Contract Law: : Text and Cases 9780195574531, 1061071081, 0195574532

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Contract LAW Text and Cases Dilan Thampapillai Vivi Tan Claudio Bozzi

Contract Law

Contract Law Text and Cases Dilan Thampapillai, Vivi Tan & Claudio Bozzi

1 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries. Published in Australia by Oxford University Press 253 Normanby Road, South Melbourne, Victoria 3205, Australia © Dilan Thampapillai, Vivi Tan and Claudio Bozzi 2012 The moral rights of the authors have been asserted. First published 2012 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence, or under terms agreed with the appropriate reprographics rights organisation. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. National Library of Australia Cataloguing-in-Publication entry Author: Thampapillai, Dilan. Title: Contract law : text and cases / Dilan Thampapillai, Vivi Tan, Claudio Bozzi. ISBN: 9780195574531 (pbk.) Notes: Includes index. Subjects: Contracts—Australia—Textbooks. Commercial law—Australia—Textbooks. Other Authors/Contributors: Tan, Vivi. Bozzi, Claudio. Dewey Number: 346.9407 Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Limited Level 15, 233 Castlereagh Street Sydney NSW 2000 Telephone: (02) 9394 7600 Facsimile: (02) 9394 7601 Email: [email protected] Edited by Natasha Broadstock Cover design by Canvas Group Text design by Polar Design Typeset by diacriTech, India Proofread by Roz Edmond Indexed by Glenda Browne Tables by Jon Jermey Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

Contents Table of Cases Table of Statutes

xviii liv

Prefacelix Acknowledgmentslx

chapter 1 An introduction to law school

1

1.0

Commencing as a first-year law student

2

1.1

Tips for studying at law school 2 1.1.1 Understand what law is 2 1.1.2 Work effectively at law school 3 1.1.3 Practise the core legal skills 4 The common law method 4 Case law analysis 5 Legal problem solving 5 Statutory interpretation 6 Legal writing 6 Research6 1.1.4 Remember that reputation matters 7 1.1.5 Be seen at law school 8 1.1.6 Read widely 9 1.1.7 Remember that law is a skills profession 9

1.2 Conclusion

9

chapter 2 Theories of contract law

10

2.0 Introduction

11

2.1

The contract as bargain 11 2.1.1 History 11 2.1.2 Theory 13 Standard form contracts 13 Ambiguity14 Hypothetical and actual consent 14

2.2

The contract as promise

16

2.3

The contract as property 2.3.1 Property and the reliance theory of contract

18 20

[ vi ]

Contents

2.3.2

Remedial action The harm principle The corrective justice principle

21 21 22

CHAPTER 3 Offer23 3.0 Introduction

24

3.1

25

Offer and acceptance

3.2 Offers 3.2.1 Is there an offer? 3.2.2 The existence of a definite promise

26 26 28

3.3

Invitations to treat 3.3.1 A framework for invitations to treat

29 32

3.4

Mere puffery

32

3.5

Different types of contracts 3.5.1 Unilateral and bilateral contracts 3.5.2 Shop sales 3.5.3 Auctions 3.5.4 Tenders 3.5.5 Ticket cases

36 36 36 37 38 38

3.6

Termination of offers 3.6.1 Revoking a unilateral contract

48 49

CHAPTER 4 Acceptance 53 4.0 Introduction

54

4.1 Acceptance 4.1.1 ‘A meeting of minds’ 4.1.2 Consciousness of the offer

54 54 56

4.2

Communication of the acceptance 4.2.1 Silence as acceptance 4.2.2 Acceptance by conduct

57 59 59

4.3

Prescribed mode of acceptance 4.3.1 The postal rule 4.3.2 Instantaneous methods of communication

61 61 64

CHAPTER 5 Consideration 69 5.0 Introduction

70

5.1

70

Defining consideration

Contents

5.1.1 5.1.2

The benefit/detriment requirement The bargain requirement

71 72

5.2

Consideration must move from the promisee

73

5.3

Consideration need not be adequate but must be sufficient 5.3.1 Adequacy 5.3.2 Sufficiency

74 74 75

5.4

Illusory consideration

76

5.5

Past consideration is not adequate consideration

77

5.6

Compromise and forbearance to sue as consideration 5.6.1 Compromise 5.6.2 Forbearance

78 78 79

5.7

Existing duties 5.7.1 Existing public duty imposed by law 5.7.2 Existing duty imposed by a contract in which the promisee is already bound

79 80

Promises to pay lesser sums

84

5.8

80

chapter 6 Capacity to contract

87

6.0 Introduction

88

6.1 Minors 6.1.1 The position under the common law 6.1.2 Statutory amendments to the common law

88 88 89

6.2

91

Mentally disabled and intoxicated persons

6.3 Corporations 6.3.1 What is a corporation? 6.3.2 Legal capacity to contract 6.3.3 Contracts preceding incorporation

93 93 94 95

6.4

Unincorporated associations 6.4.1 Liability of committees

96 97

6.5

The Crown

98

6.6 Bankrupts 6.6.1 Vesting and transfer of property on bankruptcy 6.6.2 Disclaiming onerous property 6.6.3 Rights and responsibilities following bankruptcy

100 100 101 102

6.7

104

Married women

[ vii ]

[ viii ]

Contents

chapter 7 Intention to create legal relations

106

7.0 Introduction

107

7.1

Domestic arrangements 7.1.1 From presumption to construction

108 109

7.2

Commercial arrangements 7.2.1 Express exclusions 7.2.2 Mere representations and puffery 7.2.3 From presumption to construction Ermogenous v Greek Orthodox Community of SA Inc

110 110 111 113 114

7.3

Particular situations 7.3.1 Government schemes and agreements 7.3.2 Voluntary associations 7.3.3 Registered companies

116 116 117 118

chapter 8 Certainty and completeness

120

8.0 Introduction

121

8.1 Certainty 8.1.1 Severability 8.1.2 Clauses capable of more than one meaning 8.1.3 Discretion and ‘subject to finance’ clauses

123 123 125 127

8.2

130

Illusory promises

8.3 Completeness 8.3.1 Specific performance

132 133

8.4

135

Agreements to negotiate in good faith

chapter 9 Estoppel 141 9.0 Introduction

142

9.1

The concept of estoppel 9.1.1 A unified doctrine of estoppel? 9.1.2 An argument for maintaining the distinction

142 144 146

9.2

Promissory estoppel 9.2.1 Elements i Assumption ii Inducement iii Detrimental reliance iv Knowledge

148 155 157 157 157 158

Contents

9.2.2 9.3

v Reasonableness vi Unconscionability Relief under equitable estoppel

Common law estoppel

158 158 159 161

chapter 10 Formalities 163 10.0 Introduction

164

10.1

Statute of Frauds 10.1.1 Relevant provisions What should the written evidence contain? 10.1.2 Signature 10.1.3 Joinder of documents Parol and oral evidence

164 166 170 172 174 177

10.2

Sale of goods 10.2.1 Acceptance 10.2.2 Earnest and part payment

178 178 179

10.3

Effect of non-compliance

179

10.4

Part performance

180

chapter 11 Express terms

187

11.0 Introduction

188

11.1

Pre-contractual terms 11.1.1 Promissory nature

188 190

11.2

Incorporation of terms 11.2.1 Incorporation by signature 11.2.2 Incorporation by reference and reasonable notice 11.2.3 Incorporation through course of dealing

196 197 198 199

chapter 12 Construing terms

202

12.0 Introduction

203

12.1

203 203 206 209 210

Admissibility of evidence 12.1.1 Parol evidence rule Partly oral and partly written contracts Collateral contracts Variation of contracts and rectification of documents

[ ix ]

[ x ]

Contents

12.2

Extrinsic evidence admitted in the interpretation of documents 12.2.1 Evidence of subjective intention 12.2.2 Evidence in support of implication of terms 12.2.3 Evidence of customary or common usage 12.2.4 Evidence of subsequent conduct 12.2.5 Inoperative or contingent documents

211 212 214 214 215 216

12.3

Summary of Australian courts’ approach to the construction process

216

12.4

Estoppel and the construction of written contracts

216

chapter 13 Implied terms

220

13.0 Introduction

221

13.1

Terms implied in fact 221 13.1.1 Formal contracts 222 Reasonable and equitable 223 Business efficacy 223 Obviousness 224 Clarity 226 Consistency 226 13.1.2 Informal contracts 227

13.2

Terms implied by custom

227

13.3

Terms implied by law 13.3.1 The implied duty of good faith The development of the implied duty of good faith 13.3.2 The implied duty to cooperate

229 231 232 236

chapter 14 Privity of contract

239

14.0 Introduction

240

14.1

The development of the privity rule

240

14.2

Privity of contract 14.2.1 Privity and the doctrine of consideration

243 245

14.3 Remedies 247 14.3.1 Damages at common law 248 14.3.2 Remedies in equity 251 Trusts 254 14.4

Trident v McNiece 256

14.5

Exceptions to the privity rule

267

14.6

Third party beneficiaries and exclusion clauses

268

Contents

chapter 15 The doctrine of frustration

270

15.0 Introduction

271

15.1

The application of the doctrine 15.1.1 The frustrating event 15.1.2 Without the fault of either party Onus of proof 15.1.3 Radically alter the performance of the contract

271 276 276 279 283

15.2

What can constitute a frustrating event? 285 15.2.1 External events 285 15.2.2 Personality: death or incapacity 286 15.2.3 Increased burden of performance 287 15.2.4 Frustration of purpose: the principle of Krell v Henry 287 15.2.5 Uncontemplated events 288 15.2.6 Disappointed expectations 289 15.2.7 Illegality 289 15.2.8 War 290 15.2.9 Delay 291

15.3

Absolute contracts

15.4 Land 15.5

292 292

Effects of frustration 296 15.5.1 Automatic discharge of obligation 296 15.5.2 Discharge in futuro 298

chapter 16 Misrepresentation 303 16.0 Introduction

304

16.1

The general rule 16.1.1 The elements of an actionable misrepresentation

305 305

16.2

Positive misrepresentation 16.2.1 Mere puffery 16.2.2 Statements of opinion 16.2.3 Statements of intention 16.2.4 Statements of law

305 306 309 311 312

16.3 Silence 315 16.3.1 Where the silence distorts some positive representation 316 16.3.2 Where the statement becomes untrue 319 16.3.3 Where the parties are in a fiduciary relationship 319

[ xi ]

[ xii ]

Contents

16.4

Culpable misrepresentation 16.4.1 Fraudulent misrepresentation 16.4.2 Negligent misrepresentation

320 320 320

16.5

Innocent misrepresentation

322

16.6

Who may sue for misrepresentation? 16.6.1 Limitations on actions for misrepresentation Where the statement is non-inducing Where the plaintiff is unaware of the representation Where the plaintiff knows that the representation is false Where the plaintiff does not act on the representation Where the misrepresentation is not material

322 323 323 324 324 324 325

16.7 Rescission

325

chapter 17 Misleading or deceptive conduct

328

17.0 Introduction

329

17.1

The objective of s 18

329

17.2

Conduct in trade or commerce

330

17.3

Establishing misleading or deceptive conduct 17.3.1 The Taco Bell steps 17.3.2 The ordinary and reasonable person

334 334 336

17.4

Examples of misleading or deceptive cases 17.4.1 Comparative advertising 17.4.2 Silence where disclosure is expected 17.4.3 Puffery 17.4.4 Promises 17.4.5 Character merchandising

339 339 339 340 340 340

chapter 18 Unconscionable conduct

343

18.0 Introduction

344

18.1

344 346 347 348 350 350 350 353 358

The elements of unconscionability 18.1.1 Special disadvantage Constitutional or situational disadvantage Limitations to the concept of special disadvantage 18.1.2 Knowledge of special disadvantage 18.1.3 Taking unconscionable advantage ACCC v CG Berbatis Holdings Pty Ltd Bridgewater v Leahy Louth v Diprose

Contents

18.2 Defences

364

18.3 Remedies

364

18.4

Statutory unconscionability

364

chapter 19 Undue influence

368

19.0 Introduction

369

19.1

Categories of undue influence 19.1.1 Actual undue influence 19.1.2 Presumed undue influence

370 370 372

19.2

Specific relationships of influence 19.2.1 Parent and child 19.2.2 Guardian and ward 19.2.3 Religious adviser and disciple

378 378 378 380

19.3

Rebutting the presumption 19.3.1 Independent advice 19.3.2 Free will

387 387 388

19.4

The principle in Yerkey v Jones 388

19.5 Remedies

392

chapter 20 Duress 395 20.0 Introduction

396

20.1

The elements of duress

396

20.2

The legal boundaries of duress 20.2.1 Duress, undue influence and unconscionability 20.2.2 Duress and consideration

397 397 398

20.3

Contracts made under duress are voidable

398

20.4

Categories of duress 20.4.1 Duress to the person Threats of violence Other threats 20.4.2 Duress of goods 20.4.3 Economic duress

399 399 399 400 401 401

20.5

The overborne will and the nature of the threat 20.5.1 The overborne will 20.5.2 The nature of the threat

408 409 409

20.6 Causation

413

20.7 Remedies

414

[ xiii ]

[ xiv ]

Contents

chapter 21 Unfair contract terms

416

21.0 Introduction

417

21.1

The Australian Consumer Law

417

21.2

The rationale behind the Unfair Contract Terms regime

418

21.3

Application and operation 21.3.1 A consumer contract 21.3.2 A standard form contract 21.3.3 An unfair term The ACL’s examples of unfair terms

420 420 421 422 423

21.4 Remedies

424

chapter 22 Mistake 427 22.0 Introduction

428

22.1

Unilateral mistake 22.1.1 Unilateral mistake as to identity When the parties have contracted at a distance When the parties have contracted face to face 22.1.2 The effect of an executed document 22.1.3 Unilateral mistake as to terms 22.1.4 ‘Snapping up’ an offer

430 430 431 432 433 433 434

22.2

Common and mutual mistake

435

22.3

The subject matter of the contract 22.3.1 Identifying the subject matter 22.3.2 Total failure of consideration Absence of subject matter Partial absence of subject matter Mistake as to quality of subject matter

436 436 437 437 439 439

22.4

Other categories of mistake

439

22.5 Remedies 22.5.1 Rescission 22.5.2 Unjust enrichment 22.5.3 Specific performance 22.5.4 Rectification For common mistake For unilateral mistake

440 440 444 444 444 445 446

Contents

chapter 23 Termination for breach

451

23.0 Introduction

452

23.1

Right to terminate conferred by contract 23.1.1 Restrictions 23.1.2 Effect

452 453 453

23.2

Right to terminate conferred by law 23.2.1 Repudiation Anticipatory breach 23.2.2 Breach of essential term or condition 23.2.3 Breach causing loss of substantial benefit

455 455 459 460 463

23.3

Election to affirm the contract

464

chapter 24 Discharge of contract by performance and agreement

470

24.0 Introduction

471

24.1

Discharge by performance 24.1.1 Time of performance Application of the equitable rules 24.1.2 Order of performance 24.1.3 Level of performance

471 471 472 473 474

24.2

Discharge by agreement

475

24.3

Discharge by express or implied contractual terms 475 24.3.1 Failure of contingent conditions 477 Contingent condition to performance and formation 477 Relevance of the duty to cooperate 478 Contingent conditions precedent and subsequent to performance 479 24.3.2 Non-fulfilment of contingent conditions 479 Consequences of the non-fulfilment of a contingent condition 480 24.3.3 Election to terminate 482 Restrictions on the right to terminate 482 Effect of termination 484

24.4

Discharge by subsequent agreement

485

24.5

Discharge by abandonment

486

24.6

Estoppel and termination

486

[ xv ]

[ xvi ]

Contents

chapter 25 Common law damages

490

25.0 Introduction

491

25.1 Damages 25.1.1 The compensatory nature of damages 25.1.2 Proof of loss

491 492 492

25.2

Types of damages 25.2.1 Expectation damages and reliance damages Loss of profits Loss of chance or opportunity Loss of use of money Personal injury Mental distress and loss of reputation 25.2.2 Restitution damages

493 493 497 498 500 501 501 502

25.3

Account of profits (disgorgement)

502

25.4

Liquidated damages

504

25.5

Valuation and assessment 25.5.1 Market value

506 508

25.6

Contributory negligence

511

25.7

Proportionate liability

511

chapter 26 Limitations on the award of damages

514

26.0 Introduction

515

26.1 Causation 26.1.1 The ‘but for’ test 26.1.2 Concurrent causes 26.1.3 Intervening events Contributory negligence breaking the chain of causation Intervening event created or enlarged by the breach

515 515 516 516 522 525

26.2 Remoteness 526 26.2.1 Hadley v Baxendale 527 The first limb of Hadley v Baxendale 528 The second limb of Hadley v Baxendale 529 26.3 Mitigation 26.3.1 Rationale for the mitigation obligation 26.3.2 Reasonable steps 26.3.3 The impecunious plaintiff 26.3.4 Attempts at mitigation which increase loss

531 532 532 533 534

Contents

chapter 27 Restitution and debt

538

27.0 Introduction

539

27.1

Restitution and contract provisions

539

27.2

The unjust enrichment principle 540 27.2.1 Recovery of the value of non-monetary benefits 540 27.2.2 Recovery of money 540 Failure of consideration 540 Mistake 542 27.2.3 Defences to claims for money 542

27.3 Debt 27.3.1 The doctrine of substantial performance

544 544

27.4 Deposits

546

chapter 28 Equitable remedies

549

28.0 Introduction

550

28.1

Specific performance 550 28.1.1 Jurisdictional requirements 550 Consideration 550 Enforceability 551 Inadequacy of common law damages 551 28.1.2 Discretionary requirements for an order of specific performance 552 (i) Fairness 552 (ii) Hardship to the defendant 552 (iii) Breach of contract by plaintiff 553 (iv) Readiness and willingness of the plaintiff to perform 553 (v) Contracts for personal services 556 (vi) Constant supervision by the court 557

28.2 Injunctions

558

28.3 Declarations

559

28.4

559

Index 

Equitable damages

562

[ xvii ]

[ xviii ]

Table of Cases

Table of Cases Page numbers denoting case extracts appear in bold. 21st Century Promotions Australia Pty Ltd v Telstra Corp [2001] SASC 299

473

A Roberts & Co Ltd v Leicestershire City Council [1961] Ch 555 446 Abbott & Co v Wolsey [1895] 2 QB 97 178 Abbott v Lance (1860) Legge 1283 50 Abram v A V Jennings Ltd [2002] SASC 417 484 ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 347–53, 358, 365 ACCC v Keshow (2005) ATPT (Digest) 46–265 419 ACCC v Lux [2004] FCA 926 419 ACCC v Radio Rentals [2005] FCA 1133 365 ACCC v Samton Holdings Pty Ltd [2000] 1725 235, 349 ACCC v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 365 Aclaw Pty Ltd v Fullston [2000] SASC 440 459 Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2003] 2 AC 541 164 Adams v Champion [1935] USSC 24 254 Adams v Lindsell (1818) 1 B & Ald 681 54, 61–2, 66 Adaras Development Ltd v Marcona Corporation [1975] 1 NZLR 324 138 Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274 222 Adenan v Buise [1984] WAR 61 371 Adler v Dickson [1955] 1 QB 158 251 Administration of the Territory of Papua New Guinea v Leahy (1961) 105 CLR 6 116 Administrative of Papua New Guinea v Daera (1973) 130 CLR 353 215 AGC v McWhirter (1977) 1 BPR 9454 37–8 Agip SpA v Navigazione Alta Italia SpA (‘The Nai Genova’ and ‘The Nai Superba’) [1984] 1 Lloyd’s Rep 353 447 Air Great Lakes Pty Ltd v KS Easter Holdings Oty Ltd (1985) 2 NSWLR 309 216, 486 Aiton Australia Pty Ltd v Transfield Pty ltd (1999) 153 FLR 236 557 Ajayi v R T Briscoe (Nigeria) Ltd [1964] 3 All ER 556 149, 151 Re: AJG [2004] QCA 88 7 Akerhielm v De Mare [1959] AC 789 320 Al Khudairi v Abbey Brokers Ltd [2010] EWHC 1486 311 Alati v Kruger (1955) 94 CLR 216 305, 326 Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 233, 235–6 Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 515, 517–26, 528 Alexus Pty Ltd v Pont Holdings Pty Ltd [2000] NSWSC 1171 473 Allcard v Skinner (1887) 36 Ch D 145 361, 369–70, 372, 380, 382–3, 386, 394 Allen v Richardson (1879) 13 Ch D 524 440 Alliance Petroleum Australia NL v Australian Gas Light Co (1985) 39 SASR 84 473 Allianz v Waterbrook [2009] NSWCA 224 522–5 Allied Mills Ltd v Gwydir Valley Oilseeds Pty Ltd [1978] 2 NSWLR 26 279 Alucraft Pty Ltd (in liq) v Grocon Ltd (No 2) [1996] 2 VR 386 492

Table of Cases

Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] 2 QB 84 152, 154, 215 Amann Aviation Pty Ltd v Commonwealth of Australia (1990) 92 ALR 603 472 AMC (IO) Pty Ltd v Aquila Steel Pty Ltd [2009] QSC 139 135–6, 138 The Amphitrite [1921] 3 KB 500 99 Anaconda Nickel Ltd v Edensor Nominees Pty Ltd [2004] VSCA 167 158, 210 Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 123 Anangel Atlas Compania Naviera SA v Ishikawajima-Harima Heavy Industries Co Ltd (No 2) [1990] 2 Lloyd’s Rep 526 84 Andar Transport Pty Ltd v Brambles Ltd (2004) 78 ALJR 907 211 Anders v Schluter (1973) 6 SASR 325 174 Andoy Pty Ltd v S & M Cannon Pty Ltd (1990) 17 IPR 533 559 Andre et Cie SA v Ets Michel Blanc et Fils [1979] 2 Lloyd’s Rep 427 312 Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd [2002] VSC 248 540 Angell v Duke (1875) LR 10 QB 174 167 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 473, 477 Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 99, 226 Antons Trawling Co Ltd v Smith [2003] 2 NZLR 23 82–3 ANZ Banking Group Ltd v Beneficial Finance Corp Ltd (1982) 57 ALJR 352 462 ANZ Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662 540 ANZ Banking Group Ltd v Wrenport Pty Ltd [1995] QCA 140 484 Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635 233 Apriaden Pty Ltd v Seacrest Pty Ltd [2005] VSCA 139 453 Archer v Stone (1898) 78 LT 34 430 Arizona Retail Systems. Inc v Software Link Inc 831 F Supp 759 46 Arnot v Hill-Douglas [2006] NSWSC 429 210 Ashdown v Kirk [1999] 2 Qd R 1 454 Ashton v Australian Cruising Yacht Company Pty Ltd [2005] WASC 192 115 Asia Pacific International Pty Ltd v Dalrymple [2000] 2 Qd R 229 364 Asia Pacific International Pty Ltd v Peel Valley Mushrooms Pty Ltd [2000] QSC 168 472 ASIC v National Exchange Pty Ltd (2005) 148 FCR 132 365 Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 All ER 902 429, 437 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 457, 460–2, 468 Astilleros Canarios SA v Cape Hatteras Shipping Co Inc (The Cape Hatteras) [1982] 1 Lloyd’s Rep 518 165 Astley v Austrust Ltd (1999) 197 CLR 1 511 ATCO Controls Pty Ltd (In liq) v Newtronics Pty Ltd Receivers and Managers Appointed (in liq ) (2009) 25 VR 411 72, 116 Atkinson v Hastings Deering (Queensland) Pty Ltd (1985) 8 FCR 481 506 Atlas Steels (Australia) Pty Ltd v Atlas Steels Ltd (1984) 49 SR 157 556 Atlas Tiers Ltd v Briers (1978) 144 CLR 202 501 Attorney-General for England & Wales v R [2002] 2 NZLR 91 70, 74 Attorney-General of Hong Kong v Humphreys Estate Ltd (1987) 1 AC 114 152–4 Attorney-General v Blake [1998] Ch 439 504 Attorney-General v Blake [2000] UKHL 45 502 Attorney-General v Codner (1973) 1 NZLR 545 151

[ xix ]

[ xx ]

Table of Cases

Attwood v Rattenbury (1822) 6 Moo CP 579 246 Attwood v Small (1838) 7 ER 684 324 Auckland Harbour Board v R [1924] AC 318 99 Aurel Foras Pty Ltd v Graham Karp Develpments Pty Ltd [1975] VR 202 297 Aussie Invest Corp Pty Ltd v Pulcesia Pty Ltd [2005] VSC 362 475 Austin v Sheldon [1974] 2 NSWLR 661 294–5 Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) NSWLR 582 122, 130–1, 157, 235 Australia and New Zealand Banking Group v Frost Holdings Pty Ltd [1989] VR 137 Australia and New Zealand Banking Group v Karam (2005) 64 NSWLR 149 396, 405–8, 410–412 Australia and New Zealand Banking Group v Widin (1990) 26 FCR 21 171, 175, 182–3, 185 Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149 115 Australia Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 116 Australian Broadcasting Commission v Australian Performing Right Association Limited (1973) 129 CLR 165 236 Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454 88 Australian Capital Territory Rugby League Club Inc v ACT Leagues Club Ltd (1992) 107 FLR 303 117 Australian Crime Commission v Gray [2003] NSWCA 318 156 Australian Knitting Mills Ltd v Grant (1933) 50 CLR 387 501 Australian Meat Industry Employees’ Union v Frugalis Pty Ltd [1990] 2 Qd R 201 223, 477 Australian Mortgage v Baclon [2001] NSWSC 774 473 Australian Steel and Mining Corp Pty Ltd v Corben [1974] 2 NSWLR 202 325 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 24, 26–9, 31, 36, 72–3, 107, 216, 244 Australis Media Holdings Pty Ltd v Telstra Corporation (1998) 43 NSWLR 104 237 Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 454, 464–5, 474 Avery v Bowden (1856) 6 E & B 953 300 Avon County Council v Howlett [1983] 1 WLR 605 161, 440 Awaroa Holdings Ltd v Commercial Securities and Finance Ltd [1976] 1 NZLR 19 316 Axelsen v O’Brien (1949) 80 CLR 219 137, 552 B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419 (CA) 298 Bacchus Marsh Concentrated Milk Co Ltd (in liquidation) v Joseph Nathan & Co Ltd [1919] HCA 18 204, 228 Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 441 Bak v Glenleigh Homes Pty Ltd [2006] NSWCA 10 468, 498, 513, 536 Baker v Campbell [1983] HCA 39 264, 376 Baker v McLaughlin [1967] NZLR 405 553 Baldwin v Everingham [1993] 1 Qd 10 117 Balfour v Balfour [1919] 2 KB 571 71, 108, 112 Balfour v Hollandia Ravensthorpe NL (1978) SASR 240 311 Ballantine v Harold (1893) 19 VLR 465 175 Ballantyne v Phillot (1961) 105 CLR 379 72, 78 Ballas v Theophilos (No 2) (1957) 98 CLR 193 472 Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379 42, 198 Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176 CLR 344 501, 528, 540–1, 543

Table of Cases

Banco de Portugal v Waterlow [1932] AC 452 532 Bank Line Ltd v Arthur Capel and Co [1919] AC 435 272–3, 275, 280, 290 Bank Negara Indonesia v Philip Hoalim (1973) 2 MLJ 3 149, 151 Bank of New South Wales v Commonwealth [1948] HCA 7 332 Bank of New South Wales v Rogers (1941) 65 CLR 42 372, 382 Bank of Victoria Ltd v Mueller [1925] VLR 642 388, 390–1 Banks v Williams (1912) 12 SR 382 168 Bankway Properties Ltd v Pensfold-Dunsford [2001] EWC Civ 528 215 Banque Brussels Lambert SA v Australian National Industries (1989) 21 NSWLR 502 110, 115 Barclays Bank Plc v O’Brien [1994] 1 AC 180 370 Barlow v Bishop 1 East s Rep 432 104 Barooga Projects (Investments) Pty Ltd v Duncan [2004] QCA 149 484 Barr v Gibson (1838) 3 M & W 390 437 Barry v Davies [2000] 1 WLR 1962 38 Barto v GPR Management Services Pty Ltd (1992) ATPR 41-162 331 Barton v Armstrong [1973] 2 NSWLR 598 398 Barton v Armstrong [1976] AC 104 325, 396, 398–400, 403–4, 413 Barton v Official Receiver (1986) 161 CLR 75 551 BAS Capital Funding Corp v Medfinco Ltd [2004] 1 Lloyd’s Rep 652 288 Bastard v McCallum [1924] VLR 9 172, 178 Batiste v Lenin [2002] NSWCA 316 453, 459, 463 Baxton v Kara [1982] 1 NSWLR 604 170 Beach Petroleum NL v Johnson (1993) 115 ALR 411 311 Beaton v McDivitt (1985) 13 NSWLR 134 73 Beaton v McDivitt (1987) 13 NSWLR 162 12, 71–3, 244 Beattie v Lord Ebury (1872) 7 LR Ch App 777 311 Belgravia Investments Pty Ltd v Evans (Unreported, 13 March 1998) 409 Bell v Lever Bros Ltd [1931] 1 KB 557 225, 429, 436–7 Bell v Lever Bros Ltd [1932] AC 161 223, 437, 439, 442–4 Bellgrove v Eldridge (1954) 90 CLR 613 475, 509–10 Beneficial Finance Corp Ltd v Sharker (1993) 32 NSWLR 161 508, 533 Bennett v Minister for Community Welfare (1992) 176 CLR 408 515 Bentsen v Taylor, Sons & Co (No 2) (1893) 2 QB 460 Beswick v Beswick [1966] 3 All ER 1 242–3, 245, 251, 256 Beswick v Beswick [1967] UKHL 2 263 Beswick v Beswick [1968] AC 58 240, 242, 249–53, 259–60, 551 Bettyes v Maynard (1882) 46 LT 766 442 Bevanere Pty Ltd v Lubidineuse (1985) 59 ALR 334 330 Bicknell v Bell (1897) 19 ALT 45 172 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 122, 130–2, 137–8 Bishopsgate Insurance Australia Ltd v Commonwealth Engineering (NSW) Pty Ltd [1981] 1 NSWLR 429 445 Bissett v Wilkinson [1927] AC 177 309–10 Black Clawson International Ltd v Papierwerke Waldhof-Aschaffenberg AG [1981] 2 Lloyd’s Rep 446 297

