction in which A secured B’s performance of an act (including monetary payments) to be done by a certain date by requiring the payment of a fixed sum.161 So, for example, where A and B agreed that B would deliver to A a set quantity of mushrooms by date X for the sum of £25, and this was recorded as a condition of defeasance on the back of a bond which otherwise stated that B would pay A the sum of £40 (the penalty) on date X+1, the court saw through the mere form of the way in which the transaction was recorded and understood that A’s right against B to the £40 was in the nature of a security right to ensure that B received his set quantity of mushrooms on date X. This interpretative work achieved by the penalties doctrine meant that, in equity, A could only insist on enforcing his right to the £40 insofar as it was needed to secure the performance of his pending mushroom delivery (that is, B had to pay to A the loss caused by the failure of the conditional defeasance, interest and any legal costs). An important caveat on the analysis above is that the intention-based rationalisation is not a plausible hypothesis for all types of relief granted against the enforcement of bonds. This was because the common law courts made the active choice not to allow parol evidence162 to contradict a bond. Take, for instance, the contentious issue that the common law enabled an obligee holding a simple bond to enforce the bond multiple times (indeed, at common law, A could successfully sue on a bond stolen back from B, even where B had paid the sum due under the bond).163 The rationale for allowing double recovery was captured in an exchange between Serjeants Staunford and Bromley in Waberley v Cockerel (1541): “it is nevertheless better to suffer mischief to one man than inconvenience to many, which would subvert the law”.164 St German’s student explained that it was common law procedure and not substantive law, which could lead to the double payment by B to A of the sum owing on the bond in simple bond cases.165 The utilitarian justification for the rule leading 160 Cavendish (n 12) [4], [7]. 161 A conceptually similar approach was being taken with mortgages. See Paciocco Appeal (n 7) [208]– [209] citing G & C Kreglinger v New Patagonia Meat and Cold Storage Company Limited [1914] AC 25 (HL) 35–36. 162 Common law courts did not treat a party to a cause as competent to give evidence in until 1852: WR Cornish and GN Clark, Law and Society in England 1970–1950 (Sweet & Maxwell 1989) 42; and Evidence Act 1851 (14 & 15 Vict c 99). 163 See Donne v Cornewall (1486) JH Baker, Baker and Milsom Sources of English Legal History: Private Law to 1750 (2nd ed, OUP 2010) 283. 164 Baker (n 163) 285. 165 TFT Plucknett and JL Barton (eds), St German’s Doctor and Student (first published 1528, Selden Society 1974) 98–100.



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to double recovery was that the common law procedure favoured the universal benefits of simplicity and certainty in making the bond non-traversable proof of an obligation to pay a debt, rather than giving a careless party, who failed to destroy the bond or take an acquittance, a remedy. Where Chancery was allowing relief in double-recovery simple bond cases, it was applying the same substantive principles as the common law. However, as a result of different procedural rules, the Chancellor was simply, as Macnair argues,166 applying the same substantive legal rule as the common law (debts are not owed twice) but reaching a different conclusion on account of a more in-depth factual analysis on account of different procedural rules (evidence of the discharge of the obligation contained in the bond was admissible in the Chancery). Relief in simple bond cases was thus not really about the intention-based rationalisation, but can simply be justified on the basis that different procedural rules concerning the admissibility of parol evidence resulted in different outcomes in the common law courts and the courts of equity. By way of summary, there are three key points to take from the historical analysis above. First, this analysis is set out not to suggest that a history lesson ought solely to govern the proper rationalisation for the penalties doctrine. Rather, it is to demonstrate that within the historical development of the penalties doctrine there is jurisprudence and commentary which illustrates that there is nothing anomalous about the intention-based rationalisation being proffered as the basis for relief against penalties in conditional bond cases. Further, this observation illustrates that the intention-based rationale is a theory which, unlike many of the other rationalisations, can explain why judges developed the penalties doctrine, rather than simply being an ex post facto rationalisation for the doctrine’s existence. Put simply, if the High Court of Australia is going to reach back in time to reformulate the penalties doctrine, then it needs to consider the underlying doctrinal reasons as to why the grant of relief from a penalty was considered appropriate and assess whether those reasons are still persuasive in a modern context. In answer to this question, the contract law minimalists will find the adoption of an intention-based rationale appealing. Second, it is important to appreciate that the law of penalties began its development into its modern form from about the mid-15th century. It is axiomatic that any legal development over such a significant period is not susceptible to a simple explanation. Finally, the analysis above is important because it demonstrates why it is erroneous and simplistic to believe that the High Court in Andrews “paradoxically” expanded the penalties doctrine while utilising authorities from when the power to contract was at its zenith. The intention-based nature of the Andrews formulation is the key to understanding why this is so.

Reason three – contractual interpretation The third reason why the intention-based rationalisation provides a strong post-Andrews explanation for the penalties doctrine is that the question of 166 Mike Macnair, “Equity and Conscience” (2007) 27 OJLS 659, 680–81.

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whether A has a “collateral” right, the purpose of which is to merely “secure” performance of a related primary stipulation, is to be determined at the time of entry into the contract.167 In Andrews the High Court was not required to provide any express or empirical legal analysis as to how the process of delineating between collateral and primary stipulations is to be undertaken. This has created academic criticism of the Andrews formulation because one orthodox answer to this conundrum is to apply the well-established orthodox principles of contractual interpretation. In this connection, there are five important points to note regarding the interpretation of “penal” clauses and the Andrews formulation. First, an objective theory of interpretation of written instruments permeates equity,168 and the general law more broadly.169 At a high level of generality, the orthodox approach to construing contracts, statutes, trusts and security documents is the same: a search for the objective meaning of the instrument. Given the centrality of the objective approach towards interpretation in the general law, there seems to be no warrant for applying wholly different rules of interpretation to “penalty” clauses.170 Accordingly, the court is concerned with whether the objectively manifested facts satisfy the set legal criteria for whether the penalties doctrine is engaged (that is, that A has a contractual right against B that is properly interpreted as being in the nature of a security right). Second, on this “objective” approach, the impugned obligations or stipu­ lations should be construed in accordance with how a reasonable person in the parties’ position would be taken to have understood the relevant contract, read as a constituent whole, in the circumstances171 and context in which that contract was entered into (that context including the purpose and object of the transaction).172 Accordingly, what is meant in this chapter by the “parties’ intentions” is not the search for the parties’ subjective intentions or the literal meaning of a particular contractual provision read in isolation. Rather, “intention” is used to describe the intellectual fiction of the parties’ intentions when applying the objective theory of contract law to the impugned bargain.173 167 Paciocco Appeal (n 7) [95]; and Mineralogy (n 33) [471]–[478]. It has been noted that this distinguishes penalties from forfeiture on the basis that the former looks at the position of the parties when the contract was made, whereas the latter looks at the position after the breach when the innocent party is enforcing the forfeiture: Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130 (CA) 144 (Hoffman LJ); and Cavendish (n 12) [9]. 168 Parkin v Thorold (1851) 2 Sim NS 1, 61 ER 239; Tilley v Thomas (1867) LR 3 Ch App 61, 67; Solomons v Halloran (1906) 7 SR (NSW) 32, 42–44. Such an approach is wholly consistent with the High Court’s recent emphasis on there being a uniform law of interpretation: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 [17], [93]–[118]. 169 Byrnes (n 168) [93]–[118]; Cusack v London Borough of Harrow [2013] UKSC 40; [2013] 1 WLR 2022 [58]–[59]. See also ch 9 by Professor Stevens in this volume. 170 Paciocco Appeal (n 7) [200]. 171 See Western Export Services v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1 [2]–[5]. There is controversy concerning the extent to which contextual surrounding circumstances are available, in the absence of ambiguity, to aide contractual interpretation. English courts take a broader view whereas Australian courts have traditionally favoured a more restrictive approach. See Stratton Finance Pty Limited v Webb [2014] FCAFC 110; (2014) 314 ALR 166 [36]–[40]. 172 Byrnes (n 168) [98]–[98]; and Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35]. 173 See Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; 219 CLR 165.



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Third, part of the “baggage” that comes with an objective theory of interpretation is that sometimes when a court declares pre-existing rights and obligations, the parties may find themselves in a legal relationship that is fundamentally different to that which they subjectively believed they had entered. Indeed, whether the court is interpreting a contract, penal clause, trust or security instrument, the labels used by the parties to describe the legal effect of the impugned provisions are simply not wholly determinative.174 Relevantly, as in the context of security rights, just because a provision (that is, a penalty or security right) is drafted on its face to suggest that the right is intended to be enforceable outright (without limitation) as opposed to enforceable by way of security is not determinative as to the right’s proper characterisation. In this connection, Cooke J’s observations in Re Universal Management175 as to whether a purported transfer of property was by way of outright sale or security are apposite: “the question is whether in substance the transaction was a sale on the one hand or [a security right] on the other; and that in determining [the impugned right’s] substance not only the terms of the documents but the surrounding circumstances are relevant.”176

Justice Cooke’s statement of principle reflects the High Court’s emphasis in Andrews that in order to properly characterise whether a contractual stipulation operates as a penalty, it is essential to consider the substance of the legal effect of the rights created by the impugned clauses rather than merely focus on form.177 To consider substance over form is not to depart from the orthodox objective approach towards contractual interpretation.178 What the references to “substance over form” and “objective interpretation” above mean in practical terms is that it is open to the contracting parties to attach whatever label they see fit to a fixed sum clause. However, it is up to the court to determine whether or not the label affixed to the impugned right is accurate: is the impugned right nonetheless properly understood as being in the nature of a security right? Or is the impugned right wholly enforceable? This process requires the court to construe the relevant agreement as a constituent whole,179 which requires the express legal form of the contractual arrangement to be non-determinative and the actual substance of what the parties have agreed (objectively determined), including the underlying purpose and logic of the transaction, to inform the inquiry. The giving effect to the “substance” of a written instrument has attracted some unwanted academic criticism on the basis that it enables courts to

174 See Dunlop (n 57) 86 (Lord Dunedin); and Re Spectrum Plus [2005] UKHL 41; [2005] 2 AC 680 [116]–[117]. 175 [1983] NZLR 462. 176 Re Universal (n 175) 470. 177 Andrews (n 2) [10]–[13]. For a similar approach see M&J Polymers Ltd v Imerys Minerals Ltd [2008] EWHC 344 (Comm); (2008) 1 Lloyds Rep 541 [41] discussed in McFarlane (n 4) para [13.007]; and Cavendish (n 12) [15]. 178 Paciocco Appeal (n 7) [200]. 179 FAI General Insurance Company Limited v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641 [33].

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impermissibly (and by stealth) engage in “paternalistic intervention”.180 However, it is of the first importance to emphasise that the maxim that equity considers substance rather than form must not be misused in this context. Further, it ought to be remembered that: (i) the High Court has stated on various occasions that there is no general equitable doctrine allowing this maxim to be used to rewrite instruments in order to give them a meaning which they cannot possibly bear;181 and (ii) in ascertaining the “substance” of the transaction a court may only have recourse to the evidence which may be adduced and legitimately considered when interpreting and construing contracts.182 Put shortly, on its most narrow understanding, the Andrews formulation is only engaged if, applying orthodox principles of contractual interpretation, it is right to view A’s right against B as “collateral”, that is, a right that, as a matter of substance, is intended to secure performance of a related primary stipulation or obligation. Viewed this way, without this anterior stage of the analysis being satisfied, the penalties doctrine as enunciated in Andrews simply has no work to do. This is the genius of the Andrews formulation. So understood, Andrews has the potential to contemporaneously broaden the reach of the penalties doctrine (the doctrine can apply to any right in the nature of a security) whilst reconciling the doctrine with the parties’ powers to contract (because a corollary of the intention-based rationale is that the doctrine has no application where it is irresistibly clear that A’s right against B is not merely enforceable for the limited purpose of securing performance of a stipulation). Applying, and understanding, the High Court’s formulation in this way also reconciles and realigns curial intervention in penalties183 cases with the orthodox justification that equity’s typical concern is with the procedural unfairness184 of a bargain (that is, whether the parties’ consent or intention was genuine) as opposed to the substantive unfairness of the rights and obligations created by an impugned bargain. Fourth, considering that the objective “reasonable person” is the lens through which contractual provisions are interpreted, the post-Andrews penalties doctrine might be seen as encompassing a normative presumption that contractual rights in the nature of security rights must be exercised reasonably and for the purpose for which they were conferred.185 When dealing with a collateral stipulation intended to secure a primary stipulation, it would be unreasonable to enforce the collateral stipulation or “security right” to an 180 Sarah Worthington, “What is Left of Equity’s Relief Against Forfeiture” in Elise Bant and Matthew Harding (eds), Exploring Private Law (CUP 2010) 249, 252–53. 181 K D Morris & Sons Pty Ltd (in Liq) v Bank of Queensland Ltd (1980) 146 CLR 165, 199-200; FAI (n 179) [11]; Byrnes (n 168) [52]. 182 Heydon, Leeming and Turner (n 49) para [3.180]. 183 cf Cavendish (n 12) [34]. 184 See Michael Byran and Vicki Vann, Equity and Trusts in Australia (CUP 2012) 104. 185 This reflects the developing relationship between terms of cooperation and reasonableness and unconscientiousness in the exercise of contractual rights: Anthony Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 LQR 66, 73. Sir Anthony Mason has observed that the enforcement of security rights serve as a specific example where A has to take into account broader considerations in exercising her rights against B. See also Vodafone Pacific Ltd & Ors v Mobile Innovations Ltd [2004] NSWCA 15 [216]–[217]; and MSC (n 112) [97].



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extent beyond what is needed in order to secure performance of the primary stipulation. To do so would go beyond the objective purpose which the collateral stipulation serves when viewed in the context of the wider bargain. In this sense when the post-Andrews penalties doctrine is engaged the impugned clause can be considered to be in the nature of a right that is enforceable for the limited purpose for which it was conferred (or, A’s “security” right against B is a purposive right). Fifth, part of the “baggage” that comes with an objective approach to interpretation may be a common normative presumption (but no more) that contractual parties will not typically intend to punish themselves or each other nor would they typically unduly abrogate their freedom of action. Such a presumption would be functionally similar to other well-established circumstances where the general law requires written instruments to be construed in a manner that presupposes that they are not intended to abrogate the parties’ liberty of action, including the presumption that penal statutory provisions are construed narrowly (being an interpretive approach with historical roots in the equitable interpretation of written instruments).186 Stated shortly, such a presumption would enable the intention-based rationalisation for the penalties doctrine to be reconciled with the theorisation that the penalties doctrine is about the general law’s aversion to punishment and the preservation of freedom of action in civil causes. It follows that embracing an intentionbased rationale does not require the wholesale rejection of all other rationales for the law of penalties, rather, some of the legitimate concerns raised by other rationales can be accounted for by the interpretative process. This analysis is also wholly consistent with the procedural manner in which the general law has historically protected fundamental rights and freedoms. Finally, it is important to address here one potential criticism of the intention-based framework and rationalisation for the penalties doctrine. In short, the criticism that I am envisaging will go along these lines: when construing written instruments, judges typically exercise a degree of choice and may make a number of what are, in substance, policy or personal preferencebased decisions which can be articulated or “dressed up” as giving fidelity to objectively discerned intentions. That is, there is a risk that judges may read down substantive contractual rights on account of the penalties doctrine and justify doing so by the ex post facto reasoning that this is what the parties “really” intended.187 The problem with this line of argument is that it is really a criticism 186 See Robert French, “The Judicial Function in an Age of Statutes” (2011 Goldring Memorial Lecture, Wollongong, 18 November 2011); and James Edelman, “Uncommon Statutory Interpretation” (2012 Western Australia Constitutional Centre Twilight Seminar, Perth, 30 May 2012). Authorities on this point are legion: see: Potter v Minahan [1908] HCA 63; (1908) 7 CLR 277; Bropho v Western Australia (1990) 171 CLR 1, 15; and Saeed v Minister for Immigration and Citizenship [2010] HCA 23; (2010) 241 CLR 252 [15], [58]. Such a rule can be rationalised on the bases that (i) it improves the procedural creation of legislative instruments as it ensures that parliament (or a delegated law making body) actually intends the desired result by using irresistibly clear drafting; and/or (ii) there is an assumption that law makers do not intend to abrogate certainly judicially recognised “fundamental” rights: Brendan Lim, “The Normativity of the Principle of Legality” (2013) 37 MULR 372. 187 Professor Worthington has set out some of the staunchest academic criticisms of legal doctrines, including relief against forfeiture, that enable ex post facto curial paternalism: Worthington (n 180), 252.

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of judicial method and not with understanding the penalties doctrine within an intention-based framework. Indeed, it is a strength of the thesis developed in this chapter that the parties are free to draft around the penalties doctrine where it is irresistibly clear that A’s right against B is not a mere security right.

Reason four – reconciling the penalties jurisprudence with Andrews Significance of whether a fixed sum constitutes a genuine pre-estimate of loss A contentious issue in the law of penalties post-Andrews is the status of preAndrews jurisprudence. The fourth reason why the intention-based rationale best explains the penalties doctrine is that it enables the Andrews formulation to be reconciled with existing penalties jurisprudence. In Andrews, the High Court observed that its formulation for when the penalties doctrine was engaged concerned the “threshold” issue of when a clause was a prima facie penalty. As the court observed, its formulation concerned: “an anterior stage of analysis – identification of those criteria by which the penalty doctrine is engaged”.188 The court’s identification of the Andrews formulation as constituting the “anterior” analysis raises the question: what is the posterior analysis? The best answer to this question is that: even when A’s right against B can be characterised as being in the nature of a security and thereby engaging the penalties doctrine, A’s exercise of the right will not be restrained where the sum secured can be characterised as a genuine pre-estimate of loss as assessed at the time the contract was entered into.189 Put another way, where the parties have gone out of their way to provide for a genuine pre-estimate of loss, the general objective intention is that the clause should be fully enforceable even if it is capable of having a dual characterisation of being in the nature of a security right.190 Put shortly, on the approach advocated by this chapter, the guidelines191 to determine whether there is a penalty, espoused by the High Court in Ringrow and Lord Dunedin in Dunlop, remain relevant as the post-Andrews “posterior analysis”.192 For even where A has a right in the nature of a security, that right will be fully enforceable if the fixed sum in question is a genuine pre-estimate of loss by reference to the greatest possible loss that A could suffer as a result of B’s failure to perform the primary stipulation. That is, if the sum agreed is not extravagant and unconscionable in amount, it will be fully enforceable as a fixed sum. Where A can enforce the fixed sum clause against B, the sum fixed by the parties functions as an agreed debt rather than true contractual damages.193 Thus A is still given the advantage of avoiding the limitations associated with whether she can claim damages for breach of contract (causation, remoteness and mitigation do not enter the analysis). 188 Andrews (n 2) [15]. 189 Paciocco Appeal (n 7) [113]–[114], [265]. 190 For a similar argument, albeit on broader terms that A’s enforcement of the right would not be “unconscionable” see McFarlane (n 4) para [13.013]. 191 In Cavendish (n 12) [22], the Supreme Court of the United Kingdom observed that it was unfortunate that Lord Dunedin’s speech has been applied as a quasi-statute. 192 Dunlop (n 57) 86–88; and Ringrow (n 48) [32]. 193 Burrows (n 69) 440–41.



Ch 20  Doctrinal Approaches to the Law of Penalties 489

Is A’s right against B in the nature of a security right? It is worth noting here that if the Andrews formulation is to be understood as resting on an intention-based rationalisation, the fundamental question of when the doctrine is enlivened becomes a question of whether A’s right against B is in the nature of a security right. Accordingly, there are three other considerations arising from the penalties jurisprudence which, if satisfied, will result in the penalties doctrine not being engaged on this basis. Logically, these considerations should be considered alongside the court’s “anterior” stage of analysis because they concern the question of whether the penalties doctrine is engaged at all. As the High Court observed in Andrews, the penalties doctrine is clearly not engaged where A’s right against B does not secure performance of a stipulation or obligation but simply constitutes a fee levied on B when A confers on B some further right or benefit (also described as being a fee levied by A on B by virtue of there being an “alternative” primary stipulation or a fee for a further “accommodation” or “service”).194 This is because where the fee in question is levied for the provision of a further contractual right or benefit, the parties intend that the fee constitutes the fully enforceable consideration for that right or benefit. Take, for instance, the following example (based on Metro-Goldwyn Mayer Pty Ltd v Greenham)195: A and B enter into a contract under which B is conferred a right to screen A’s film on a single occasion for the fixed sum of $Y. The contract then contains a further stipulation that for each additional occasion that B screens the film, B is required to pay A the increased fixed sum of $Y×4 per screening. In this example, the fee of $Y×4 for each additional screening constitutes a fee levied by A on B in exchange for a new contractual right or benefit and, accordingly, the right to the increased fee would not engage the penalties doctrine because it does not operate as a security right. Similarly, in the remitted Andrews litigation, the fact that A (the Bank) levied various fees against B (the consumer) for the conferral of a new right or benefit was precisely why the majority of the impugned bank fees were not penalties in the Andrews sense.196 Post-Andrews significance of the commercial justification test The intention-based rationalisation can absorb the unfortunately named “commercial justification” test for whether A’s contractual term against B providing for a fixed sum to be paid to A is otherwise enforceable, despite not being a genuine pre-estimate of loss.197 Reconciling the commercial justification test with Andrews would require the following analysis. Where A’s right is characterised as existing to facilitate a sound commercial justification rather than to secure performance of a primary contractual stipulation, it is wholly enforceable as the right cannot be seen as a mere security right.198 However, 194 Andrews (n 2) [80]–[92]; and Paciocco Appeal (n 7) [199]. 195 [1966] 2 NSWLR 717. 196 Paciocco Appeal (n 7) for honour and dishonour fees [215]–[231], [240]–[244]; for non-payment fees [272]; and for overlimit fees [232]–[235], [237]–[239]. 197 Which has found its way into Australian law: Paciocco Appeal (n 7) [99], [147]. 198 McFarlane (n 4) para [13.013].

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the term “commercial justification” is problematic. First and foremost, it has to be appreciated that the term “commercial justification” is actively unhelpful because this exception applies in circumstances where the relationship between A and B, or the justification in question, is difficult to characterise as “commercial” in nature.199 Second, there is temptation to argue that every clause in a commercial contract is “commercially justifiable” on the straightforward and obvious basis that the parties have agreed to it. Accordingly, rather than using the term “commercial justification”, a better approach might be simply to ask whether, on its proper construction, A’s right against B is not intended to be enforceable by way of security because it is properly characterised as serving some other “legitimate interest”. This approach reflects that recently adopted by the Supreme Court of the United Kingdom in Cavendish and ParkingEye. Although in Cavendish and ParkingEye the Supreme Court reaffirmed that the rule against penalties was: (i) wholly a creature of common law;200 and (ii) that the doctrine exists to preserve the compensatory principle of contractual damages and therefore only applies on breach of a contractual obligation,201 the court observed that a fixed sum clause that does not provide for a genuine pre-estimate of loss will still be enforceable provided that the fixed sum serves to protect a “legitimate interest”. As Lord Neuberger and Lord Sumption said, the true test for whether the penalties doctrine is engaged requires consideration of: “whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”202

The test posited by the Supreme Court of the United Kingdom is conceptually similar to the observation of Allsop P in the Paciocco Appeal that: “[t]he object and purpose of the doctrine of penalties is vindicated if one considers whether the agreed sum is commensurate with the interest protected by the bargain”.203 The reasons for preferring a “legitimate interest” rather than “commercial justification” test are threefold. First, on the intent-based understanding of Andrews, if A’s right against B is not a security right that exists to secure the performance of a related contractual right or stipulation, the penalties doctrine simply has no work to do. Accordingly, where A’s right is characterised as existing to facilitate a legitimate interest rather than to secure B’s performance of a primary contractual stipulation, it is wholly enforceable as the right cannot be characterised as a mere security right referable to B’s performance of the stipulation. Second, a test of “legitimate interest” engages with broader social and economical considerations than a “commercial justification” test.204 There is no conceptual difficulty with A’s right existing to further broader social and 199 200 201 202 203

See ParkingEye (n 13). ParkingEye (n 13) [6]–[14]. ParkingEye (n 13) [6]–[14]. ParkingEye (n 13) [6]–[14] [32]. See also at [151]–[153] (Lord Mance) and [255] (Lord Hodge). Paciocco Appeal (n 7) [103]. See also at [137], [147], [163]–[165], [176]–[170], [177]. In the Paciocco Appeal the existence of a legitimate interest can be seen as one reason why late payment fees on credit card accounts were characterised as not existing merely to secure performance of a primary obligation and therefore the fee was fully enforceable. 204 See Cavendish (n 12) [29].



Ch 20  Doctrinal Approaches to the Law of Penalties 491

economic considerations. Third, the adjective “legitimate” limits the use of ex post facto attempts to justify the existence of the impugned clause by drawing attention to the fact that any interest must have existed at the time A and B entered into the relevant bargain and must be ascertainable on the ordinary principles of contractual interpretation and construction.205 In ParkingEye, A levied a £85 charge on B if B overstayed a free of charge two hour parking limit. It was common ground between the parties that in making use of the car park, B entered into a contract with A under which B agree to leave the car park within two hours. Failure to do so would constitute a breach of contract, in respect of which B agreed to pay the fixed sum of £85 to A. The court held that the fee was not a penalty as it had served a “legitimate interest”. The fee was characterised as having the principal purposes of: (i) deterring motorists from abusing the car park by staying beyond the period of free parking and thus facilitating a turnover of potential consumers for the attached retail premises; and (ii) enabling A (the parking services provider) to properly administer the free parking scheme (which included a profit motive).206 Requirement that B can perform the secured obligation As the High Court observed in Andrews, because the penalties doctrine is engaged where A has a right against B that is intended to secure the occurrence of a primary stipulation or obligation, it is axiomatic that in order for A’s exercise of the security right to be restrained, it must be possible for B to provide for the satisfaction of the secured stipulation.207 B can achieve this in one of two ways. Importantly, both modes of satisfaction can be explained by the intention-based rationale, as both are illustrative of B “making good” on the original intent of the parties’ bargain: the performance of the primary stipulation. The first mode of satisfaction is the actual performance of the primary stipulation (specific relief such as an injunction or decree of specific performance). The second, and more common, mode of performance is payment by B to A for the loss or prejudice suffered by A as a result of the failure of the primary stipulation (including interest and any related costs of recovery thereby returning A to the position she would have been had the primary stipulation been performed). In Andrews the High Court emphasised that a monetary payment by B to A for the failure of the primary stipulation must be compensatory: the court will only relieve B from a penalty where it is possible to award A compensation for the prejudice suffered by the occurrence or non-occurrence of the primary stipulation. In short, because the obligation to pay damages is a monetised form of the primary stipulation,208 A cannot enforce a right intended to function as a mere security for performance of the primary stipulation beyond the compensatory amount without a contradiction arising. Presumably there would be only limited circumstances in which a court could not fix a sum to 205 206 207 208

Cavendish (n 12) [28]. ParkingEye (n 13) [98]–[99], [197]–[198]. Andrews (n 2) [40]–[44]. Note that a security rights analysis does not necessarily depend on the compensatory principle to value the “secured” stipulation or right.