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Bligh v Martin [1968] 1 All ER 1157 439 Blomley v Ryan (1956) 99 CLR 362 344, 346–9, 351, 354, 360, 363 Bolton v Madden (1873) LQ 9 QB 55 74 Booker Industries Pty Ltd v Wilson Parking Qld Pty Ltd (1982) 149 CLR 600 122, 133–6, 224 Borrowman v Rossel (1864) 16 CB (NS) 58 448 Borthwick v Carruthers (1787) 1 TR 648 88 Bosaid v Andry [1963] VR 465 168, 173, 176 Boscaini Investments Pty Ltd v Petrides (1982) ASC 52-222 319 Boston v Boston [1904] 1 KB 124 166, 168 Bot v Ristevski [1981] VR 120 454, 546 Boughton v Knight (1873) LR 3 PD 64 92–3 Boulton v Jones (1857) 2 H & N 564 430 Bourne v Mason [1726] EngR 165 241, 257 Bowes v Chaleyer (1923) 32 CLR 159 460, 464, 474 BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925 300 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 225 222, 225–6, 234, 238, 275, 468, 476, 485 Bradley Egg Farm v Clifford [1943] 2 All ER 378 97 Branir Pty Ltd v Owston Nominees No 2 Pty Ltd [2001] FCA 1833 207–8, 210 Brauer & Co (Great Britain) Ltd v James Clerk (Brush Materials) Ltd [1952] 2 Lloyd’s Rep. 147 284 Braunbeck v Mercantile Building Land & Investment Co Ltd (1887) 9 LR 9 175 Breen v Williams (1996) 186 CLR 71 199, 224 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegen PVBA [1978] 2 Lloyd’s Rep 109 297 Bremer Vulkan Schiffblau und Maschinenfabrick v South India Shipping Corp Ltd [1981] AC 909 277–8, 297 Brennan v Bolt Burdon [2004] EWCA Civ 1017 312 Bressan v Squires [1974] 2 NSWLR 460 54, 64 Bridgewater v Leahy (1998) 194 CLR 457 344, 349, 353–8, 411 Brien v Dwyer (1978) 141 CLR 378 452, 472–3 Briginshaw v Briginshaw (1938) 60 CLR 336 182 Brimaud v Boston Securities Entertainment Pty Ltd [1998] 1392 FCA 508 Brinkibon Ltd v Stahag Stahl und Stahlwarendhandelgesellschaft mbH [1983] 2 AC 34 64–7 Brisbane CC v Group Projects Pty Ltd (1979) 145 CLR 143 275, 298 Britain v Rossiter (1879) 11 QBD 123 180 British Car Auctions Ltd v Wright [1972] 1 WLR 1591 37 British Empire Films Pty Ltd v Oxford Theatres Pty Ltd [1943] VLR 163 76 British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166 273–4, 276, 283–4, 291 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 253, 532 British Workman’s & General Insurance Co Ltd v Cunliffe (1902) 18 TLR 502 313 Brogden v Metropolitan Ry Co 2 App Cas 666 31, 60 Brooke v Hewitt (1796) 3 Ves Jun 253 100 Re: Brooks (1903) 21 WN 4 93 Broome v Cassell & Co [1972] AC 1027 263

Table of Cases

Brown v Byrne (1854) 3 E&B 703 215 Brown v Gould [1972] Ch 53 123 Brown v Heffer [1967] [1967] HCA 40 134 Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 329 Brown v Raphael [1958] 2 All ER 79 310 Brown v Robertson (1890) 16 VLR 786 168 Brownlie v Campbell (1880) 5 App Cas 925 322 Bruce v AWB Ltd [2000] FCA 594 207 Bruce v Tyley (1916) 21 CLR 277 292 Brusewitz v Brown [(1923) NZLR 1106 361 Bruton v London & Quadrant Housing Trust [2000] 1 AC 406 88 Buchanan v Byrnes (1906) 3 CLR 704 486 Buckenara v Hawthorn Football Club Ltd [1988] VR 39 559 Buckley v Tutty (1971) 125 CLR 353 118 Budget Stationery Supplies Pty Ltd v National Australia Bank Ltd (1996) 7 BPR 14 210, 448 Bull v Fulton (1942) 66 CLR 205 93 Bullock v Lloyds Bank Ltd [1995] 1 Ch 327 385 Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 231–3, 235, 453, 498, 506 Burger King Corp v Hungry Jack’s Pty Ltd [2005] FCAFC 49 453 Burgess v Cox [1950] 2 All ER 1212 171, 177 Burgess v Cox [1951] Ch 383 174–5 Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 528, 531–3 Burton v Palmer [1980] 2 NSWLR 878 473 Bush v National Australia Bank Ltd (1962) 35 NSWLR 390 445 Business and Professional Leasing Pty Limited v Akuity Pty Limited [2008] QCA 215 472 Butcher v Lachlan Elder Realty Pty Ltd (2002) 55 NSWLR 558 307, 329 Butler v Fairclough (1917) 23 CLR 78 492 Re: Butlins Settlement Trust [1976] Ch 251 445 Butt v M’Donald (1896) 7 QLJ 68 236–7 Butts v O’Dwyer (1952) 87 CLR 267 134–5, 165 Buxton v Bellis (1877) 3 VLR (E) 243 169, 173 Byers v Brown (1859) 2 Legge 1136 173 Byers v Dorotea Pty Ltd (1986) 69 ALR 715 340, 342 Re: Byrne; Ex parte Norco Co-op Ltd (1986) 15 FCR 255 174 Byrne v Australian Airlines Ltd (1995) 185 CLR 410 222–23, 227, 230 Byrne v van Tienhoven (1880) LR 5 CPD 344 48 C Czarnikow Ltd v Koufos [1969] 1 AC 350 C H Giles & Co Ltd v Morris [1972] 1 All ER 960 Cable (1956) Ltd v Caratti [1971] WAR 86 Cade Pty Ltd v Thomson Simmons [1998] SASC 6912 Cadogan Estates Ltd v McMahon [2001] BPIR 817 Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26 Caltex Oil (Australia) Pty Ltd v Dredge ‘Willemstad’ (1976) 136 CLR 529 Calvo v Sweeney [2009] NSWSC 719 Cameron v Avery (1873) 4 AJR 141

528–30, 533 556–7 176 498, 506 100 540 516 370 171

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Cameron v Campbell & Worthington Ltd [1930] SASR 402 508 Cameron v Hogan (1934) 51 CLR 358 115, 117–18 Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 336–8 Canning v Temby (1905) 3 CLR 419 472, 553 Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 432 Carberry v Gardiner (1936) 36 SR NSW 559 165 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 24, 26–7, 29–31, 54, 58, 60, 111–112 Carlingford Australia Insurance Ltd v EZ Industries Ltd [1988] VR 349 123 Carlton Cricket and Football Club v Joseph (1970) VR 487 98 Carmichael v National Power Plc [1999] 1 WLR 2042 215 Carnegie v Waugh (1823) 1 LJ(KB) 89 241, 257 Carnival Cruise Lines Inc v Shute 499 US 585 45, 47 Carpenter v McGrath (1996) 40 NSWLR 39 293 Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 456–9, 464, 468, 473, 494, 513 Carrington Slipways Pty Ltd v Patrick Operations Pty Ltd (1991) 24 NSWLR 745 268 Carter v Hyde (1923) 33 CLR 115 54–5, 552 Re: Casey’s Patents [1892] 1 Ch 104 78, 172 Re: Casey’s Patents; Stewart v Casey [1892] 1 Ch 104 78 Casinos Austria International (Christmas Island) Pty Ltd v Christmas Island Resort Pty Ltd [1998] WASC 387 459 Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 133 508, 532 Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 230 Caterson v Commissioner of Railways (1973) 128 CLR 99 526 Cathels v Commissioner of Stamp Duties (1959) 79 WN 244 Cavasinni v Cavasinni [2001] NSWSC 223 544 Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33 234–5 Central London Property Trust Ltd v High Trees House Ltd (1947) KB 130 148–9, 151 CFA Group v Mars Trading [2001] NSWSC 112 531 CGM Investments Pty Ltd v Chelliah [2003] FCA 79 486 Chadwick v Manning (1896) AC 231 150 Ex parte Chalmers (1873) LR 8 Ch App 289 100, 102 Chambers v Rankine [1910] SALR 73 175 Chan v Cresdon Pty Ltd (1989) 168 CLR 242 453 Chaplin v Hicks [1911] 2 KB 786 499, 507 Chapman v Hearse (1961) 106 CLR 112 525 Chappel v Hart (1998) 195 CLR 232 501, 515, 525 Chappell and Co Ltd v Nestle Co Ltd [1960] AC 87 12, 75 Chinnock v Sainbury (1860) 30 LJ (Ch) 409 556 Christiansen v Klepac [2001] NSWSC 385 484 City Bank of Sydney v McLauglin (1909) 9 CLR 615 93 City of Camberwell v Camberwell Shopping Centre Pty Ltd [1994] 1 VR 163 460 City of Gosnells v Roberts [1994] ATR 61-846 97 Clarke v Dunraven [1897] AC 59 24 Clarke v Lonergan (1960) 78 WN 367 171 Classic International Pty Ltd v Lagos (2002) 60 NSWLR 241 442 Claude Neon Ltd v Hardie [1970] Qd R 93 275

Table of Cases

Cleaver v Mutual Reserve Fund Life Association (1892) 1 QB 147 248, 260 Clohesy v Maher (1880) 6 VLR L 357 174 Clough v London and North Western Railway Co (1871) LR 7 Exch 26 326 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 121–23, 131, 135–8, 140 Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (‘The Marine Star’) [1996] 2 Lloyd’s Rep 383 298 Coastal Estates v Melevende [1965] VR 433 326 Cocking v Ward (1845) 1 CB 858 167 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 203, 211–12, 214–15, 221–2, 224–6, 272–3, 276, 284, 286–9, 454 Coefficiency Pty Ltd v Workforce International Pty Ltd [2005] NSWCA 300 452 Cohen v Cohen (1929) 42 CLR 91 108 Cohen v Roche [1927] 1 KB 169 178 Collen v Wright (1857) 8 E & B 647 100 Collin v Holden [1989] VR 510 174 Collins v Godefroy (1831) 109 ER 1040 80 Combe v Combe [1952] EWCCiv 7 151 Command Energy Pty Ltd v Nauru Phosphate Royalties Trust [2003] VSC 261 463 Commercial Bank of Australia Ltd v Younnis [1979] 1NSWLR 444 543 Commercial Bank of Australia v Amadio (1983) 151 CLR 447 344–52, 354–6, 359, 362, 364, 366–7, 405, 412 Commercial Banking Company of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337 322–3 Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 447–8 Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 446 Commissioner of Stamp Duties (Qld) v Jolliffe [1920] HCA 45 254 Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51 543 Commonwealth Bank of Australia v Poynten 1996 Aust Contract R 90-065 90 13 Commonwealth Bank of Australia v Spira (2002) 174 FLR 274 233 Commonwealth Bank of Australia v TLManagement Pty Ltd [1990] VR 510 113 Commonwealth Development Bank of Australia Ltd v Cassegraine [2002] NSWSC 965 233 Re: Commonwealth Homes and Investment Co Ltd [1943] SASR 211 172 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 468, 472, 493–9, 501, 504, 506, 528, 536 Commonwealth of Australia v Spotless Catering Services Ltd [2000] WASCA 302 477 Commonwealth of Australia v Verwayen (1990) 170 CLR 394 142, 144–8 Commonwealth v Crothall Hospital Services Aust Ltd (1981) 54 FLR 439 99 Commonwealth v John White & Sons (NT) Pty Ltd (1967) 13 FLR 172 178 Commonwealth v Ling (1993) 44 FCR 397 99 Commonwealth v Scituate Savings Bank (1884) 137 Mass 301 151 Commonwealth v Verwayen (1990) 170 CLR 394 155, 158–61 Compagnie de Commerce et Commission SARL v Parkinson Stove Co [1953] 2 Lloyd’s Rep 487 61 Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada (‘The Julia’) [1949] AC 293 272, 290 Computer World (Victoria) Pty Ltd v Internet Centre of Excellence (2000) Pty Ltd [2006] FCA 752 207

[ xxv ]

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Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 330–3 Concrete Pty Ltd v Parramatta Design and Developments Pty Ltd [2006] HCA 55 236 Conlon v Simms [2006] 2 All ER 1024 319 Connolly Ltd v Bellway Homes Ltd [2007] EWHC 895 447 Connor v Martin 3 Wils 5 104 Conservative and Unionist Central Office v Burrell Inspector of Taxes [1982] 2 All ER 1 117 Consolidated Credit Network Pty Ltd v Sonenco Apartments Pty Ltd [2001] NSWSC 1000 551 Consolidated Neon (Phillips System) Pty Ltd v Tooheys Ltd (1942) 42 SR 152 272, 286 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 160 CLR 226 227–9, 468 Re: Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194 296, 298, 440 Coogee Esplanade Surf Motel Pty Ltd v Commonwealth (1983) 50 ALR 363 99, 170 Cooke v Clayworth [1811] EngR 189 346 Cooney v Burns (1922) 30 CLR 216 183–5 Cooper v Phibbs (1867) LR 2 HL 149 436, 440–1 Cooper v Ungar (1958) 100 CLR 510 452–3, 477 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1996] Ch 286 557–8, 560 Cooperative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 445 Corcoran v O’Rourke (1888) 14 VLR 889 171, 175, 177 Corin v Patton (1990) 169 CLR 540 550 Corley v Chippendale (1882) 1 QLJ 69 171 Cornish v Kanematsu (1913) 13 SR 8 286 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 74, 240–1, 243–8, 251, 257–8, 260, 269 Coulson v Allison (1860) 2 De GF & J 521 314 Council of the City of Sydney v Goldspar Australia Pty Ltd [2006] FCA 372 215 Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 122–3 County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 208–9 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297 136, 140 Couturier v Hastie (1856) 5 HLC 673 437–8 Cox v Prentice (1815) 3 M & S 344 437 Crabb v Arun District Council [1975] EWCA Civ 7 145, 152–3 Crago v McIntyre (1976) NSWLR 729 93 Re: Craig [1971] Ch 95 370–1 Craine v Colonial Mutual Fire Insurance Co Ltd [1920] HCA 64 151 Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 444 Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438 476 Creamoata Ltd v Rice Equalization Association Ltd (1953) 89 CLR 286 485 Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 398, 404, 406–7, 409, 412–13 Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 296–7 Crown v Clarke (1927) 40 CLR 227 71 CSS Investments Pty Ltd v Lopiron Pty Ltd (1987) 76 ALR 463 474

Table of Cases

CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714 Cumming v Ince (1847) 116 ER 418 Cundy v Lindsay (1878) 3 App Cas 459 Currie v Misa (1875) LR 10 Ex 153 Curwen v Yan Yean Land Co Ltd (1891) 17 VLR 745 Cutter v Powell (1795) 6 TR 320

402 396 428, 431, 433 71 316–17 286

Dahl v Nelson, Donkin & Co (1881) 6 App Cas 38 274, 291 Dalgety & Co Ltd v Gray (1919) 26 CLR 249 167 In the Estate of Daniel Doull (1881) 7 VLR (IP & M) 70 88 Darbey v Whitaker [1857] EngR 762 134–5 Darlington Borough Council v Wiltshire Northern Ltd [1995] 3 All ER 895 242, 252–3 Darter Pty Ltd v Malloy [1993] 2 Qd R 615 164, 168 Darvall McCutheon v H K Frost Holdings Pty Ltd (in liq) [2002] VSCA 85 498 Daulia Ltd v Four Millbank Nominees Ltd [1978] 1 Ch 231 50, 167 David Jones Ltd v Willis (1934) 52 CLR 110 501 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 312, 540, 542–543 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 226, 272–6, 283, 288–289 De Choisy v Hynes [1937] 4 All ER 54 103 Re: De Garis and Rowe’s Lease [1924] VLR 38 295 De Leuil v Jeremy (1964) 65 SR 174–6 Deane v City Bank of Sydney (1904) 2 CLR 198 206, 208 Deemcope Pty Ltd v Cantown Pty Ltd [1995] 2 VR 44 402, 409 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 315–16, 323, 339, 342 Denkewitz v Hodgson [1998] QSC 261 498 Denmark Production Ltd v Boscobel Productions Ltd [1969] 1 QB 699 277 Denne v Light (1857) 8 De GM & G 774 552 Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 272–3, 290, 293, 296, 298 Derry v Peek (1889) 14 App Cas 337 320–1 Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167 178 Di Biase v Rezek [1971] 1 NSWLR 735 171, 174–5 Diagnostic X-Ray Services Pty Ltd v Jewell Food Stores Pty Ltd (2001) 4 VR 632 558 Diakogiannis v Johnson (1989) NSW Conv R ¶55-472 61 Re: Dickson Catering Pty Ltd (in liq) 115 Digital Equipment Corp v Uniq Digital Technologies, Inc, 73 F3d 756 47 Dillwyn v Llewelyn (1862) 45 ER 1285 73, 158–9 Dimmock v Hallett (1866) 2 Ch App 21 306 Dimond v Moore (1931) 45 CLR 159 295 Dimskal Shipping Co SA v International Transport Workers Federation (‘The Evia Luck’ (No 2)) [1992] AC 152 398, 407, 409, 412, 414 Dinan v Harper [1922] VLR 49 170 Diprose v Louth (No 1) (1990) 54 SASR 438 360 Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [1965] NSWR 1504 463, 468

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Director General of Fair Trading v First National Bank [2002] 1 AC 481 423 Director of Consumer Affairs Victoria v Craig Langley Pty and Matrix Pilates and Yoga Pty Ltd [2008] VCAT 1332 420, 422–3 Director of Consumer Affairs Victoria v Trainstation Health Clubs Pty Ltd (Civil Claims) [2008] VCAT 2092 420 Director of Public Prosecutions (NI) v Lynch [1975] UKHL 5 406 Discount and Finance Ltd v Gehrig’s NSW Wines Ltd (1940) SR NSW 598 142 DKB Investments Pty Ltd v Belcote Pty Ltd (No 2) (1993) 113 FLR 290 210 Dodd Properties Ltd v Canterbury City Council [1980] 1 WLR 433 534 Donoghue v Stevenson [1932] AC 562 321 Dougan v Ley (1946) 71 CLR 142 179, 551 Douglas v Cicirello [2006] WASCA 226 460, 472 Dowdell v Knispel Fruit Juices Pty Ltd (trading as Nippys) [2003] FCA 851 115 Dowell v Custombuilt Homes Pty Ltd [2004] WASCA 171 540 Downey v Crawford [2004] FCA 1264 544 Dowsett v Reid (1912) 15 CLR 695 364, 441 Drive Yourself Hire Co (London) Ltd v Strutt [1953] 2 All ER 1475 240, 242, 251 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 212, 452, 459, 463, 468, 472, 486 Dublin City Distillery (Great Brunswick Street, Dublin) Ltd v Doherty [1914] AC 823 178 Dudgeon v Chie (1955) 55 SR 450 169–70 Dunkirk Colliery Co v Lever (1878) 9 Ch D 20 532 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915) AC 79 504–5 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 12, 74, 240–1, 244, 246–7, 251, 253, 258 Dunlop v Higgins (1848) 9 ER 805 54–5 Dunn v McDonald [1897] 1 QB 555 100 Dunton v Dunton (1892) 18 VLR 114 75 Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd (1968) 2 QB 839 151 Dutton v Poole (1678) 85 ER 523 240–1 Dymocks Holdings Pty Ltd v Top Ryde Booksellers Pty Ltd [2000] NSWSC 795 498 Dyster v Randall & Sons [1926] 1 Ch 932 430 E Johnson & Co (Barbados) Ltd v NSR Ltd [1997] AC 400 Earl of Beauchamp v Winn (1873) LR 6 HL 223 Earnshaw v Gorman & Sons Pty Ltd [2001] NSWCA 291 East Ham Corp v Bernards Sunley & Sons Ltd [1966] AC 406 Eastwood v Kenyon (1840) 113 ER 482 eBay International AG v Creative Festival Entertainment Pty Ltd [2006] FCA 1768 Edensor Nominees Pty Ltd v Anaconda Nickel Ltd [2001] VSC 502 Edgar v Blick [1814] EngR 53 Edgington v Fitzmaurice (1885) 29 Ch D 459 Education v Commercial and General Investments Ltd [1970] 1 WLR 241 Edwards v Skyways Ltd [1964] 1 WLR 349 Edwards v Society of Graphical and Allied Trades [1971] Ch 354 Egan v Caveny [1921] VLR 27

294 442 472–3 532 70, 72 452 210 39 130, 311, 325 61 110, 113 531 174

Table of Cases

Egan v Ross (1928) 29 SR NSW 382 171 Electronic Industries v Horsburgh [1967] VR 313 173 Elias v George Sahely & Co Barbados Ltd [1983] 1 AC 646 164, 173–5 Elizabeth City Centre v Corralyn (1994) 63 SASR 235 64 Elkhoury v Farrow Mortgage Services Pty Ltd (in liq) (1993) 114 ALR 454 Elliott v Reading [1999] WASCA 11 459, 477 Ellis v Rogers (1884) 29 Ch D 661 555 Ellul & Ellul v Oakes (1972) 3 SASR 377 121, 175, 196, 200 Embiricos v Sydney Reid & Co [1914] 3 KB 45 291–2 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 54–5, 59–60, 68 Enderby Town Football Club Ltd v Football Association Ltd [1971] Ch 591 117 Energy World Corp Ltd (ACN 009 124 994) v Maurice Hayes and Associates Pty Ltd (ACN 063 758 181) (2007) 239 ALR 457 445 English v Plath [2003] QSC 222 498 Entores Ltd v Miles Far East Corporation [1955] 2 QB 327 54, 61, 65–7 Equitable Life Assurance of the US v Bogie (1905) 3 CLR 878 484 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 408 Equiticorp Financial Services Ltd (NSW) v Equiticorp Financial Services Ltd (NZ) (1992) 29 NSWLR 260 409, 412 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 188–90, 196, 201, 204–9, 216, 467–8 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 114–16 Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260 290 Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241 320 Esso Australia Resources Ltd v Plowman (1995) 69 ALJR 404 199 Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477 231, 234–5 Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 111–13 Esso Petroleum Co Ltd v Mardon [1976] 1 QB 801 309, 321 Etablissments Georges et Paul Levy v Adderley Navigation Co Panama SA (‘The Olympic Pride’) [1980] 2 Lloyd’s Rep 67 445 Etna v Arif [1999] 2 VR 353 210, 482 Ettridge v Vermin Board of the District of Murat Bay [1928] SASR 124 454 Euphoric Pty Ltd v Ryledar Pty Ltd [2006] NSWSC 2 454 European Bank Ltd v Citibank Ltd (2004) 60 NSWLR 153 298 Evalena Pty Ltd v Rising Sun Holdings Pty Ltd [2003] NSWSC 622 544 Evda Nominees Pty Ltd v Victoria [1984] HCA 18 264 Eveready Australia Pty Ltd v Gillette Australia Pty Ltd (No 4) [2000] ATPR 41-751 305, 309 Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASC 160 235 FA Tamplin SS Co Ltd v Anglo American Petroleum Products Co Ltd [1916] 2 AC 397 FAI General Insurance Co Ltd v Ocean Marine Mutual Protection and Indemnity Association (1997) 41 NSWLR 559 FAI Traders insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 Falck v Williams [1900] AC 176

273, 280, 285 326 116 440

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[ xxx ]

Table of Cases

Farmer v Honan and Dunne (1919) 26 CLR 183 130, 215 Farmers’ Co-Op Executors & Trustees v Perks (1989) 52 SASR 399 370–1 Farmers’ Mercantile Union and Chaff Mills Ltd v Coade (1921) 30 CLR 113 54, 59 Farr Smith & Co Ltd v Messers Ltd [1928] 1 KB 397 178–9 Farrant v Leburn [1970] WAR 179 454 Farrelly v Hircock (No 1) [1971] Qd R 341 172 Fauzi Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646 176–7, 179 Feletti v Kontoulas [2000] NSWCA 59 498 Felthouse v Bindley (1862) 142 ER 1037 59–60, 68 Fensom v Cootamundra Racecourse Reserve Trust [2000] NSWSC 1072 540 Ferguson v John Dawson & Partners (Contractors) Ltd [1976] 1 WLR 1213 215 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 290, 300, 539 Field v Shoalhaven Transport Pty Ltd [1970] 3 NSWR 96 325 Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 437 498 Finch v Sayers [1976] 2 NSWLR 540 287 Findlay & Co Stockbrokers (Underwriters) Pty Ltd v Carminco Gold & Resources Ltd [2007] FCA 573 542 Finelvet AG v Vinava Shipping Co Ltd [1983] 1 WLR 1469 290 Fink v Fink (1946) 74 CLR 127 498, 501 Finlayson v Carr [1978] 1 NSWLR 657 118 Firstpost Homes Ltd v Johnson [1995] 1 WLR 1567 174 Firth v Halloran (1926) 38 CLR 261 295–6 Fisher v Bell [1961] 1 QB 394 29, 36 Fitch v Snedaker 38 NY 248 (1886) 56 Fitzgerald v Masters (1956) 95 CLR 420 124–5, 553 Fitzgerald v Penn (1954) 91 CLR 268 513, 515, 518, 525 Fitzpatrick v Michel (1928) 28 SR 285 310 Fitzwood v Unique Goal (2002) 188 ALR 566 311 Fleming v Beevers [1994] 1 NZLR 385 109, 114 Fletcher v Manton (1940) 64 CLR 37 293–4 Flower v London and North Western Railway Company [1894] 2 QB 65 89 Floyd v Buckland (1703) 2 Freeman 268 181 Foakes v Beer (1884) 9 App Cas 605 84 Fong v Cilli (1968) 11 FLR 495 48 Foran v Wight (1989) 168 CLR 385 459–60, 483 Ford Motor Co of Australia Ltd v Arrowcrest Group Pty Ltd (2003) 134 FCR 522 402 Ford v Young (1882) 8 VLR (E) 93 171 Foremost Pro Color Inc v Eastman Kodak Co (1983) 703 F2d 534 34 Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443 463 Foster v Wheeler (1888) LR 38 Ch D 130 137 Fowler v Fowler (1859) 4 De G & J 250 445 Franklin v Manufacturers Mutual Insurance Ltd (1935) 36 SR NSW 76 161 Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450 429, 439, 445 Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59 180, 184, 541 Freeman v Cooke (1848) 2 Ex 654 27

Table of Cases

Friedeberg-Seeley v Klass (1957) 101 Sol Jo 275 Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 524 Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217

396 555 174, 180, 209, 340

G Scammell & Nephew Ltd v H C & J G Ouston [1941] AC 251 121, 123 Re: Galaxy Media Pty Ltd (2001) 167 FLR 149 123, 130 Galloway v Galloway (1914) 30 TLR 531 439 Re: Gamerco SA v ICM / Fair Warning (Agency) Ltd [1995] 1 WLR 1226 272 Gange v Sullivan (1966) 116 CLR 418 481–3, 486 Garcia v National Australia Bank Ltd (1998) 194 CLR 395 104, 344, 350, 389–92 Garden State Packers v Lancken [2000] NSWSC 139 498 Gardiner v Grigg (1938) 38 SR 524 179 Garrard v Frankel (1862) 30 Beav 445 448 Gates v City Mutual Life Assurance Society Ltd (1986) 63 ALR 600 209 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50 210, 454, 484 Gelling v Crispin (1917) 23 CLR 443 273 General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ 735 204 George Hudson Holdings Ltd v French (1973) 128 CLR 387 61 George Whitechurch Ltd v Cavanagh (1902) AC 117 150 George Wimpey (UK) Ltd v VI Construction Ltd [2005] EWCA Civ 77 447 Georgiou v Sindel [1982] 1 NSWLR 435 168 Gerrard v Slamar [2004] WASCA 253 506 Getreide-Import GmbH v Contimar SA Compania Industrial, Commercial y Maritima [1953] 1 WLR 207 64 Giasoumi v Hutton [1977] VR 294 169 Gibbons v Wright (1954) 91 CLR 423 92 Gibson v Manchester City Council [1978] 1 WLR 520 25 Gidley v Palmerston (1822) 3 B & B 275 100 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR NSW 122 61 Gill & Duffus SA v Rionda Futures Ltd [1994] 2 Lloyd’s Rep 67 168 Gillen v Atalanta Systems, Inc, 997 F2d 280 47 Gillespie Brothers & Co v Cheney Eggar & Co [1896] 2 QB 59 a 208 Gillette Australia Pty Ltd v Energizer Australia Pty Ltd (2002) 193 ALR 629 339 Gino D’Alessandro Constructions Pty Ltd v Powis [1987] 2 Qd R 40 165 Gipps v Gipps [1978] 1 NSWLR 454 324 Giumelli v Giumelli (1999) 196 CLR 101 159–61 Given v Pryor (1979) 39 FLR 437 305 Gladstone v Ball (1862) 1 W & W (E) 277 174 Glasbrook Bros v Glamorgan County Council [1925] AC 270 80 Glenmont Investments Pty Ltd v O’Loughlin (No 2) (2000) 79 SASR 185 498, 506 Godecke v Kirwan (1973) 129 CLR 629 130, 134, 137, 198 Godfrey Constructions Pty Ltd v Kanangra Parl Pty Ltd (1972) 128 CLR 529 484 Goldsborough Mort & Co Ltd v Carter (1914) 19 CLR 429 297 Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674 48, 439, 444, 552 Goldsworthy v Brickell [1987] 1 All ER 853 369, 372

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Table of Cases

Gompertz v Bartlett (1853) 2 E & B 849 439 Goodman v Pocock (1850) 15 QB 576 465 Goodwin’s of Newton Pty Ltd v Gurrey [1959] SASR 295 37 Gough Bay Holdings Pty Ltd v Tyrwhitt-Drake [1976] VR 195 483 Gould v Vaggelas (1984) 157 CLR 215 322–3, 325, 516 Grainger & Sons v Gough [1896] AC 325 29, 32 Graves v Northern NY Pub Co, 260 AD 900, 22 NYS2d 537 (1940) 35 Gray v Motor Accident Commission (formerly State Government Insurance Commission) (1998) 196 CLR 1 492 Great Northern Eastern Ry Ltd v Avon Insurance Plc [2001] EWCA Civ 780 215 Great Peace Shipping Ltd v Tsalviris Salvage (International) Ltd [2003] QB 679 442–3 Greater Fredericton Airport Authority Inc v NAV Canada (2008) 290 DLR (4th) 405 84 Green v Sommerville (1979) 141 CLR 594 553 Greenwood Shopping Plaza Ltd v Beattie (1980) 111 DLR 263 Gregg v Scott [2005] 2 AC 176 499 Gregory v Philip Morris Ltd (1988) 80 ALR 455 559 Grieve v Enge [2006] QSC 37 483, 551 Griffiths v Knight [1960] SR NSW 353 79 Grime v Bartholomew [1972] 2 NSWLR 827 130, 170, 174–5 Grist v Bailey [1967] Ch 532 442 Grummitt v Natalisio [1968] VR 156 174, 185 Grundt v Great Boulder Mines Pty Ltd (1937) 59 CLR 641 142–3, 145–7, 150, 153 Guiness Plc v Saunders [1990] 2 AC 663 539 Hadley v Baxendale (1854) 9 Ex 341 20, 468, 513, 527–30, 533, 536 Hahndorf Golf Club Inc v John Nitschke Nominees Pty Ltd (2003) 86 SASR 221 123 Hall v Busst (1960) 104 CLR 206 122 Halloran v Firth (1926) 26 SR 183 295 Hamer v Sidway 124 NY 538 (1891) 71, 143 Hamlyn & Co v Wood & Co (1891) 2 QB 488 225 Hammersley v De Biel (1845) 12 Cl & Fin 45 148, 153 Handley v Gunner [2008] NSWCA 113 471–2 Harbottle Brown & Co Pty Ltd v Halstead [1968] 3 NSWR 493 117 Harcourt Brace Jovanovich Inc v Sun Bank National Association No 87-3985 14 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 492 Harris v Nickerson (1873) LR 8 QB 286 37 Harrison & Jones Ltd v Bunten & Lancaster Ltd [1953] 1 QB 646 439 Harse v Pearl Life Insurance Co [1904] 1 KB 558 313 Hart v MacDonald (1910) 10 CLR 417 215, 221–2 Hart v Swaine (1877) 7 ChD 42 314 Hartigan v International Society for Krishna Consciousness Incorporated [2002] NSWSC 810 364, 380–4, 394 Hartley v Ponsonby (1857) 119 ER 1471 81, 85 Hartog v Colin & Shields [1939] 3 All ER 566 428, 434, 447 Harvela Investments v Royal Trust Co of Canada [1986] 1 AC 207 38 Harvey v Edwards Dunlop & Co Ltd (1927) 39 CLR 302 170, 175, 177–8