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compensate A for the failure of a primary stipulation, as the judicial trend over the past century has been to expand the types of losses that are recoverable under the general law.209

Conclusion While it remains to be seen how the antipodean equitable penalties doctrine will develop post-Andrews, this chapter has presented a clear and coherent framework for understanding the doctrine: the best rationalisation for the post-Andrews penalties doctrine is that it is a species within the wider genus of the law relating to security rights. This approach can be seen as resting on an “intention-based” rationale, as it requires a penal clause to first be characterised as a security right for the penalties doctrine to be engaged. Where, applying orthodox principles of interpretation, A has a right against B which is acquired for the limited purpose of securing a primary stipulation, the assertion of that right ought to necessarily be controlled by the purpose of securing performance of that stipulation (or the stipulation’s monetised equivalent). There are four reasons why this can provide a strong underlying justification for the post-Andrews penalties doctrine. First, the intention-based rationalisation fit comfortably with the High Court’s “anterior” formulation for when the penalties doctrine is engaged. Second, and related to the first reason, this “anterior” formulation must depend on either contractual interpretation or construction in order to be satisfied. Third, the intention-based rationale forms one understanding of why equity historically intervened to restrain the enforcement of penalties in conditional bond cases. Fourth, the intention-based rationale provides a coherent path for reconciling the “anterior” issue of when the penalties doctrine is engaged with existing penalties jurisprudence. Viewed through the prism of an intention-based rationalisation, the genius of the Andrews formulation is that it has the potential to contemporaneously broaden the reach of the penalties doctrine (the doctrine can apply to any right contained in a contract that functions in the nature of a security) whilst finally reconciling the doctrine with the longstanding critique that it impermissibly interferes with the parties’ powers to contract (as the doctrine has no application where it is irresistibly clear that a right is not merely enforceable for the limited purpose of securing performance of a primary stipulation).

209 See Heydon, Leeming and Turner (n 49) para [18.160].

Index [References are to page numbers] Abandonment waiver used as meaning unilateral release or, where, 3, 27, 28-30, 31, 33-34, 35 — see also Waiver, doctrine of extinguished or fundamentally altered so indistinguishable from election, whether, 3, 29, 30, 31, 33-34, 35 time for (if principle exists), 29-30, 33, 34 Assignment — see also Equitable assignment failure of legal, where, 17 meaning of, 17, 381 nature and effect of, 17, 381-382 language of transfer, 17, 381-382 statutory assignment, 17, 381 ubiquity in commercial law of, 17 Assumpsit, action of defence of “non-assumpsit”, 65 enforcement of undertaking or promise where no debt by, 64, 66 historical origins of doctrine of consideration in, 61, 62, 63, 64-65, 66, 67-68, 72, 73, 74, 80 — see also Consideration, doctrine of “cause” / “consideration”, interchangeability of, 67, 68 induced injurious reliance as alternative to, 74 requirements of, 64, 72 trespass as breach of undertaking or promise, 64 undertaking or promise, as, 64 Breach of contract anticipatory, doctrine of, 291-295 application to executed contract of, whether, 294-295 claims for fixed sum, whether no duty on part of plaintiff to mitigate loss where, 292-293 good faith and, 293-294

493

breach of implied term of mutual trust and confidence in employment contract, 257, 288-291 ambit of term, 288, 289 breach of duty of good faith, whether identical to, 289-290 consequences of, 290-291 specific performance, whether should result from, 291 when breached?, 289 damages for, 14-15, 16, 22, 89, 93-94, 116, 117, 259, 260, 299, 301, 303, 304-310, 311, 333-358, 375, 458 — see also Damages determining whether, framed by understanding of context and imperatives of contract, 7, 115-120 — see also Characterisation, process of; Construction of contract discharge by, 13-14, 131, 257-295 — see also Discharge by breach of contract employment contract, 257, 279-291 breach of implied term of mutual trust and confidence, 257, 288-291 termination of, for, 257, 279-288, 291 — see also Employment contract; Termination entitlement of innocent party to terminate contract for other party’s breach, whether, 259-274, 295 — see also Discharge by breach of contract entitlement of party in breach to terminate contract for other party’s breach or repudiation, whether, 274-279 — see also Discharge by breach of contract entitlement of party in non-serious breach to terminate contract for other party’s serious breach or repudiation, whether, 274-276, 278-279 — see also Discharge by breach of contract

494 Contract in Commercial Law Breach of contract continued entitlement of party in serious breach to terminate for other party’s serious breach or repudiation, whether, 276-279 — see also Discharge by breach of contract nature of, 257, 259 penalities doctrine and whether any necessity for, 21-22, 457-463, 472-473, 477, 489-492 — see also Penalties, doctrine of repudiatory, 13, 14, 16, 40, 43, 57, 274-279, 333-358 — see also Repudiatory breach assessment of damages for reasonable pre-breach expenditure under commercial contract where, 16, 333-358 — see also Damages breach of implied duty of fair dealing and performance in good faith in long-term / relational contract, whether, 43, 57 breach of implied obligations of co-operation, honesty, loyalty, mutual trust and confidence in long-term / relational contract, whether, 40, 43, 57 entitlement of party in breach to terminate contract for other party’s breach or repudiation, whether, 13, 14, 274-279 — see also Discharge by breach of contract entitlement of party in non-serious breach to terminate contract for other party’s serious breach or repudiation, whether, 13, 14, 274-276, 278-279 — see also Discharge by breach of contract entitlement of party in serious breach to terminate for other party’s serious breach or repudiation, whether, 13, 14, 276-279 — see also Discharge by breach of contract termination for, 13-14, 257, 259-279, 279-288, 291, 295 — Discharge by breach of contract employment contract for, 257, 279-288, 291 — see also Employment contract; Termination Characterisation, process of — see also Construction of contract; Interpretation of contract accidental characteristics, 106

construction and interpretation, 7, 107-108, 109-110, 118, 119 contextual understanding essential for proper, 118, 119 intersection with characterisation, 7, 109-110 usefulness of conceptual distinction between, 107-108 “construction in broad sense”, hidden / disguised as, 7, 105-107, 108 ascription of meaning, 108 level of abstraction, 106 value judgments involved in, 7, 106-107, 108 contextual understanding, 118, 119 essential for proper interpretation and construction of contract, 118, 119 frame for characterisation, as, 118 contractual terms, 7, 109, 110, 115-120, 131, 261 accommodation of fiduciary relationship to, 110 adequacy of damages for breach of, 116, 117 breach of, nature and consequences of, 116, 117-118 construction of, 116 determining breach of, 7, 115-120 — see also Breach of contract innominate term theory, 131, 261 test of essentiality, 115-118 values brought to bear in evaluation of, 116, 117-118 doctrine of penalties, 109, 113-114 — see also Penalties, doctine of use of analogy of, 109 values brought to bear in evaluation of, 114 essential characteristics, 106, 115-118 fiduciary relationship, 106, 108-111 — see also Fiduciary relationship contract and, relationship between, 109-110 identification of existence, character and scope of, 109 nature of, 110-111 use of analogy of, 106 values brought to bear in evaluation of, 109, 110-111 generally, 7, 105-120 insurance, 109, 114-115 meaning and nature of contract of, 114-115 use of analogy of, 109



Index 495 values brought to bear in evaluation of, 115 meaning and purpose of, 120 recognition of, 109, 120 unconscionability in commerce, 106, 109, 111-113 — see also Unconscionability essence of doctrine, 111, 112-113 use of analogy of, 106, 109 values brought to bear in evaluation of, 111, 112-113 value judgements in, 7, 106-107, 108, 109, 110-111, 112-113, 114, 115, 116, 117-118, 119-120 commercial considerations, 113, 115, 116, 117-118, 119, 120 contextual understanding of, 118, 119 evaluation and categorisation of essence / importance of circumstances/ relationships by reference to, 107, 108, 109, 118 imposition of standard of behaviour, whether, 119 necessity for explicitness and clarity of, 7, 120 specificity of each case, 119 use and structure of language involved in, 7, 107

Chose in action equitable assignment of — see Equitable assignment Codification of Australian contract law objections to, 23 purpose of proposed, 23-24 Commission on European Contract Law 1994 (Lando Commssion) abolition of doctrine of consideration proposed by, 75 intention to create legal relations as sole test of contractual liability proposed by, 75 Consideration, doctrine of abolition of, proposed by Commission on European Contract Law 1994 (Lando Commssion), 75 American Uniform Commercial Code and, 74 basis of, notion of reciprocity (quid pro quo) as, 4, 61, 65, 92-93, 103 examples of how/where justice of exchange / reciprocity embedded in other private law rules, 93

function of reciprocity in society, 92-93 civil law approach to enforceability of promises and influence on, 4, 61-62, 67-72, 75, 78, 79-80, 81-87, 103 causa, principle of, 4, 67-69, 75 Commission on European Contract Law 1994 (Lando Commssion), 75 common law compared with, 70-72, 78, 79-80, 82-87, 103 French Civil Code, 69 intention of parties given effect even if gratuitous promise, 70-71, 72, 75, 82, 86 offers and options, binding nature of, 71 Principles of European Contract Law, 75 serious intention in meaning of promise, 68-70, 71, 72, 81-83, 86 Commission on European Contract Law 1994 (Lando Commssion) proposals, 75 criticisms of, by Law Revision Committee (LRC), 94-102 — see also “Law Revision Committee (LRC), Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration (1937)” below arguments against, 94-95, 96-102 consideration need not be adequate, therefore reciprocity fatally diluted, 94 consideration inconsistent with common sense and business expediency, 95-96 looseness /inconsistency of definitions /conceptions of value qualifying as valid consideration and allowing courts to extend doctrine to enforce promise, 95 emasculation / demise of, whether, 4, 61, 75 enforceability of promises and, 4, 5, 61-62, 63, 65, 66-75, 78-80, 87, 88, 96-102 agreement purporting to modify terms of already existing contract, whether valid if no consideration, 74 American Uniform Commercial Code, under, 74 civil law approach, 4, 61-62, 67-72, 75, 81-83, 86

496 Contract in Commercial Law Consideration, doctrine of continued common sense morality as basis, rejection of, 65 “consideration” as crucial test for informal contracts, 66 gratuitous promises not generally enforceable, 71 overcoming of problems by judge’ “sniffing out detriment / advantages” in order for, 71-72, 73, 74 promissory estoppel, application of, 73-74 recommendations as to types of promises which should be enforceable without consideration, 5, 78-80, 87, 88, 96-102 — see also “recommendations by Law Revision Committee (LRC) as to types of promises which should be enforceable without consideration” below requirement for exchange or counter-performance, 70 subjective motive as objective reason for, 68 United Nations Convention on Contracts for the International Sale of Goods, under, 74 equitable assignment of equitable chose in action, whether valid when made voluntarily without consideration, 389, 390, 391-396 equitable estoppel as cause of action, whether detrimental reliance substitutes for consideration as means of contractual enforcement, 17, 361, 363, 370-371 evidentiary role for, whether,62, 68-69, 75 failure of consideration as breach of contract, 263, 264-265 function of, 80, 94-95 future prospects for, 74-75 historical meanings of “consideration”, 64-65, 66, 67, 68-69 historical origins of, 4, 61, 62, 63-69, 72, 73, 74, 75, 80 action of assumpsit, 61, 62, 63, 64-65, 66, 67-68, 72, 73, 74, 80 — see also Assumpsit, action of action on the bond, 65 attempted encapsulation as formula in 19th century, 66-67

breach of promise made in expectation of marriage, 65-66 causa, whether germ of common law consideration, 4, 67, 68-69 common sense morality, eventual rejection of, 65 conveyancing and law of uses, 63-64 meanings of “consideration” 64-65, 66, 67, 67, 68-69 Roman law principle of ex nudo pacto non oritur actio, 4, 63 hostility towards, 77 implementation of, criticisms by Law Revision Committee (LRC) of — see “criticisms of, by Law Revision Committee (LRC)” above; and “Law Revision Committee (LRC), Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration (1937)” below intention to create legal relations and, 4, 61, 62, 68-70, 75 civil law, in, 68-70 objective assessment of, 69 necessity in common law of, whether, 70 provenance of, 69-70 justifications for, 83, 91-94 expectation damages as contractual remedy, 93-94 respectful dealing in market domain, 92-93 Law Revision Committee (LRC), Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) (1937), 5, 77-91, 94-103 aim of recommendations made by, 78 criticisms of consideration made by, 94-102 — see also “criticisms of, by Law Revision Committee (LRC)” above enforceability of seriously intended exchanges not questioned by, 91 rationales for recommended reforms, 78, 79 recommendations as to types of promises which should be enforceable without consideration, 5, 78-80, 87, 88, 96-103 — see also “recommendations by Law Revision Committee (LRC) as to types of promises which should be enforceable without consideration” below



Index 497 responses to recommendations made by, 78-91, 96-102 — see also “responses to recommendations of Law Revision Committee (LRC)” below meaning of, 77 movement of consideration from promisor, 72 Ontario Law Reform Committee, Report on Amendment of the Law of Contract (1987), 78 past consideration, 5, 62, 66, 78-79, 100-101 incorporation on principled basis of, whether, 5 insufficiency of, 62, 66, 78-79, 100-101 primacy of, 61, 62 Principles of European Contract Law, 75 promissory estoppel, 5, 62, 73-75, 82, 90-91 application of, 5, 73-74, 82, 90-91 detrimental reliance by promisee, whether strictly necessary, 73, 74 enforcement of voluntary promises in absence of consideration, 73, 74-75 evolution of doctrine of, 73-74 whether undermines doctrine of consideration, 5, 62, 73 reciprocity (quid pro quo) as foundation of, 4, 61, 65, 92-93, 103 examples of how/where justice of exchange / reciprocity embedded in other private law rules, 93 function of reciprocity in society, 92-93 recommendations by Law Revision Committee (LRC) as to types of promises which should be enforceable without consideration, 5, 78-80, 87, 88, 96-103 — see also Law Revision Committee (LRC), Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) (1937)” above; and “responses to recommendations of Law Revision Committee (LRC)” below aim of, 78 promises for past consideration, 5, 78, 79, 96, 100-101 promises in writing, 5, 78, 79-80, 87 promises that induce foreseeable reliance, 5, 78, 88

promises to accept part payments in discharge of whole debt (deemed valuable consideration), 5, 78, 79, 96, 97-100 promises to do what already bound to do (deemed vaulable consideration), 5, 78, 79, 96-97 promises to keep offers open for definite period (“firm offers”), 5, 78, 79, 96, 101-102 whether recommendations are improvement, arguments against, 78-79, 103 responses to recommendations of Law Revision Committee (LRC), 78-91, 96-102 — see also Law Revision Committee (LRC), Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) (1937)” above; and “recommendations by Law Revision Committee (LRC) as to types of promises which should be enforceable without consideration” above rejection of recommendation as to “promises for past consideration” on ground of severance of causal and temporal link between promise and performance, 78-79, 100-101 rejection of recommendation as to “promises in writing” on grounds of erroneous reasoning and insufficient provision of protection, 78, 79-88 rejection of recommendation as to “promises that induce foreseeable reliance” on ground of failure to give protection to promisor’s interests as existing promissory estoppel does, 78, 88-91 rejection of recommendation as to “promises to accept part payments in discharge of whole debt” on ground of distortion of promissory estoppel and that preferable to deploy collateral unilateral contract, 78-79, 96, 97-100 rejection of recommendation as to “promises to do what already bound to do” on ground can supplement original bilateral contract with collateral unilateral contract, 78-79, 96-97

498 Contract in Commercial Law Consideration, doctrine of continued rejection of recommendation as to “promises to keep offers open for definite period” on ground can protect promisee’s reliance by finding preliminary or collateral contract, 78-79, 96, 101-102 status of, 4, 61, 75 UNIDROIT Principles, 75 United Nations Convention on Contracts for the International Sale of Goods, 74 variation of contract by, 3, 28, 29, 30, 34, 74 waiver subsumed within, whether, 3, 28, 29, 30 written promises, problems of enforcement in absence of consideration, 87-88 Construction of contract — see also Characterisation, process of; Interpretation of contract associations between other doctrines and, 7, 8-9, 123, 124, 126, 127, 132, 133-135 — see also Rectification, doctrine of broad sense, in, 7, 105-120 — see also Characterisation, process of “commercial common sense” in, meaning and relevance of, 7-8, 127-129, 130, 132, 177-178 objective, whether, 8, 127, 128, 129, 132, 177 judicial methodology differs in approach to, 8, 127-129 public policy, whether relevant, 8, 130 conceptual meaning of, 107-108, 110 consistence with commercial common sense, extent to which permissible to use in, 7-8, 127-129, 130, 132, 136-141, 177-178 “common sense”, meaning and relevance of, 7-8, 127-129, 130, 132, 177-178 parties’ intentions at formation, relevance of, 7-8, 128, 132, 136-141 rejection of inconsistent construction, whether, 7, 8 128, 177 “construction”, meaning of, 150 determining breach of contract by, 7, 115-120 distinctiveness of, 7, 124, 133 exclusion clauses — see Exclusion / limitation clauses

good faith, whether obligation imposed by law or as matter of construction of parties’ intentions, 11, 12, 237, 241, 250, 251 historical back ground to methods of, 122-125 implication of terms, whether process of, 129-130 — see also Implication of terms interpretation and, meaning of, 110, 121 interpretation distinguished from, whether useful, 107-108 limitation clauses — see Exclusion / limitation clauses non-admissibility of statements made in Parliament during passage of Bill not rule of evidence but of construction, 186 parol evidence rule as rule of, 167, 179-181, 182 parties’ intentions at formation, relevance of, 7-8, 128, 132, 136-141 — see also Contractual intention factual presumption of shared contractual intention, 136-137 inter-subjective measurement of, as better view, 136-141 objective approach, whether, 8, 128, 132, 136, 138-141 subjective approach (will theory), whether, 8, 139 process of, framed by understanding of context and imperatives of particular contract, 7, 105-120 — see also Characterisation, process of purpose of, 211 rectification and, 7, 9, 124, 126, 133-134, 211 — see also Rectification, doctrine of complementary to construction, 211 distinguished from construction, 7, 9, 124, 126, 133-134 understanding of context and imperatives of contract as frame for, 7 value judgments in, 7, 106 — see also Characterisation, process of Contractual intention construction of contract and relevance of, 7-8, 69, 128, 132, 136-141 — see also Construction of contract factual presumption of shared contractual intention, 136-137



Index 499 inter-subjective measurement of, as better view, 136-141 objective approach, whether, 8, 69, 128, 132, 136, 138-141 subjective approach (will theory), whether, 8, 139 counterfactual implication of shared, 136 defects in subjective, 10, 178-179, 184 contract void, whether, 178 effect of, 10, 178-179 permitting contract to be avoided, 10, 178, 184 rectification also permitted, whether, 10, 184 factual presumption of shared, 136 good faith and, 11, 12, 237, 241, 250, 251 important role in Australian law of contract of, based on parties’ intentions, 251 obligation imposed by law or as matter of construction of parties’ intentions, whether, 11, 12, 237, 241, 250, 251 parties’ intentions irrelevant where duty imposed by law, 237, 241 implication of terms and relevance of, 129, 130, 132, 136 — see also Implication of terms intention to be bound, 4, 62, 63 interpretation of contract and relevance of, 8, 122-125, 126-127, 128, 131, 132, 136-141, 174, 177, 180, 181, 191-192, 215-216 — see also Interpretation of contract commercial context, relevance of, 126 inter-subjective measurement of, as better view, 136-141 objective approach to, 8, 126, 127, 128, 131, 132, 136, 138-141, 174, 177, 180, 181 proof of, 122-125, 127, 131, 139-140 subjective approach to, 8, 136, 139, 191-192, 215-216 inter-subjective measurement of, as better view, 136-141 language of, 8, 9-10 objective, whether, 8, 9, 126-128, 131-132, 136-137, 138-141, 167-169-172, 174, 177, 180, 181, 182, 183, 197-198, 199, 200, 201-202, 203-210, 212-218, 221, 222-226, 228, 229

general construction of common intention, through, 131, 136-137 justification for, 171 manifestation in actual agreement, 167, 169 propelling implication of terms, 131-132 rectification, doctrine of, and, 9, 136, 167-168, 182, 183, 197-198, 199, 200, 201-202, 203-210, 212-218, 221, 222-226, 228, 229 proof of, 122-123, 124, 125, 171-172, 180, 181 extrinsic evidence, whether by, 124, 125, 171-172, 180, 181 historical background to, 122-125 proposal that sole test of contractual liability, 75 provenance of, 69-70 rectification, doctrine of, and relevance of, 9-10, 123, 124, 127, 132, 133-135, 136, 167-168, 182, 183, 193, 194-217, 221-229 — see also Rectification, doctrine of subjective (will theory), whether, 8, 9-10, 132-136, 139, 167, 169, 172-173, 184, 191-192, 194-197, 198, 199, 201-204, 207, 209, 210, 211-216, 221-222, 224-226, 227, 228-229 cross offers, significance of, 173 known or suspected without outward manifestation, 136 non-conformity of actual agreement with, reason for denying enforcement, whether, 167, 173 persistence of approach 169, 191-192 rectification, doctrine of, and, 9-10, 132, 133-135, 136, 184, 194-197, 198, 199, 201-204, 207, 209, 210, 211-216, 221-222, 224-226, 227, 228-229 outwardly evidenced mutual accord, as, 136 Contractual liability consideration and — see Consideration, doctrine of exclusion / limitation of, whether — see Exclusion / limitation clauses foreseeable reliance no justification for imposing, 78, 103 intention to create legal relations as sole test of, proposed by Commission on European Contract Law 1994 (Lando Commssion), 75

500 Contract in Commercial Law Contractual liability continued promise as essence of, 77, 89-90, 103 serious intention to be bound necessary for, but not sufficient, 103 voluntary exchange as mark of mutually respectful dealing / reciprocity as basis of, 103 Damages assessment of, for reasonable pre-breach expenditure where wrongful repudiation of commercial contract, 16, 333-358 appropriate discount to reflect proven existence of relevant non-negligible countervailing contingencies, whether, 16, 334, 337, 342, 343, 344, 347, 357 burden of proof of recoupment/ non-recoupment of pre-breach expenditure, who bears, 333, 334, 336-341, 344, 345, 352, 354-357 causation and remoteness, relevance of, 341, 351-352, 356 claimant’s readiness and willingness (or not) to perform contract, relevance of, 349-350, 354, 355, 357-358 decision and analysis of reasoning in Amann, 335-349, 357 direct and consequential loss distinguished, 341 how should Amann have been decided?, 349-354 legal presumption in favour of recoupment of pre-breach expenditure when uncertainty as to eventual profit from performance of contact, whether, 16, 334, 336, 337-341, 342, 347, 348, 349-351, 352-354, 355, 357 mechanism for apportioning loss to promisee between parties if necessary, whether, 16, 335, 341, 344-345, 348, 354, 355-356, 358 optimal approach to pre-breach expenditure where evidential uncertainty, 354-357 pre Amann rule requiring proof by claimant of profits had breach not occurred, 339 “reasonableness” of pre-breach expenditure, meaning of, 356

who bears burden of proof of recoupment/non-recoupment of pre-breach expenditure, 333, 334, 336-341, 344, 345, 352, 354-357 breach of contract, for, 14-15, 16, 22, 89, 93-94, 116, 117, 259, 260, 299, 301, 303, 304-310, 311, 333-358, 375, 458 assessment of, for reasonable pre-breach expenditure where wrongful repudiation of commercial contract, 16, 333-358 — see also “assessment of damages for reasonable pre-breach expenditure where wrongful repudiation of commercial contract” above characterisation of breach and adequacy of, 116, 117 common law debt distinguished from, 14-15, 299, 303, 304-310, 311 damages for breach of trust, whether distinguished from, 301 discretionary measure of, 14, 16, 304 entitlement of innocent party to, 15, 259, 260 equitable estoppel as justification of distinct form of, 375 expectation damages, 89, 93-94 purpose of, 22, 458 quantum of, 259 recoverability of, 259 reliance damages 16, 333-358 — see also “assessment of damages for reasonable pre-breach expenditure where wrongful repudiation of commercial contract” above rules of contribution, whether should be developed, 16, 335, 341, 344-345, 348, 354, 355-356, 358 term to increase damages by way of extravagant amount void, 22 wrongful repudiation of commercial contract and recovery of reasonable pre-breach expenditure, where, 16, 333-358 — see also “assessment of damages for reasonable pre-breach expenditure where wrongful repudiation of commercial contract” above breach of trust, whether for, 297-311 confusion between and misapplication of two forms of account, 301-302, 304, 311



Index 501 distinguished from damages for breach of contract or tort, whether, 301 equitable account “in common form”, 300-301, 303-304, 306-311 focus of, 299-300 measure of trustee’s restorative liability, 299, 303 restoration of trust property, whether, 297-298, 299, 301-302 “wilful default” basis of accounting, 300, 301, 303, 308-311