Table of Cases

Harvey v Facey [1893] AC 552 24, 28 Harwood v Gayler and Cleland (Unreported, Qld C A, No 2567, 1 November 1996) 498 Hasham v Zenab [1960] AC 316 550 Haskew v Equity Trustees, Executors and Agency Co Ltd 46 (1919) 27 CLR 231 387 Hawick v Flegg (1958) 75 WN 255 118 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 157, 401, 407 Hawkins v Clayton (1988) 164 CLR 539 199, 222, 227 Hawkins v Price [1947] 1 Ch 645 170 Hawthorn Football Club Ltd v Harding [1988] VR 49 127 Haydon v McLeod (1901) 27 VLR 395 168 Hayes v Dodd [1988] EWCA Civ 8 496 Head v Kelk [1963] SR NSW 340 180 Heale v Phillips [1959] Qd R 489 118 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 320, 322 Heilbut, Symons & Co v Buckleton [1913] AC 30 193 Heine Bros (Aust) Pty Ltd v Forrest [1963] VR 383 559 Heinmann v The Commonwealth (1938) 38 SR 691 221, 223, 225 Henderson v Kane and Pioneer Club [1924] NZLR 1073 119 Henjo Investments Pty Limited v Collins Marrickville Pty Limited (No 1) (1988) 79 ALR 83 329, 340 Henningsen v Bloomfield Motors Inc 32 NJ 358 13 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 199 Henthorn v Fraser (1892) 2 Ch 27 62–3, 67 Henville v Walker (2001) 182 ALR 37 516 Heppingstone v Stewart (1910) 12 CLR 126 168 Hercules Motors Pty Ltd v Schubert (1953) 53 SR 301 79 Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683 288 Herton v Jones (1935) 53 CLR 475 110 Higgons v Burton (1857) 26 LJ Ex 342 430 High Court in Wenham v Ella (1972) 127 CLR 454 528 Highmist Pty Ltd v Tricare Ltd [2005] QCA 357 475, 486 Highway Properties Ltd v Kelly, Douglas & Co Ltd (1971) 17 DLR (3d) 710 295 Hill v Rose [1990] VR 129 319 Hill v Terry [1993] 2 Qd R 640 165 Hillas & Co Limited v Arcos Limited [1932] All ER 494 76, 122, 126, 133, 136–7, 140 Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 274, 285, 296 Hirsch v The Zinc Corp Ltd (1917) 24 CLR 34 297 Hoad v Swan (1920) 28 CLR 258 459 Hocking Stuart (Hawthorn) Pty Ltd v Vernea [2005] VSCA 129 508 Hodgins v Duke Nominees Pty Ltd (2000) 77 SASR 74 459 Hoenig v Isaacs [1952] 2 All ER 176 544–6 Holland v Wiltshire (1954) 90 CLR 409 452–4 Hollis v Edwards (1683) 1 Vern 159 181 Holmes v Jones (1907) 4 CLR 1692 324 Holmes v Keyes [1959] Ch 199, 215 119

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Holwell Securities Ltd v Hughes [1974] 1 WLR 155 63 Home Insurance Co v Adminsitratia Asigurarilor de Stat [1983] 2 Lloyd’s Rep 674 111 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 273, 276 Hood v Anchor Line Henderson Brothers Ltd [1918] UKHL 2 40–2 Hooker Town Development Pty Ltd v Jilba (1973) 47 ALJR 320 123 Hookway v Racing Victoria Ltd [2005] VSCA 310 543 Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 206 Horlock v Beal [1916] 1 AC 486 285 Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 331–2, 334–5 Horsey v Graham (1862) LR 5 CP 9 167 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 191–6, 200–201, 206, 210, 222–3, 236–7, 319 Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] 110 FCA 1040 502–4 Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) 4 Ex D 216 63–4, 66–67 Howard F Hudson Pty Ltd v Ronayne (1972) 126 CLR 449 477 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 61, 168, 215 Howard v Currie (1879) 5 VLR (E) 87 93 Howe v Teefy (1927) 27 SR 301 506–8 Hoyt’s Proprietary Ltd v Spencer [1919] HCA 64 209, 228, 467 Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 273 444 Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 716 486 Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 38, 116, 233, 319 Hughes v Liverpool Legal Society [1916] 2 KB 482 314 Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 149, 151 Hughes v Molloy [2005] VSC 240 540 Huguenin v Baseley (1807) 14 Vesey Junior 273 373, 375, 379, 381, 383 Hume Steel Ltd v Attorney for Victoria (1927) 39 CLR 455 198 Re: Humzy-Hancock [2007] QSC 34 7 Hungerfords v Walker (1989) 171 CLR 125 500 Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd [2001] NSWCA 313 506 ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226 290 Idameneo Pty Ltd v Ticco Pty [2004] NSWCA 329 453 Idoport Pty Ltd v National Australia Bank [1999] NSWSC 828 236 Re Imperial Land Co of Marseilles (Harris’ Case) (1872) LR 7 Ch App 587 62, 66 Imperial Loan Co v Stone [1892] 1 QB 599 92 Inche Noriah v Shaik Allie Bin Omar [1929] AC 127 373, 387 Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525 288 Industries of Australia Pty Ltd v Effem Foods Pty Ltd Trading as ‘Uncle Ben’s of Australia’ (1992) 27 NSWLR 326 123 Ingram v Little [1961] 1 QB 31 432, 450 Insight Oceania Pty Ltd v Philips Electronics Australia [2008] NSWSC 710 234 Integrated Lighting & Ceilings Pty Ltd v Philips Electrical Pty Ltd (1969) 90 WN Pt 1 693 178

Table of Cases

Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433 International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3 International Harvester Co v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239 Isotomic Pty Ltd v Adelaide International Raceway Pty Ltd [2007] SASC 111

197, 419 211 198 77 215

J B & B L Nominees Pty Ltd v McCormack [1982] WAR 258 178 J Boag & Son Brewing Ltd v Bridon Investments Pty Ltd [2001] TASSC 29 477 J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 180, 182, 184–5, 557–8 J E Verrault and Fils Ltee v A-G Quebec (1976) 57 DLR (3d) 403 99 J Lauritzen AS v Wijsmuller BV (‘The Super Servant Two’) [1990] 1 Lloyd’s Rep 1 277, 285, 296 J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539 401, 410 Jackson v Horizon Holidays [1975] 3 All ER 92 248–50, 260, 269 Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125 272, 282, 286, 291, 298 Jacobs v Bills [1967] NZLR 249 552 Jakobkiewicz v Dickson Catering Pty Ltd [2002] ACTSC 107 115 James Miller & Partners Ltd v Whitworth Street Estates Manchester Ltd [1970] AC 572 215 Jefferys v Jefferys (1841) Cr & Ph 138 550 Jennings’ Trustee v King (1952) 1 Ch 555 Jennings v Zihali-Kiss (1972) 2 SASR 493 316 Jenyns v The Public Curator (Queensland) [1953] HCA2 372, 383 Jeppesons Road Pty Ltd v Di Domenico [2005] QCA 391 462 Jessop v McInteer [2003] QCA 170 208 Jillcy Film Enterprises 593 F Supp 515 137 JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 192, 195–6, 201 JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 507 John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656 320 John v Rees [1970] Ch 345 117 Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190 210 Johnson v Agnew [1980] AC 367 253 Johnson v Buttress (1936) 56 CLR 113 359, 369–77, 382, 385, 387, 394 Johnson v Humphrey [1946] 1 All ER 460 170 Johnson v Perez (1988) 166 CLR 351 506 Johnson v Unisys Ltd [2003] 1 AC 518 492 Jones (AE) v Jones (FW) (1977) 1 WLR 438 145 Jones v Baker [2002] NSWSC 89 180 Jones v Bartlett (2000) 176 ALR 137 501 Jones v Canavan (1972) 2 NSWLR 236 229 Jones v Dumbrell [1981] VR 199 319 Jones v Padavatton [1969] 2 All ER 616 108 Jones v Peters [1948] VLR 331 174 Jorden v Money (1854) 5 HLC 185 146, 148–151, 153 Joscelyne v Nissen [1970] 2 QB 86 444–5 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 277, 279–83, 286, 292

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Kai Nam v Ma Kam Chan [1956] AC 358 313 Kali Bakhsh Singh v Ram Gopal Singh (1913) 30 TLR 138 388 Kalnenas v Kovacevich [1961] WAR 188 173–5, 185 Kargotich v Mustica [1973] WAR 167 533 Katz v Jones [1967] NZLR 861 551 Katz v Oak Indus Inc 508 2d 873 14 Kaufman v Gerson [1904] 1 KB 591 410 Kaufman v McGillicuddy (1914) 19 CLR 1 454 Keays v Great Southern Railway Co [1941] IR 534 89 Kelly v Webster (1852) 12 CB 283 166–7 Kelner v Baxter CP 174 28 95 Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) LR 2 QB 580 325 Kennedy v Vercoe (1960) 105 CLR 521 134–5, 479 Kenneth Harrison v West of Scotland Kart Club [2004] SCotCS 80 97 Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 515 Kettlewell v Refuge Assurance Co [1908] 1 KB 545 313 Khan v Khan (2004) 62 NSWLR 229 380, 384–7, 394 King v Cornell (1932) 50 WN 50 170 King v Grimwood (1891) 17 VLR 253 171, 174 King’s Norton Metal Co Ltd v Edridge Merrett & Co Ltd (1897) 14 TLR 98 431–2 Kintella Pty Ltd v Scotte [1999] ACTSC 100 498, 532 Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 WLR 110, 113 Knight’s Case (1588) 5 Co Rep 54b 295 Knowles v Anglican Church Property Trust Diocese of Bathurst (1999) 89 IR 47 117 Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (‘The Evia’ (No 2)) [1983] 1 AC 736 290 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 241 CLR 88 463 Koufos v C Czarkinow Ltd [1969] 1 AC 350 518 Kovan Engineering (Aust) Pty Ltd v Gold Peg International Pty Ltd [2006] FCAFC 117 116 Kowalski v Lochlee Pty Ltd [2003] SASC 95 123 KPMG v Network Rail Infrastructure Ltd [2006] EWHC 67 (Ch) 447 Krakowski v Eurolynx Properties Pty Ltd (1995) 183 CLR 563 316–20 Krell v Henry [1903] 2 KB 740 272, 281, 287–8 L Shaddock & Associates v Council of the City of Parramatta (1981) 150 CLR 225 Lactos Fresh Pty Ltd v Finishing Services Pty Ltd (No 2) [2006] FCA 748 Lahoud v Lahoud [2006] NSWCA 169 Lalor v Winfield [1925] VLR 306 Lambert v Lewis [1982] AC 225 Lamond v Calcraft (1945) 53 SR 103 Lampleigh v Braithwait (1616) 80 ER 255 Lamshed v Lamshed (1963) 109 CLR 440 Land and Homes (WA) v Row (1936) 39 WALR 27 Lantry v Tomule Pty Ltd [2007] NSWSC81 Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221

321–2 542 210 170–1 522–3 558 77 552 91 477 457

Table of Cases

Larratt v Bankers and Traders Insurance Co Ltd (1941) 41 SR 454 Latec Finance Pty Ltd v Knight [1969] 2 NSWR 79 58 Laurence v Lexcourt Holdings Ltd [1978] 1 WLR 1128 442 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 453, 459, 472–3 Laybutt v Amoco Australia Pty Ltd [1974] HCA 49 131 Leaf v International Galleries [1950] 2 KB 86 439 Lee v GEC Plessey Telecommunications [1993] IRLR 383 84 Lee v Showman’s Guild of Great Britain [1952] 2 QB 329 117 Leeman v Stocks [1951] Ch 941 173–4 Lefkowitz v Great Minneapolis Surplus Store 86 NW 2d 689 (1957) 29, 32, 34–5 Legione v Hately (1983) 152 CLR 406 147, 149–51, 156–7, 162, 293, 553 Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1 448 Re: Leitch’s Will (1896) 13 WN 58 105 Leitz Leeholme Stud Pty Ltd v Robinson [1977] 2 NSWLR 544 295 Leonard v Pepsico Inc 88 F Supp 2d (1999) 32–5 Les Affreteurs Reunis Societe Anonyme v Leopold Walford (London), Ltd (1919) AC 801 261 Leslie Leithead Pty Ltd v Barbar (1965) 65 SR 172 322 L’Estrange v Graucob Ltd [1934] 2 KB 394 197, 204 Lewis v Averay [1972] 1 QB 198 430, 432, 450 Lewis v Heffer [1978] 1 WLR 1061 117 LG Thorne v Thomas Borthwick (1955) 56 SR 81 207, 209 Liangis Investments Pty Ltd v Daplyn Pty Ltd (1994) 117 FLR 28 210 Liesbosch, Dredger v Edison, SS (Owners) [1933] AC 449 534 Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 124–25, 216, 439 Lintel Pines Pty Ltd v Nixon [1991] VR 269 453 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1812 212 Liristis v Wallville [2001] NSWSC 428 486 Lister v Romford Ice and Cold Storage Co Ltd [1956] UKHL 6 228, 273 Littman v Aspen Oil (Broking) Ltd [2005] EWHCA Civ 1579 447 Liverpool City Council v Irwin [1977] AC 239 221, 225, 228, 230, 238, 273 Lloyds Bank Ltd v Bundy [1975] 1 QB 326 365 Lloyd’s v Harper (1880) 16 ChD 290 250, 253, 259, 261, 267 LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 204 Loan Investment Corporation of Australasia v Bonner (1970) NZLR 724 260 Lockhart v Osman [1981] VR 57 319 L’Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486 277–8 Logan Downs Pty Ltd v Commissioner for Railways [1960] Qd R 191 116 London and Westminster Loan and Discount Co Ltd v Bilton (1911) 27 TLR 184 372 Long v Lloyd [1958] 1 WLR 753 326 Longden v Kenalda Nominees Pty Ltd [2003] VSCA 128 506 Lonsdale v Whittaker (1915) 17 WALR 111 168, 170 Lott v Collins (1869) 8 SCR 104 171 Louinder v Leis (1982) 149 CLR 509 473 Louth v Diprose (1992) 175 CLR 621 344, 346–7, 349–50, 355, 358–64, 366–7, 371

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Table of Cases

Lowe v Evans [1989] 1 Qd R 295 Lucas v Dixon (1889) 22 QBD 357 Lucy v The Commonwealth (1923) 33 CLR 229 Lukacs v Wood (1978) 19 SASR 520 Luke v Simmons [1927] AC 487 Lumbers v W Cook Builders Pty Ltd [2008] HCA 27 Lumley v Wagner (1852) 42 ER 687 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 Lynch v DPP for Northern Ireland [1975] AC 653 Lyon v Home (1868) LR 6 Eq 655

473 169 464 443 430 539 559 460–2, 468, 473–4, 492–3 398 380

Mabo v Queensland (No 2) (1992) 175 CLR 1 5 Mabon v Methodist Church [1998] 3 NZLR 513 114 Macbeath v Haldimand (1786) 1 TR 172 100 McBride v Sandland (1918) 25 CLR 69 168, 182, 184–5 McCarthy v McIntyre [1999] FCA 784 544 McCaul v Clark [1929] VLR 233 168 MacCormac v Bradford [1927] SASR 152 170 McCrae v Commonwealth Disposals Commission (1951) 84 CLR 377 435 McCulloch v Fern [2001] NSWSC 406 380 McDermott v Black (1940) 63 CLR 161 79, 121 McDonald v Australian Wool Innovation Ltd [2005] FCA 105 115 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 454 Macdonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152 210 McDowell v Meader (1891) 13 ALT 116 171 MacEwin & Co v Ashwin [1916] NZLR 1028 103 McGregor v McGregor (1888) 21 QBD 424 109 Mackay v Dick (1881) 6 App Cas 251 236, 474 Mackener v Feldia AG [1967] 2 QB 590 320 Mackenzie v Albany Finance Ltd [2003] WASC 100 544 Mackenzie v Coulson (1869) LR 8 Eq 368 440, 444 MacKenzie v Royal Bank of Canada [1934] AC 468 312 McKinnon v Grogan [1974] NSWLR 295 117 McLarnon v McLarnon (1968) 112 Sol Jo 419 400 McLaughlin v Daily Telegraph Newspaper (1904) 1 CLR 243 92–3 McMahon v Gilberd & Co Ltd [1955] NZLR 1206 32 McNab v Auburn Soccer Sports Club Ltd [1975] 1 NSWLR 54 119 McNally v Waitzer [1981] 1 NSWLR 294 473 MacNamara v Northern Assurance Co Ltd [1925] AC 619 119 McRae v Commonwealth Disposal Commission (1951) 84 CLR 377 437–9, 441–2, 494, 499 MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125 38–43 McTier v Haupt [1992] 1 VR 653 477 Maddison v Alderson (1883) 8 App Cas 467 150, 153, 182–4 Magennis v Fallon (1828) 2 LR Ir 167 306

Table of Cases

Maggs v Marsh [2006] EWCA Civ 1058 215 Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565 552 Maguire v Makaronis (1996) 188 CLR 449 319, 326 Maguire v Simpson (1977) 139 CLR 362 99 The Mahkutai [1996] 2 Lloyd’s Reports 1 268 Mahony v J Kruschich (Demolitions) Pty Ltd (1985) 156 CLR 552 515, 518, 521 Mainline Investments Pty Ltd v Davlon Pty Ltd [1969] 2 NSWR 392 167 Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd [1973] HCA 22 228 Malmesbury (Earl) v Malmesbury (Countess) (1862) 31 Beav 407 444 Manby v Scott (1663) 1 Sid 120 104 Manchester Diocesan Council for Education v Commercial and Investments Ltd [1970] 1 WLR 241 61 Mann v Capital Territory Health Commission (1982) 148 CLR 97 501 Manubens v Leon [1919] 1 KB 208 498 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 445 March v E & MH Stramare Pty Ltd (1991) 99 ALR 423 468, 513, 515–16, 525, 536 Marginson v Ian Potter & Co (1976) 136 CLR 161 164 Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 277 Marks v Hunt Bros Sydney Pty Ltd [1958] SR 281 210 Marminta Pty Ltd v French [2003] QCA 541 486 Marquis of Cholmondeley v Clinton (1821) 4 ER 721 203 Marsh v Mackay [1948] St R Qd 113 182 Martech v Energy World (2006) 234 ALR 265 84 Martyn v Glennan [1979] 2 NSWLR 234 170 Marzo v Land and Homes WA Ltd (1931) 34 WALR 62 171 Maskell v Horner [1915] 3 KB 106 401, 404 Massey v Crown Life Insurance Co (1978) 1 WLR 676 32 Masters v Cameron (1954) 91 CLR 353 192, 479 Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234 207–9, 212 Matthey v Curling [1922] 2 AC 180 292, 296 May & Butcher Ltd v R [1934] 2 KB 17 133 Mealey v Mountains Development Group Pty Ltd [2003] NSWSC 830 462 Medlin v State Government Insurance Commission (1995) 182 CLR 1 515–16 Meehan v Jones (1982) 149 CLR 571 122, 127–31, 137, 170, 477, 479–80 Mehmet v Benson (1965) 113 CLR 295 553–6 Melverton v Commonwealth Development Bank of Australia (1989) ASC 55-921 350 Mendelssohn v Normand Ltd [1970] 1 QB 177 165 Mercantile Bank of Sydney v Taylor [1893] AC 317 204 Meredith Projects v Fletcher Construction [2000] NSWSC 493 453, 477 Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671 294 Merman Pty Ltd v Cockburn Cement Ltd (1988) 10 ATPR 40-915 331 Mesaros v United States, 845 F2d 1576 (1988) 34 Metropolitan Knitting and Hosiery Co Ltd (in liq) v Thomas Burnley & Sons Ltd (1924) 35 CLR 232 178–179

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Table of Cases

Metropolitan Water Board v Dick, Karr & Co Ltd [1918] AC 119 272, 276, 289 M’Ewan v Dynon (1877) 3 VLR (L) 271 175 Microsoft Corp v Harmony Computers & Electronics Inc 846 F Supp 208 (1994) 44 Midland Silicones Ltd v Scruttons Ltd [1962] AC 446 240, 243, 253, 268 Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd [2006] VSC 42 26 Miles v New Zealand Alford Estate Co (1886) 32 Ch D 266 78–9, 180 Millett v Regent (22 July 1974, unreported) 182 Minister of State for the Army v Dalziel (1944) 68 CLR 261 296 Mitchell v Pacific Dawn Pty Ltd [2007] QCA 74 411 Mitchell v Pattern Holdings Pty Ltd [2001] NSWSC 199 484 Mitchell v Valherie (2005) 93 SASR 76 306–9, 327 MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWSC 1066 484 M’Levy v Matthews (1863) 2 W & W (L) 175 MLW Technology Pty Ltd v May [2005] VSCA 29 491 Mobil Oil Australia Ltd v Wellcome International (1998) 81 FCR 475 49–51, 498 Mogg v Lord Raglan & St Arnaud Gold Mining Co (NL) (1878) 4 VLR (E) 138 170 Mohr v Smith [1914] SALR 92 459 Molton v Camroux (1848) 2 Ex 487 92 Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196 515, 528, 534 Mondel v Steel (1841) 8M & W 858 546 Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351 164 The Moorcock (1889) 14 PD 64 223, 225 Moore v Garwood (1849) 4 Exch 681 208 Morley v Loughnan [1893] 1 Ch 736 380 Morris v Baron & Co Ltd [1918] AC 1 210 Mount Gambier Co-Operative Milling Society Ltd v Williams [1921] SASR 185 322 Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383 501, 518 Mountford v Scott [1933] 3 WLR 884 136 Mouritz v Hegedus [1999] WASCA 1061 501 Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111 122 Mrocki v Mountview Prestige Homes Pty Ltd [2010] VSC 624 122 Muhammad Issa el Sheikh Ahmad v Ali (1947) AC 427 534 Muirhead v Commonwealth Bank of Australia (1996) 139 ALR 561 173 Murray Irrigation Ltd v Balsdon [2006] NSWCA 253 498 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 79–81, 83, 85, 165 Mutual Finance Ltd v John Wetton and Sons Ltd [1937] 2 KB 389 400 Mutual Life & Citizen’s Assurance Co v Evatt (1970) 122 CLR 628 320–2 Ex parte Myers (1884) 10 VLR (L) 322 173 Nader v Urban Transit Authority of New South Wales (1985) 2 NSWLR 501 Nagy v Masters Dairy Ltd (1996) 150 ALR 273 Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31 Nash v Dix (1898) 78 LT 445 Nash v Inman [1908] 2 KB 1 National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365

518 340 506 430 90 210, 448

Table of Cases

National Australia Bank Ltd v Nemur Varity Pty Ltd (2002) 4 VR 252 528 National Australia Bank v Nobile (1988) 100 ALR 227 305 National Bank of Australasia v Falkingham & Sons [1902] AC 585 204 National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 272, 275, 284, 291, 293, 295–6 National Mutual Life Association of Australia Ltd v Walsh (1987) 8 NSWLR 585 444 National Roads and Motorists’ Association (NRMA) [2007] NSWCA 81 210 National Trustees Executors and Agency Co of Australia Ltd v Abercomby & Beatty Pty Ltd [1965] VR 675 462 National Westminster Bank Plc v Morgan [1985] 1 AC 686 365, 369 Naxakis v Western General Hospital (1999) 197 CLR 269 498 NBTY Europe Ltd (formerly Holland & Barrett Europe Ltd) v Nutricia International BV [2005] 2 Lloyd’s Rep 350 435 Neate v Parfit [2006] WASC 121 484 Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 473, 559 Neill v Hewens (1953) 89 CLR 1 168, 172–4 Nelson v Bellamy [2000] NSWSC 182 463 Nelson v Dahl (1879) 12 ChD 568 227–8 New England Reinsurance Corp v Messoghios Insurance Co SA [1992] 2 Lloyd’s Rep 251 165 New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68 208, 498 New South Wales v Bardolph (1934) 52 CLR 455 99–100 New Zealand Shipping Co Ltd v A M Sattherthwaite & Co Ltd; ‘The Eurymedon’ [1975] AC 154 243, 268 Newborn v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 452 Newborne v Sensolid (Great Britain) Ltd [1953] All ER 708 95 Newcombe v Chapple (1985) 3 BPR 9391 552 News Limited v Australian Rugby League Football Ltd (1996) 139 ALR 193 402 Nguyen v Taylor (1992) 27 NSWLR 48 172, 174 Nicholas v Thompson [1924] VLR 554 314, 325 Nicholson and Venn v Smith Marriott (1947) 177 LT 189 437 Nicolazzo v Harb [2009] VSCA 79 208 Nicolene Ltd v Simmonds (1953) 1 QB 543 124–5 Niesmann v Collingridge (1921) 29 CLR 177 479 Nile Co for the Export of Agricultural Crops v H and J M Bennet (Commodities) Ltd [1986] 1 Lloyd’s Rep 555 288 Nina’s Bar Bistro and City of Gosford v Marim Pty Ltd (1990) 6 BPR 13871 279 Nobleza v Lampl (1986) 85 FLR 147 182 North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd [1979] QB 705 399, 402–3, 413–14 Northern Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 295 Northrop Corp v Litronic Industries. 29 F3d 1173 46 Norths Ltd v McCaughen Dyson Capel Cure Ltd (1988) 12 ACLR 739 119 Re: Northumberland and Durham District Banking Co; Ex parte Bigge (1858) 28 LJ (Ch) 50 324 Norton v Angus (1926) 38 CLR 523 552 Norwest Beef Industries Ltd v Peninsula and Oriental Steam Navigation Co (1987) 8 NSWLR 568 207

[ xli ]

[ xlii ]

Table of Cases

Nottidge v Prince (1860) 66 ER 103 NRMA Ltd v Morgan [1999] NSWSC 407 NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635 Nunan v Southern Railway Co (1923) 2 KB 703 Nund v McWaters [1982] VR 575 Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74 Nurdin & Peacock Plc v DB Ramsden & Co Ltd [1999] 1 EGLR 119

380 525 445–6 236 42 453 64 551

O’Brien v ANZ Bank Ltd (1971) 5 SASR 347 364 Occidental Worldwide Investment Corporation v Skibs A/S Avanti (‘The Siboen’ and ‘The Sibotre’) [1976] 1 Lloyd’s Rep 293 396, 398, 401, 409 Ocean Tramp Tankers Corp v V/O Sovfracht (‘The Eugenia’) [1964] 2 QB 226 277, 287–8 Ogilvie v Ryan [1976] 2 NSWLR 504 183 Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 492 Oldham v Lichford (1705) 2 Freeman 285 181 Olsson v Dyson [1969] HCA 3 259 Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 212 O’Rorke v Bolingbroke (1877) 2 App Cas 814 345, 363 O’Rourke v Hoeven [1974] 1 NSWLR 622 180 Oscar Chess Ltd v Williams [1957] 1 WLR 370 193, 195 Oudaille v Lawson [1922] NZLR 259 310, 313 Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17 231, 233, 235–6 Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6 542 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Pacific Dunlop Ltd v Hogan (1989) FCR 553 Pacol Ltd v Trade LinesLtd (1982) 1 Lloyd’s Rep 456 Page One Records Ltd v Britton [1967] 3 All ER 822 Page v Horne [1848] 50 ER 804 Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 Pall Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854 Palmco Shipping Inc v Continental Ore Corp (The Captain George K’) [1970] 2 Lloyd’s Rep 21 Re: Palmdale Insurance Ltd [1982] VR 921 Palmer v Bank of NSW (1975) 133 CLR 150 Palmer v Hutchinson (1881) 6 App Cas 619 Pan Foods Company Importers & Distributors Pty Ltd v Australian and New Zealand Banking Group Ltd [2000] HCA 20 Pankhania v London Borough of Hackney [2002] EWHC 2441 Panoutsos v Raymond Hadley Corporation of New York (1917) 2 KB 473 Pao On v Lau Yiu Long [1980] AC 614 Paradine v Jane (1647) Aleyn 26 Parbury Henty & Co Pty Ltd v General Engineering & Agencies Pty Ltd (1973) 47 ALJR 336 Park v Brothers [2005] HCA 73

211–12 341 152 559 360 121 277 288 459 110 100 453, 476 312 457 398, 401, 403, 407 283, 292, 295 178 498

Table of Cases

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 331, 336 Parke B Ryder v Wombwell (1868) LR 4 Ex 32 89 Parker v Barnett (1889) 16 VLR 214 171 Parker v British Airways Board [1982] QB 1004 5 Parker v Manessis [1974] WAR 54 174 Parker v South Eastern Railway Co (1877) 2 CPD 416 42 Pascoe v Turner [1978] EWCA Civ 2 152 Pasedina (Holdings) Pty Ltd v Khouri (1977) 1 BPR 9460 551–2 Paterson v McNaghten (1905) 2 CLR 615 484 Patrick Stevedores Operations Pty Ltd v Maritime Union of Australia [1998] WASCC 120 558 Pattinson v Mann (1975) 13 SASR 34 28 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 165, 539–540 Payne v Cave (1789) 100 ER 502 37, 48 Peckham v Moore [1975] 1 NSWLR 353 97–8 Peek v Gurney (1873) LR 6 HL 377 322–3 Peeters v State 154 Wis 111 142 NW 181 (1913) 44 Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 506 Penrith District Rugby League Football Club Ltd v Fittler (Unreported, SC (NSW)) 459 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 212 Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146 168, 179–80 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 477–80, 482–3 Perry v Sidney Phillips & Son [1982] 3 All ER 705 534 Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 300, 460, 464 Peters American Delicacy Co Ltd v Champion (1928) 41 CLR 316 223 Peters v Fleming (1840) 6 M & W 42 Ex 46 89 Petrie v Dwyer (1954) 91 CLR 99 452 Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401 26, 29, 36–7 Pharmaceutical Society of Great Britain v Dickson [1970] AC 403 117 Pharmacy Care Systems Ltd v Attorney-General the New Zealand (2004) 2 NZCCLR 187 396 Philegan & Co Pty Ltd v Blacktown Municipal Council (1974) 29 LGRA 231 552 Phillips v Brooks Ltd [1919] 2 KB 243 432, 450 Phillips v Royal London Insurance Co Ltd (1911) 105 LT 136 313–14 Photo Production Ltd v Securicor Transport Ld [1980] AC 827 491 Pigott v Thompson [1802] EngR 202 241, 257 Pilkington v Wood [1953] Ch 770 531 Pilmer v The Duke Group Ltd (in liq) (2001) 180 ALR 249 516 Pinnel’s Case (1602) 5 Co. Rep. 117a 84 Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724 275, 291, 297 Pirie v Saunders (1961) 104 CLR 149 168, 171–4 Pirt Biotechnologies Pty Ltd v Pirtferm Ltd [2001] WASCA 96 113 Placer Development Ltd v Commonwealth (1969) 121 CLR 353 76, 131–2 Plenty v Seventh-Day Adventist Church of Port Pirie [2006] SASC 361 501 Re: Plomley (dec’d) (1923) 24 SR 115 105