Discharge by breach of contract — see also Breach of contract condition-warranty approach to ascertaining innocent’s party’s right to terminate for other party’s breach, 13-14, 131, 260, 261, 262-263, 264-265, 266, 267-274, 295 application of, whether before Hongkong Fir approach, 266, 267, 268, 269, 271-272, 273 conceptual distinctiveness of, 262 factually incompatible with Hongkong Fir approach, whether, 262-263 historical background to, 264-265, 266 “intermediate / innominate term” and, 131, 261 matter of contractual construction and nature of term breached, 14, 260, 262, 266, 268, 269, 271 meaning of, 260 scope of, 261 Singaporean position as example of rationalisation / resolution of Hongkong Fir approach and, 267-274, 295 entitlement of innocent party to elect to terminate contract for other party’s breach, whether, 13, 131, 259-274 historical reasons for differences in approaches to, 263-267 importance of ascertaining, 13, 260 motive, whether relevant to, 13 repudiatory breach of contract itself if no legal justification for, 13, 259, 260 Singaporean position as example of rationalisation / resolution of condition-warranty and Hongkong Fir approaches, 267-274, 295

two main tests for ascertaining, 13-14, 260-274, 295 — see also “condition-warranty approach to ascertaining innocent’s party’s right to terminate for other party’s breach” above; and “Hongkong Fir approach to ascertaining innocent’s party’s right to terminate for other party’s breach” below entitlement of party in breach to terminate contract for other party’s breach or repudiation, whether, 13-14, 274-279 financially advantageous to exercise right of termination first, whether, 274, 276 lack of clear authority, 274 entitlement of party in non-serious breach to terminate contract for other party’s serious breach or repudiation, whether, 13-14, 274-276, 278-279 dependence of breaches, 278-279 order of occurrence of breaches not necessarily decisive, 276 position of England, Australia and Singapore, 274-276 entitlement of party in serious breach to terminate for other party’s serous breach or repudiation, whether, 13-14, 276-279 better view of, 276-278 dependence of breaches, 278-279 position of England and Australia unclear, 276-278 seriousness of breach, relevance of, 278 Hongkong Fir approach to ascertaining innocent’s party’s right to terminate for other party’s breach, 13-14, 260-264, 265-274, 295 conceptual distinctiveness of, 262 default rule, whether, 266-267, 268, 269, 271-272, 273 effect of, 261, 262 endorsement in Australia of, 272 endorsement in Canada of, whether, 272-273 extension to consideration of secondary rights and obligations arising when primary obligations not performed, 265-266 factually incompatible with condition-warranty approach, whether, 262-263

502 Contract in Commercial Law Discharge by breach of contract continued failure of consideration, whether fundamental breach, 263 focus on nature and consequences of breach of relevant term, 13-14, 260-261, 262, 265, 266, 268, 269, 272 intentions of parties, relevance of, 266, 267, 272 “intermediate / innominate term” and, 261 legal hibernation and resurrection of original incarnation of, 265, 266 limited scope of “conditions and warranties” under, 261 meaning of, 260 operation of, where no repudiation of contract, 262 original incarnation of, 263-264, 265, 266 provision of additional characterisation by, 261 reactions to, 261-262 role of, 262 Singaporean position as example of rationalisation / resolution of condition-warranty approach and, 267-274, 295 importance of law relating to, 13, 295 loss of right to terminate for repudiatory breach, 13 meaning of, 259 relevance of good lawyerly attributes to discussion of, 258-259 Discharge of contract breach, by — see Discharge by breach of contract mutual agreement, by, 259 performance, by, 259 Duress defeasibility of presumptively enforceable agreement by, 94 element of fairness and, 238 enforcement of contract in absence of vitiating factors such as, 178, 184, 408-409, 410 impermissible way of deriving enforceable expectations, as, 92 more than just evidence of serious intention, 80-81 rectification, whether permitted where, 184

Election, doctrine of abandonment or unilateral release extinguished or so fundamentally altered as to be indistinguishable from, whether, 3, 29, 30, 31, 33-34, 35 application of, effect of, 367, 368 indefinite exercise of modification of terms, whether recognised by law of, 3 waiver used as meaning, where, 3, 27-28, 30, 31, 33-34, 35 — see also Waiver, doctrine of abandonment or unilateral release extinguished or fundamentally altered so indistinguishable from, whether, 3, 29, 30, 31, 33-34, 35 confusions and limitations of law, 34, 35 election between competing rights held by person making election, 27, 33, 34 justification for, 34 making and foreshadowing election distinguished, 28, 33 time for, 33, 34 Employment contract breach of implied term of mutual trust and confidence in, 257, 288-291 ambit of term, 288, 289 breach of duty of good faith, whether identical to, 289-290 consequences of, 290-291 specific performance, whether should result from, 291 when breached?, 289 relational contract, as, 37, 45, 46, 49 — see also Relational contract termination of, for breach, 257, 279-288, 291 better practical approaches, 287-288 cases prior to Geys, 280-284 doctrine of automatic termination, whether applicable, 257, 279-280, 285-286 doctrine of elective termination (general rule), whether applicable, 257, 279, 282, 283-285, 286, 287, 291 Geys (UK), 279, 284-287, 291 hybrid approach, 280-281, 283 practical problems caused by adherence to elective doctrine, 287 state of flux in law, 281-282, 283

Law Commission of England and Wales Formalities for Contracts for Sale etc of Land (No 164, 1987), 373 Illegal Transactions: The Effect of Illegality on Contracts and Trusts (No 154, 1998), 437, 448, 452 The Illegality Defence (No 320, 2010), 18, 448 The Illegality Defence: A Consultative Report (No 189, 2009), 452 recommendations and work of, in relation to illegality, 442, 443, 447, 448 Equitable assignment agency mechanism, 18, 384, 399-403 close fit with language of “transfer”, 18 commercial expedience, 18, 384 effects of, 18, 384, 399-400 flexibility of, 402 assignor, whether necessary to be party to suit based on, 17-18, 386 effects of, 18, 382, 384, 387, 388-389, 396, 399-400, 401-402 equitable chose in action, of, 383-403 additional “leap-frogging” aspect of, 384, 397-403 agency mechanism, 399-403 operation of, whether different from equitable assignment of legal chose in action, 383, 385-389, 396, 399, 402-403 trust mechanism, 383-396 valid when made voluntarily without consideration, whether, 389, 390, 391-396 failure of legal assignment, on, 17 legal chose in action, of, 383, 384-389, 396, 398, 399, 401 operation of, whether different from equitable assignment of equitable chose in action, 383, 385-389, 396, 399, 402-403 trust mechanism, 383, 384-385, 388 legal or equitable chose in action, of, 381-403 agency mechanism, by way of, 384, 399-403 analogy with conveyance of fee simple in land, whether, 382 “transfer” of property right, whether by way of, 381-382, 386-387, 402-403 trust mechanism, by way of, 382-396, 401, 402-403

Index 503 trust mechanism, 17-18, 382-403 bare trust, 383-384, 388, 402 incomplete conception, 18, 384, 396-402 shortcomings of, 396-402 special trust, 388 Estoppel, doctrine of detrimental reliance as basis of, 34, 17, 78, 88-91, 361, 363, 370-371 developments in, 4 equitable estoppel, 16-17, 359-380 “estoppel”, meaning and etymological derivation of, 16-17 estoppel by representation, 16, 360-361, 363-374, 376, 378, 380 effect of, 16 equitable estoppel as cause of action distinguished from, 360-361, 363-374, 376, 378, 380 evidential estoppel, 16, 360-361, 363-374, 376, 378, 380 effect of, 16 equitable estoppel as cause of action distinguished from, 360-361, 363-374, 376, 378, 380 good conscience and fair dealing as rationale of, 238 loss of right to terminate for repudiatory breach through, 13 meaning of, 16-17 operation as cause of action, recognised distinct principle for, 16, 17, 359-380 application only to where promise relates to identified property, whether, 17, 359, 360, 363-364, 367, 378-379, 380 articial limitation of application not justified, whether, 360, 380 commercial context, in, concerns about, 361-363, 367 consideration requirement, whether undermined by, 369-370, 373, 374, 378 contract distinguished from, 17, 360-361, 369-375, 376-380 contract law, whether undermined by, 361 detrimental reliance, whether substitute for consideration as means of contractual enforcement, 17, 361, 363, 370-371

504 Contract in Commercial Law Estoppel, doctrine of continued different approaches of Australia (Waltons Stores) and England (Thorner), whether, 359-360, 367 justification for classical requirements of contract formation by, whether, 361, 373-374 justification for content of rules operating to impose private law duties, whether, 361, 373-374 justification of distinct form of contractual damages, 375 liability for pre-contractual conduct, whether, 363 liability of promisor, how arises, 17, 361, 363, 372-374, 376, 377 nature and function of, 376-377, 379, 380 no immediate duty imposed to perform promise, 17, 361, 363, 372 preclusive estoppels (estoppel by representation / evidential estoppel / proprietary estoppel) distinguished from, 16, 360-361, 363-374, 376, 378, 380 promissory estoppel distinguished from, 360-361, 363-369, 378-379, 380 proprietary estoppel in particular form in both England and Australia, whether, 360, 363 restitutionary liability, analogy with, 375, 376-377, 379-380 promissory estoppel, 5, 62, 73-75, 78, 82, 88-91, 93, 360-361, 363-369, 378-379, 380 detrimental reliance by promisee, whether strictly necessary, 73, 74 enforceability of promises and application of, 5, 73-75, 78, 82, 88-91 equitable estoppel as cause of action distinguished from, 360-361, 363-369, 378-379, 380 evolution of doctrine of, 73-74 less than full expectation damages available via, 93 whether undermines doctrine of consideration, 5, 62, 73 proprietary estoppel, 360-361, 363-374, 376, 378, 380 equitable estoppel as cause of action distinguished from, 360-361, 363-374, 376, 378, 380

equitable estoppel as particular form of, in both England and Australia, whether, 360, 363 variation of contract and operation of, in absence of consideration, 30 waiver and, 3, 28, 29, 30, 32, 33 relevance of, 32,33 whether subsumed within doctrine of, whether, 3, 28, 29, 30 Exclusion / limitation clauses common law and statutory approaches to, differences across common law jurisdictions in 406-407 governing law, relevance of, 407 jurisdiction in which litigation occurring, relevance of, 407 transnational contracts and increasing global strategic significance of, 406-407 contra proferentem doctrine, 405, 413, 416, 417, 420, 422 efficacy of, questions about, 405 enforcement in accordance with terms of, perceived injustice flowing from, 406 “entire agreement” clause, 167, 405, 423-424 exclusion of liability for precontractual (mis)representation, whether, 405, 423-424 parol evidence rule as implied, 167 formation of contract, effect on, 405 freedom of contract and, 23, 407-413, 428, 434 contracts of adhesion as focus for reconsideration of paramountcy of, 409 economic and social history of late 19th century to present day and, 407-413 enforcement of contract in absence of fraud, misrepresentation, duress or undue influence, 408-409, 410 erosion of, 23 — see also “judicial interpretation / construction of ”; and “statutory responses to” below exploitation of superior bargaining power, judicial indifference to, 409, 410 fiction, whether, 23 judicial activism preceding interventionist legislation, 409



Index 505 legislative intervention to ameliorate outcomes of, 408, 409 “paramount public policy”, as, historically, 407-408, 434 party autonomy and, 409 standard form contracts, 409 UNIDROIT Principles of International Commercial Contracts, reference to, 428 good faith, whether exclusion or limitation by agreement by parties of duty of, 12, 241-244 historical perspective on emergent judicial and legislative regulation of exclusion of liability in late 19th and 20th century-United States, 411-412 incorporation of terms, effect on, 405 judicial interpretation / construction in Australia of, 416-422 — see also “judicial interpretation / construction of ” below commitment to freedom of contract in late 19th century/early 20th century, 418 consumer/trade practices legislation as modern basis for exclusion or modification of exclusion and limitation clauses, 417 exclusion of liability for fraud or deliberate dereliction of duty, whether, 420 exclusion of liability for negligence, approach where, 420-421, 422 exclusion or modification of operation of fiduciary duties, whether, 420 formal commercial contracts where no question of reasonableness or fairness arises, where, 417 fundamental breach doctrine not followed, 416 increasing array of statutory protections available to vulnerable / weaker parties, effect of, 418 interpretation in Canadian courts distinguished, 417-418 interpretation in English courts distinguished in minor respects (following final rejection in England of fundamental breach), 416, 420-422, 423

interpretation in New York courts distinguished in relation to exclusion of liability for negligence, 422 natural and ordinary meaning of words, read in light of contract as a whole and contra proferentem in case of ambiguity, 416, 417, 420 no distinction between exclusion and limitation clauses (despite suggestions otherwise in light of misleading or deceptive conduct legislative provisions), 416 non-commercial contracts, whether different approach involving considerations of reasonableness or fairness reserved for, 417 no statutory overlay, where, 420 significance of signature on contract, 417-418 statutory remedies, whether excluded or restricted, 417 judicial interpretation / construction in Canada of, 411, 413-416, 417-418 — see also “judicial interpretation / construction of ” below absence of interventionist legislation, 415 balance between allowing parties to make own enforceable bargains and having courts enforce bargains in favour of repudiating parties, 414-416 broad open-ended approach advocated by some judges, 417 fundamental breach doctrine, rejection of / potential revival of, 411, 414, 415 interpretation in Australian courts distinguished, 417-418 reservation of right not to enforce exclusion clause where unfair and unreasonable or unconscionable, 411 three-stage approach, 415-416 judicial interpretation / construction in England of, 406, 411, 413, 416, 420-428 — see also “judicial interpretation / construction of ” below continuing controversy and uncertainty, 422-428 “entire agreement clause”, whether excludes raising pre-contractual misrepresentation, 423-424

506 Contract in Commercial Law Exclusion / limitation clauses continued exclusion clauses distinguished from limitation clauses, 416 exclusion of liability for negligence, approach where, 420-423 fundamental breach, quashing / rejection of doctrine of, 406, 411, 413, 416, 427 interpretation in Australian courts distinguished in minor respects (following final rejection in England of fundamental breach), 416, 420-422, 423 interpretation in New York courts distinguished in relation to exclusion of liability for negligence, 422 variety of interpretive techniques (outside operation of consumer protection legislation) employed to narrow down operation of exclusion / limitation clauses, 422-428 judicial interpretation / construction in United States of, 411-413, 422 — see also “judicial interpretation / construction of ” below English mid-20th century judicial activism paralleled by interventionist State legislation, 412 explicit considerations of public policy, 412, 413 incremental development of twin notions of good faith and unconscionability, effect of, 412 “no reliance clause”(surprisingly) upheld in New York as answer to claim of fraud, where, 412-413, 422 judicial interpretation / construction of, 405, 406, 407-428 assessments of “unfairness / “unjustness” in absence of all material facts, whether danger in, 406 Australia, in, 416-422 — see also “judicial interpretation / construction in Australia of ” above Canada, in 411, 413-416, 417-418 — see also “judicial interpretation / construction in Canada of ” above contra proferentem approach, use of, 413, 416, 417, 420, 422 creativity in, 406, 410 economic and social history of late 19th century to present day, relevance to doctrinal development of, 407-413

England, in 406, 411, 413, 416, 420-428 — see also “judicial interpretation / construction in England of ” above “entire agreement” clause, whether excludes liability for precontractual (mis)representation, 405, 423-424 fundamental breach, quashing / rejection of doctrine of, 406, 411, 413, 416, 427 increasing judicial antipathy to clauses limiting / excluding liability for breach of contract / negligence, effect of, 409-411, 413 “no reliance” clause, 405, 412-413, 422 post-war consumerism, impact of, 407, 411 rigidity of approach supplanted by combination of statutory overlay and judicial techniques straining against exclusion or limitation of liability, 434 United States, in, 411-413, 422 — see also “judicial interpretation / construction in United States of ” above varied approaches to, and lack of certainty in, 405, 434 “no reliance” clause, 405, 412-413, 422 upheld in New York as answer to claim of fraud, where, 412-413, 422 purpose of rules about, 22-23 statutory responses to, 23, 406, 407, 408, 411, 412, 416-419, 432-434 absence in Canada of, 411 carriage of goods by sea legislation of UK, 408 civil liability legislation of Australian States as counterpoint to consumer/unfair contracts/trade practices legislation, 419 consequences of statutory control of exclusion clauses, whether undermining certainty, 406, 434 focus of, 406, 416 post-war consumer / contracts legislation of NSW, 406, 411, 417 post-war consumer / unfair contracts / trade practices legislation of Commonwealth of Australia, 406, 407, 411, 416-419, 432-434 post-war unfair contracts/ misrepresentation legislation of UK, 406, 411, 432, 434



Index 507 public policy explicit in, 434 uniform commercial code of some US States, 412 transnational case study of insurance contracts (England, New York and Australia), 430-434 claim in Australia for statutory remedies for misleading conduct not precluded by exclusion clause, 432-433 effect of Australian insurance contracts legislation transnationally, whether any, 433-434 effect of Australian trade practices legislation transnationally, whether any, 432-433 lack of uniformity of approaches, 434 preparedness at first instance in New York to uphold exclusions of liability for fraudulent conduct, 430, 431 related English litigation, 430-432 UNIDROIT Principles of International Commercial Contracts, construction of exclusion clauses under, 428-429 avoidance of contract or contract term for gross disparity, 429 neutral form of governing law in transnational contracts, 428 no power to modify exemption clauses, 429 reference to freedom of contract, 428 right to invoke clause excluding or limiting liability of beneficiary, unless grossly unfair to do so, having regard to purpose of contract, 428-429 standard terms, effectiveness of, 429

Fiduciary relationship — see also Good faith basis of, 109 categories of, 109 contract and, relationship between, 109-110 exclusion or modification of operation of fiduciary duties by contract, whether, 420 express exclusion of, whether, 111 identification of existence, character and scope of, 109 key ingredients, 108, 233 nature of, 110-111

new directions and style of reasoning adopted by Supreme Court of Canada in relation to, 232, 233 example of universalism, as, 233 requirement of good faith in, 236, 239 values brought to bear in evaluation of, 109, 110-111 — see also Characterisation, process of Freedom of contract contracts of adhesion as focus for reconsideration of paramountcy of, 409 economic and social history of late 19th century to present day and, 407-413 enforcement of contract in absence of fraud, misrepresentation, duress or undue influence, 408-409, 410 erosion of, 23 — see also Exclusion / limitation clauses exploitation of superior bargaining power, judicial indifference to, 409, 410 fiction, whether, 23 good faith as duty imposed by law, whether conflict with, 238-242 — see also Good faith judicial activism preceding interventionist legislation, 409 legislative intervention to ameliorate outcomes of, 408, 409 “paramount public policy”, as, historically, 407-408, 434 party autonomy and, 238-242, 409 good faith as duty imposed by law, whether conflict with, 238-242 penalties doctrine and decision in Andrews, relevance of, 458, 461, 475-476, 492— see also Penalties, doctrine of standard form contracts, 409 UNIDROIT Principles of International Commercial Contracts, reference to, 428 Good faith anticipatory breach and concept of, 293-294 Australian law of contract, in, 250-251, 254 important role on basis of parties’ intentions and under established doctrines, 251 no generally applicable duty, 250-251, 254

508 Contract in Commercial Law Good faith continued breach of duty of, 43, 57, 289-290 identical to breach of implied term of mutual trust and confidence in employment contract, whether, 289-290 repudiatory breach of contract where, whether, 43, 57 Canadian position before Bhasin, 246-248 duty of fair dealing and performance in, whether implied in relational contract, 12, 39, 40, 41, 43, 51, 57 relevant test, 41 repudiatory breach of contract where breach of, whether, 43, 57 duty imposed by law on contracting parties (Bhasin / Canadian approach), 12-13, 231-255 application of, 12, 239-241, 249, 251-255 arbitration proceedings, potential impact in, 254 Australian and UK positions contrasted with, 246-251, 254 conflict with freedom of contract and party autonomy, whether, 238-242 co-operation by parties to achieve contractual objects, 12 decisions in Bhasin at first instance and on appeal to Court of Appeal, 235-236 definition by parties of scope of, whether, 12 discrete bargain treated differently from long-term relational contract, whether, 12, 239-241, 249 effects of decision by Supreme Court of Canada in Bhasin, 12, 238-246 exclusion or limitation by agreement by parties of, whether, 12, 241-244 expansion of reach of good faith arguments beyond traditional categories allowed by, 12-13 general organising principle of comon law of contract, as, 12, 231, 234, 236 guidance / difficulties for contractual drafters and future litigants from, whether, 12, 252, 253-255 honest and reasonable performance by parties of contractual duties, 12, 234, 236, 242 incremental development by lower courts of, whether, 252, 253

influence of other legal systems / internationalisation, 245-246 legal rule distinguished from organising principle, 236 limits on, whether, 241-242 meaning of, 12, 234, 236, 242 minimum standard, as, 237 nature and facts of dispute in Bhasin, 234-235, 237, 240, 244-245 nature of, 239, 242, 244 no term implied as result of parties’ supposed intentions, 237, 238, 251 “organising principle”, meaning of, 236 parties’ intentions irrelevant to, 237, 241 practical application / development of, 12, 251-255 reactions to decision in Bhasin, 234, 238, 246, 251 recognition by Supreme Court of Canada in Bhasin of, 236-237 role of existing principles, 244-245 scope of, 236-237, 239-241 term implied by court as obligation imposed by court, 237, 238, 251 type of conduct amounting to dishonesty, 237, 247-248, 254 type of contract may affect application of, 239-241, 249 universalist technique of legal reasoning, as, and implications of, 231-232, 234, 237, 252-253 vagueness of operational content, 252 English law of contract, in, 249-250, 254 absence not central to liability, 250 broad duty not endorsed, 250, 254 existence of duty as implied term as result of parties’ intention, not obligation imposed by law, 250 expectation of honesty underlying relational contract, 249 meaning of, 10-12, 41, 227 compliance with honest standards of conduct, 11, 12, 227 compliance with reasonable standards of conduct, 11, 12 honest dealings only, whether, long-term contract, where, 12, 41 obligation of co-operation by parties to achieve contractual objects, 11, 12 principle in various manifestations of particular duties, whether, 10-11 rule requiring honest and reasonable exercise of powers by contracting parties, whether, 11, 12 single positive duty, whether, 10



Index 509 obligation imposed by law or as matter of construction of parties’ intentions, whether, 11, 12, 250, 251 — see also “duty imposed by law (Bhasin / Canadian approach)” above undermines agreed terms of contract, whether, 11 rejection of common sense morality as early retardation of development of doctrine of, whether, 65 requirement of, in certain recognised relationships / established categories of contract doctrine, 236, 239 examples of Bhasin organising principle, whether, 236 extension of Bhasin organising principle beyond, where existing law inadequate, 236-237

Illegality, doctrine of Australian approach to to common law effect on enforceability of contract, 19, 438, 446-449, 456 dependence on policy of relevant statutory or common law rule violated, 19 former problematic attachment to English precedents and reliance rule, 438 importance of legal consistency and coherence, 19, 443, 448-449, 455, 456 outcome different to that reached under English flexible balancing of range of factors approach, whether, 19 uniform application across law of obligations of, 19 very flexible approach rejecting English reliance rule with starting point of non-enforceability subject to flexible exceptions (Nelson and Fitzgerald), 19, 438, 446-449 common law effect on enforceability of contract, 8, 18-20, 439-456 — see also “two stages / exercises in determining impact on enforceability of contract” below applicable, where, 19, 439-440, 441-445, 455 application of “public policy”, whether, 8, 439 earlier traditional English approach of focus on rules distinguishing between illegality in formation and illegality in performance, whether still relevant, 449, 455

most important English case (ParkingEye) directly on, 442, 455 flexible balancing of range of factors / proportional English approach as better approach, whether, 18-20, 442-443, 446, 449, 450-451, 455-456 rigid reliance (on facts disclosing illegality) rule, 18, 19-20, 443-446, 451-454, 455, 456 tension between English approaches, 444-445 very flexible Australian approach rejecting reliance rule with starting point of non-enforceability subject to flexible exceptions (Nelson and Fitzgerald), 19, 446-447 complexity of, 435-438, 439-445, 455, 456 clash of values between private and public law, 435-436, 455 common law and legislation both involved, 436, 439-445, 455 concern with reconciliation of clashing values, 436 describing contract as illegal and describing effects of illegal contract distinguished, 437-438, 455 inconsistency of approaches by courts and textbooks, 438, 455 reference to” illegality of relevant conduct” better than to “illegal contract”, 437-438, 455 uncertainty as to scope of “illegality”, 436-437, 455, 456 English approaches to common law effect on enforceability of contract, 18-20, 435, 442-446, 449, 451-454, 455, 456 earlier traditional approach of focus on rules distinguishing between illegality in formation and illegality in performance, whether still relevant, 449, 455 flexible balancing of range of factors / proportional approach as better approach, whether, 18-20, 442-443, 446, 455 lack of clarity and certainty in, 18, 19 most important case (ParkingEye) directly on, 442, 455 rigid reliance (on facts disclosing illegality) rule, 18, 19-20, 443-446, 451-454, 455, 456 tension between, 444-445

510 Contract in Commercial Law Illegality, doctrine of continued Law Commission of England and Wales, 18, 437, 442, 443, 447, 448, 452 Illegal Transactions: The Effect of Illegality on Contracts and Trusts (No 154, 1998), 437, 448, 452 The Illegality Defence (No 320, 2010), 18, 448 The Illegality Defence: A Consultative Report (No 189, 2009), 452 recommendations and work of, 442, 443, 447, 448 impact of criminal conduct on enforceability of contract as core contractual question, 438-447, 450-456 common law and legislation both relevant, 439-445, 455 two separate stages / exercises in determining, 438-456— see also “two stages / exercises in determining impact on enforceability of contract” below impact of non-criminal conduct on enforceability of contract as further question, 439 legislative effect on enforceability of contract, 439-441, 455 need for coherent and consistent approach across law of obligations to, 19, 435 role of law of unjust enrichment concerned with restitution of benefits conferred under contract affected by criminal conduct as further question, 19, 439 scope of, uncertainty as to, 436-437, 455, 456 contract term rendered void or unenforceable, whether, 436-437 “contrary to public policy”, whether, 436 criminal or civil wrongdoing, whether, 436 “quasi-criminal” conduct, whether, 437, 456 “state unlawfulness”, whether, 436 type of turpitude, whether focus on, 437 two stages / exercises in determining impact on enforceability of contract, 438-456 clear distinction between stages, 439 continuum rather than separate stages, whether, 439

first stage as ordinary statutory interpretation as to legislative effect of relevant criminal conduct on contract, 439-441, 455 second stage as consideration of effect of criminal conduct on contract at common law (“common law effect”), 439-456 — see also “common law effect on enforceability of contract” above Implication of terms approaches to, 6-7, 20, 143-166 discretionary interpretative approach, whether, 6-7, 20, 143-166 — see also “interpretative approach to implication in fact” below reconciliation of, 7, 145, 152 rule-based gap-filling exercise, whether, 6, 7, 20, 129, 143-144, 145, 147, 152, 156, 161-163, 164-165 — see also “rule-based (gap-filling) approach to implication in fact” below “entire agreement” clause, whether parol evidence rule implies, 167, 175, 179-181 fact, in, 6-7, 20, 143-166 “commercial common sense”, whether taken into account in, 165, 166 “commercial practices” / “shared normative understandings” as part of context, 166 foundations of, 145 generally, 143-166 interpretative approach, 6-7, 20, 143-166 — see also “interpretative approach to implication in fact” below rule-based (gap-filling) approach, 6, 7, 20, 129, 143-144, 145, 147, 152, 156, 161-163, 164-165 — see also “rule-based (gap-filling) approach to implication in fact” below good faith as implied term, 237, 238, 250, 251 duty imposed by court and not as result of parties’ supposed intentions, where, 237, 238, 251 result of parties’ intentions, where, 250 imbalance in contract may be corrected by, 94 intentions of parties, relevance of, 129, 130, 132, 136 — see also Contractual intention counterfactual implication of shared contractual intention, 136 objective approach, 132, 136