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Table of Cases

Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 279, 484 Popiw v Popiw [1959] VR 197 169, 179 Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon Pty Ltd (‘The New York Star’) (1978) 139 CLR 231 243, 268–9, 454 Powell v Jones [1968] SASR 394 137 Powell v Lee (1908) 99 LT 284 58 Powell v Powell [1900] 1 Ch 243 372, 378–80, 394 Powell v Smith (1872) LR 14 Eq 85 441 Power v Butcher [1829] EngR 162 228 Powercell v Cuzeno [2003] NSWSC 600 167–8 Pratt v Rush (1879) 5 VLR (L) 421 178 Prenn v Simmonds [1971] 1 WLR 1381 429 President of the Methodist Conference v Parfitt [1984] QB 368 117 Price v Easton [1833] EngR 334 241, 257 Re: Prince Blücher; Ex parte Debtor [1931] 2 Ch 70 173 Printing and Numerical Registering Co v Sampson 19 LR Eq 462 (1875) 283 Prior v Payne (1949) 23 ALJ 298 127 ProCD v Zeidenberg (1996) 86 F3d 1447 25, 44–7 Produce Brokers Company Limited v Olympia Oil and Cake Company Limited (1916) 1 AC 314 228 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 293, 295, 453, 459, 463 Prole v Allen [1950] 1 All ER 476 97 The Prometheus (1949) 82 LR 859 100 Psaltis v Schultz (1948) 76 CLR 547 439 Public Service Credit Union v Campion (1984) 75 FLR 131 400, 410, 415 Public Trustee v Taylor [1978] VR 289 312–15 Public Trustee v Wadley (1997) 7 Tas R 35 158 Public Trustees v Bussell (1993) 30 NSWLR 111 107 Pukallus v Cameron (1982) 180 CLR 447 445–6 Qantas Airways Ltd v Dillingham Corporation Ltd (Unreported, NSW SC, 8 April, 1987) 235 QBE Insurance Ltd v Moltoni Corp Pty Ltd (2000) 22 WAR 148 498 Quanta Software International Pty Ltd v Quanta Systems Ltd [2004] FCA 1182 487 Quek v Beggs (1990) 5 BPR 11761 380, 382–3, 395 Quenerduaine v Cole (1883) 32 WR 185 61 Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370 522, 524 Quinn Villages P/L v Mulherin [2006] QCA 433 484 R & A Cab Co Pty Ltd v Rutty [2007] VSC 62 R J T Consulting Engineers Ltd v D M Engineering Northern Ireland Ltd [2002] 1 WLR 2344 R v Attorney-General for England and Wales [2004] 2 NZLR 577 R v Brislan (1935) 54 CLR 262 R v Clarke (1927) 40 CLR 227 R v Judges of the Federal Court of Australia (1979) 143 CLR 190 R v Moore (1884) 10 VLR (L) 322

472 164 388, 394 119 56–7, 71 119 173

Table of Cases

R v Transworld Shipping Ltd (1975) 61 DLR (3d) (304) 99 R v Weaver (1931) 45 CLR 321 306 R W Cameron & Co v Slutzkin Pty Ltd (1923) 32 CLR 81 440 Re: Raatz [1897] 2 QB 80 102 RACV Investment Co Pty Ltd v Silbury Pty Ltd (1986) 13 ACLR 555 445 Radosavljevic v Radin [2003] NSWCA 217 498 Radrick v City Mutual Life Assurance Society Ltd (1897) 18 LR Eq 128 170 Raffaele v Raffaele [1962] WAR 29 109, 185 Raffles v Wichelhaus (1864) 2 H & C 906 428, 435 Rainbow Spicy Sales Pty Ltd v Sanders [1964-65] NSWR 422 459, 472 Ramsden v Dyson (1866) LR 1 HL 129 145, 152–3 Ratto v Trifid Pty Ltd [1987] WAR 237 107 Rawson v Hobbs (1961) 107 CLR 466 484 Ready Construction Pty ltd v Jenno [1984] 2 Qd R 78 552 Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 193 Redglove Projects Pty Ltd v Ngunnawal Local Aboriginal Land Council [2005] NSWSC 892 484 Redgrave v Hurd (1881) 20 Ch D 1 311, 314, 324 Redken Laboratories (Aust) Pty Ltd v Docker [2000] NSWCA 100 501 Redowood Pty Ltd v Mongoose Pty Ltd [2005] NSWCA 32 54 Regent v Millett (1976) 133 CLR 679 182, 184–5, 551 Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 471 Reid v Zoanetti [1943] SASR 92 168, 185 Reigate v Union Manufacturing Co (Ramsbottom) (1918) 1 KB 592 225 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 230–2, 235, 480 RGZ 99,-144 445 Re: Rhodes (1890) 44 Ch D 94 93 Rhodes Pty Ltd v Galati [1961] WAR 180 170, 174 Riches v Hogben [1985] 2 Qd R 292 109, 145, 159 Ridgeway Coal Co 616 F Supp 404 (1985) 137 Ridgway v Wharton (1857) 6 HLC 238 177 Riley v Melrose Advertisers (1915) 17 WALR 127 175 Riley v Osborne [1986] VR 193 185 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 504–5 Ringstad v Gollin & Co Pty Ltd (1924) 35 CLR 303 291 Riverlate Properties Ltd v Paul [1975] Ch 133 448 RJR Holdings Pty Ltd v Balleroo Pty Ltd (1991) 56 SASR 151 473 Robert A Munro & Co, Ltd v Meyer (1930) 2 KB 312 439, 458 Robertson and Moffatt v Belson [1905] VLR 555 319 Robertson v Robertson (1930) QWN 41 400 Robertson v Wait [1853] EngR 77 261 Robertson v Wilson (1958) 75 WN 296 Robinson v Davison (1871) LR 6 Ex 269 287 Robinson v Harman [1848] EngR 135 492, 495–7, 503–4, 513, 536

[ xlv ]

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Table of Cases

Robophone Facilities Ltd v Blank [1966] 1 WLR 1427 Romanos v Pentagold Investments Pty Ltd [2003] HCA 58 Roper v Johnson (1873) LR8CP 167 Roscorla v Thomas (1842) 3 QB 234 Rose and Franck Co v J R Crompton & Bros Ltd [1923] 2 KB 261 Rosenhain v. Commonwealth Bank of Australia [1922] HCA 41 Ross v Allis-Chalmers Australia Pty Ltd (1980) 32 ALR 561 Rosser v Austral Wine and Spirit Co Pty Ltd [1980] VR 313 Rothmans of Pall Mall (NZ) Ltd v Attorney-General [1991] 2 NZLR 323 Roufos v Brewster (1971) 2 SASR 218 Rowallan Group Ltd v Edgehill Portfolio No 1 Ltd [2007] EWHC 32 Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 Royal Bank of Scotland Plc v Etridge (No 2) [2002] AC 773 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] UKPC 4 Royal Exchange Assurance v Hope (1928) Ch 179 Rushton (SA) Pty Ltd v Holzberger [2003]QCA 106 Russell v Slater [1912] St R Qd 237 Ryan v King’s Cross RSL Club Ltd [1972] ACLC 27 Ryan v The Queen [2001] HCA 21 Ryder v Frohlich [2004] NSWCA 472 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65 Ryrie v Cruickshank (1896) 13 WN 14

530 472 531 77 107, 110–12 228 192 171 559 108 447 540–1, 543, 550 369 211–12, 215 386 255 61 173 119 383 486 210, 212, 454 170

Saad v TWT Ltd [1998] NSWSC 282 533 Said v Butt [1920] 3 KB 497 430 Sargeant v ASL Developments Ltd (1974) 131 CLR 634 305, 452 Scally v Southern Health and Social Services Board [1992] 1 AC 294 230 Scammell (G) & Nephew Ltd v H C and J G Ouston [1941] AC 259 126, 132 Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] 2 AC 694 505 Scandrett v Dowling (1992) 27 NSWLR 483 117–18 Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 272–3, 276–7, 289, 292, 294, 296 Schaefer v Schuhmann [1972] AC 572 110, 169 Re: Schebsman (1944) Ch 83 261 Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462 525 Scott v Bradley [1971] 1 All ER 583 171 Scott v Rayment (1868) LR 7 Eq 112 556 Scottish Halls Ltd v The Minister (1915) 15 SR 81 287 Scriven Bros & Co v Hindley & Co [1913] 3 KB 564 435 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 12, 242–3 Sea-Land Service Inc v Cheong Fook Chee Vincent [1994] 3 SLR 631 84 Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596 222, 230, 236–7, 474, 478 Re: Selectmove Ltd [1995] 1 WLR 474 84 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 498–9, 501

Table of Cases

Sensis Pty Ltd v McMaster-Fay [2005] NSWCA 163 499 Service Station Association Limited v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 233 Shahid v Australasian College of Dermatologists [2007] FCA 693 115 Sharp v Anderson [1995] ANZ ConvR 501 109 Sharp v Batt (1930) 25 Tas LR 33b 279, 297 Sharp v Thompson (1915) 20 CLR 137 435, 440 Shell UK Ltd v Lostock Garage Ltd (1976) 1 WLR 1187 226, 228 Shepperd v Council of Ryde (1985) 85 CLR 1 209 Shevill v Builders Licensing Board (1982) 149 CLR 620 453, 459, 463 Shiel v Colonial Bank of Australia (1870) 1 VR (E) 40 172 Shiell v Symons [1951] SASR 82 296 Shiels v Drysdale (1880) 6 VLR (E) 126 108 Shipley Urban District Council v Bradford Corporation [1936] Ch 375 444 Shirlaw v Southern Foundries (1926) Ltd (1939) 2 KB 206 224–5 Shoe Lane Parking Case (1971) 2 QB 42–3 Shogun Finance Ltd v Hudson [2004] 1 AC 919 431, 433, 450 Shuey, Executor v United States 92 US 73 (1875) 26, 48 Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 148 Simmons Ltd v Hay (1964) 81 WN (Pt 1) 358 272, 286, 288 Simms v Habich (1879) 13 SALR 89 175 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 468, 513, 534, 536 Simos v National bank of A’asia Ltd (1976) 10 ACTR 4 543 Simply Irresistible Pty Ltd v Couper (No 2) [2011] VSC 33 492 Sims v Robertson (1921) 21 SR NSW 246 170 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 170 Sinclair v SSET Constructions Pty Ltd [2002] NSWCA 125 499 Sindel v Georgiou (1984) 154 CLR 661 168 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 1 All ER 213 267 Skeate v Beale (1841) 113 ER 688 401 Skywest Aviation Pty Ltd v Commonwealth (1995) 126 FLR 61 210 Slee v Warke (1949) 86 CLR 271 444 Smidt v Tiden (1874) LR 9 QB 446 435 Smith New Court Securities Ltd v Citibank NA [1997] AC 254 506 Smith v Allwright [1944] USSC 108 264 Smith v Hartshorn (1959) 60 SR 391 179 Smith v Hughes (1871) LR 6 QB 597 54, 315, 433–4, 447 Smith v Land & House Property Corp (1884) 28 Ch D 7 306, 310, 327, 373 Smith v Lush 1952 52 SR 207 170, 172 Smith v Pisani (2001) 78 SASR 548 479 Smith v River Douglas Catchment Board [1949] 2 All ER 240, 242, 251 Smith v William Charlick Ltd (1924) 34 CLR 38 401–3 Smith v Yarnold [1969] 2 NSWR 410 97 Snepp v United States [1980] USSC 60 503 Société Franco Tunisienne d’Armement v Sidermar SpA [1961] 2 QB 278 284 Softplay v Perpetual [2002] NSWSC 1059 233

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Table of Cases

Solle v Butcher [1950] 1 KB 671 429, 435, 441–3 South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65 543 South Launceston Football Club Inc v Tasmanian Football League Ltd (1995) 4 Tas R 342 119 South Suburban Land and Finance Co Ltd v Hughes (1889) 15 VLR 751 170 South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541 235–6 Spiro v Glencrown Properties Ltd [1991] 2 WLR 931 168 Spurling v Bradshaw Ltd [1956] 1 WLR 461 419 St George Football Association Inc v Soccer NSW Ltd [2005] NSWSC 1196 116 Re: Stapleton (1879) 10b Ch D 586 100 State Government Insurance Corporation v Government Insurance Office of NSW (1991) ATPR 41-110 329 State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 454 State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503 233 State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 207–8, 210 Steadman v Steadman [1976] AC 536 164, 182, 185 Steel-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398 92 Steele v Tardiani (1946) 72 CLR 386 544 Step-Saver Data Systems, Inc v Wyse Technology, 939 F2d 91 46 Steria v Hutchinson [2007] ICR 445 144 Stewart v Casey [1892] 1 Ch 104 78, 172 Stickney v Keeble (1915) AC 386 457 Stilk v Myrick (1809) 170 ER 79–82, 85 Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294 119 Stivactas v Michaeletos (No 2) [1994] ANZ Conv R 242 385 Stokes v Whicher [1920] 1 Ch 411 174–7 Stones v Dowler at LJ Ex 124 208 Storer v Manchester City Council [1974] 3 All ER 824 26 Strickland v Turner (1852) 7 Ex 208 437 Striker Resources Nl v Australian Goldfields Nl (Liq) [2006] WASC 153 454 Strutt v Whitnell [1975] 1 WLR 870 531 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASC 222 64 135–6, 138, 140, 236 Stuart Pty Ltd v Condor Commercial Insulation Pty Ltd [2006] NSWCA 334 530 Sturt v McInnes [1974] 1 NZLR 729 172 Subdivisions Ltd v Payne [1934] SASR 214 175, 439 Sudbrook Trading Ltd v Eggleton (1983) 1AC 444 133–5 Sullivan v Della Bosca [1999] NSWSC 136 117 Sumampow v Mercator Property Consultants Pty Ltd [2005] WASCA 64 484 Summers v The Commonwealth [1918] HCA 33 228, 486 Sunbay Projects Pty Ltd v Naughton [2010] QCA 247 123 Sunstar Fruit Pty Ltd v Cosmo [1995] 2 Qd R 214 459, 473 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 164, 480–2 Svanosio v McNamara (1956) 96 CLR 186 439, 442–3 SVI Systems Pty Ltd v Best & Less Pty Ltd [2001] FCA 279 506 Swain v The Law Society (1983) 1 AC 598 242, 259 Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560. 444

Table of Cases

Swaisland v Dearsley (1861) 29 Beaver 430 Sweet and Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 Swift v Jewsbury (1874) LR 9 QB 301 Symonds v Vass [2009] NSWCA 139

444 137 172–3 523

T A Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1955) 56 SR 151 401–3 Tabet v Gett (2010) 240 CLR 537 499–500 Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 329, 334–8 Take Harvest Ltd v Liu [1993] AC 552 164, 179–80 Tallerman & Co Pty Ltd v Nathan’s Merchandise Victoria Pty Ltd (1957) 98 CLR 93 26, 54, 63 Tanaka v Tokyo Network Computing Pty Ltd [2003] NSWSC 114 454 Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 553 Tarongo Land Pty Ltd v Lyons [2005] VSC 49 484 Tasita Pty Ltd v Papua New Guinea (1991) 34 NSWLR 691 99 Tasmania Development & Resources v Martin (2000) 97 IR 66 498 Tate v Williamson (1866) LR 2 Ch 55 372 Tavefund Pty Ltd v Stephen Fitzgerald & Co Pty Ltd [1989] ACTSC 57 486 Taylor v Brown (1839) 2 Beav 180 457 Taylor v Caldwell (1863) 3 B & S 826 271, 280–1, 283, 285, 292 Taylor v Dexta Corporation Ltd [2006] NSWCA 310 212 Taylor v Johnson (1983) 151 CLR 422 54–5, 440, 442–3 Taylor v Motoability Finance Ltd [2004] EWHC 2619 539 Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd (1982) QB 133 152 TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130 498, 531 Teacher v Calder [1899] UKHL 1 503 Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 545 267 Tekely v Pryce [2000] NSWCA 6 472 Re: Teller Home Furnishings Pty Ltd 173 Telstra Corp Ltd v First Netcom Pty Ltd (1997) 148 ALR 202 559 Tennants (Lancashire) Ltd v C S Wilson & Co Ltd [1917] AC 495 298 Terrex Resources NL v Magnet Petroleum Pty Ltd [1988] 1 WAR 144 165, 215 Territorial and Auxiliary Forces Association of the County of London v Nichols [1949] 1 KB 35 312–13 Thearle v Keeley (1958) 76 WN 48 296 Thirkell v Cambi [1919] 2 KB 590 173 Thomas Bates & Sons Ltd v Wyndham’s (Lingeries) Ltd [1981] 1 WLR 505 445, 447 Thomas Butcher v Stapely and Richard Butcher (1686) 1 Vern 363 181 Thomas v Thomas (1842) 114 ER 330 70, 75 Thompson v London Midland & Scottish Railway Co (1930) 1 KB 41 42 Thompson v Palmer (1933) 49 CLR 507 143–7, 150, 153, 157 Thomson v McInnes (1911) 12 CLR 562 173–178 Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] 1 Lloyd’s Rep 547 446, 448 Thorby v Goldberg (1964) 112 CLR 597 121 Thorne v Motor Trade Association [1937] AC 797 410 Thornley v Tilley [1925] HCA 13 228 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 25, 41, 197, 419

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[ l ]

Table of Cases

Thorpe v Lochel [2005] WASCA 85 501 Tillett v Charing Cross Bridge Co [1859] EngR 421 135 Timmins v Moreland Street Property Co Ltd (1911) 12 CLR 562 174–7 Tinn v Hoffman & Co (1873) 29 LT 271 57 Tiplady v Gold Coast Carlton Pty Ltd (1984) ATPR 45-646 454 Tipperary Developments Pty Ltd v Western Australia (2009) WASCA 126 115 Tito v Waddell (No 2) [1977] Ch 106 492, 503 Todd v Nicol [1957] SASR 72 108 Tofts v Pearl Life Assurance Co Ltd [1915] 1 KB 189 313 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 55, 197–8, 204, 211, 236, 269 Tomlinson Bros & Co v Daniels (1930) 33 WALR 101 175 Tonitto v Bassal (1992) 28 NSWLR 564 168, 175 Tooth & Co Ltd v Bryen (No 2) (1922) 22 SR NSW 541 170, 175 Toyota Motor Corp Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 107 Trans Trust SPRL v Danubian Trading Co Ltd [1952] 2 QB 297 534 Tricontinental Corp v HDFI Ltd (1990) 21 NSWLR 689 477 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 5, 74, 240, 243, 250, 254–5, 257–67 Tri-Global (Aust) Pty Ltd v Colonial Mutual Life Assurance Society Ltd [1992] ATPR 40 556 Tropeano v Riboni [2005] VSC 229 463 Tropical Traders Ltd v Goonan (1964) 111 CLR 41 452, 473 Trupkovic v Furrer [2007] QSC 027 484 Tsakiroglou v Noblee Thori GmbH [1962] AC 93 286, 297 TSB Developments Pty Ltd v HCH andKFisheries Pty Ltd [2003] TASSC 136 131 Tulk v Moxhay (1848) 41 ER 1143 251 Turner Kempson & Co Pty Ltd v Camm [1922] VLR 498 54–5 Turner v Bladin (1951) 82 CLR 463 550 Turner v Forwood [1951] 1 All ER 746 208 Turner v Kwikshift Pty Ltd (1993) 113 FLR 8 501 Tweddle v Atkinson (1861) IB & S 383 240–241, 243–4, 247, 251, 257, 259 Underwood v Gerard (1894) 15 LR NSW Eq 155 105 Union Fidelity Trustee Co of Australia v Gibson [1971] VR 573 387 United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618 121, 135–6, 139–40, 235–6 United States v Braunstein 75 FSupp 137 (1947) 34 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 279, 533 Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 291 Universe Tankship of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’) [1983] 1 AC 366 396–7, 399, 401–4, 406, 410, 412, 414 Universo Insurance Company of Milan v Merchants Marine Insurance Company (1897) 2 QB 93 228 Re: Unley Democratic Association [1936] SASR 473 272 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 121, 125–7, 129 Van den Esschert v Chappell [1960] WAR 114

195, 201

Table of Cases

Van den Hurck v R. Martens & Co Ltd [1920] 1 KB 850 532 Van der Sterren v Cibernetics (1970) 44 ALJR 157 454 Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 240, 256, 258, 261 Vandyke v Vandyke (1976) 12 ALR 621 454 Vass v Commonwealth (2000) 96 FCR 272 116 Vault Corp v Quaid Software Ltd, 847 F2d 255 46 Veivers v Cordingley [1989] 2 Qd R 278 50 Verrall v Hackney London Borough Council [1983] Qd R 561 97 Vickery v Woods (1952) 85 CLR 336 95 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 528–9, 533 Victorian Economic Development Corp v Clovervale Pty Ltd [1992] 1 VR 596 508 Vimar Seguros y Reaseguros, SA v M/V Sky Reefer (1995) 132 L Ed 2d 462 45 Vitosh v Brisbane City Council (1960) 5 LGRA 342 313 Vodafone Pacific Ltd v Mobile Innovation Ltd [2004] NSWCA 15 210, 233–34 Vroon BV v Foster s Brewing Group Ltd [1994] 2 VR 32 25, 222 W & J Investments Ltd v Bunting [1984] 1 NSWLR 331 505 W J Tatem Ltd v Gamboa [1939] 1 KB 132 289 W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 315 Ex parte WA National Football League (Inc) (1979) 143 CLR 190 119 Wacal Investments Pty Ltd v Hurley [1992] 1 Qd R 455 472 Wakeling v Ripley (1951) 51 SR NSW 183 108–9, 123, 133 Walford v Miles [1992] 2 AC 128 121, 135, 138, 138–140 Walker v Citigroup Global Markets Australia Pty Ltd [2006] FCAFC 101 498 Walker v Walker (1740) 2 Atk 98 181 Wall v Niagara Mining and Smelting Co of Idaho 20 Utah 474 58 P 399 (1899) 95 Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49 453 Wallace v Broadribb (1985) 55 ALR 737 37 Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279 486 Walter Construction Group Ltd v Walker Corp Ltd [2001] NSWSC 283 459 Walter v Everard [1891] 2 QB 369 88 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 12, 24, 73, 142, 144–58, 161–2, 164, 168, 181–2, 184, 216, 551 Ward v Eltherington [1982] Qd R 561 97 Waring v SJ Brentnall Ltd (1975) 2 NZLR 401 442 Watkins v Coombes [1922] HCA 3 361, 385 Watkins v Rymill (1883) 10 QBD 178 42–3 Watson v Delaney (1991) 22 NSWLR 358 165, 184 Watson v Issell (1890) 16 VLR 607 171 Watson v Phipps (1985) 63 ALR 321 122–3 Watts Watts & Co Ltd v Mitsui & Co Ltd [1917] AC 227 291 Webb v England (1860) 29 Beav 44 556 Weimann (as trustee for Weimann Family Family Trust (No 3)) v Allphones Retail Pty Ltd (No 2) [2009] FCA 1230 116 Weld-Blundell v Stephens [1920] AC 956 523

[ li ]

[ lii ]

Table of Cases

Wenham v Ella (1972) 127 CLR 454 504, 506, 509, 528, 533 Wesoky v Village Cinemas International Pty Ltd [2001] FCA 32 459 West London Commercial Bank v Kitson (1884) 13 QBD 360 312, 315 West Sussex Properties Ltd v Chichester DC [2000] All ER (D) 887 443 Western Australian Land Authority v Simto Pty Ltd [1998] WASCA 262 454 Westmelton (Vic) Pty Ltd v Archer and Schulman [1982] VR 305 372, 387 Westpac Banking Corporation v Cockerill (1998) 152 ALR 267 at 289 408 Westpac Banking Corporation v Dawson (1990) 19 NSWLR 614 430 Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361 300, 454, 484 Whereat v Duff [1972] 2 NSWLR 147 372 Whim Well Copper Mines Ltd v Pratt (1910) 12 WALR 166 287 White Rose Flour Milling Co Pty Ltd v Australian Wheat Board (1988) 18ALJR 324 401–2 White Trucks Pty Ltd v Riley (1948) 66 WN 101 59 White v Australian and New Zealand Theatres Ltd (1943) 67 CLR 266 215, 498 White v Bluett (1853) 23 LJ (Exch) 36 75 White v Neaylon (1886) 11 App Cas 171 (PC) 185 Re: Whitely Partners Ltd (1886) 32 Ch D 337 173 Whitlock v Brew (1968) 118 CLR 445 123–5, 127, 130, 132–3, 137 Wigan v Edwards (1973) 1 ALR 497 79–80 Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280 168 Wilcher v Steain (1961) 79 WN 141 322, 324 Wilde v Anstee (1999) 48 NSWLR 387 473 Wilding v Sanderson [1897] 2 Ch 534 441 Wilkie v London Passenger Transport Board MR (1947) 1 All ER 258 41 William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016 439 Williams v Baltic Insurance Association of London, Ld (1924) 2 KB 282 261 Williams v Bayley (1866) LR 1 HL 200 371 Williams v Bulat [1992] 2 Qd R 566 430 Williams v Cawardine [1833] EWHC KB J44 56 Williams v Johnson [1937] 4 All ER 34 372 Williams v Mason (1873) 37 JP 264 172–3 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 79–85, 398 Wilson & Sons v Pike [1949] 1 KB 176 178 Wilson v Darling Island Stevedoring and Lighterage Co Ltd [1956] HCA 8 254, 256, 263, 266, 268 Wilton & Cumberland v Coal & Allied Operations Pty Ltd [2007] FCA 725 115 Wilton v Farnsworth (1948) 76 CLR 646 197, 355 Winks v WH Heck & Sons Ltd [1986] 1 Qd R 226 446 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363 243, 256 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649 459 Wisconsin Real Estate Investment Trust v Weinstein 781 F 2d 589 14 With v O’Flanagan [1936] 1 Ch 575 319 Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212 175–6 Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 Build LR 81 272, 276, 294

Table of Cases

Wood v Corrigan (1928) 28 SR 492 Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 Woolworths Ltd v Crotty (1942) 66 CLR 603 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 Wright v Hamilton Island Enterprises Ltd [2003] QCA 36 Wright v Madden [1992] 1 Qd R 343 Wright v TNT Management Pty Ltd (1989) 15 NSWLR 679 WRN Ltd v Ayris [2008] EWHC 1080 Xenos v Wickham (1867) LR 2 HL 296 Yaxley v Gotts [2000] Ch 162 Yerkey v Jones (1939) 63 CLR 649 York Air Conditioning and Refrigeration (A/asia) Pty Ltd v Commonwealth [1949] HCA 23 York Glass Co v Jubb (1925) 134 LT 36 Young v Queensland Trustees Ltd (1956) 99 CLR 560 Young v Tockassie [1905] HCA 17

558 242, 250, 253, 256, 259–60 501 72, 74–5 210 167 222, 331 84 228 181 369, 388–9, 391 122, 127 92–3 544 228

[ liii ]

[ liv ]

Table of Statutes

Table of Statutes Australia—uniform legislation Fair Trading Acts Sale of Goods Acts

Commonwealth

371 230, 417

Acts Interpretation Act 1901 s 13 331 Australian Consumer Law see Competition and Consumer Act 2010 Bankruptcy Act 1966 s 58(1) 100 s 116 100 s 126 103 s 132 101 s 133 101 s 133(6) 101 s 133(7) 101 s 133(8) 102 s 269 101 Bills of Exchange Act 1909 s 8(1) 164 Competition and Consumer Act 2010 191, 304, 316, 371, 491 Schd 2 417 s 18 329–30, 336, 339, 341 s 20 344, 350, 364, 397 s 21 344, 364, 397 s 22 344, 364, 397, 417 s 23 504 s 23(1) 424 s 23(3) 420, 421 ss 23–28 420 s 24 423–4 s 25(1) 423–4 s 25(1)(c) 505 s 27(1) 420 s 27(2) 422 s 41 59 s 232(3) 424 s 236 424 s 237 424 s 250 424 Constitution s 51(i) 332 Corporations Act 2001 s 57A 94 s 124 94

s 126 95 s 127 95 s 131(1) 95 s 131(2) 96 s 131(3) 95 s 131(4) 96 s 132(1) 95 s 140 118–119 s 254A 94 Electronic Transactions Act 1999 67 Fair Trading Act 1998 s 10 329 Family Law Act 1975 s 119 104 Insurance Contracts Act 1984 262, 268 s 50 294 Judiciary Act 1903 Pt IX 99 Pt IXA 99 Tax Assessment Act 1936 542 Trade Practices Act 1974 304, 417 Pt V 333 s 6(2) 332 s 51AA 348, 350, 364, 412 s 51AB 364, 412 s 51AC 364, 412 s 52 316, 329–32, 333–41, 498 Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 330, 421

ACT

Civil Law (Property) Act 2006 s 204 s 501 Civil Law (Wrongs Act) 2002 s 101 s 102 s 107B Crown Proceedings Act 1992 Electronic Transactions Act 2001 Limitation Act 1985 s 11(1) Sale of Goods Act 1954 s 3 s 11 s 15

168 472 511 511 511 99 67 491 93 168 438 473

Table of Statutes

s 37 s 52(2) s 53(3) s 54(3) Supreme Court Act 1933 s 26 s 27

475 474 508 508 559 559

NSW

Civil Liability Act 2002 s 34 Contracts Review Act 1980 s 9(2)(a) Conveyancing Act 1919 s 13 s 54A s 54A(1) s 66K Crown Proceedings Act 1988 Electronic Transactions Act 2000 Fair Trading Amendment (Unfair Contract Terms) Act 2010 Frustrated Contracts Act 1978 s 12 s 14A Law Reform (Miscellaneous Provisions) Act 1965 ss 8–9 Limitation Act 1969 s 14 Married Persons (Equality of Status) Act 1996 s 10 Minors (Property and Contracts) Act 1970 s 6(1) s8 s 17 s 19 s 20 s 21 s 22 s 23 s 26 s 26(3) s 26(4) s 27 s 27(5)(a) s 27(5)(b) s 28(2) s 29(2)

511 405 412 472 173 168 294 99 67 420 299 491 511 491 105 89–91 90 89 89 90 90 90 90 90 90 90 90 90, 91 90 90 91 91

s 30 s 30(1)(a) s 30(1)(b) s 30(1)(c) s 30(2) s 30(3) s 30(4) s 30(5) s 33 s 34 s 35 s 36 s 37 s 38 Sale of Goods Act 1896 Sale of Goods Act 1923 s 11 s 15 s 33 s 51(2) s 52(3) s 53(3) Sale of Goods (Amendment) Act 1988 s3 Supreme Court Act 1970 Pt IV s 68 Testator’s Family Maintenance and Guardianship of Infants Act 1916

NT

90 90 90 90 90 90 90 90 90, 91 91 90 90 91 91 93 438 473 475 474 508 508 168 180 559 376

Crown Proceedings Act 1993 99 Electronic Transactions Act 2000 67 Law of Property Act 2000 s 56 267 s 58(2) 171 s 62 168 s 65 472 Law Reform (Miscellaneous Provisions) Act 1956 s4 511 s 15 511, 515 s 16 511, 515 Limitation Act 1981 s 12(1) 491 Married Persons (Equality of Status) Act 1989 s 33 105 Sale of Goods Act 1972 s 9(3) 178 s 10 438

[ lv ]

[ lvi ]