Index 511 interpretative approach to implication in fact (Belize), 6-7, 20, 143-166 avoidance of defeating contractual purposes / business efficacy, 145, 152, 155-161, 163, 164 close relationship with, but distinguished from, interpretation of express terms, 148-151 criticisms of, 144, 145, 146-147 defences of, 145 exercise in construction, as, 150 factors justifying refusal to imply, 164-166 focus on meaning of instrument, 145-151, 152, 153-161 matter of language and logic, as, 145, 152, 153-155 objectivity, 145-148, 156-157, 166 obviousness, 152, 161-164 reconciliation with rule-based approach, 7, 145, 152 solution to identified problem, whether provides / governs, 150-151, 165 subjective intentions of parties, irrelevance of, 146-148 tension with rule-based approach, 20, 143-144 workable transaction, need for, 152 mutual trust and confidence in employment contract, of, whether breach identical to breach of duty of good faith, 289-290 parol evidence rule as implied “entire agreement” clause, 167 process of interpretation / construction of contract, whether, 129-130 — see also Construction of contract; Interpretation of contract rectification distinguished, 132, 133-134 relational contract, where, 47, 48, 50 rule-based (gap-filling) approach to implication in fact, 6, 7, 20, 129, 143-144, 145, 147, 152, 156, 161-163, 164-165 clarity, 143, 164 consistency, 143, 164 necessary for business efficacy, 129, 143, 144, 152 obviousness (officious bystander test), 129, 143, 144, 147, 152, 156, 161-163 reasonableness and equitableness, 143, 164-165 reconciliation with interpretative approach, 7, 145, 152 tension with interpretative approach, 20, 143-144

Insurance contract meaning and nature of, 109, 114-115 values brought to bear in evaluation of, 115 — see also Characterisation, process of Interpretation of contract — see also Characterisation, process of; Construction of contract application of principles of, 185-190 law of trusts, to, 187-188 legislation, to, 185-187 wills, whether to, 189-190 Common European Sales Law (proposed but abandoned), under, 191 conceptual meaning of, 107-108, 110 construction and, meaning of, 110, 121 construction distinguished from, whether useful, 107-108 “construction in broad sense” / characterisation, 7, 105-120 — see also Characterisation, process of contextual approach to, whether development encouraged by concept of relational contract, 3, 38, 44, 52, 59 evidence of surrounding circumstances / contextual evidence in, admissibility of, 5-6, 124, 125, 126, 127, 130-131, 132-133, 139-140, 167, 171-172, 175-177, 179-181, 197 ambiguity, gateway requirement of patent, whether, 5-6, 124, 130, 132-133 broader view, 6, 126, 127, 130-131, 132, 133, 139, 175-177 conduct of parties subsequent to entering agreement inadmissible, 171-172, 176 pre-contractual negotiations inadmissible, 127, 131, 139-140, 176-177, 180, 197 purpose of, 175 express “entire agreement” clause, effect and extent of operation of, 181 express terms, of, 148-151 ambiguity, 149 close relationship with, but distinguished from, implication of terms in fact, 148-151 identification of contractual purpose, 149 interpretative dissonance between first blush meanings and ostensible contractual purposes, 149 vagueness, 149

512 Contract in Commercial Law Interpretation of contract continued governing rules in conformity with wider body of law, 168, 185-190 historical back ground to methods of, 122-125 common law evidentiary rules, 125 common law pleading system, 122, 123 courts of equity and evidential system, 123-125 expert and party witnesses in court, 125 pleading reforms, 122 post-fusion, 125 special juries of merchants, 125 imbalance in contract may be corrected by, 94 implication of terms, whether process of, 129-130 — see also Implication of terms intention of parties and, 8, 122-125, 126-127, 128, 131, 132, 136-141, 174, 177, 180, 181, 191-192, 215-216 — see also Contractual intention commercial context, relevance of, 126 inter-subjective measurement of, as better view, 136-141 objective approach to, 8, 126, 127, 128, 131, 132, 136, 138-141, 174, 177, 180, 181 proof of, 122-123, 124, 125, 127, 131, 139-140 subjective approach to, 8, 136, 139, 191-192, 215-216 meaning of, 174, 177 parol evidence rule as implied “entire agreement” clause, whether, 167, 175, 179-181 rectification, whether different aspect of single task of, 8, 126-127 — see also Rectification, doctrine of Interpretation of legislation context in which legislation passed, admissibilty and relevance of, 186-187 non-admissibility of statements made in Parliament during passage of Bill not rule of evidence but of construction, 186 subjective intention of legislature irrelevant to, 185-186, 187 Law Revision Committee (LRC) Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) (1937), 5, 77-91, 94-103 — see also Consideration, doctrine of

aim of recommendations made by, 78 criticisms of consideration made by, 94-102 enforceability of seriously intended exchanges not questioned by, 91 rationales for recommended reforms, 78, 79 recommendations as to types of promises which should be enforceable without consideration, 5, 78-80, 87, 88, 96-103 responses to recommendations made by, 78-91, 96-102 Misrepresentation enforcement of contract in absence of vitiating factors such as, 178, 408-409, 410 “entire agreement” clause, whether excludes liability for pre-contractual, 405, 423-424 impermissible way of deriving enforceable expectations, as, 92 Mistake common mistake, 9, 10, 135-136, 178-179, 184, 193, 194, 197-199, 200, 204, 211-212, 216-217, 219-220, 221, 222, 223-226, 229 contract void for, whether, 178-179, 184 rectification for, 9, 135-136, 184, 193, 194, 197-199, 200, 204, 211-212, 216-217, 219-220, 221, 222, 223-226, 229 — see also Rectification, doctrine of contract void or voidable for, whether, 178-179, 184 disruption of bilateral agreement by, 139 emergence of doctrine of, 122 enforcing, 184-185 unilateral mistake, 10, 127, 135-136, 172-173, 184-185, 199, 208-211, 219-223, 227-229 enforcing, 184-185 non est factum finding where, 127 rectification for, 10, 135-136, 184, 199, 208-211, 219-223, 227-229 — see also Rectification, doctrine of terms of agreement, about, where known to other party, 172-173, 184-185 vitiating factor, whether, 127, 184-185 will theory (subjective intention of parties), whether some remaining relevance, 8, 10

Ontario Law Reform Committee Report on Amendment of the Law of Contract (1987), 78 Parol evidence rule — see Construction of contract Penalties, doctrine of abolition of, whether desirable, 20-21, 464 application of, 20-22, 457-463, 472-473, 477, 489-492 confinement to terms applicable upon breach of contract, whether, 20-21, 459 no breach of contract, whether where, 21-22, 457-463, 472-473, 477, 489-492 Australian approach, 21-22, 113, 457-463, 472-473, 475-492 breach of contract not essential for clause to be struck down as penal, 21-22, , 457-463, 472-473, 477, 489-492 decision in Andrews, 457-463, 472, 475-492 development post-Andrews of, 21, 22, 489-492 English approach to conception and operation of doctrine distinguished, 21-22, 113, 472-473 “legitimate interest test”, only recent recognition of, 21, 22, 489-491 competing rationales for, 22, 114, 457, 458, 463-492 contractual risk calculation and bargaining position, 469-470 deterrence, 465-467 economic efficiency, 474-475 elusiveness of identification of, 22, 463-464 importance of understanding, 464 intention-based and unconscionable exercise of legal rights, 22, 457-458, 462, 465, 475-492 — see also “defence of intention-based and unconscionable exercise of legal rights rationalisation of, post-Andrews” below preservation of liberty of action, 470-471 preservation of substantive fairness, 467-468 prevention of perverse contractual incentives, 475

Index 513 prevention of punishment, 468-469 protection of “compensation for” breach of contract principle, 471-474 decision in Andrews, 457-463, 472, 475-492 appeal in Paciocco from, 458, 489-491 application of reformulation to future cases unclear and uncertain, whether, 461-462 decision at first instance, 458-459 defence of, 457-458, 462, 475-492 departure from breach requirement based on historical analysis, 459, 460, 461, 472 effect of formulation, 477, 492 facts of, 458 formulation of when penalties doctrine to be engaged, 459-460 fundamental change to accepted understanding of law of penalties made by, 458 governs vital question of when court will refuse to enforce contractual right penalising party to contract, 461 interference with parties’ powers to contract, whether, 461 lack of clear rationale for reformulation of law, whether, 461 legitimate interest test better characterisation than commercial justification test, 489-491 major issue as to whether breach of contract necessary precondition, 459-460, 472 status of pre-Andrews jurisprudence following, 488-492 threshold requirement of formulation, 477-478 unconscionability, relevance of, 477-478 unified penalties doctrine originating in equity or separate “equitable” doctrine / “common law” penalties doctrines, whether, 462-463 defence of intention-based and unconscionable exercise of legal rights rationalisation of, postAndrews, 22, 457-458, 462, 475-492 dependence on proper objective interpretation or construction of parties’ substantive rights and obligations, 457-458, 476, 483-488, 492

514 Contract in Commercial Law Penalties, doctrine of continued fit with Andrews formulation, 22, 458, 476-478, 492 historical pedigree, 476, 478-483, 492 opens way for coherent development of law reconciling doctrine with classical power to contract critique, 475-476, 492 provides coherent path for reconciling “threshold” issue of when doctrine engaged with existing jurisprudence, 457-458, 462, 476, 488-492 freedom or power to contract, not necessarily antagonistic to, 458, 461, 475-476, 492 species within wider genus of law relating to security rights, 457-458, 465, 492 values brought to bear in evaluation of, 114 — see also Characterisation, process of Privity, doctrine of modernisation by Supreme Court of Canada of, 234 statutory exceptions to, 72 unenforceability of promise benefitting third party, 72 Promissory estoppel — see Estoppel, doctrine of Rectification, doctrine of application of principles of, 187-188, 189-190 law of trusts, to, 187-188 wills, whether to, 189-190 availability of, 127, 133-135, 193, 199-202, 216-217 proof by extrinsic evidence that both parties objectively intended something other than as written in contract, whether where, 127 proof of actual subjective agreement between parties continuing until reduction to written contract failing to embody that agreement, whether where, 133-135, 199, 201-202, 216 common mistake, for, 9, 135-136, 184, 193, 194, 197-199, 200, 204, 211-212, 216-217, 219-220, 221, 222, 223-226, 229 competing views of doctrine of, 9-10, 127, 133-135, 167-168, 181-183, 184, 193-229

partial rescission of express or implied contract term that written terms comprise entire agreement, whether “correct” view, 10, 127, 167-168, 181, 182-183, 184 rectification of instrument made in pursuance of contract not contract itself, as “traditional” view, 10, 181 rectification of parties’ objective agreement so as to conform to subjective intentions where differ, as “radical” view, 10, 133-135, 181, 182, 198-199 resolution of, whether, 204-206, 216, 227, 229 uncertainty and complexity of, 9-10, 193-229 construction of contract, relationship with, 7, 9, 124, 126, 133-134, 211 complementary, 211 distinguished, 7, 9, 124, 126, 133-134 evidence of prior negotiations admissible for purpose of, 177 examples of operation and consequences of, 183-184, 198-204, 208-216 governing rules of, 9-10, 123, 124, 127, 132-135, 136, 167-168, 181-184, 193-229 concern with documents, whether, 9, 124, 181, 195, 200-206, 223-224 concern with parties’ intentions, whether, 9-10, 123, 124, 127, 132, 133-135, 136, 167-168, 182, 183, 193, 194-217, 221-229 conformity with wider body of law, in, 168, 184 pragmatic / policy concerns, whether relevant, 217-218 resolution of different opinions, whether, 204-206 unsettled nature of, 9-10, 193-194 historical background to, 123-124, 225 implication of terms distinguished, 132, 133-134 intentions of parties, relevance of, 9-10, 123, 124, 127, 132, 133-135, 136, 167-168, 182, 183, 193, 194-217, 221-229 inter-subjective measurement, 136 objective determination of common intention in disconformity with terms of document, whether, 9, 127, 136, 167-168, 182, 183, 197-198, 199, 200, 201-202, 203-210, 212-218, 221, 222-226, 228, 229