Table of Statutes

s 33 s 51(2) s 52(3) s 53(3) Sale of Goods Amendment Act 1999 s2

475 474 508 508 168

Qld

Civil Liability Act 2003 s 28 Crown Proceedings Act 1980 Electronic Transactions Act 2001 Equity Act 1867 s 62 Hire-Purchase Act 1959 s 12 Law Reform Act 1995 s5 s 10 s 18 Limitation of Actions Act 1974 s 10(1)(a) Property Law Act 1974 s 55 s 56(2) s 59 s 62 Sale of Goods Act 1896 s 13 s 32 s 50(2) s 51(3) s 52(3) Sale of Goods Act 1936 s9 Statute of Frauds 1972 s3

SA

Crown Proceedings Act 1992 Early Closing Act 1926 Electronic Transactions Act 2000 Frustrated Contracts Act 1988 s7 Law of Property Act 1936 s 16 s 26(1) Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001

511 99 67 559 534 511 511 104 491 168 267 171 168 472 473 475 474 508 508 438 168 99 37 67 299 472 168

s3 s7 s8 Limitation of Actions Act 1936 s 35(a) Minors Contracts (Miscellaneous Provisions) Act 1979 s4 s 6(2) Sale of Goods Act 1895 s6 s 48 s 49(3) s 50(3) Statutes Amendment (Enforcement of Contracts) Act 1982 s4 Supreme Court Act 1935 s 30

511 511 511 491 89 91 90 93 438 474 508 509 168 559

Tas

Civil Liability Act 2002 s 43 Conveyancing and Law of Property Act 1884 s 36(1) s 45 Crown Proceedings Act 1993 Electronic Transactions Act 2000 Limitation Act 1974 s 4(1)(a) Mercantile Law Act 1935 s 12 Sale of Goods Act 1896 s9 s 11 s 15 s 35 s 53(2) s 54(3) s 55(3) Supreme Court Civil Procedure Act 1932 s 11(7) s 11(13) Wrongs Act 1954 s2 s4

511 168 105 99 67 491 171 93 178, 179 438 473 475 474 508 509 472 559 511 511

Table of Statutes

Vic

Crown Proceedings Act 1958 99 Electronic Transactions (Victoria) Act 2000 67, 174 Fair Trading Act 1999 417 Pt 2B 420 Fair Trading Amendment (Unfair Contract Terms) Act 2010 419 Frustrated Contracts Act 1959 s3 299–301 Goods Act 1958 93 s 11 437 s 15 473 s 37 475 s 55(2) 474 s 56(3) 508 s 57(3) 509 Instruments Act 1958 s 126 168, 173, 174 s 129 171 Limitation of Actions Act 1958 s 5(1)(a) 491 Marriage Act 1958 s 157 105 Property Law Act 1958 s 41 472 s 53(1)(a) 173 s 55(d) 181 Sale of Goods (Vienna Convention) Act 1987 s8 168, 174 s9 168 Supreme Court Act 1986 s 29 147 s 38 559 Town and Country Planning Act 1961 Pt II 312 Wrongs Act 1958 s 24AF 511 ss 25–26 511

WA

Civil Liability Act 2002 s 5AI Crown Suits Act 1947 Law Reform (Contributory Negligence and Tortfeasors) Contribution Act 1947 ss 3A–4

511 99

511

Law Reform (Statute of Frauds) Act 1962 s2 Limitation Act 2005 s 13 Property Law Act 1969 s 11 s 21 s 31 s 34(1) Sale of Goods Act 1895 s4 s 4(3) s6 s 10 s 30 s 48(2) s 49(3) s 50(3) Supreme Court Act 1935 s 25(10)

Hong Kong

Landlord and Tenant Ordinance

Imp

Statute of Frauds 1677 s4 s 17 Statute of Frauds Amendment Act 1828 s6

United Kingdom

168 491 267 472 105 174 93 179 178 438 473 475 474 508 509 559 313 164–79, 222 166, 181 166, 179 172

Contracts (Right of Third Parties) Act 1999 242 Hire Purchase Act 1964 s 27 433 Increase of Rent and Mortgage Interest (Restrictions) Act 1920 313, 441 Law of Property Act 1925 s 56 251 Law of Property (Miscellaneous Provisions) Act 1989 s2 181 Law Reform (Frustrated Contracts) Act 1943 443 Law Reform (Married Women and Tortfeasors) Act 1935 105 Married Women (Restraint Upon Anticipation) Act 1949 105

[ lvii ]

[ lviii ]

Table of Statutes

Married Women’s Property Act 1870 104 Mercantile Law Amendment Act 1856 s3 171 Purchase Tax Act 1963 111 Rent and Mortgage Interest Restrictions Act 1923 313, 441 Rent Restrictions (Notices of Increase) Act 1923 313, 441 Sale of Goods Act 1893 s 53(2) 523

Stamp Act Union and Labour Relations Act 1974 s 13(1)

40, 43 410

United Nations

United Nations Convention on Contracts for the International Sale of Goods (1980) Art 29(2)

165

Preface

Preface It is our pleasure to present Contract Law: Text and Cases to you for use in your study of contract law. We hope that this book will be of use to students, practitioners and academics. We have specifically designed this book for use in the twelve-week semesters that now characterise the academic year at most Australian law schools. As academics we have noticed that lecturers now have to compete with a wide array of sources of information and entertainment in order to capture the attention of their students. At the same time, students often have a number of factors competing for their time, such as part-time employment. Given these pressures and distractions, when students are faced with the traditional casebook and textbook model of teaching, one book or the other is invariably underutilised by the student. Indeed, many academics have expressed a concern that students are not reading enough cases. What we have done in this book is to merge the traditional textbook and casebook models into one book and to supplement that with tutorial exercises and answers, as well as summaries of the key points in each chapter. In our view, the effect of the merger is to compel students to read cases and to focus in on key points in each chapter. This book is of course intended as a companion to classroom teaching, but we hope that it may also prove invaluable to the growing number of off-campus students who must engage in self-directed learning. We are grateful to the following students at Deakin University and Victoria University for their assistance in putting together this book: Hannah Stevens, Joshua Todd, Eric Ansell, Jonathan Ferraro, Sarah McBean, Philip Liberatore, Jessica Dickson, Devesh Khanna and Sarah Charters. Their work as research assistants made our task of writing the chapters for this book somewhat easier. In terms of the authors, we divided up the chapters in this book as follows: Dilan Thampapillai wrote chapters 1, 3, 4, 5, 8, 9, 13, 14, 16, 17, 18, 19, 20 and 21; Vivi Tan wrote chapters 11, 12, 23, 24, 25, 26, 27 and 28; and Claudio Bozzi wrote chapters 2, 6, 7, 10, 15 and 22. We trust that this book will be of assistance. Dilan Thampapillai (LLB, BA, Australian National University; M.Com, University of Sydney; LLM, Cornell University; PhD Candidate, University of Melbourne) Vivi Tan (LLB (Hon), Victoria University School of Law) Dr Claudio Bozzi (LLB, BA, University of Melbourne; PhD, Edinburgh University)

[ lix ]

[ lx ]

Acknowledgments

Acknowledgments The author and the publisher wish to thank the following copyright holders for reproduction of  their material: Council of Law Reporting for New South Wales for case extracts from New South Wales Law Reports (NSWLR) © Council of Law Reporting for New South Wales; LexisNexis for case extracts from ALR, Butterworths Family Court Reports and the extract from Seddon and Ellinghaus, Cheshire & Fifoot’s law of contract, LexisNexis Butterworths 2008 (9th edn); Thomson Reuters for case extracts from Commonwealth Law Reports (CLR), Federal Court Reports (FCR), South Australian State Reports (SASR), Weekly Law Reports (WLR) and Western Australian Reports (WAR); Victorian Council of Law Reporting for case extracts from Victorian Law Reports (VR). Every effort has been made to trace the original source of copyright material contained in this book. The publisher will be pleased to hear from copyright holders to rectify any errors or omissions.

[ 1 ]

chapter

1

An introduction to law school

Chapt e r o v e rv i e w 1.0

Commencing as a first-year law student   2

1.1

Tips for studying at law school   2 1.1.1 Understand what law is   2 1.1.2 Work effectively at law school   3 1.1.3 Practise the core legal skills   4 The common law method   4 Case law analysis   5 Legal problem solving   5 Statutory interpretation  6 Legal writing  6 Research  6

[ 2 ]

Contract Law: Text and Cases

1.1.4 Remember that reputation matters   7 1.1.5 Be seen at law school   8 1.1.6 Read widely  9 1.1.7 Remember that law is a skills profession   9 1.2

Conclusion  9

• 1.0 Commencing as a first-year law student Every High Court justice, every Senior Counsel, every law firm partner and every other type of working lawyer, no matter how successful they might be, all had to start their legal education as a humble first-year law student. In fact, every student who decides to study law has made a pivotal decision, and with the right advice it can be a very positive experience. However with little advice—or that of the wrong kind—it can be a less rewarding or even unsatisfactory experience. It is essential then to receive the right advice and guidance to guide you through the process of studying law. We hope that this book, in addition to the valuable efforts of your lecturers, assists you in the study of contract law, a subject that has come to be embedded in the first-year program at many law schools. The purpose of this chapter is to provide you with a basic overview of studying law. The chapter will touch upon many of the fundamental skills that are required at law school, as well as some of the tangential issues related to classroom learning. It is worth pointing out that law school will not be without its challenges. Success, failure and  redemption have an uncanny knack of accompanying law studies, despite the best-laid plans and good intentions of both students and staff. Your journey into the law will be a deeply personal intellectual experience, and one that will hopefully open many doors. For some people studying law will be the beginning of a lifelong engagement with the law and the legal profession; while for others it will be a valuable addition to their knowledge base. Either way, given its all-pervasive nature, the law will continue to have relevance to your life and career.

• 1.1 Tips for studying at law school 1.1.1  Understand what law is Knowing what law is and what it is about is crucial to understanding how to deal with the law. Unlike mathematics, physics or chemistry, law is not a hard science. It is instead a social science. This means that there are not many exact answers in law, particularly for some of the more difficult questions that arise. Further, while many areas of law are quite well settled, their application to a particular set of facts might The law is concerned with how societies be debatable. Moreover, some questions of law are new and very organise themselves and unsettled. how they regulate the Leaving aside the question of whether the law is settled or not, interactions among their there is the more fundamental question of what the law is and members. what purpose it serves. The law is concerned with how societies

Chapter 1

An introduction to law school

organise themselves and how they regulate the interactions among their members. Essentially, the law is concerned with: (i) setting the parameters of lawful behaviour in society; (ii) providing the infrastructure for myriad lawful pursuits; and (iii) providing a system of dispute resolution. Very often the study of law focuses on the dispute resolution aspect of the law. However, while the adversarial nature of the legal system is fundamental to its identity, it is not the only defining feature of the law. There are other useful purposes for the law, such as safeguarding the legitimate expectations of consumers (for example, consumer protection law and contract law); policing criminal behaviour (for example, criminal law and criminal procedure); setting standards with respect to non-discrimination (for example, human rights law); and so on. In short, the law serves the purpose of influencing social, political and commercial behaviours in society. It is also worth pointing out that a lot of the rules and values of the law become internalised by members of our society and that this influences the way in which our society operates. The law also supports lawful activities by providing a rule-based framework that allows necessary transactions to take place. For example, if it were not for the rules of property law and contract law, our economy could not exist. Further, the rules of agency law, sale of goods law and property law enable a large number of ordinary commercial transactions to take place. In this way the law is not about setting the rules for a dispute. It is instead about providing a type of infrastructure that allows a wide range of commercial and social dealings to take place. Thinking of the law as infrastructure, as a conditioning tool for expectations and actions, or as a regulator of behaviour involves an intellectual paradigm shift from the common public perception of the adversarial system. However, understanding the importance of these functions is crucial to grasping the notion of law as a social science.

1.1.2  Work effectively at law school To more concrete matters: it is a truism that success at law school is often a reflection of the amount of hard work that a student has applied to the subject matter. However, there is of course a difference between simply working hard and working effectively. A student who works hard on non-essential tasks or who repeatedly does essential tasks in the wrong way is just as likely to do poorly as a student who takes too many short cuts and misses out on essential skills and knowledge. Working effectively requires: (i) reading the assigned textbook readings, relevant cases and statutes, and accepting that you might have to do those readings several times over. It might be hard to accept that grasping legal concepts can require reading a chapter in a textbook or the relevant part of a judgment several times. But the reality with complex concepts is that, for most of us, it can take a while for the knowledge to sink in and to become a part of our thinking. There is also an art to reading judgments and statutes that your lecturers will address in class. (ii) allocating sufficient time for study. Think about it this way: if a group of builders were going to build a house that you were going to live in for the next 30 years, would you want them to work on it intermittently and often do vital works at the very last minute? Even if you do not end up being a lawyer, your law degree will form part of your set of qualifications

[ 3 ]

[ 4 ]

Contract Law: Text and Cases

hereafter. Accordingly, the amount of time that you put into your studies now will affect your success and the long-term value of your degree. We realise that this can be a hard task when you have to balance part-time jobs, family, sports, hobbies and social commitments, but you need to work out for yourself what the right balance is during term time. (iii) using class time effectively. A reasonable amount of information will be presented to you during the semester. Your results will depend on your ability to synthesise that information and to apply it to a set of problem questions in assignments and the exam. This means that you need to be able to receive the information in class and then use it in tutorials. Any distractions during class time impede that process. For example, turning up to class and then playing around on Facebook is a waste of time. You should be trying to think and engage during class. Remember that a law degree costs about $35 000 on HECS; and over the course of 36 subjects in a combined degree, with perhaps five hours of lectures and tutorials per subject per week, this works out at about $16 per hour. Would you pay $16 per hour to surf Facebook? Class should be a social space to some degree. The friends that you make in law school might turn out to be lifelong friends (or rivals). But there should be a balance between the classroom as a social and an intellectual space. If you talk during class it disrupts the lecturer’s ability to convey information to you and others. It effectively forces other people around you to listen to what you are saying and so interferes with their ability to access a university resource—that is, class time in There should be a lectures and tutorials. It is almost akin to standing outside a lecture balance between the theatre and stopping somebody from entering the room. So if you classroom as a social and wouldn’t even think about doing that, then why would you go and an intellectual space. do something that essentially has the same effect?

1.1.3  Practise the core legal skills Effective law students catalogue the relevant skills that they need for law school. Remember that a skill is only useful if you practise it and if you have a forum in which you can apply it on a regular basis. The core legal skills are: (i) (ii) (iii) (iv) (v) (vi)

the common law method; case law analysis; legal problem solving; statutory interpretation; legal writing; and research.

Studying a course in contract law will call for all six of these skills. These six core legal skills recur in almost every subject, are transferable into other areas of professional endeavour, and will feature heavily in your professional life as a lawyer.

The common law method The common law method requires an understanding of how case law develops in the common law system, how to find similarities within the case law, and how to differentiate cases. The common law method involves the application of existing principles to new problems. However,

Chapter 1

An introduction to law school

this is not a straightforward proposition. In Parker v British Airways Board1 Lord Justice Donaldson wrote: ‘As a matter of legal theory, the common law has a ready made solution for every problem and it is only for the judges, as legal technicians, to find it. The reality is somewhat different.’2 At times, the common law must contend with a factual situation that falls outside the previous fact situations around which a body of law has developed. At other times, the utility of a legal fiction might come to be exhausted because a truth which it had previously ignored has become undeniable. This is best illustrated in Mabo v Queensland (No 2),3 where the High Court discarded terra nullius as a redundant legal fiction. The common law method also involves working with precedent. This requires the ability to think critically about precedents and to place them within the context of the broader area of the relevant law. Sometimes, this might mean that the value of a precedent needs to be questioned if its application to the immediate facts of a case could result in some injustice. As Lord Denning stated in The Discipline of Law: By standing by previous decisions, we have kept the common law on a good course. All that I am against is its too rigid application—a rigidity which insists that a bad precedent must necessarily be followed. I would treat it as you would a path through the woods. You must follow it certainly so as to reach your end. But you must not let the path become too overgrown. You must cut out the dead wood and trim off the side branches, else you will find yourself lost in thickets and brambles. My plea is simply to keep the path to justice clear of obstructions which would impede it.4

Case law analysis The skill of reading and analysing a case requires the ability to identify the essential facts, the legal principles in dispute, the facts that are germane to the resolution of the dispute, the nature of the different decisions that the judges made in the case, and how those decisions developed the relevant area of law. An example of exercising the skill of case law analysis is reflected in working through the High Court’s decision in Trident v McNiece.5 In Trident a majority of the High Court found an exception to the doctrine of privity, but the individual members of the majority did so for different reasons. Mason CJ and Wilson J circumvented the privity doctrine by relying on the contract itself. Toohey J favoured a similar approach but confined his decision to situations of insurance contracts. Deane J relied on a trust device, while Gaudron J relied upon unjust enrichment. The minority of Brennan and Dawson J J held fast to precedent. An exercise of case law analysis skills would go through the individual decisions, analyse their reasoning and comment on the implications for the doctrine.

Legal problem solving Legal problem solving requires the ability to: (i) identify how a specific set of facts gives rise to a series of legal questions; (ii) determine essential and non-essential facts; 1 2 3 4 5

[1982] 1 All ER 834. Ibid, 836. (1992) 175 CLR 1. Lord Denning, The Discipline of Law, Butterworths (1979), p. 414. (1988) 165 CLR 107.

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(iii) know which specific facts trigger the application of a particular set of legal rules; (iv) apply those rules to the facts and, through a reasoning process, come up with an advice.

Statutory interpretation Statutory interpretation requires the ability to read a statute and to apply it as a form of law. It involves an understanding of: (i) (ii) (iii) (iv) (v) (vi)

the purpose behind the statute; the structure of the statute; the scheme contained in the relevant part of the statute; the purpose of the scheme; the relationship between the scheme or part to other schemes or parts in the statute; the meaning of terms within a specific section and the meaning of a section as a whole and its operation.

Statutory interpretation is not a simple art, but it has some basic rules which, when mastered, can be applied in different legal contexts. Most of the difficulty with statutory interpretation stems from the indeterminacy of language. Put simply, a phrase devoid of any context may be liable to be interpreted in two competing ways. In a recent law review article the Hon J J Spigelman AC of the New South Wales Supreme Court used the simple example of the phrase ‘the chicken is ready to eat’ to illustrate just such a problem.6 Clearly, this phrase can be interpreted as meaning either that the chicken is ready to eat   something or that the chicken has been cooked and is ready to be consumed. Both interpretations are valid, but they are diametrically opposed to each other. When interpretive problems of this type occur in a legal context it places courts in a quandary as to how to resolve the puzzle of competing interpretations. Most often this is resolved by having regard to the context and purpose of the statute. Even so, reasonable minds may disagree as to the nature of the context and purpose of a statute.

Legal writing Legal writing is the ability to convey a legal analysis in a professional and persuasive manner. It  does take a while to develop legal writing skills and exposure to a wide variety of legal writings is immensely helpful. Issues of structure and clarity are essential to legal writing. Moreover, a legal writer must have an understanding of the formal and informal rules of legal writing. It is essential that you practise the art of writing. Lord Denning has stated: The reasons why words are so important is because words are the vehicle of thought. When you are working out a problem on your own … you think in words, not symbols or numbers. When you are advising your client … you must use words. To do it convincingly, do it simply and clearly. … Obscurity in thought inexorably leads to obscurity in language.7

Research Research requires the ability to acquire knowledge. In the online environment this might relate to your ability to search databases and to procure information. In a more practical sense it might 6 Hon J J Spigelman AC, ‘The Intolerable Wrestle: Developments in Statutory Interpretation’ (2010) 84 ALJ 822, 824. 7 Lord Denning, The Discipline of Law, Butterworths (1979), p. 5.

Chapter 1

An introduction to law school

involve the ability to find law reports and books in a library, or just knowing who to ask about a particular problem. These six skills are at the core of the profession. Being realistic, it will take a few years for you to develop them to a high level, but it is worth committing to the process of developing them. Our advice would be to keep track of your skills development and seek feedback from your lecturers and tutors as you go along.

1.1.4  Remember that reputation matters There is no getting around the fact that law school is a communal endeavour. As a student you have little control over who your lecturers, tutors and fellow students are, and similarly the academics have little input into the ability of students to enrol. It is a reality that people from all parts of the wider community will enrol in law school. What we all share is an investment in the reputation of the law school. Anything that damages the reputation of the law school, such as plagiarism, cheating, bullying and the like, has the ability by extension to damage our own professional reputations. It follows then that we all have a stake in discouraging negative behaviours at law school and encouraging and supporting positive conduct. Plagiarism is not a simple matter. While it does potentially have significant professional ramifications, it occurs for a variety of reasons. There is a significant difference between plagiarism that occurs because a student has been careless or is unaware of the conventions of citation and quotation and that which happens as a result of a student engaging in a conscious and deliberate deception. In Re Humzy-Hancock 8 McMurdo J found that a student, who was seeking admission as a legal practitioner, had not knowingly and deliberately committed plagiarism during his studies but had instead engaged in ‘carelessness’ and a ‘misunderstanding of what was required’. In contrast, in Re AJG 9 the Queensland Court of Appeal took a stricter line. De Jersey CJ stated: Legal practitioners must exhibit a degree of integrity which engenders in the Court and in clients unquestioning confidence in the completely honest discharge of their professional commitments. Cheating in the academic course which leads to qualification central to practice and at a time so close to the application for admission must preclude our presently being satisfied of this applicant’s fitness.10

The concern that the courts and admissions boards have with plagiarism is that if students engage in dishonesty when they are under pressure as students then they might do similar things as lawyers, but at a time when they have access to a client’s funds or other property. In a similar vein, anything that compromises the integrity of the assessment scheme will likely have reputational implications. Putting to one side those types of conduct which might attract sanction under the rules of academic discipline, it is worth considering how both academics and students can contribute to the reputation of the law school. As you may be aware, a university is a statutory corporation and it is funded by the public through the government. As such, an academic is a public intellectual and should be engaged in

8 [2007] QSC 34 (Unreported, McMurdo J, 26 February 2007). 9 [2004] QCA 88 (Unreported, de Jersey CJ, Jerrard JA and Philippides J, 15 March 2004). 10 Ibid, [4].

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public life in several ways. The main method of engagement is through research publications. An academic should be actively engaged in research and should be developing a reputation within their field and the profession for their research work. This might take a lot of time and effort. But it is an investment that is worth making for both students and the wider public. Success in research benefits all the stakeholders in a university. In this context, it is useful for students to bear in mind that academics have essential duties in relation to research and that this might impact at times on their availability. Further, academics with specialised knowledge have an obligation to try and bring that knowledge to bear upon public discourses; and when an academic engages the broader public through writing opinion pieces and the like, they should do so in an ethical and even-handed manner. Students should behave in an ethical manner consistent with the university rules. Students should always feel free to question the knowledge that they are receiving, but they should do so in a positive and constructive manner. Further, a law student should always strive to give a good impression to visitors to the law school (such as judges, practitioners from law firms and other academics). A final point is that at law school you will come into contact with people from a broad cross section of the community. Some matters that attract action under the rules of academic discipline have their origin in serious educational disadvantage or mental health issues. At times this has been true of cases of plagiarism or inappropriate conduct. If such matters do arise—and they are quite rare—be compassionate but proactive in seeking a resolution to them.

1.1.5  Be seen at law school As noted above, law school is a communal activity. There is something quite attractive about the concept of a ‘learning community’. This is a very useful way to look at law school: everybody who has an engagement with law school is learning in some way. It follows then that if you isolate yourself from the school that you will cut yourself off from formal and informal sources of learning. It is important that you turn up and engage with others. It is also important you allow others to participate in the law school community. Being part of a learning community requires a respect for the rights of others. Inclusiveness and respect are the hallmarks of a strong learning community. Therefore the more constructively that you engage with others, the greater your personal benefit and that of the school as a whole will be. As Sir Garfield Barwick wrote in A Radical Tory: Personal freedom does not mean that any citizen can do as he or she pleases. By description a citizen is a member of a community whether large or small. The citizen owes his significance as a person to the fact that he or she is a member of a community. Robinson Crusoe on his lonely island, even with his companion Friday, not being a member of a community, had no real significance. Each member of the community owes duties of a definable nature to all fellow citizens.11

On a practical level it is nearly impossible for any lecturer to impart every tip, trick or piece of knowledge on a subject in a two-hour lecture. Some of these pieces of information can be 11 Sir Garfield Barwick, A Radical Tory: Garfield Barwick’s Reflections and Recollections, Federation Press (1995), p. 274.

Chapter 1

An introduction to law school

quite useful and the best way to get them is to have a brief face-to-face conversation with your lecturer or tutor. Email can be useful, but it is a bit limited and is likely only to garner answers to specific questions. Discussion boards on course websites can be useful, and certainly are more time efficient for staff and students than email, but these can be slightly formal as well. The more that your lecturers and tutors can see how you are going in your studies, the better able they are to gauge what needs to be done to improve your performance. This cannot be done on a course website or via email. It is also quite difficult in lectures. It requires open and honest face-to-face discussion. On a student-to-student level it is worth forming study groups and getting involved in revising subject matter and preparing law summaries together.

1.1.6  Read widely It is expected that you have a high level of legal literacy. The study of law requires the mastery of technical language and concepts. This is most likely to be achieved if you read different types of legal writing. Similarly, given that the law is intimately connected to society, it helps to follow public debates. Reading legal texts, cases, law review articles, current affairs reports and opinion pieces increases your engagement with the wider legal world. This then leads to a greater ability to think and write as a lawyer. Words are the stock trade of the lawyer, so fluency with them is an aid to academic and professional success.

1.1.7  Remember that law is a skills profession While the specific core legal skills were identified above, it does bear repeating that law is a skills profession. You will get hired on the basis of your ability to acquire information and to work with that information. Law school is not simply about acquiring knowledge. It is about learning how to think about the law and how to work within the legal system. There are some challenges facing the pursuit of the skills model at university. The ‘rote learn and regurgitate’ model is diametrically opposed to what law school is about. You should avoid the tendency to just memorise and repeat facts. There are particular skills and techniques that are involved in legal analysis. These skills and techniques need to be taught in class and practised in tutorials. It is the combination of skills, technique and knowledge that your tutors are after, rather than a perfect pre-prepared or memorised answer that might not even fit the question.

• 1.2 Conclusion We hope that this chapter has been of some use and guidance to you as you embark upon your law studies; that you will find that your studies in the law broaden both your mind and horizons; and that they are as enjoyable as possible.

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chapter

2

Theories of contract law

Chapt e r o v e rv i e w 2.0

Introduction  11

2.1

The contract as bargain   11 2.1.1 History  11 2.1.2 Theory  13 Standard form contracts   13 Ambiguity  14 Hypothetical and actual consent   14

2.2

The contract as promise   16

2.3

The contract as property   18 2.3.1 Property and the reliance theory of contract   20 2.3.2 Remedial action  21 The harm principle   21 The corrective justice principle   22

Chapter 2

Theories of contract law

• 2.0 Introduction The law of contract has been influenced by numerous disparate sources and lacks a thorough philosophical or theoretical foundation. Rather, it reflects the fact that jurists have justified the enforcement of contracts on divergent and often contradictory bases. For example, utilitarian theories see the law of contract as a means of protecting parties reliant on promised advantages and holding people to what they have led others to expect, fashioning remedies on the basis of these expectations.1 Theorists drawing on traditions of natural rights, on the other hand, view contracts as devices for managing the rights to things—rights that have been created by the parties having fashioned an agreement. Pound noted that the law of contract was insufficiently utilitarian: In a developed economic order the claim to promised advantage is one of the most important individual interests that press for recognition. If it is a task of the legal order to secure reasonable individual expectations so far as they may be harmonised with the least friction and waste, in an economic order those arising from promises have a chief place. Credit is a principal form of wealth. It is a presupposition of the whole economic order that promises will be kept. The social order rests upon stability and predictability of conduct, of which keeping promises is a large item. But the law has been slow in coming toward this demand of the economic order, and … has not fully secured individual interests in promised advantage to the extent of the jural postulate of the economic order.2

• 2.1 The contract as bargain 2.1.1  History The bargain theory of contract arose in the nineteenth century as a necessary counterpart to the rejection of the will theory of contract (that the wills of the parties should correspond), and the adoption of an objective model. Under the objective analysis the unexpressed intentions of the parties were subordinated to a legal analysis of their words and conduct as a determinant of their obligations. The paradigm ‘manifestation of mutual assent’ occurred when one party’s acceptance of another party’s offer brought finality to the bargaining process. As Langdell said: As to the rule that the wills of the contracting parties must concur, it only means that they  must concur in legal contemplation, and this they do whenever an existing offer is accepted … In truth, mental acts or acts of the will are not the materials out of which promises are made; a physical act on the part of the promisor is indispensible.3 1 Adam Smith, Lectures on Justice, Police, Revenue and Arms, Cannan ed. (1890), p. 7; John L Austin, Lectures on Jurisprudence, 4th ed., John Murray (1873), Vol. 1, pp. 326–327. This theory, which has its origins in the medieval action of assumpsit, is probably ascendant: see Edward Jenks, The History of the Doctrine of Consideration in English Law, C J Clay & Sons (1892), pp.115–118 and Merton Ferson, The Rational Basis of Contracts, Foundation Press (1949), p.121. 2 R Pound, ‘Individual Interests of Substance—Promised Advantages’, 59 Harvard Law Review 1, 1–2 (1945) 162–163. 3 C C Langdell, Summary of the Law of Contracts, Little, Brown and Company (1880), p. 244. P S Atiyah expresses it in virtually identical terms in An Introduction to the Law of Contract, OUP (1971), p. 4: ‘It is one of the most fundamental features of the law of contract that the test of agreement is objective and not subjective. In other words it matters not whether the parties have really agreed in their innermost minds … but whether their conduct and language are such as would lead reasonable people to assume that they have agreed.’

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Contract Law: Text and Cases

The nineteenth-century bargain theory rested on a reconceptualisation of consideration.4 In law there was complete equivalence between consideration and the promise—each party was assumed to view the performance they undertook as the price of the performance undertaken by the other. Therefore the consideration could represent the only inducement for the promise.5 In Pollock’s succinct formulation, consideration was explained as follows: ‘An act or forbearance of the one party, or the promise thereof, is the price for which the promise is bought.’6 Price is established by an agreement between the parties on the act or forbearance as consideration. Consideration was also defined away from the bilateralism of being at once a benefit to the promisor and a detriment to the promisee, to a detriment-only formulation. However, this left consideration to be measured from the parties’ subjective motives—an approach incompatible with the emerging objective bargain theory of the contract. Consideration was therefore reformulated on the basis of the detriment to the promisee. In the United States the bargain theory of consideration has been given legislative sanction in the Restatement (2d) Contracts 1979, which states (at S71): (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. (3) The performance may consist of a An act other than a promise, or b A forbearance, or c The creation, modification, or destruction of a legal relation. (4) The performance or return promise may be given to the promisor or to some other person.

The last feature of this definition does not represent Australian law, where privity of contract requires that the promisee provide consideration.7 The bargain theory of contract was adopted in Waltons Stores (Interstate) Ltd v Maher,8 where Mason CJ and Wilson J stated that it ‘had not been expressly adopted in Australia or England’.9 Their Honours pointed to a potential difference between Australian and American contract law in that, while Australian and bargain-theory-based concepts of consideration may be roughly equivalent, consideration may be implied by Australian law in situations where the bargain theory would not recognise it.10 Essentially then, Australian law ‘accepts the basic element of the bargain theory of consideration’ and rejects the reliance-based theory, even if it does not adopt and apply the bargain theory as extensively as courts in the United States.11 4 See Chapter 5. 5 C C Langdell, Summary of the Law of Contracts, Little, Brown and Company (1880), pp. 78–79; see also P Kelley, ‘A Critical Analysis of Holmes’ Theory of Contract’, 75 Notre Dame Law Review 1722 (2000), 1757. 6 F E Pollock, Pollock’s Principles of Contract, 8th ed., Stephens & Sons (1911), p. 175. Pollock’s formulation was approved by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, 855. Despite Pollock’s expression and its clear adoption by the House of Lords, P S Atiyah is of the opinion that the bargain theory of consideration did not provide the foundation for the development of an English law of contractual consideration: see P S Atiyah, Essays on Contract, Clarendon Press (1988), p. 60. However, the bargain theory was clearly the means by which consideration was formulated by the House of Lords in Chappell and Co Ltd v Nestle Co Ltd [1960] AC 87. 7 See Dunlop Pneumatic Tyre v Selfridge & Co Ltd [1915] AC 847; Scruttons Ltd v Midland Silicones Ltd [1962] AC 446; [1962] 1 All ER 1; see also Chapter 14 for a discussion of privity of contract. 8 (1988) 76 ALR 513. 9 Ibid, 522. 10 Ibid, 522. 11 Beaton v McDivitt (1987) 12 NSWLR 162, 182 per McHugh JA.

Chapter 2

Theories of contract law

2.1.2  Theory When parties conclude a bargain, they exchange a promise in the present to perform the terms of the contract in the future. By free and mutual consent they are bound by duties they owe each other. As stated above, the consent is viewed objectively by reference to the parties’ conduct, rather than being found in the parties’ subjective intentions. Consent’s central role in contract law is recognised and modified by rational bargaining theory, since the court’s role is to ‘enforce … bargains, and conversely not to enforce promises made outside a commercial bargain’.12 It has been argued that rational bargaining theory can be used to determine the hypothetical consent to the content of contracts not determined by parties beforehand.13

Standard form contracts Classically, a legally enforceable contract requires a manifestation of mutual assent to the exchange, or agreement. However, the revolution of mass production and mass distribution has ushered in an age of standardised consumer contracts.14 Today, therefore, the most common contracts are not characterised by individualised negotiation over prices and terms, but offer set terms and characteristics which consumers (for example) enter seamlessly without negotiation in the mass retailing environment of market economics, or via online purchases. The background to these agreements is standardised consumer contracts which are not entered into through actual bargaining processes, but in which courts are frequently asked to identify the classical contractual paradigm of offer and acceptance. The reconciliation of standard form contracts with legal assent is problematic for common law contract theory. Apparent consent is viewed as nothing ‘but subjection more or less voluntary to terms dictated by the stronger party, terms whose consequences are often understood only in a vague way, if at all’.15 Nevertheless, in some jurisdictions (originally in the United States), where standardised contracts on a ‘take it or leave it’ basis were heavily used, a theory of hypothetical market assent arose to bind all consumers—even if empirically only very few consumers made

12 Commonwealth Bank of Australia v Poynten (1996) Aust Contract R 90-065, 90,384 per Young J. 13 See J Coleman, Risks and Wrongs, Oxford University Press (2002), p. 272. 14 Friedrich Kessler, ‘Contracts of Adhesion—Some Thoughts about Freedom of Contract’, 43 Columbia Law Review 629 (1943). 15 Ibid, 632. George L Priest, ‘A Theory of the Consumer Product Warranty,’ 90 Yale Law Journal 1297 (1981) also warned of the capacity of manufacturers to use warranties in standard form contracts as a cost-reduction mechanism, and effectively as a form of fraud. In Henningsen v Bloomfield Motors Inc 32 NJ 358, 161 A2d 69 (NJ 1960) the New  Jersey Supreme Court (at 87) said of a standard form contract purporting to exclude warranties of merchantability and consequential damages for bodily injury: ‘The warranty before us is a standardized form designed for mass use. It is imposed upon the automobile consumer. He takes it or leaves it, and he must take it to buy an automobile. No bargaining is engaged in with respect to it. In fact, the dealer through whom it comes to the buyer is without authority to alter it … The form Warranty is not only standard with Chrysler but … it is the uniform warranty of the Automobile Manufacturers Association … The gross inequality of bargaining position occupied by the consumer in the automobile industry is thus apparent. There is no competition among the car makers in the area of the express warranty. Where can the buyer go to negotiate for better protection? … Because there is no competition among the motor vehicle manufacturers with respect to the scope of protection guaranteed to the buyer, there is no incentive on their part to stimulate good will in that field of public relations … This basic reasoning—stressing the uniformity within an industry as showing lack of consumer choice—was applied by courts in refusing to enforce standard-form terms similarly limiting the liability of mass-product and service providers in other fields, such as landlords.’

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Contract Law: Text and Cases

their purchases after reading the contract, and even fewer either read, comprehended and actually bargained over its terms. Rational bargaining theorists maintain that hypothetical consent is ‘a proxy for actual consent’ and indicative of the content of hypothetical contracts, and that consent follows logically from the parties’ consideration of their rational self-interest.16

Ambiguity Typically, courts revert to the hypothetical bargain framework when contingencies arise which are addressed by ambiguous contract terms, and as a rule of construction to imply rights and obligations about which the contract is silent. To disambiguate the contract: the court … construe[s] the language [of the contract] … so as to give effect to what would have been the intention and agreement of the parties had their attention been drawn to events as they actually were to occur.17

The court supplements an incomplete contract, lacking terms about which the parties did not specifically negotiate, with terms the parties would have provided for had the problem been explicitly anticipated.

Applied as a rule of construction, the court supplements an incomplete contract, lacking terms about which the parties did not  specifically negotiate, with terms the parties would have provided for had the problem been explicitly anticipated.18 Even so stated, it is not clear whether the hypothetical bargain  reconstructs the contract so as to apply the best rules for the subject matter of that contract—the rules the parties would probably have chosen, the rules that perfectly rational and completely informed parties would have chosen, the rules that parties would in general choose to govern the situation.19

Hypothetical and actual consent The equation of rational self-interest with hypothetical consent is problematic, as is the connection between hypothetical and actual consent. Logical consistency is not sufficient to manifest an intention to be legally bound. Evidence of hypothetical consent—because the terms so deduced are consistent with a process in which rational bargaining optimised the allocation of risk through the contract mechanism, and minimised costly enforcement—is still not evidence of actual consent. However, bargaining theory may assist in interpreting certain contracts in the absence of essential information (that is, silence regarding key contract terms) based on assumptions about agent rationality. However the rationality of the bargaining situation cannot justify consent in the absence of actual consent. In a legal regime requiring consent to be actual, the bargaining theory can only do interpretive work when the intention to be legally bound has become concretely manifest in some way. The interpretation of consent when parties do not explicitly address the issue is not discerned logically but conventionally, based on the shared meanings of both the milieu 16 See J Coleman, Risks and Wrongs, Oxford University Press (2002), p. 272. 17 Harcourt Brace Jovanovich Inc v Sun Bank National Association, No 87-3985 (Fla Cir Ct June 25, 1987). 18 See for example Katz v Oak Indus Inc 508 A 2d 873, 880 (Del Ch 1986) per Chancellor Allen; and Wisconsin Real Estate Investment Trust v Weinstein, 781 F 2d 589, 593 (7th Cir 1986). 19 See D Charny, ‘Hypothetical Bargains: The Normative Structure of Contract Interpretation’ 89 Michigan Law Review 1815, 1821 (1990–1991).

Chapter 2

Theories of contract law

of the contracting parties (so that the actual understanding of the contract participants can be pragmatically addressed) and the interpretive legal community. The conclusions of rational bargaining are indeed only justified when evidence is lacking regarding the meaning of the parties’ actual consent (that is, the interpretation of the contract) from the relevant ‘community of discourse’.20 For Barnett,21 consent must be commensurate with its meaning in such a community and therefore may or may not be approximated by rational rules of bargaining or assumptions about participants’ self-interest. A number of economic rationalist theories—of which Coase’s22 is the most famous—argue that individual bargaining is an act capable (when the individual bargaining events are summed together) of constructing rational social conditions. Social conditions include costs and benefits, but the two-party bargaining situation is the representative model by which the level of efficiency for the regulation of a range of related activities is set. What is currently achieved by legal means such as tort law—to redistribute social resources when imperfect markets produce more social cost than benefit—is, for Coase, best addressed by allowing freely bargaining individuals to allocate goods in the most socially beneficial way.23 Rational bargaining therefore attempts to ‘mimic the market’.24 Coase’s theory is in the tradition of Adam Smith’s, who regarded the markets of his own day as excessively regulated by governments attempting to ensure the alignment of private bargains and the public good, and who posited a competitive free market both to introduce efficiencies25 and as an abstract method for discovering the actual intentions of the contracting parties. For Becker, social benefit is maximised by reference to an aggregate of transactions constituted by the same individual bargaining exchanges.26 Bargaining, in Becker’s view, occurs in a market situation which aggregates unrelated empirical bargaining events, but nevertheless relies on the logic of the rationality of discrete individual bargains. In the simplest model of the bargaining situation on which the contractual theory is based, a single seller offers a commodity to a single potential buyer, concluding a successful bargain when the parties agree on a mutually acceptable transfer price, thereby selling the good. But the two-party bargaining situation is not deducible from a non-social starting point, and the essential terms of bargaining theory as an explanation of contract formation and its consequences (including bargain and contract themselves) assume a social context. The individual bargain,

20 See R E Barnett, ‘The Sound of Silence: Default Rules and Contractual Consent’ 78 Vanderbilt Law Review 821 (1992); see also R Craswell, ‘Contract Law, Default Rules, and the Philosophy of Promising’ 88 Michigan Law Review 489, 516–528 (1989). 21 Ibid. 22 Ronald H Coase, ‘The Problem of Social Cost’ 3 Law & Economics 1 (1960). 23 Ibid; see also A Schwartz and L L Wilde, ‘Imperfect Information in Markets for Contract Terms: The Example of Warranties and Security Interests’ 69 VA L Rev 1387 (1983), in which the authors argue that even a small minority of rationally acting value-seeking consumers in a market could apply sufficient pressure on large firms to adopt efficient standard form terms. 24 See for example R E Barnett, ‘Contract Remedies and Inalienable Rights’ 4 Social Philosophy and Policy 179 (1986); see also R E Barnett, ‘The Sound of Silence: Default Rules and Contractual Consent’ 78 Virginia Law Review 821 (1992), 859–873. 25 Adam Smith, The Wealth of Nations, Modern Library (1937), pp. 500–501. 26 Gary Becker, ‘Irrational Behaviour and Economic Theory’ Journal of Political Economy 70 (1962), pp.1–13. For an opposing view, see J F Muth, ‘Rational Expectations and the Theory of Price Movements’ Econometrics 29 (1961), 315–335; G L S Sheckle, Epistemics and Economics, Cambridge University Press (1972), pp. 15–16, 132, 135–136; H Wolozin (ed.), The Economics of Pollution, General Learning Press (1974), p. 12.

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Contract Law: Text and Cases

like the aggregate market, is a system embedded in social institutions, and the transactions that individual bargains entail are only sensible, measurable and enforceable in relation to those social institutions. Moreover, the market qua social institution cannot emerge from an aggregation of individual bargains. Law provides the framework of rules within which bargaining can—and without which it cannot—occur. Laws regarding property rights, validity and transfer of title, warranties of quality, and liability enable the sale (which is a legal mechanism) upon which bargaining theory is modelled. In other words, buyers and sellers are only willing to transact when a consensually underpinned, public market structure exists, allowing the bargain to occur as part of an established process. Commentators have criticised attempts to analyse relational contracts in terms of simple exchange mechanisms.27 The simple exchanges of bargaining theory correspond to sales rather than to contracts. Contracts are an attempt to orient the rights and obligations of particular participants over longer periods; they arrange in the present what has to be organised in the future.28 They are a form of socially endorsed and market-backed private legislation between parties providing specialised terms for the particular transaction. As Farnsworth says, in contract private ‘parties … [are] viewed as acting in a kind of legislative capacity, so that the enforcement of a contract by the state merely implement[s] a form of private law established by the parties’.29

• 2.2 The contract as promise Deontological (or deontic) moral theories are concerned with the rules that accompany obligations. The word is itself derived from the Greek word deon (‘to bind’) and hence is concerned with duties that arise in both formal and informal situations. Deontological ethics is typically not concerned with the consequences of actions (teleological theories), but with the internal logic or the character of the moral action and duty itself. Deontologists are not pragmatists to the extent that the theory maintains that action should be judged in accordance with a moral standard and not with its predicted or projected outcome. Theories of contract law based on Theories of contract law based on deontological morality deontological morality are are concerned to explain how the actions and processes the law concerned to explain how undertakes can be justified, on the basis of their understanding of the actions and processes the law undertakes can be the foundation of the contract. Arguments that base contract law justified, on the basis of on the social role and power of morality must show how contract their understanding law enforces the rights and responsibilities inherent in making a of the foundation of promise. If contract law differs significantly from the morality of the contract. making a promise, it is unjustified on that basis. 27 See for example E A Farnsworth, ‘Legal Remedies for Breach of Contract’ Columbia Law Review 70 (1970), 1145–1216; E J Mishan ‘The Economics of Disamenity’ Natural Resources Journal 14 (1974), 55–86; B Ward, What’s Wrong with Economics?, Basic Books, Inc (1972), pp. 199ff. 28 See I R Macneil, ‘Restatement (Second) of Contracts and Presentation’ Virginia Law Review 60 (1974), 589–610. 29 E A Farnsworth, ‘The Past of Promise: An Historical Introduction to Contract’ Columbia Law Review 69 (1969) 576–607, 599.

Chapter 2

Theories of contract law

The theory that the contract is a type of promise has had numerous exponents and adherents,30 but was expounded in greatest detail by Fried.31 It holds that the contract is ‘grounded in the primitive moral institution of promising’, and that contract law is justified because and to the extent that it enforces promises that have been made. Based on a liberal theory of society which principally values individual autonomy, this account is founded on the view that the state must support contract law that reflects and serves the right of individuals to enter legally binding, selfimposed obligations. Scholars have objected to Fried’s analysis of enforcement as based on the immoral divergence from the promise.32 Their arguments are based on a correspondence view of the contract. They question whether and to what extent contract law should be based on morality. Morality, unlike contract, is aimed at leading a good life. Contracts are based on a legal duty that corresponds to the parties’ moral duty, and contract law falters if it fails to impose that corresponding legal duty. Whereas seeing the contract as a promise would require the law to oblige the party in breach to perform the contract, the law typically enforces damages as a remedy. That is it tends to recognise and address the expectation of the party, and not the promise itself. Some eminent jurists have argued that contract law converts the promise into a contractual duty to do what is promised or to pay damages in case of default.33 Furthermore, economic analysis of contracts suggests that damages do not translate the promisor’s duty to perform the contract because promisors’ breaches of contract occur when the cost of performing the contract is greater than the threatened sanction, so that breaching promisors benefit by means of the penalty. If, as Pound argued, the economic order’s—and society’s—stability and predictability are to be facilitated, economists object that the marketplace is a more effective and efficient mechanism for achieving this than contract law. Contract law therefore not only fails to uphold the morality of the contract, but also turns its back on the moral foundations of society.34 However, neither the promissory argument, nor the correspondence argument address fundamental issues such as how the content of the rights of the parties is determined, or the moral justification of the legal enforcement of the promise. Other theorists have argued that both arguments must be supplemented by a theory of liberal autonomy which identifies the foundation of the contract as a self-imposed moral responsibility:35 moral autonomy as the foundation of both moral duties and obligations guards against the violation of the personal responsibility to uphold promises. Morality, it is argued, has the power to bind selves and others to a promise. Moral autonomy is also said to be an efficient and effective means of coordinating party actions, as the promisor indicates by means of promising that they assume a moral responsibility which, by freely 30 See for example R Pound, ‘Individual Interests of Substance—Promised Advantages’, 59 Harvard Law Review 1, 1–2 (1945). 31 Charles Fried, Contract As Promise: A Theory of Contractual Obligation, Harvard University Press (1988), p. 40. 32 Dori Kimmel, From Promise to Contract: Toward a Liberal Theory of Contract, Oxford University Press (2003); Sean Shiffrin, ‘The Divergence of Contract and Promise’ 120 Harvard Law Review 708 (2007). For a response to Shiffrin, see Jeffrey M Lipshaw, 21 Canadian Journal of Law and Jurisprudence 399 (2008); Michael G Pratt, ‘Contract: Not Promise’ 35 Florida State University Law Review 801 (2008). 33 Oliver Wendell Holmes Jr, The Common Law, Little, Brown and Company (1963), p. 301. 34 Sean Shiffrin, ‘The Divergence of Contract and Promise’ 120 Harvard Law Review 708 (2007), 718–719. 35 Joel Feinberg calls this ‘personal sovereignty’: see Harm to Self: The Moral Limits of Criminal Law, Oxford University Press (1986), Vol. 3, p. 52; see also Joseph Raz, The Morality of Freedom, Oxford University Press (1986), pp. 369–370.

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choosing it, they reckon to be legitimate, and thereby assure their performance of the contract. The freedom to make and the obligation to keep promises mirror each other and provide the moral foundation for contract law. The source of moral responsibility is anchored in the fact of its being self-given, and otherwise avoidable.36 This assurance induces the promisee to enter the contract for achieving mutual ends because the promise has the practical consequence of the subject rationally altering their position vis-à-vis the other and the prevailing circumstances. The essential purpose of the promise is fulfilled if the promisee is justified in believing that the promisor is accountable to the promisee for the promise. Moreover, personal sovereignty guarantees individuals the right to pursue their ends consistent with the liberty of others to do the same. The question will arise as to whether, given that contracts are interpreted objectively, a party can be held liable for a promise they did not intend subjectively to make; or, how an individual subject to a duty may be responsible for remedying non-performance when they have contracted without the intention of being legally accountable for violating it. Moral obligations apply only  when individuals have the intention of subjecting themselves to the consequences of violation, which they do by exercising their free will in the decision to enter contractual relations.37 Correspondence theories explain this readily by yoking moral to legal rights and responsibilities through the medium of the contract. However, this is not consistent with the principle of personal sovereignty which ultimately justifies legal sanctions. Even an apparent or objective promise which the promisor had no intention of upholding, or about which they cannot verify an intention, makes the promisor accountable—either by obligation or because of duty. However, it has been argued that a subjective contract can give rise to expectation damages, whereas a merely objective promise will only give rise to reliance damages.38

• 2.3 The contract as property Lysander Spooner strongly criticised elevating the promise above other considerations in providing a grounding to the law of contract: The words ‘I promise’ are no essential part of the contract. Nor is a formal promise in any case essential to the validity of a debt—that is, to the obligation to deliver money that has been sold and paid for. A man may make as many naked promises to pay money as he pleases and they are of no obligation in law. On the other hand, if a man has received value from another, with the understanding that it is no gift, or that an equivalent is to be paid for it, the debt is obligatory—that is, the obligation to deliver the equivalent is binding— whether there be any formal promise to pay or not … The promise then is a matter of mere form in any case, and of no importance to the validity of an obligation to deliver an equivalent that has by contract (consent) been exchanged for value that has been received.

36 Michael Pratt, ‘Promises, Contracts and Voluntary Obligations’, 26 Law and Philosophy (2007) 531, 533; Joesph Raz, ‘Promises and Obligations’ in P M S Hacker and J Raz, eds., Law, Morality and Society: Essays in Honour of H L A Hart, Oxford University Press (1977), pp. 210, 218. 37 H L A Hart, Essays on Bentham, Oxford University Press (1982), p. 255. 38 J S Krauss, ‘The Correspondence of Contract and Promise’, 7 Columbia Law Review (2009) 109, 1603, 1623.

Chapter 2

Theories of contract law

It may be important as evidence of the contract; but it is not part of the contract itself; that is, it of itself conveys no rights of property to the promisee, and no rights of any to the equivalent promised which he would not have without any formal promise.39

Spooner champions a title-transfer model of contract law in which the essential act is not the act of promising, but the transfer of title to an alienable good. Where no transfer of title has taken place a mere promise—which in Roman law was referred to as nudum pactum—will not bind the promisor, who retains absolute title to their property, to the promisee in such a way as to make the promise enforceable, and provide the promisee with a claim. Like the contract as promise theory, the property theory of contract is also a normative theory. Although contract and property law are frequently distinguished, a number of legal scholars have recently considered their similarities and the benefits of thinking of the contract in terms of property.40 Immanuel Kant saw property titles rather than promises as the basis of contracts, and contracts as instruments by which alienable goods are assigned or transferred.41 For Kant the obligation inherent in the contract is not derived from the promise, but from the fact that free wills have established a consensual relationship under the conditions of civil society. If the contract is to work as the transfer of title to property, it can only work for alienable rights; it cannot work for inalienable rights such as the right to self-determination, which human beings inalienably possess as proprietors of their own will.42 Andrew Gold has argued that ‘a contract is best understood as a special type of property—property in a promisor’s future actions’.43 He suggests that the promisee has acquired rights in the promisor’s future actions for a consideration. The acquisition of that right is only possible if and justifiable on the basis that the promisor’s radical possession of the right is not incompatible with disposing of the right to another in return for a valued benefit.44 That is, individual ownership cannot impede and must include the capacity to assign ownership of one’s future actions to another person.45

39 The Collected Works of Lysander Spooner, M & S Press (1971), pp. 110–101. 40 Those scholars having expressed scepticism about the coherence of the comparison and the view include Jeremy Waldron, The Right to Private Property, Clarendon Press (1988), p. 181 (on the basis that the subject matter of contracts is actions and property cannot offer guidance on how to judge and assess conduct); Thomas W Merrill and Henry E Smith, ‘The Property/Contract Interface’, 101 Columbia Law Review (2001) 773, 777 (who distinguish contract from property on the basis that property is a right in rem and binds the rest of the world, compared to a contract which operates on and between named parties); and J E Penner, The Idea of Property in Law, Clarendon Press (1997). Those scholars who have entertained the prospect but emphasised the negative include Stephen A Smith, Contract Theory, Oxford University Press (2004), p. 72; and Stephen Alexander Smith, ‘Towards a Theory of Contract’ in J Horder, ed., Oxford Essays in Jurisprudence: Fourth Series, Oxford University Press (2000), pp.107–129 at 123; E J Weinrib, ‘Punishment and Disgorgement as Contract Remedies’, 78 Chicago-Kent Law Review (2003) 55; Peter Benson, ‘The Unity of Contract Law’ in Peter Benson, ed., The Theory of Contract Law: New Essays, Cambridge University Press (2001), p. 118. 41 Immanuel Kant, The Philosophy of Law: An Exposition of the Fundamental Principles of Jurisprudence as the Science of Right, T & T Clark (1887). 42 Jean-Jacques Rousseau (Judith R Masters, tr., Roger Masters, ed.), On the Social Contract, with the Geneva Manuscript and Political Economy, St Martin’s Press (1978), Book 1, Ch. 4; John Stuart Mill (Gertrude Himmelfarb, ed.), On Liberty, Penguin (1859), Ch. 5. 43 A S Gold, ‘A Property Theory of Contract’, Northwestern University Law Review 103:1 (2009) 1, 3. 44 Ibid, 4, building on the theories of John Locke, ‘The Second Treatise of Government’ in John Locke, Political Writings, Hackett Publishing Company (1993), pp. 13–14; see also p. 14, nn. 59–62 for a discussion of other proponents of self-ownership. 45 Gold, ibid, 4–5.

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Indeed, self-ownership is radical because it precedes and is the basis for all other property rights which may be created by physical or intellectual labour.46 The rights persons have over themselves and their bodies as property is governed by the same general principle that governs all property and makes ordinary property transferable.47 The promisee’s consideration evinces an intention to perform the value of the acquired performance; and the promisee only acquires the right if and once they fulfil the conditional obligation inherent in the promise. The promisee’s right is deserved because it results from the labour they have expended in bringing the conditions of the contract into existence. That individuals possess an inalienable right to transfer their alienable rights is both the foundation and the limit of this approach to contractual obligation. An assignment of rights is illegal  when the rights are not the alienable property of the individual. The assignment is also ineffective unless it attracts That individuals the  consent of, and is taken possession of by, the transferee.48 possess an inalienable right to transfer their The promise is then enforceable by means of these corresponding alienable rights is both the duties and rights arising from the mutual consent of both parties: foundation and the limit of the consent of the promisor to the alienation of their right, the property approach to and  the  consent of the promisee to the appropriation of that contractual obligation. right.49

2.3.1  Property and the reliance theory of contract The contract as property theory is an attempt to counteract the one-sided reliance theory of contract. From the point of view of the promisee’s interests, contractual obligations appear to be best explained by developing a theory which centralises the promisee’s reliance on the promise. Such reliance can be used to explain both the nature of the obligation and the justification for the contract’s enforcement.50 If reliance arguments amount to no more than saying that contractual promises are or should be binding because they are relied upon by one party, they are too thin and too broad. Such a formulation tells us nothing about the merit of the reliance and the right to compensation invoked when the reliance is disappointed. A test for the worthiness of the claim would have to be introduced based on familiar legal standards such as reasonableness, foreseeability or justice51. These in turn are anchored in, and show the contract to reflect, social understandings and 46 See Catherine Valcke, ‘Locke on Property: A Deontological Interpretation’, 12 Harvard Journal of Law and Public Policy (1989) 941, 983, referring to s 27 of the Second Treatise of Government. 47 That right is discussed by William Blackstone, Blackstone’s Commentaries on the Laws of England (facsimile edition with introductions by Stanley N Katz, University of Chicago (1979), Book 1, Ch. 1, p. 134 ‘the third absolute right, inherent in every Englishman, is that of property, which consists in the free use, enjoyment and disposal of all his acquisitions without any control or diminution save only by the laws of the land’; see also Karl Olivecrona, Law as Fact, 2nd ed., Stevens & Sons (1971), p. 290. 48 Peter Benson ‘The Idea of a Public Basis for Justification for Contract’ 33 Osgoode Hall Law Journal 273 at p.296. 49 See P Benson, ‘The Unity of Contract Law’ in P Benson ed., The Theory of Contract Law, Cambridge University Press (2001), p. 129. 50 For a discussion of the historical vicissitudes of reliance theories, see R E Barnett, ‘The Death of Reliance’, Journal of Legal Education 518 (1996), 46; for a substantive consideration of reliance theories, see P S Atiyah, Promises, Morals and Law, Oxford University Press (1983); Grant Gilmore, The Death of Contract, Fuller and Perdue (1974). 51 See Hadley v Baxendale (1854) 9 Ex 341; 156 Eng Rep 145, 151, which limited the extent of promissory liability for consequentialist damages to those which are foreseeable.

Chapter 2

Theories of contract law

norms which inform the courts approach to the central question: ‘is this a promise that should be enforced?’52 The assumption behind a theory based on the promisee’s reliance is that the contract is an unproblematic set of obligations made at a point of time. However, contracts need not be thought of as relational for them to entail observations, understandings and assumptions on both sides, all or some of which may—to varying degrees—enter into the calculation as to whether to enter the contract based on beliefs or assessments as to what it means.53 Within the complex dynamics of contract formation, cases may arise where promises are not explicitly made, but reliance ensues because of the conduct of or representation made by an individual, who may or may not even be cognisant of having made it. Or, reliance may play no part in the enforcement of the contract. If the promisor is liable through no fault or because of no deed of their own, the enforcement of the contract or the payment of compensation for its non-performance will unfairly benefit the promisee. If the point of corrective justice is to correct a wrong, reliance without wrongdoing cannot of its own accord justify a remedy.54 If, as liberal theory maintains, freedom may be either positive (freedom to) or negative (freedom from), then autonomous agents may choose to enter or refuse to enter contracts.55 One party’s reliance on terms cannot simpliciter impose obligations on another without their corresponding consent to be bound by those same obligations.

2.3.2  Remedial action The promisee may sue for expectation damages on the basis—and equal to the value—of the deprivation of the property they have acquired. The two guiding principles providing a framework for the formulation of remedies are the harm and corrective justice principles.

The harm principle Moral theories of contract justify the enforcement of the contract on the basis that so acting realises  a social good embodied in the contract. In a liberal society which values individual autonomy and permits the expression of and protects individual will, the harm principle is enlivened when power (juridical or political) is exercised over individuals only to avoid harm occurring to others. The operative terms of the principle—in particular what constitutes harm, and how to apply  the principle, which requires identifying the point at which the power is to be brought into  effect and to what extent56—are debatable and can be defined from numerous (often conflicting) perspectives.57 However, from the perspective of the contract and the application of R E Barnett, ‘Contract Remedies and Inalienable Rights’, 4 Social Philosophy and Policy 179 (1986). Joseph Raz, The Morality of Freedom, Oxford University Press (1986), pp. 369–370. Charles Fried, Contract As Promise: A Theory of Contractual Obligation, Harvard University Press (1988), p. 10. See Isaiah Berlin, ‘Two Concepts of Liberty’ in Isaiah Berlin, Four Essays on Liberty, Clarendon Press (1969) for the classic formulation of this concept; see also R E Barnett, ‘The Sound of Silence: Default Rules and Contractual Consent’ 78 Virginia law Review (1992) 821, 828. 56 See D Kimel, ‘Remedial Rights and Substantive Rights in Contract Law’, 8 Legal Theory (2002) 313, 332. 57 See Stephen Alexander Smith, ‘Towards a Theory of Contract’ in J Horder, ed., Oxford Essays in Jurisprudence: Fourth Series, Oxford University Press (2000), pp. 107–129, discussing both the utilitarian and rights-based definitions of harm; see also D Kimel, From Promise to Contract: Towards a Liberal Theory of Contract, Hart Publishing (2003), pp. 104–109. 52 53 54 55

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contract law, the relevant harm is the harm that is done to individual rights. Nevertheless, rights are not the only things that may be infringed; nor do all infringements of contracts involve rights.

The corrective justice principle The application of corrective justice to contract situations will depend on the existence of corresponding rights and liabilities.58 Wrongs as between parties are corrected by means of compensation to the extent of the harm or loss suffered by the party that the other party is responsible for. This may be achieved by the return of property or by the payment of a sum equivalent to the value of that property, if that can be calculated. Corrective justice has been viewed as too abstract a concept to apply to contracts and as failing on its own terms to provide the fundamental rights against which to assess the rights and liabilities embodied in the contract, concentrating instead on the secondary duty to repair.59 Distributive justice is concerned not with parties in a relatively closed system, such as a contract, but with the allocation of resources across populations in a society.

Ke y p o in ts for re v ision The contract as a bargain is an objective theory of contract which asserts that the contract’s existence and substance is to be assessed independently of the subjective will and intentions of the parties. Bargaining theory may be used as a theory of contract construction by assuming the parties’ hypothetical consent; however, the gap between hypothetical rational consent and actual consent may be great. Rational bargaining theory has been criticised as unrealistically abstracted from any social basis by commentators who insist that the market is a normative community and that contracts can only be interpreted on the basis of actual beliefs and customs. The theory of contract as promise emphasises individual autonomy and the freely self-imposed obligations and corresponding rights of the parties—these reciprocal rights and obligations coordinate and bind the actions, and expectations of, and potential remedies sought by, the parties. The contract may be viewed in terms of property, in which the parties exercise their inalienable right to transfer title to an alienable right in their possession, including the right of self-ownership to another. Reliance theories of contract are problematic since they leave unanswered questions about whether the reliance is well founded and justified, and the merits of the claim against a disappointed reliance; and because reliance may arise because of the parties’ conduct or other representations outside the structure of an agreement formally entered into. Basing our understanding of the foundation of the contract on the available remedies may involve inconsistencies and contradictions. The basis of remedial action in the harm principle is problematic because not all agree as to what constitutes a harm and when it occurs, and even when the concept is centred on the infringement of individual rights embodied in the contract, damage under the contract may extend beyond harming an individual right. 58 E J Weinrib, ‘Punishment and Disgorgement as Contract Remedies’, 78 Chicago-Kent Law Review (2003) 55, 59–60. 59 Stephen A Smith, Contract Theory, Oxford University Press (2004), p. 147.