Index 515 subjective approach, whether, 9-10, 132, 133-135, 136, 184, 194-197, 198, 199, 201-204, 207, 209, 210, 211-216, 221-222, 224-226, 227, 228-229 interpretation of contract, relationship with, 8, 126-127 limits of, 194 meaning of, 127 nature of jurisdiction, 124 parol evidence rule and, 179, 182 purpose of, 132, 134, 167-168, 193, 194, 204, 205, 211-212 scope for, 8-9, 134 sub-set of specific performance, whether, 124, 182 unilateral mistake, for, 10, 135-136, 184, 199, 208-211, 219-223, 227-229

Relational contract application of term, 37-38, 39-44, 45-46, 47, 49, 51, 52, 54, 55, 58 commercial transactions generally, whether to, 37-38, 40 employment contract, to, 37, 45, 46, 49 English High Court cases, in, 39-44, 47, 51, 52, 54, 55, 58 legal effects of, 38, 39, 43-44 long-term business relationships, to, 37, 41, 42, 45-46, 52 “requirements contract”, 46 class of, whether, 38-39 descriptive paradigm of, 3, 38, 39, 43, 45, 46, 48, 52-55, 56-59 commitment by both parties, 53-54, 55 co-operation and loyalty of both parties, 43, 55 elements of, 43, 52-53, 54-55, 56 implication of contractual obligations, 3, 43, 46 indeterminacy and expectations, 3, 43, 54-55, 59 indeterminate performance obligations, 3, 52-53, 55, 56, 59 long-term business relationship, 38, 39, 43, 45, 46, 48, 52, 55, 56, 59 economic theory and, 39, 44, 46-52, 53, 54 commitment by both parties, 54 guidance on appropropriate legal and regulatory framework, 44 implied terms, 47, 48, 50 institutional economics, 49-52 maintenance of business relationships, 46-48, 50 quasi-integration, 44, 49-52, 53, 54 “requirements contract”, 46 self-enforcing contracts or relational contracts, 44, 46-48

encouragement of development of contextual approach to interpretation, whether, 3, 38, 44, 52, 59 duty of good faith imposed by law, whether, 12, 239-241, 249 implied duty of disclosure of material information, whether, 3, 40, 48, 58 implied duty of fair dealing and performance in good faith, whether, 12, 39, 40, 41, 43, 51, 57 good faith, meaning and application of, where long-term contract, 12, 41 relevant test, 41 repudiatory breach of contract where breach of, whether, 43, 57 implied duty of honesty and integrity, whether, 42, 43, 58 meaning of, 42, 43 implied obligations of co-operation, honesty, loyalty, mutual trust and confidence, 3, 39-40, 41, 43-44, 49, 50, 51, 55, 57, 58, 59 consequence of, 43-44 repudiatory breach of contract where breach of, whether, 40, 43, 57 judicial references to, in connection with commercial transactions, 37-38 launch and development of concept of, 44-46, 55 defects in classical approach to contract analysis, 45 implicit understandings of parties, 45-46 understanding of relationship and expectations of parties, 45, 55 legal concept, whether, 3, 37-59 dificulties necessary to address, 38, 43 elements of, 43, 52-53, 54-55, 56 guidance from sociological and economic theories, 44-52 potential consequences of, 3, 38, 39, 56-58 usage in English High Court cases, 37-38, 39-44, 47, 51, 52, 54, 55, 58 legal consequences of, 3, 38, 39, 56-58, 59 contextual interpretation necessary, 56-58, 59 protracted litigation more likely, whether, 56 recognition of implicit expectations / obligations, 3, 39, 56-58 meaning of, 3, 38, 40, 41, 42, 43, 50, 52-55, 56-57 elements of, 43, 52-53, 54-55, 56-57 lack of clarity, 38 synthesis, 52-55

516 Contract in Commercial Law Relational contract continued sociological theory and, 39, 44-46, 52-54 embedded exchange, 44-46 guidance on appropropriate legal and regulatory framework, 44 indeterminate performance obligations, 52-53 three-dimensional view of, 57 Remedies assessment of damages for reasonable pre-breach expenditure where wrongful repudiation of commercial contract, 16, 333-358 — see also Damages damages for breach of contract, 14-15, 16, 22, 89, 93-94, 116, 117, 259, 260, 299, 301, 303, 304-310, 311, 333-358, 375, 458 — see also Damages damages for breach of trust, whether, 297-311 — see also Damages rectification for mistake — see Rectification, doctrine of specific implement (civilian Scots law), 15-16, 313-315, 317, 318, 319, 320-321, 322-331 — see also Specific implement specific performance, 15-16, 89, 288-291, 314-318, 319-324, 326-327, 329-331 — see also Specific performance Repudiatory breach assessment of damages for reasonable pre-breach expenditure under commercial contract where, 16, 333-358 — see also Damages breach of implied duty of fair dealing and performance in good faith in long-term / relational contract, whether, 43, 57 breach of implied obligations of co-operation, honesty, loyalty, mutual trust and confidence in long-term / relational contract, whether, 40, 43, 57 entitlement of party in breach to terminate contract for other party’s breach or repudiation, whether, 13, 14, 274-279 — see also Discharge by breach of contract entitlement of party in non-serious breach to terminate contract for other party’s serious breach or repudiation, whether, 13, 14, 274-276, 278-279 — see also Discharge by breach of contract

entitlement of party in serious breach to terminate for other party’s serious breach or repudiation, whether, 13, 14, 276-279 — see also Discharge by breach of contract meaning and effect of, 13-14 — see also Discharge by breach of contract Restitution conferred under contract affected by criminal conduct, 19, 439 — see also Illegality, doctrine of liability for, analogy with equitable estoppel, 375, 376-377, 379-380 Roman law bare promises, enforceability of, 4, 63 contracts, of, 1, 63 introduction to Scotland of, 313 Scots law civilian classification of, 313, 315 law of actions, 313 law of persons, 313 law of things, 313, 315 emphasis on order and principle, 313 English authorities, whether use of, 316 introduction of Roman civil law to, 313 specific implement, decree of, 15, 16, 313-314, 315, 317, 318, 319, 320-321, 322-331 — see also Specific implement various sources of, 313 Specific implement discretionary basis to refuse decree for, 314, 315, 317, 321, 323-324, 326, 327, 328-329, 331 disproportionate burden / hardship in performance, 326, 331 impossibility of performance, 315, 327 too generalised to be enforced, 315, 317, 324, 327 “keep open” cases and decree for, whether, 315, 317, 319, 322-331 law of obligations as basis of entitlement to decree for, 313-314 meaning of, 313-314 specific performance distinguished, 15, 16, 314, 318, 319, 320-321, 323, 324, 327, 330-331 starting point for decree for, 15, 16, 314, 318, 319, 321, 323, 324, 327, 330-331 Specific performance breach of implied term of mutual trust and confidence in employment contract, whether should result in, 288-291



Index 517 discretionary considerations for availability of order for, 15-16, 317, 318, 320, 321-322, 323-324, 329-330 difficulty, time and expense of litigation resulting from court supervision, 16, 320, 321, 322, 323, 329-330 public interest in bringing litigation to end and undesirability of judges being required to make order lacking precision under threat of imprisonment, 16, 322, 323-324 undesirable effect of order on party against whom made, 16, 320, 321, 322 inadequacy of common law remedies, where, 15-16, 314, 317, 318, 319-321-323, 324, 327, 329-330, 331 “keep open” cases and order for, whether, 315, 316-318, 319-320, 326-327, 329-330 specific implement (civilian Scots law) distinguished, 15, 16, 314, 318, 319, 320-321, 323, 324, 327, 330-331 starting point for order for, 15, 16, 314, 318, 319, 320-321, 323, 324, 327, 330, 331

Termination employment contract, of, for breach, 257, 279-288, 291 better practical approaches, 287-288 cases prior to Geys, 280-284 doctrine of automatic termination, whether applicable, 257, 279-280, 285-286 doctrine of elective termination (general rule), whether applicable, 257, 279, 282, 283-285, 286, 287, 291 Geys (UK), 279, 284-287, 291 hybrid approach, 280-281, 283 practical problems caused by adherence to elective doctrine, 287 state of flux in law, 281-282, 283 innocent party’s right of, at common law, 13-14, 131, 259-274, 295 breach of contract, for, where no express reference in contract, 13-14, 131, 259-274, 295 — see also Discharge by breach of contract express term of contract, under, 268-270 mistaken exercise of right of, as repudiatory breach — see Repudiatory breach

Trust application of contractual principles of interpretation and rectification to law of, 187-188 damages for breach of, whether, 297-311 — see also Damages Unconscionability — see also Estoppel, doctrine of defeasibility of presumptively enforceable agreement by, 94 element of fairness and, 238 essence of doctrine, 111, 112-113 interpretation of exclusion clauses where, 411, 412 judicial development of principles guiding/ content of statutory standard, 112 more than just evidence of serious intention, 80-81 penalties doctrine and relevance of, 477-478 rectification for unilateral mistake where, 199, 209, 221-222, 223, 227 statutory transposition to business relationships, 111 use as analogy in characterisation process, 106, 109 values brought to bear in evaluation of, 111, 112-113 — see also Characterisation, process of Undue influence defeasibility of presumptively enforceable agreement by, 94 element of fairness and, 238 enforcement of contract in absence of vitiating factors such as, 178, 184, 408-409, 410 impermissible way of deriving enforceable expectations, as, 92 more than just evidence of serious intention, 80-81 rectification, whether permitted where, 184 UNIDROIT Principles of International Commercial Contracts consideration not required for contract under, 75 construction of exclusion clauses under, 428-429 avoidance of contract or contract term for gross disparity, 429 neutral form of governing law in transnational contracts, 428 no power to modify exemption clauses, 429 reference to freedom of contract, 428

518 Contract in Commercial Law UNIDROIT Principles of International Commercial Contracts continued right to invoke clause excluding or limiting liability of beneficiary, unless grossly unfair to do so, having regard to purpose of contract, 428-429 standard terms, effectiveness of, 429 “soft law”, as 75 Unification of law of contract abolition of forms of action, 1 achievement in 19th century English law of, 1 influence of jurists, 1 pressures on unitary understanding, 1-2 removal of issues from juries, 1 specification of legal rules, 1 Unilateral release waiver used as meaning abandonment or, where, 3, 27, 28-30, 31, 33-34, 35 — see also Waiver, doctrine of extinguished or fundamentally altered so indistinguishable from election, whether, 3, 29, 30, 31, 33-34, 35 time for (if principle exists), 29-30, 33, 34 United Nations Convention on Contracts for the International Sale of Goods consideration not required for agreement modifying existing contract, 74 Unjust enrichment cause, relevance of, 68 effect of criminal conduct on role of law of, 19, 439 new directions and style of reasoning adopted by Supreme Court of Canada, 232-233 Variation of contract consideration as basis for, 30, 34, 35 long-term contracts, where, 35 unilateral release / waiver, by — see Waiver, doctrine of Waiver, doctrine of abandonment or unilateral release, where means, 3, 27, 28-30, 31, 33-34, 35 extinguished or fundamentally altered so indistinguishable from election, whether, 3, 29, 30, 31, 33-34, 35 time for (if principle exists), 29-30, 33, 34 application of, 32-35, 367, 368 detrimental reliance, whether necessary, 32 effect of, 367, 368 election between inconsistent rights, whether relevant, 33

estoppel, whether relevant, 32, 33 long-term contracts, where, 35 time for insistence on right, whether definite or indefinite, 33, 34, 35 unilateral variation, where, 32 election, where means, 3, 27-28, 30, 31, 33-34, 35 — see also Election, doctrine of abandonment or unilateral release extinguished or fundamentally altered so indistinguishable from, whether, 3, 29, 30, 31, 33-34, 35 confusions and limitations of law, 34, 35 election between competing rights held by person making election, 27, 33, 34 justification for, 34 making and foreshadowing election distinguished, 28, 33 time for, 33, 34 expansion of understanding of, whether desirable, 3, 36 forbearance, where means, 3, 27, 28 independent principle or subsumed within doctrimes of estoppel, election or variation by consideration, whether, 3, 28 generally, 25-36 jurisdictions other than Australia, in, 35 limitations imposed in Australia on, 26-36 loss of right to terminate for repudiatory breach through, 13 overly restrictive understanding of, whether, 3, 36 reason or justification for operation of, necessity of, 29, 34, 36 unilateral release or abandonment, where means, 3, 27, 28-30, 31, 33-34, 35 extinguished or fundamentally altered so indistinguishable from election, whether, 3, 29, 30, 31, 33-34, 35 time for (if principle exists), 29-30, 33, 34 variety of meanings of “waiver”, 3, 27-31, 33-34, 35 abandonment or unilateral release, 3, 27, 28-30, 31, 33-34, 35 basis of unfairness or approbation and reprobation, whether, 27, 30, 31 difficulties created by, 3 election, 3, 27-28, 29, 30, 31, 33-34, 35 forbearance, 3, 27, 28 residual category of, whether, 30-31 subsumed within doctrines of estoppel, election or variation by consideration, whether, 3, 28, 29, 30