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chapter

3

Offer

Chapt e r o v e rv i e w 3.0

Introduction  24

3.1

Offer and acceptance   25

3.2

Offers  26 3.2.1 Is there an offer?   26 3.2.2 The existence of a definite promise   28

3.3

Invitations to treat   29 3.3.1 A framework for invitations to treat   32

3.4

Mere puffery  32

3.5

Different types of contract   36 3.5.1 Unilateral and bilateral contracts   36 3.5.2 Shop sales  36 3.5.3 Auctions  37 3.5.4 Tenders  38 3.5.5 Ticket cases  38

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3.6

Termination of offers   48 3.6.1 Revoking a unilateral contract   49

• 3.0 Introduction A contract is an agreement between two parties which creates legally binding obligations.1 There are six essential elements that are required by the common law for the formation of a contract. These are: (i) (ii) (iii) (iv) (v) (vi)

offer; acceptance; consideration; intention to create legal relations; capacity; and certainty and completeness.

Though there are other doctrines in contract law that will have some bearing upon the formation  of a contract and the enforceability of any obligations, these doctrines of formation are essential and their requirements must be satisfied in order for a binding contract to exist. There are many ways in which a contract can form. The traditional rules of contract law suggest that there is a ‘magical moment of formation’.2 This view of contract law assumes two autonomous parties negotiating on equal terms until they strike a bargain and conclude an agreement.3 At that moment the precise nature of the bargain, which is the contract itself, would be clearly known to both parties. However, this traditional view has come under pressure from two quarters. First, the rules of formation and the assumptions that underpin the traditional view of contracting should not obscure the relevance of the vitiating factors doctrines.4 The assumption that both parties are equal in their status and knowledge has not proven itself to be true, if the history of contract law cases is taken into account. All too frequently there have been instances where one party has enjoyed a significant advantage over the other, or where one party has  laboured under a misapprehension. For example, there are a number of situations in which one party may act to their detriment in reliance on the statements of another, but they may do so in the absence of a binding contract.5 In such cases the law of estoppel—a creature of equity6—may come into play. Further, the rules pertaining to formation cannot be allowed to overshadow the legal importance of those activities that take place prior to a bargain

1 Clarke v Dunraven [1897] AC 59; Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; Harvey v Facey [1893] AC 552; Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. 2 E Mensch, ‘Freedom of Contract as Ideology’, 33 Stanford Law Review (1981) 753, 760. 3 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, LexisNexis (2008), p. 95. 4 See Chapters 16, 18, 19 and 20. 5 See for example Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 6 See Chapter 9. The doctrines of equity were developed in the Courts of Chancery to ameliorate the harsh operation of the doctrines of the common law: see Hon Justice Michael Kirby AC CMG, ‘Equity’s Australian Isolationism,’ (2008) 8(2) QUTLJ J 444. An electronic version of this paper can be accessed here: www.austlii.edu. au/au/journals/QUTLawJ Jl/2008/25.pdf

Chapter 3

Offer

being  struck. A contract procured through undue influence, for example, will be liable to be set aside at the petition of the affected party. There are well-established doctrines relating to estoppel, undue influence, misleading and deceptive conduct, misrepresentation, duress and unconscionable dealings which can affect the rights of parties regardless of the satisfaction of the requirements of the doctrine of formation. These doctrines of vitiating factors are all triggered by events that take place prior to contract formation. Second, notwithstanding the application of the vitiating factors doctrines, there are other more basic transactions that inadvertently challenge the common law’s preconceived notions of formation. This second challenge to the orthodox model of formation arises from the fact that there are a number of mundane everyday transactions where a contract is formed without any interpersonal interaction. In these instances there is no bargaining and no magical ‘meeting of the minds’. For example, buying a train ticket from an automated machine, buying a drink from a vending machine or entering a pay car park, are all instances in which a contract forms without any direct human communication.7 Other examples of contracts forming in non-traditional ways are the purchasing of plane tickets over the internet and click-wrap licences.8 There are alternative views to the traditional model.9 In this context it is pertinent to consider the view of Lord Denning MR in Gibson v Manchester City Council:10 To my mind it is a mistake to think that all contracts can be analysed in the form of offer and acceptance … You should look at the correspondence as a whole and at the conduct of the parties.11

What Lord Denning suggested was a ‘global’ approach to contract formation: all the relevant events would need to be taken into account, rather than a simple act of offer and a corresponding act of acceptance. There is some support for this approach in Australian jurisprudence.12 However, despite the challenges that it faces, the traditional notion of contract formation still retains its primacy within the common law.13

• 3.1 Offer and acceptance Within the agreement requirement there are two sub-elements: offer and acceptance. These two doctrines are interrelated with respect to the role that they play in formation—one is more or less redundant without the other. That is to say: where some dispute arises under a putative contract, unless there has been an acceptance as a matter of fact, there can be no need to go back and consider whether the legal formalities of offer were satisfied. In the remainder of this chapter we are concerned with what constitutes an offer. Chapter 4 addresses the question of what constitutes an acceptance. Though the concepts of offer and acceptance might seem simple enough, there are a number of legal issues that can arise in relation to each doctrine. Put simply, an offer sets out

7 8 9 10 11 12 13

Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163. Pro CD Inc v Zeidenberg 86 F3d 1447 (1996). See Chapter 2. [1978] 1 WLR 520. Ibid, 523. Vroon BV v Fosters Brewing [1994] 2 VR 32. Ibid, 79–83.

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the terms of a bargain. However, the demarcation line between an offer and an invitation to treat (see below) is not always clear. In addition, there may be a question under the law as to when an offer can be made.14 Our traditional model suggests that one party makes the offer and the other party accepts, and it is the acceptance of the offer that leads to the formation of a contract between the parties.15 Notwithstanding, there may be issues over what in fact constitutes an effective acceptance. There may also be issues that arise when a party seeks to revoke an offer or an acceptance. Note that an offer can be withdrawn at any time before acceptance.16 Put simply, an offer Offer and acceptance are important for our purposes because sets out the terms of a their occurrence signals that there is a meeting of the minds and bargain. that mutually binding obligations have been formed.

• 3.2 Offers An offer is essentially a statement of the terms on which the offeror is prepared to be contractually bound.17 Normally, an offer will be constituted by a person offering to do something or to refrain from doing something. But the corollary will be that the person to whom the offer is made—the offeree—will also agree to do something or to refrain from doing something. An offer can be made expressly or it can be implied from conduct. The offer must also be promissory; that is, the offeror must intend that it can be converted into a legally binding obligation by the act of acceptance.18 Consider the following scenario: Jacek promises to hire Dennis as a sales assistant with a salary of $45 000. In return, Dennis agrees to work for Jacek. In this scenario, Jacek is the offeror and Dennis is the offeree. There is a mutual exchange of promises: Jacek is promising Dennis employment and compensation, while Dennis is promising Jacek his labour. An offer is essentially a statement of the terms on which the offeror is prepared to be contractually bound. It can be made expressly or it can be implied from conduct.

3.2.1  Is there an offer? The existence of the offer itself may be in dispute under certain circumstances. In Australian Woollen Mills Pty Ltd v Commonwealth,19 the issue was whether the ‘offer’ upon which the plaintiffs sought to rely was in fact an offer. In that case, the Australian Government had announced that it would subsidise the purchase of raw wool by wool manufacturers and had sent a series of letters to the manufacturers. The terms of the policy scheme set out in the letters would have reduced the cost of the manufacturers’ wool purchases. The scheme was discontinued. At that time, the plaintiff had purchased wool but had not yet received a subsidy. The plaintiff sued the Government for breach of contract. 14 See Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795, which confirmed the view that a customer in a store makes an offer under the law when they present goods at the checkout counter. 15 See for example Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93. 16 Shuey, Executor v United States 92 US 73 (1875). 17 See Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd [2006] VSC 42. 18 Gibson v Manchester City Council [1978] 1 WLR 520; Storer v Manchester City Council [1974] 3 All ER 824. 19 (1954) 93 CLR 424.

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Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 The High Court at 456–457: The contracts alleged by the plaintiff are pleaded in pars. 3 and 4a of the statement of claim. Paragraph 3 alleges that ‘At or prior to the commencement of the wool season 1946–1947 the defendant promised the plaintiff that in consideration that the plaintiff would during that season purchase wool at auction and otherwise than at auction for domestic consumption in Australia the defendant would pay to the plaintiff a subsidy’. The alleged mode of determining the amount of the subsidy is then set out, but this may be put on one side for the moment. Paragraph 4a contains an identical allegation in respect of the wool season 1947–1948. In each case there follows an allegation that the plaintiff made purchases of wool from time to time ‘in pursuance of the said agreement’. The contract put forward by the plaintiff is thus seen to be of that type which is commonly said to be constituted by an offer of a promise for an act, the offer being accepted by the doing of the act. Such contracts are sometimes described as ‘unilateral’ contracts, but the term is open to criticism on the ground that it is unscientific and misleading. There must of necessity be two parties to a contractual obligation. The position in such cases is simply that the consideration on the part of the offeree is completely executed by the doing of the very thing which constitutes acceptance of the offer. A ­well-known example in which a contract was held to have been made is to be found in Carlill v Carbolic Smokeball Co [1892] EWCA Civ 1; (1893) 1 QB 256, which has been recently referred to as ‘that immortal case on unilateral contract’ ( J C Smith, Law Quarterly Review, vol. 69, p. 107). In cases of this class it is necessary, in order that a contract may be established, that it should be made to appear that the statement or announcement which is relied on as a promise was really offered as consideration for the doing of the act, and that the act was really done in consideration of a potential promise inherent in the statement or announcement. Between the statement or announcement, which is put forward as an offer capable of acceptance by the doing of an act, and the act which is put forward as the executed consideration for the alleged promise, there must subsist, so to speak, the relation of a quid pro quo … The position has been stated above in terms of the technical doctrine of consideration, and this is, in our opinion, the correct way of stating it. But it may be referred to a principle which is fundamental to any conception of contract. It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty. In such cases as the present, therefore, in order that a contract may be created by offer and acceptance, it is necessary that what is alleged to be an offer should have been intended to give rise, on the doing of the act, to an obligation. The intention must, of course, be judged in the light of the principle laid down in Freeman v Cooke (1848) 2 Ex 654, at p. 663 [1848] EngR 506; (154 ER 652, at p. 656), but, in the absence of such an intention, actual or imputed, the alleged ‘offer’ cannot lead to a contract: there is, indeed, in such a case no true ‘offer’.

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In Australian Woollen Mills the High Court held that there was no contract.20 The High Court formed the view that the facts showed that the announcement of the subsidy could be properly characterised as a government policy and, as such, it was not an offer capable of acceptance.21 In the extract above, the judgment pays particular attention to the doctrine of consideration, which we will cover in Chapter 5. However, notwithstanding the doctrine of consideration, the issue before the Court could have been resolved on the issue of offer alone. As the High Court stated: ‘it is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty’.22 The mere announcement of a policy did not signal the assumption of a duty. It was merely a sign of intent, which could be displaced by later events. As the Court stated: ‘in the absence of such an intention, actual or imputed, the alleged “offer” cannot lead to a contract: there is, indeed, in such a case no true “offer”’.23

3.2.2  The existence of a definite promise The High Court’s decision in Australian Woollen Mills v Commonwealth24 demonstrates that under the common law an offer requires that there must be a firm promise to do something or to not do something. For example, an offer is a different concept to that of the mere supply of information. Consider the case of Harvey v Facey.25 This case is widely known as the Bumper Hall Pen case, in reference to the name of the farm at issue in the dispute. In Harvey v Facey, the putative offeree, Harvey, sent a telegraph to the vendor, Facey. The telegraph read: ‘Will you sell us Bumper Hall Pen?’ Facey responded with: ‘Lowest price for Bumper Hall Pen, £900.’ Harvey then said that he agreed to buy the farm at that price. Facey demurred, saying that there was no contract. The matter went to the Privy Council, where the question to be decided was whether Facey’s telegram constituted an offer. The Privy Council ruled that it did not and that the supply of information about the price of a farm was not an offer. review question Does the decision in Harvey v Facey hold true in all circumstances? What then is the effect of listing prices in a Woolworths catalogue? What about placing a price next to goods in a shop window, or even in a supermarket?

In Pattinson v Mann26 it was suggested that there could be circumstances where providing information as to price could be considered an offer, but it would depend upon the context and in particular the types of things that one would normally expect to be present in a negotiation.27 With regard to a Woolworths catalogue and the placing of prices in a shop window, in the questions above, it may be said that there is no offer per se. As will be discussed below, in such 20 21 22 23 24 25 26 27

(1954) 92 CLR 424, 460. Ibid, 461. Ibid, 457. Ibid, 457. Ibid. [1893] AC 552. (1975) 13 SASR 34. Ibid, 37.

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situations there is merely an invitation to treat.28 The offer is made by the customer when they approach the counter and offer to pay for the goods.29 The offer is then accepted by the store owner. To hold otherwise would be to suggest that the customer is in a binding contract with the store owner at the very moment that they place an item in their shopping basket. This would mean that a customer could not change their mind about a good and place it back on the shelf without being in breach of contract.30 An element of reasonableness must bear down upon the parameters of any offer. The limitations imposed by reasonableness are evident when one considers the case of Grainger & Sons  v Gough,31 where Lord Herschell stated that the transmission of a wine price list did not amount to an offer to supply an unlimited quality of wine at the listed price.32 If it did, then the merchant would soon be unable to satisfy a number of binding contracts.33

• 3.3 Invitations to treat Clearly, intention is of paramount importance. The offeror must intend that what they are putting forward can be converted into a binding obligation.34 Sometimes, what may appear to be an offer will not be an offer at all because it does not expressly or impliedly contain a definite declaration or promise, by the offeror, that it will be performed in the event of an acceptance.35 In other words, if the other party offers to deal on those terms, the first party might be willing to agree, but they are not proposing to be immediately bound by the terms of the invitation. This is an invitation to treat, it is not an offer; that is, the first party is inviting others to make an offer which would then be capable of acceptance by the first party. An invitation to treat is, therefore, a mere approach to others which instigates the dealing process.36 It might ultimately lead to an offer and an acceptance, but it is not the offer itself. It might be helpful to consider for a moment why this rule exists. If there were no such rule in contract law, it might be inordinately difficult for ordinary commerce to take place. Businesses need the freedom to approach each other to seek prospective trade. Yet it would be too onerous to require them to frame every such approach as a contractual offer or to hold them to those An invitation to treat terms where they are merely seeking to gauge interest. As such, is a mere approach to others which instigates the rule has the capacity to facilitate the normal economic and the dealing process. It commercial life of a society. It would be difficult for commerce to might ultimately lead to an operate without this rule. offer and an acceptance, However, what may appear to be an invitation to treat can be but it is not the offer itself. an offer if it is specific enough and if it shows the intention to be

28 See Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795. 29 Pharmaceutical Society of Great Britain, ibid; see also Fisher v Bell [1961] 1 QB 394. 30 Such an outcome would self-evidently be absurd. 31 [1896] AC 325. 32 Ibid, 334. 33 Ibid, 334. 34 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. 35 See Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424. 36 Lefkowitz v Great Minneapolis Surplus Store 86 NW 2d 689 (Minn 1957).

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an offer;37 that is, if the intention to be bound is present and the terms are suitably capable of being defined as an offer, then a statement in an advertisement (for example) will not be regarded as an invitation to treat. It will instead be considered to be an offer. The dividing line between an offer and an invitation to treat is best illustrated in the seminal case of Carlill v Carbolic Smoke Ball Co.38 The Carbolic Smoke Ball Co manufactured an anti-cold and flu preparation known as a carbolic smoke ball. They advertised a £100 reward for anyone who contracted a cold or flu after taking their smoke ball according to the printed directions. The advertisement stated that they had deposited £1000 with a bank to show that they were genuine. Mrs Carlill bought and used the smoke ball as directed, but still contracted influenza. She then sued the company. The company pleaded in its defence that the advertisement was not sufficiently definite, that it was not a true offer, that it was unreasonable to expect them to pay and that the offer had to be made to a specific person or class of persons. The Court of Appeal held in Mrs Carlill’s favour. An offer could be made to the world at large provided that the offeror had intended this to occur. The company was not in a contract with everybody—just with those who stepped forward and accepted the offer. The terms of the offer were quite specific. The company intended to pay £100 to anybody who used the ball and still caught a cold. Why else would they have deposited the £1000? Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 Lindley LJ at 261–263: I will begin by referring to two points which were raised in the Court below. I refer to them simply for the purpose of dismissing them. First, it is said no action will lie upon this contract because it is a policy. You have only to look at the advertisement to dismiss that suggestion. Then it was said that it is a bet. Hawkins, J, came to the conclusion that nobody ever dreamt of a bet, and that the transaction had nothing whatever in common with a bet. I so entirely agree with him that I pass over this contention also as not worth serious attention. Then, what is left? The first observation I will make is that we are not dealing with any inference of fact. We are dealing with an express promise to pay £100 in certain events. Read  the advertisement how you will, and twist it about as you will, here is a distinct promise  expressed in language which is perfectly unmistakable—‘£100 reward will be paid  by the Carbolic Smoke Ball Company to any person who contracts the influenza after  having used the ball three times daily for two weeks according to the printed directions supplied with each ball.’ We must first consider whether this was intended to be a promise at all, or whether it was a mere puff which meant nothing. Was it a mere puff ? My answer to that question is No, and I base my answer upon this passage: ‘£1000 is deposited with the Alliance Bank, shewing our sincerity in the matter.’ Now, for what was that money deposited or that

37 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. 38 Ibid.

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statement made except to negative the suggestion that this was a mere puff and meant nothing at all? The deposit is called in aid by the advertiser as proof of his sincerity in the matter—that is, the sincerity of his promise to pay this £100 in the event which he has specified. I say this for the purpose of giving point to the observation that we are not inferring a promise; there is the promise, as plain as words can make it. Then it is contended that it is not binding. In the first place, it is said that it is not made with anybody in particular. Now that point is common to the words of this advertisement and to the words of all other advertisements offering rewards. They are offers to anybody who performs the conditions named in the advertisement, and anybody who does perform the condition accepts the offer. In point of law this advertisement is an offer to pay £100 to anybody who will perform these conditions, and the performance of the conditions is the acceptance of the offer … But then it is said, ‘Supposing that the performance of the conditions is an acceptance of the offer, that acceptance ought to have been notified.’ Unquestionably, as a general proposition, when an offer is made, it is necessary in order to make a binding contract, not only that it should be accepted, but that the acceptance should be notified. But is that so in cases of this kind? I apprehend that they are an exception to that rule, or, if not an exception, they are open to the observation that the notification of the acceptance need not precede the performance. This offer is a continuing offer. It was never revoked, and if notice of acceptance is required—which I doubt very much, for I rather think the true view is that which was expressed and explained by Lord Blackburn in the case of Brogden v Metropolitan Ry Co 2 App Cas 666—if notice of acceptance is required, the person who makes the offer gets the notice of acceptance contemporaneously with his notice of the performance of the condition. If he gets notice of the acceptance before his offer is revoked, that in principle is all you want. I, however, think that the true view, in a case of this kind, is that the person who makes the offer shews by his language and from the nature of the transaction that he does not expect and does not require notice of the acceptance apart from notice of the performance.

review questions What was the offer in Carlill? How was the offer made? Why wasn’t direct notification of acceptance required? How is Carlill different from other offer and acceptance scenarios? How do we read Carlill together with Australian Woollen Mills?39 Are the two judgments in fact contradictory? Can an advertisement be mere puffery? 2 Consider the broader policy implications that arise out of the Carlill decision. In a sense it would appear that we have a clear problem with invitations to treat because the people who write advertisements—marketers—are not lawyers and neither are most business people. But they might 1 a b c d e

39 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424, discussed above.

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be tempted to say more or less anything to make a sale. What should the law reasonably do? If you read back through Carlill, and consider it in its historical context of influenza pandemics and the  absence of trade practices legislation and other consumer protection, is it possible that the Court was using contract law to protect consumers? Is this a desirable outcome?

3.3.1  A framework for invitations to treat Having surveyed some of the jurisprudence relevant to offers and invitations to treat, we can create a framework to distinguish between the two. We should look at: (i) the terminology used by the offeror; (ii) any limitation imposed on who can accept; and (iii) any limitation imposed on what is being offered. First, if the terms of the putative offer are ambiguous, then if possible it would be useful to look at the agreement between the parties,40 which could remove the ambiguity. Second, in making an offer, the offeror may limit the possible acceptors, for example an advertisement might say that a sale is available to the first 20 customers. The failure to impose a limitation—where a limitation is desired by the offeror and where the offer is to the world at large, and where reasonableness itself does not impose a limitation as in Grainger & Sons v Gough41— may mean that the offeror is bound to a party that they did not contemplate. This point is aptly illustrated by the case of Lefkowitz v Great Minneapolis Surplus Store.42 In Lefkowitz a man tried to purchase a woman’s mink coat from a clothing store, which had advertised a sale of these coats. He sued when he was refused service. The plaintiff won because he was not excluded from the class of offerees in the advertisement (note that while the advertisement did not specify a class of offerees, the store’s ‘house rule’ was that the offer was for women only). Lefkowitz is a case where the plaintiff belonged to a class of persons not specifically excluded from being an offeree, though the context suggested that the offeror intended the exclusion. Reasonable limitations can also be applied to what is being offered, for example where stock or other such matters are concerned. In McMahon v Gilberd & Co Ltd,43 despite the absence of express words of limitation, it was held that an offer was limited to when the stock offered ran out.

• 3.4 Mere puffery It is pertinent to consider the circumstances that might support statements being cast as ‘mere puffery’. By puffery, we mean statements that induce a contract but which do not of themselves constitute binding offers. These are statements that are so far-fetched that no reasonable person would believe them. In this context it is useful to consider the case of Leonard v Pepsico Inc.44 A  soft drink company, Pepsico, offered prizes obtainable upon acquiring ‘Pepsi Points’, which were accumulated by drinking Pepsi drinks. In one television commercial, a teenager appeared to

40 41 42 43 44

Massey v Crown Life Insurance Co (1978) 1 WLR 676. [1896] AC 325, discussed above. 86 NW 2d 689 (Minn 1957). [1955] NZLR 1206. 88 F Supp 2d (SDNY 1999).

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arrive at school in a Harrier Fighter Jet, with the tagline reading: ‘Harrier Fighter 7 000 000 Pepsi-Points’. Somehow, the plaintiff acquired the requisite Pepsi Points and claimed the jet. The District  Court found that no reasonable person would have believed that the fighter jet would be a prize.45 There is also the small matter of where the plaintiff was proposing to park the jet. Regrettably, the District Court neglected to address this salient point!

Offer

By puffery, we mean statements that induce a contract but which do not of themselves constitute binding offers. These are statements that are so far-fetched that no reasonable person would believe them.

Leonard v Pepsico Inc 88 F Supp 2d (SDNY 1999) K Wood [District Judge] at 117–128: Because whether the television commercial constituted an offer is the central question in this case, the Court will describe the commercial in detail. The commercial opens upon an idyllic, suburban morning, where the chirping of birds in sun-dappled trees welcomes a paperboy on his morning route. As the newspaper hits the stoop of a conventional two-story house, the tattoo of a military drum introduces the subtitle, ‘MONDAY 7:58 AM.’ The stirring strains of a martial air mark the appearance of a well-coiffed teenager preparing to leave for school, dressed in a shirt emblazoned with the Pepsi logo, a red- white-and-blue ball. While the teenager confidently preens, the military drumroll again sounds as the subtitle ‘T-SHIRT 75 PEPSI POINTS’ scrolls across the screen. Bursting from his room, the teenager strides down the  hallway wearing a leather jacket. The drumroll sounds again, as the subtitle ‘LEATHER JACKET 1450 PEPSI POINTS’ appears. The teenager opens the door of his house and,  unfazed by the glare of the early morning sunshine, puts on a pair of sunglasses. The drumroll then accompanies the subtitle ‘SHADES 175 PEPSI POINTS.’ A voiceover then intones, ‘Introducing the new Pepsi Stuff catalog,’ as the camera focuses on the cover of the catalog. The scene then shifts to three young boys sitting in front of a high school building. The boy in the middle is intent on his Pepsi Stuff Catalog, while the boys on either side are each drinking Pepsi. The three boys gaze in awe at an object rushing overhead, as the military march builds to a crescendo. The Harrier Jet is not yet visible, but the observer senses the presence of a mighty plane as the extreme winds generated by its flight create a paper maelstrom in a classroom devoted to an otherwise dull physics lesson. Finally, the Harrier Jet swings into view and lands by the side of the school building, next to a bicycle rack. Several students run for cover, and the velocity of the wind strips one hapless faculty member down to his underwear. While the faculty member is being deprived of his dignity, the voiceover announces: ‘Now the more Pepsi you drink, the more great stuff you’re gonna get.’ The teenager opens the cockpit of the fighter and can be seen, helmetless, holding a Pepsi. ‘[L]ooking very pleased with himself,’ … the teenager exclaims, ‘Sure beats the bus,’ and chortles. The military drumroll sounds a final time, as the following words appear: ‘HARRIER FIGHTER 7 000 000 PEPSI POINTS.’ A few seconds later, the following

45 Ibid, 126.

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appears in more stylized script: ‘Drink Pepsi—Get Stuff.’ With that message, the music and the commercial end with a triumphant flourish. Inspired by this commercial, plaintiff set out to obtain a Harrier Jet. Plaintiff explains that he is ‘typical of the “Pepsi Generation” … he is young, has an adventurous spirit, and the notion of obtaining a Harrier Jet appealed to him enormously.’ The rear foldout pages of the Catalog contain directions for redeeming Pepsi Points for merchandise. These directions note that merchandise may be ordered ‘only’ with the original Order Form. The Catalog notes that in the event that a consumer lacks enough Pepsi Points to obtain a desired item, additional Pepsi Points may be purchased for ten cents each; however, at least fifteen original Pepsi Points must accompany each order … [The plaintiff raised the requisite points and submitted an order form for ‘1 Harrier Jet’.] The general rule is that an advertisement does not constitute an offer. The Restatement (Second) of Contracts explains that: Advertisements of goods by display, sign, handbill, newspaper, radio or television are not ordinarily intended or understood as offers to sell. The same is true of catalogues, price lists and circulars, even though the terms of suggested bargains may be stated in some detail. It is of course possible to make an offer by an advertisement directed to the general public (see § 29), but there must ordinarily be some language of commitment or some invitation to take action without further communication.

… An advertisement is not transformed into an enforceable offer merely by a potential offeree’s expression of willingness to accept the offer through, among other means, completion of an order form. In Mesaros v United States, 845 F2d 1576 (FedCir1988), for example, the plaintiffs sued the United States Mint for failure to deliver a number of Statue of Liberty commemorative coins that they had ordered. When demand for the coins proved unexpectedly robust, a number of individuals who had sent in their orders in a timely fashion were left empty-handed. See id at 1578–80. The court began by noting the ‘well-established’ rule that advertisements and order forms are ‘mere notices and solicitations for offers which create no power of acceptance in the recipient.’ Id at 1580; see also Foremost Pro Color, Inc v Eastman Kodak Co, 703 F2d 534, 538–39 (9th Cir1983) (‘The  weight of authority is that purchase orders such as those at issue here are not enforceable contracts until they are accepted by the seller.’) … The exception to the rule that advertisements do not create any power of acceptance in potential offerees is where the advertisement is ‘clear, definite, and explicit, and leaves nothing open for negotiation,’ in that circumstance, ‘it constitutes an offer, acceptance of which will complete the contract.’ Lefkowitz v Great Minneapolis Surplus Store, 251 Minn 188, 86 NW2d 689, 691 (1957) … The present case is distinguishable from Lefkowitz. First, the commercial cannot be regarded in itself as sufficiently definite, because it specifically reserved the details of the offer to a separate writing, the Catalog. The commercial itself made no mention of the steps a potential offeree would be required to take to accept the alleged offer of a Harrier Jet. The advertisement in Lefkowitz, in contrast, ‘identified the person who could accept.’ Corbin, supra, § 2.4, at 119. See generally United States v Braunstein, 75 FSupp. 137, 139 (SDNY1947) (‘Greater precision of expression may be required, and less help from

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the court given, when the parties are merely at the threshold of a contract.’); Farnsworth, supra, at 239 (‘The fact that a proposal is very detailed suggests that it is an offer, while omission of many terms suggests that it is not.’) Second, even if the Catalog had included a Harrier Jet among the items that could be obtained by redemption of Pepsi Points, the advertisement of a Harrier Jet by both television commercial and catalog would still not constitute an offer. As the Mesaros court explained, the absence of any words of limitation such as ‘first come, first served,’ renders the alleged offer sufficiently indefinite that no contract could be formed. See Mesaros, 845 F2d at 1581. ‘A customer would not usually have reason to believe that the shopkeeper intended exposure to the risk of a multitude of acceptances resulting in a number of contracts exceeding the shopkeeper’s inventory.’ Farnsworth, supra, at 242. There was no such danger in Lefkowitz, owing to the limitation ‘first come, first served.’ The Court finds, in sum, that the Harrier Jet commercial was merely an advertisement. … Plaintiff’s understanding of the commercial as an offer must also be rejected because the Court finds that no objective person could reasonably have concluded that the commercial actually offered consumers a Harrier Jet … In evaluating the commercial, the Court must not consider defendant’s subjective intent in making the commercial, or plaintiff ’s subjective view of what the commercial offered, but what an objective, reasonable person would have understood the commercial to convey … If it is clear that an offer was not serious, then no offer has been made … An obvious joke, of course, would not give rise to a contract. See, eg, Graves v Northern NY Pub Co, 260 AD 900, 22 NYS2d 537 (1940) (dismissing claim to offer of $1000, which appeared in the ‘joke column’ of the newspaper, to any person who could provide a commonly available phone number). On the other hand, if there is no indication that the offer is ‘evidently in jest,’ and that an objective, reasonable person would find that the offer was serious, then there may be a valid offer … The question of puffery aside, on a literal view of the matter, the terms in the advertisement in Leonard v Pepsico were clear and definite enough to almost suggest that there was an offer. In his judgment, however, Judge Wood noted the general principle that an advertisement will not usually constitute an offer unless it is ‘clear, definite and explicit, and leaves nothing open for negotiation’.46 Leonard v Pepsico might also be seen as an application of the reasonableness principle to the concept of an offer in a context other than that of the availability of stock. review questions 1 Consider how Judge Wood arrived at her conclusion in Pepsico. What were the steps that she took in determining that Pepsico was not bound to provide the plaintiff with a Harrier Fighter Jet? 2 Imagine that I placed an advertisement in my shop window that stated: ‘Our home-made lemonade is the most amazing soft drink that you will ever taste. Money-back guarantee if it disappoints you.’ What would the effect of this advertisement be under the law? What should it be?

46 Ibid, 691.

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• 3.5 Different types of contracts 3.5.1  Unilateral and bilateral contracts A unilateral contract is one which the offeree accepts by performing their side of the bargain. The High Court in Australian Woollen Mills v Commonwealth47 stated: ‘The consideration on the part of the offeree is completely executed by the doing of the very thing which constitutes acceptance of the offer.’ There must be two parties to a contract—so the term ‘unilateral contract’ is a slight misnomer. But what it signifies is that because one party has performed their side of the bargain at the time of contract formation, it is only ever the other party that is under an obligation to perform. A bilateral contract is different to a unilateral contract because it is formed by the mutual exchange of promises. At the time of formation, the obligations of neither party have been performed. The obligations of both are executory at this point. In a unilateral contract, only one party’s obligations are executory.

3.5.2  Shop sales The display of goods in a shop is an invitation to treat, not an offer. In Fisher v Bell48 it was held that the display of a flick-knife in a shop window was not an ‘offering’ of the knife for sale. Had it been an offer, then a statutory offence would have been committed. In the case of Pharmaceutical Society of Great Britain v Boots Cash Chemists49 the issue in dispute was whether Boots, a self-service pharmacy, had contravened legislation that provided certain drugs could be sold to the public only under the supervision of a pharmacist. Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401 Somervell LJ at 405: The point which is taken by the plaintiffs is this. It is suggested that the purchase is complete if and when a customer going round the shelves in this shop of the defendants takes an article and puts it in the receptacle which he or she is carrying, and, therefore, when the customer comes to the pay desk, the registered pharmacist, even if he is so minded, has no power to say: ‘This drug ought not to be sold to this customer.’ I agree with the Lord Chief Justice in everything he said on the matter, but I will put it shortly in my own words. Whether the plaintiffs’ contention is right depends on what are the legal implications of the arrangements in this shop. Is the invitation which is made to the customer to be regarded as an offer which is completed so that both sides are bound when the article is put into the receptacle, or is it to be regarded as a more organised way of doing what is already done in many types of shops—and a bookseller is, perhaps, the best example—namely, enabling customers to have free access to what is in the shop, to look at the different articles, and then, ultimately, having taken the one which they wish to

47 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424, 456. 48 [1961] 1 QB 394. 49 [1953] 1 QB 401.

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buy, to come to the assistant and say: ‘I want this’? Generally speaking, the assistant will say: ‘that is all right’, the money passes, and the transaction is completed. I agree entirely with what the Lord Chief Justice says and the reasons he gives for his conclusion that in the case of the ordinary shop, although goods are displayed and it is intended that customers should go and choose what they want, the contract is not completed until the customer has indicated the article which he needs and the shopkeeper or someone on his behalf accepts that offer. Not till then is the contract completed, and, that being the normal position, I can see no reason for drawing any different inference from the arrangements which were made in the present case.

The crucial issue in Boots Cash Chemists was whether the offer took place at the counter or at some other point. The Court of Appeal decided that the offer was made by the customer at the counter, which was the point of sale. This meant that Boots in fact complied with the relevant legislation. In Goodwin’s of Newton Pty Ltd v Gurrey,50 however, it was held that goods were offered for sale in contravention of the Early Closing Act 1926 (SA), despite the fact that their display was no more than an invitation to treat. The particular circumstances of Goodwin’s case fitted more closely with that of an offer from the vendor. In Goodwin’s, customers were shown display sets which were not for sale and were also given a catalogue with fixed prices and information. These facts were more akin to an offer than to an invitation to treat. In Wallace v Broadribb51 the Court suggested that the statutory term ‘offer to supply’ should be accorded its ordinary meaning. This suggests that the term ‘offer’ should be interpreted one way in relation to contract law and in another, more ordinary, way in the context of fair trading legislation.

3.5.3  Auctions An auction will usually be characterised as an invitation to treat.52 In an auction the auctioneer invites offers and can accept a bid. What is happening is that the auctioneer is facilitating offers from the people who are present at the auction. There can then be no claim for breach of contract if an auction is cancelled, because any contract would exist only if the auction was held and the offer from the relevant bidder was accepted.53 Furthermore, though this is a more contentious point, the auctioneer does not have to sell to the highest bidder.54 In AGC v McWhirter 55 the holding of an auction without a reserve was not an offer to sell to the highest bidder. Also, a bidder can withdraw before their bid is accepted.56 Note however that there is a difference between the Australian and UK approaches to auctions without a reserve.

50 51 52 53 54 55 56

[1959] SASR 295. (1985) 55 ALR 737. British Car Auctions Ltd v Wright [1972] 1 WLR 1591. Harris v Nickerson (1873) LR 8 QB 286. AGC v McWhirter (1977) 1 BPR 9454. Ibid. Ibid; see also Payne v Cave (1789) 3 TR 148.

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In  Barry  v  Davies57 an English court held that an auction without a reserve meant that the auctioneer was bound to accept the highest bid. This position is obviously different to that of the New South Wales Supreme Court in AGC v McWhirter.

3.5.4  Tenders A contract can be formed through a tender process.58 An invitation to tender is an invitation to treat; however, the terms of the tender process can form a binding contract. In Harvela Investments v Royal Trust Co of Canada59 a letter regarding the purchase of shares was sent out by a vendor to two companies. The letter stated that ‘we bind ourselves to accept’ the ‘highest offer’. Harvela’s tender offered to purchase the shares for $2.175m, whereas the other tenderer, Outerbridge, offered $2.1m. However, the vendor accepted Outerbridge’s tender. The Court held that the letter inviting the tenders was an offer which could be accepted by the highest bidder. The tenders were not ‘offers’ in terms of contract law; they were potential acceptances. In Hughes Aircraft Systems v Airservices Australia,60 Finn J held that a tender process was governed by two separate process contracts. The first contract was an agreement between the tenderee, the Civil Aviation Authority, and two tenderers, to engage in a tender process. The second contract concerned the rules of the tender process. What the decisions in Harvela and Hughes suggest is that a tender inevitably involves the existence of two contracting processes. One is a contract concerning how the tender process will take place and the other is the ultimate contract between the parties.

3.5.5  Ticket cases Ticket cases are important because they illustrate the limits of the modern offer–acceptance model. In this context the reasoning derived from these cases, notably the 1975 case of MacRobertson Miller Airline Services v Commissioner of State Taxation (WA),61 can be applied to and contrasted with many modern ticketing situations and scenarios, and provide us with an idea of how a modern Australian court might interpret recent phenomenon such as click-wrap licences. Offer and acceptance tend to be concerned with ‘when’ rather than ‘whether’ a contract has formed. Normally, a ticket containing contractual terms is issued after the fare has been paid. It would appear that the contract is formed at the point prior to issue, but the courts have regarded the issuing of a ticket with conditions as an offer which the passenger can accept or reject. The passenger accepts by presenting themselves for travel. At issue in MacRobertson Miller was whether the airline ticket issued was a contract, in which case it would have been liable to stamp duty. The High Court unanimously held that the ticket was an offer, not a contract. review question Read the following extracts from the decisions of Barwick CJ and Stephen J. How do they arrive at their respective decisions? In which ways do their decisions differ or correspond?

57 58 59 60 61

[2000] 1 WLR 1962. Hughes Aircraft Systems v Airservices Australia (1997) 76 FLR 151. [1986] 1 AC 207. (1997) 76 FLR 151. (1975) 133 CLR 125.

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MacRobertson Miller Airline Services v Commissioner of State Taxation ( WA) (1975) 133 CLR 125 Barwick CJ at 132: It is, in my opinion, clear that the issuing airline operator does not by the terms of the ticket assume or offer to assume any obligation to carry the intending passenger. Clauses 2 and 5 made this particularly clear. The case is not, in my opinion, one in which an obligation is assumed or an offer of an obligation made from or upon which obligations, exemptions or limitations are stipulated. The exemption of the ticket in this case fully occupies the whole area of possible obligation, leaving no room for the existence of a contract of carriage. [133] In my opinion, the proper legal analysis of the situation which arises on the making of a reservation for a seat upon a flight, the payment of the fare appropriate to that flight and the issue of a ticket as in this case, is that if, without any antecedent promise to do so, the airline operator in fact conveys the passenger in accordance with the reservation or any variant of it permissible under the terms of carriage indorsed on the ticket, the airline operator will have earned the fare which has been prepaid and be entitled to retain it: otherwise the amount which has been prepaid against the possibility of such carriage will be refunded. But if, in any case, the described carriage eventuates it shall be upon the indorsed terms of carriage. To this statement there is a possible qualification, namely, if the airline operator has been able, ready and willing to carry the passenger in accordance with the particulars on the ticket and the intending passenger has not presented himself in due time at the airline traffic office at the designated airport, the airline operator may claim to have earned the fare. In general, therefore, the entitlement of the airline company to retain the prepaid fare is dependent on the actual performance of carriage. The situation is an example of the payment of a reward for an act performed at request with no antecedent promise by the person performing the act to do so. The terms of carriage are akin to the terms of the prospectus in Edgar v Blick [1814] EngR 53; (1816) 1 Stark 464 (171 ER 531), and like them are not dutiable, though admissible to determine the rights of the passenger and airline in respect of the actual carriage. In my opinion, therefore, the precise question in the stated case should be answered in the opposite sense to the answer given by the Supreme Court. However, quite apart from the particular terms of the ticket in the instant case, the issue of a ticket by an airline operator neither constitutes an agreement nor a memorandum of an agreement. I apprehend that the normal procedure in making a reservation of a seat on an aeroplane flight is that inquiry is made of the airline operator or its agent, usually being a travel agent, whether, having regard to existing reservations, a seat is available on a nominated flight. If it is, the appropriate fare is paid or promised to be paid and a ticket appropriate to the reservation issued. Now, supposing the airline ticket does not contain an express promise to carry the ticket holder on the nominated flight, it could be inferred from this procedure that the airline company by the issue of the ticket had bound itself by agreement to carry the intending passenger on the specified, or for that matter on any, flight, a promise which being broken would require the payment of damages. On a proper analysis of the procedure described, the airline operator was not in contractual relations with the intending passenger until it had provided him with a seat on the aeroplane. Then, in consideration of the fare prepaid, such obligations as the conditions of the ticket

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impose on the airline operator attached. The issue of the ticket, in my opinion, is mainly a receipt for the payment of the fare, though it also stipulates an occasion when the fare may not be refundable though actual carriage has not ensued. The payment made on the making of the reservation ought, in my opinion, to be regarded as no more than the prepayment of the fare payable for an actual carriage performed. Having regard to the known contingencies of airline operation it would be incongruous to infer the making of a promise to carry from the mere payment of the fare and its acknowledgment by the issue of a ticket. The ticket, apart from any specific terms it might contain, would not be regarded as entitling its holder to a place on a particular flight. It should be regarded as doing no more than denominate the carriage which, if performed, will earn the prepaid fare. If, as in the present case, the ticket contains terms of carriage, these will, given the performance of the denominated carriage, regulate the relationship of the parties during and in connexion with such carriage and thus their respective rights in relation thereto. [134] It should be observed that in Hood v Anchor Line (Henderson Brothers) Ltd [1918] UKHL 2; (1918) AC 837 the question was whether a part of the ticket which had been issued by the steamship company formed part of the terms on which the actual carriage took place. The action was for negligence in the performance of that carriage. Thus, even if there had not been in that case an antecedent promise to carry, the condition by which the appellant was held to be bound would have been part of the terms governing the relationship of the parties during the performance of the actual carriage. But, in fact, the ticket issued by the ship owner in that case contained an express engagement ‘to provide passage with certain accommodation on a particular voyage’. The ticket in that case, as Lord Findlay observed, ‘really professes to be a memorandum of the contract’ (1918) AC, at p 841. In any case, a promise to carry may be more appropriately made by a steamship company than by an airline operator. The marked degree of certainty on the one hand and of uncertainty on the other affords good ground for distinguishing the inferences which, apart from express provisions, might be drawn in the one case though not in the other. [135] Therefore, although the terms of the ticket in this case with their express and extensive limitations and exclusions preclude the existence of an antecedent contract of carriage, it is my opinion that, in any case, without the presence of these express provisions and in the absence of an express provision to carry, the ticket would not represent an agreement or a memorandum of agreement to satisfy the relevant portion of the schedule to the Stamp Act. Thus, I do not find it necessary to pass upon the submission of the appellant that the issue of the ticket was an offer of a promise, orally accepted, and for that reason not dutiable. But I do not wish by taking that course to cast any doubt on the correctness of the authorities which the appellant suggested in support of its proposition. For these reasons, I would allow the appeal. Stephen J at 135: … in the present appeal it will be critical to determine whether the issue by the appellant of its ticket was merely the making of an offer, to be later accepted either orally or by conduct, or whether, on the contrary, an agreement, of which it contained the terms, was concluded at or before the time of its issue, the ticket either being that agreement or being a memorandum of it. Each of these two latter possibilities will be excluded if the fact be

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that when the ticket was issued to the passenger no agreement had yet been concluded but instead awaited the passenger’s acceptance of the offer constituted by the ticket. [136] The matter came before the learned primary judge by way of a case stated by the Commissioner and no facts appear in that case which relate to the actual circumstances affecting the particular passenger, a Mr J C Knight. Instead the case, while annexing the ticket issued to Mr Knight, speaks of the circumstances of its issue as typical and then goes on to describe such typical circumstances. A prospective passenger makes known his requirement, is informed whether and when the passage is available and the cost, a ticket is then written out in duplicate on a printed form and tendered to the passenger in return for the price; in due course, on the day of travel, the passenger uses his ticket to secure transport of his baggage and himself on the relevant aircraft. It is to these facts that the accepted doctrine of the formation of contracts must be applied so as to determine whether the ticket is merely an offer, antecedent to agreement, or is itself the agreement or a memorandum of it. This doctrine, of the formation of contracts by offer and acceptance, encounters difficulties when sought to be applied, outside the realms of commerce and conveyancing, to the everyday contractual situations which are a feature of life in modern urban communities. Contracts for the carriage of passengers, one of the most common classes of contract in a commuter society and one which ordinarily involves the attempted imposition of contractual restrictions upon the passenger’s rights should he suffer loss or injury, provide an instance of these difficulties. The circumstances in which mass transportation occurs frequently permit of no time for prior negotiation, which would in any event usually be pointless with prevailing contracts of adhesion; moreover the transportation often will begin before there has been any communication at all between the passenger and the carrier’s agent, the contract being ‘inferred from the acquiescence of the carrier in the presence of the passenger on the conveyance’ (Hood v Anchor Line (Henderson Brothers) Ltd, per Lord Dunedin (1918) AC, at p 846; and see Wilkie v London Passenger Transport Board, per Lord Greene MR (1947) 1 All ER 258, at p 259). [137] The conventional analysis of the formation of contracts for the carriage of passengers in those somewhat more leisurely transactions which involve the issue of a ticket in return for payment of a fare and the subsequent performance of the contract by the act of transportation, is to regard the ticket as the offer, the contract being made upon acceptance of that offer by the passenger, usually by conduct. Lord Denning describes this analysis, referring to the authorities which establish it, in Thornton v Shoe Lane Parking Ltd (1971) 2 QB 163, at p 169. He does so in the course of demonstrating its inappropriateness in situations in which there in fact exists no opportunity either of considering the terms of the proffered contract or of declining to enter into it on the terms which are offered. In the present case there is no such inappropriateness. It is just such a case as that for which the conventional analysis was devised. This analysis affords to the intending passenger an opportunity, no doubt but rarely availed of, of ascertaining the conditions which the carrier seeks to impose and of accepting or rejecting them. The conventional long-distance rail or passenger liner situation is therefore applicable, a ticket is purchased in advance of the carriage and that ticket constitutes an offer available for acceptance by

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the passenger (Watkins v Rymill, per Stephen J (1883) 10 QBD 178, at p 188, Nunan v Southern Railway Co, per Swift J (1923) 2 KB 703, at p 707, and Thompson v London Midland & Scottish Railway Co, per Lord Hanworth MR (1930) 1 KB 41, at p 47). Although the economics of mass transportation in fact lead to an absence of much real choice on the passenger’s part whether or not to accept conditions sought to be imposed, he at least retains the ability to learn of those conditions and to refuse to travel by the intended means if he sees fit. The general run of so called ‘ticket cases’ involving contracts of carriage has been concerned with mishaps occurring during transportation and with the effect, if any, which conditions, sought to be imposed upon the passenger by the ticket issued to him, may have upon his rights against the carrier. The precise time at which the carrier’s offer is accepted has not been the central question, although it has been indirectly involved in the central question of whether or not the conditions on the ticket have been incorporated as terms of the contract. The authorities make it clear that, in the absence of particular conduct on the part of the passenger, acceptance of the offer which a carrier makes when a ticket is issued does not occur immediately upon its receipt by the passenger; the whole concept of a passenger’s acceptance of ticket conditions and of the need adequately to draw those conditions to his attention (Balmain New Ferry Co Ltd v Robertson, per Griffith CJ [1906] HCA 83; (1906) 4 CLR 379, at p 387) is dependent upon this. [138] It is enough to refer to three authorities, over a span of almost a hundred years, in which, when the ticket itself contains conditions or a reference to conditions elsewhere available, the passenger’s acceptance of the carrier’s offer is treated as occurring some time  after issue of the ticket. In Parker v South Eastern Railway Co (1877) 2 CPD 416, at pp 426–428 Bramwell LJ, on three occasions referred to the passenger being afforded, if he wishes, the opportunity of reading the conditions on a ticket which is proffered to him before becoming bound by them, that is, before the contract can be regarded as concluded, and see also per Baggallay LJ (1877) 2 CPD, at p 425. Then in Hood v Anchor Line (Henderson Brothers) Ltd, Lord Finlay LC and Lord Parmoor both referred to this. Lord Finlay said that ‘when the passenger or his agent gets the ticket he may examine it before accepting, and if he chooses not to examine it when everything reasonable has been done to call his attention to the conditions he accepts it as it is’ (1918) AC, at p 843. Lord Parmoor said: ‘If an intending passenger, either personally or through his agent, has reasonable notice that the ticket or document handed to him by a carrier contains certain conditions, and accepts the document or ticket as handed to him without objection, and without taking the trouble to make himself acquainted with such conditions, he must be taken to have assented to them’ (1918) AC, at pp 848–849, and see also per Viscount Haldane (1918) AC, at p 845. In the Shoe Lane Parking Case (1971) 2 QB, at p 169 Lord Denning refers to the acceptance of the ticket and its retention without objection as being regarded as an acceptance because of the theory ‘that the customer, on being handed the ticket, could refuse it and decline to enter into a contract on those terms’. Megaw LJ says, of customers of a car park to whom tickets are issued which refer to conditions displayed on the premises, that they must have ‘a fair opportunity, before the contracts are made, of discovering the conditions by which they are to be bound’ (1971) 2 QB, at pp 173–174. Such a customer, who, by the issue of a ticket, becomes the recipient of an offer, must be afforded an opportunity of learning, from the ticket, what are the terms of that offer before he can be said to have accepted it.

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[139] The cases, including some of the few passages which I have cited, are replete with references to passengers who elect not to read ticket conditions, no doubt the common behaviour of most passengers; they, it is said, do not thereby escape being bound by those conditions. This rule of law, which is directed to identifying the agreed terms of the particular contract, does not detract from but, rather, supports the proposition that acceptance, and the resultant formation of the contract, does not occur upon tender of the ticket. It occurs after that event, either when the passenger has by actual conduct intimated his acceptance of the offer, for instance by immediately boarding the vehicle in question, or, absent any such conduct, when a reasonable time has passed during which the passenger has had an opportunity of reading the conditions appearing on the ticket and has not then rejected the offer and demanded the return of his fare. In other words, acceptance will normally be by conduct and this conduct will consist either of an overt act consistent only with acceptance or, in its absence, of the passenger’s failure to reject the offer after he has had an opportunity of learning of the conditions upon which carriage is offered. Those cases in which a contract is concluded which incorporates ticket conditions despite the passenger’s failure to read them are instances either of the occurrence of such an overt act or of the passing of a reasonable time without rejection. In the latter case there is involved the concept of effective acceptance without actual communication to the offeror; but when, as here, the offeree, by tendering his fare, has performed his part of the bargain in advance his acceptance may readily be inferred from his failure, within a reasonable time after receipt of his ticket, to reject the offer and demand the return of his fare: Williston on Contracts, 3rd ed, vol 1, par 91C. What will be a reasonable time within which to reject proffered terms will be a question of fact in every case dependent upon all the circumstances, including, no doubt, the length and complexity of the conditions which form part of the offer. What Hawkins J, in Watkins v Rymill (1883) 10 QBD, at p 180, and Megaw LJ, in the passage cited from the Shoe Lane Parking Case (1971) 2 QB, at pp 173–174, each referred to as ‘a fair opportunity’ of reading the tendered ticket will provide the test, recourse being had, for this purpose, to familiar standards of reasonableness. If this, then, be the correct view of the time of formation of such a contract as the present one, it necessarily follows that in the typical circumstances referred to in the stated case the completed ticket itself will not, when it comes into existence, then record any existing agreement nor itself be an agreement; it will be no more than a written offer open for acceptance. Hence it is not dutiable as an ‘agreement or any memorandum of an agreement’ for the purposes of the Stamp Act. [140] The conditions appearing in the appellant’s ticket are not easy to interpret; they appear to relieve the appellant very substantially from performance of those obligations relating to the carriage of the passenger which are to be implied from the description, in the ticket, of the destination, the flight number and the departure time and date. However I think it unnecessary to arrive at any conclusion as to whether the presence of these conditions is such as to prevent the formation of any contract between the appellant and its passenger before transportation commences. It is enough for me to conclude that at date of issue the ticket was not an agreement or any memorandum of agreement. I would therefore allow this appeal.

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The Court held that the issue of the ticket was an offer which could be accepted by the passenger. Barwick CJ referred to the exemption clauses and the uncertainties of air travel to explain why the ticket was an offer. Stephens J adopted the conventional ticket analysis: that contract formation could not precede the notice of special terms. At issue in ProCD v Zeidenberg62 was the validity of a click-wrap licence. A licence is a type of contract. The decision by Judge Easterbrook refers to the Uniform Commercial Code (UCC). The UCC is not a statute; rather it is an attempt by American lawyers to have uniform principles apply across all the states of the United States of America (in this sense, there are strong similarities with Australian contract law). In this case, Matthew Zeidenberg bought a telephone directory database, SelectPhone™, in 1994 from a retail outlet, but decided to ignore the click-wrap licence. He formed Silken Mountain Web Services, Inc, to resell the information in the SelectPhone™ database. The rights holder, ProCD, objected to Zeidenberg’s actions. ProCD v Zeidenberg (1996) 86 F3d 1447 Judge Easterbrook at 1449: Following the district court, we treat the licenses as ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code. Whether there are legal differences between ‘contracts’ and ‘licenses’ (which may matter under the copyright doctrine of first sale) is a subject for another day. See Microsoft Corp v Harmony Computers & Electronics, Inc, 846 F Supp 208 (ED NY 1994). Zeidenberg does not argue that Silken Mountain Web Services is free of any restrictions that apply to Zeidenberg himself, because any effort to treat the two parties as distinct would put Silken Mountain behind the eight ball on ProCD’s argument that copying the application program onto its hard disk violates the copyright laws. Zeidenberg does argue, and the district court held, that placing the package of software on the shelf is an ‘offer,’ which the customer ‘accepts’ by paying the asking price and leaving the store with the goods. Peeters v State, 154 Wis 111, 142 NW 181 (1913). In Wisconsin, as elsewhere, a contract includes only the terms on which the parties have agreed. One cannot agree to hidden terms, the judge concluded. So far, so good—but one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license. Zeidenberg’s position therefore must be that the printed terms on the outside of a box are the parties’ contract—except for printed terms that refer to or incorporate other terms. But why would Wisconsin fetter the parties’ choice in this way? Vendors can put the entire terms of a contract on the outside of a box only by using microscopic type, removing other information that buyers might find more useful (such as what the software does, and on which computers it works), or both. The ‘Read Me’ file included with most software, describing system requirements and potential incompatibilities, may be equivalent to ten pages of type; warranties and license restrictions take still more space. Notice on the outside, terms on the inside, and a right to return the software for a refund if

62 (1996) 86 F3d 1447.

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the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike. See E Allan Farnsworth, 1 Farnsworth on Contracts § 4.26 (1990); Restatement (2d) of Contracts § 211 comment a (1981) (‘Standardization of agreements serves many of the same functions as standardization of goods and services; both are essential to a system of mass production and distribution. Scarce and costly time and skill can be devoted to a class of transactions rather than the details of individual transactions.’). Doubtless a state could forbid the use of standard contracts in the software business, but we do not think that Wisconsin has done so. Transactions in which the exchange of money precedes the communication of detailed terms are common. Consider the purchase of insurance. The buyer goes to an agent, who explains the essentials (amount of coverage, number of years) and remits the premium to the home office, which sends back a policy. On the district judge’s understanding, the terms of the policy are irrelevant because the insured paid before receiving them. Yet the device of payment, often with a ‘binder’ (so that the insurance takes effect immediately even though the home office reserves the right to withdraw coverage later), in advance of the policy, serves buyers’ interests by accelerating effectiveness and reducing transactions costs. Or consider the purchase of an airline ticket. The traveler calls the carrier or an agent, is quoted a price, reserves a seat, pays, and gets a ticket, in that order. The ticket contains elaborate terms, which the traveler can reject by canceling the reservation. To use the ticket is to accept the terms, even terms that in retrospect are disadvantageous. See Carnival Cruise Lines, Inc v Shute, 499 US 585, 113 L Ed 2d 622, 111 S Ct 1522 (1991); see also Vimar Seguros y Reaseguros, SA v M/V Sky Reefer, 132 L Ed 2d 462, 115 S Ct 2322 (1995) (bills of lading). Just so with a ticket to a concert. The back of the ticket states that the patron promises not to record the concert; to attend is to agree. A theater that detects a violation will confiscate the tape and escort the violator to the exit. One could arrange things so that every concertgoer signs this promise before forking over the money, but that cumbersome way of doing things not only would lengthen queues and raise prices but also would scotch the sale of tickets by phone or electronic data service. Consumer goods work the same way. Someone who wants to buy a radio set visits a store, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most important of which usually is the warranty, read for the first time in the comfort of home. By Zeidenberg’s lights, the warranty in the box is irrelevant; every consumer gets the standard warranty implied by the UCC in the event the contract is silent; yet so far as we are aware no state disregards warranties furnished with consumer products. Drugs come with a list of ingredients on the outside and an elaborate package insert on the inside. The package insert describes drug interactions, contraindications, and other vital information—but, if Zeidenberg is right, the purchaser need not read the package insert, because it is not part of the contract. Next consider the software industry itself. Only a minority of sales take place over the counter, where there are boxes to peruse. A customer may place an order by phone in response to a line item in a catalog or a review in a magazine. Much software is ordered over the Internet by purchasers who have never seen a box. Increasingly software arrives by wire. There is no box; there is only a stream of electrons, a collection of information that

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includes data, an application program, instructions, many limitations (‘MegaPixel 3.14159 cannot be used with Byte-Pusher 2.718’), and the terms of sale. The user purchases a serial number, which activates the software’s features. On Zeidenberg’s arguments, these unboxed sales are unfettered by terms—so the seller has made a broad warranty and must pay consequential damages for any shortfalls in performance, two ‘promises’ that if taken seriously would drive prices through the ceiling or return transactions to the horse-andbuggy age. According to the district court, the UCC does not countenance the sequence of money now, terms later … One of the court’s reasons—that by proposing as part of the draft Article 2B a new UCC § 2-2203 that would explicitly validate standard-form user licenses, the American Law Institute and the National Conference of Commissioners on Uniform Laws have conceded the invalidity of shrinkwrap licenses under current law, see 908 F  Supp at 655–66—depends on a faulty inference. To propose a change in a law’s text is not necessarily to propose a change in the law’s effect. New words may be designed to fortify the current rule with a more precise text that curtails uncertainty. To judge by the flux of law review articles discussing shrinkwrap licenses, uncertainty is much in need of reduction—although businesses seem to feel less uncertainty than do scholars, for only three cases (other than ours) touch on the subject, and none directly addresses it. See Step-Saver Data Systems, Inc v Wyse Technology, 939 F2d 91 (3d Cir 1991); Vault Corp v Quaid Software Ltd, 847 F2d 255, 268–70 (5th Cir 1988); Arizona Retail Systems, Inc v Software Link, Inc, 831 F Supp 759 (D Ariz 1993). As their titles suggest, these are not consumer transactions. Step-Saver is a battle-of-the-forms case, in which the parties exchange incompatible forms and a court must decide which prevails. See Northrop Corp v Litronic Industries, 29 F3d 1173 (7th Cir 1994) (Illinois law); Douglas G Baird & Robert Weisberg, Rules, Standards, and the Battle of the Forms: A Reassessment of § 2-207, 68 Va L Rev 1217, 1227–31 (1982). Our case has only one form; UCC § 2-207 is irrelevant. Vault holds that Louisiana’s special shrinkwrap-license statute is preempted by federal law, a question to which we return. And Arizona Retail Systems did not reach the question, because the court found that the buyer knew the terms of the license before purchasing the software. What then does the current version of the UCC have to say? We think that the place to start is § 2-204(1): ‘A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.’ A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. This Zeidenberg did. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance. So although the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways. ProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case in which a consumer opens a package to find an insert saying ‘you owe us an extra $10 000’ and

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the seller files suit to collect. Any buyer finding such a demand can prevent formation of the contract by returning the package, as can any consumer who concludes that the terms of the license make the software worth less than the purchase price. Nothing in the UCC requires a seller to maximize the buyer’s net gains. Section 2-606, which defines ‘acceptance of goods’, reinforces this understanding. A buyer accepts goods under § 2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection under § 2-602(1). ProCD extended an opportunity to reject if a buyer should find the license terms unsatisfactory; Zeidenberg inspected the package, tried out the software, learned of the license, and did not reject the goods. We refer to § 2-606 only to show that the opportunity to return goods can be important; acceptance of an offer differs from acceptance of goods after delivery, see Gillen v Atalanta Systems, Inc, 997 F2d 280, 284 n1 (7th Cir 1993); but the UCC consistently permits the parties to structure their relations so that the buyer has a chance to make a final decision after a detailed review. Some portions of the UCC impose additional requirements on the way parties agree on terms. A disclaimer of the implied warranty of merchantability must be ‘conspicuous.’ UCC § 2-316(2), incorporating UCC § 1-201(10). Promises to make firm offers, or to negate oral modifications, must be ‘separately signed.’ UCC §§ 2-205, 2-209(2). These special provisos reinforce the impression that, so far as the UCC is concerned, other terms may be as inconspicuous as the forum-selection clause on the back of the cruise ship ticket in Carnival Lines. Zeidenberg has not located any Wisconsin case—for that matter, any case in any state—holding that under the UCC the ordinary terms found in shrinkwrap licenses require any special prominence, or otherwise are to be undercut rather than enforced. In the end, the terms of the license are conceptually identical to the contents of the package. Just as no court would dream of saying that SelectPhone (trademark) must contain 3100 phone books rather than 3000, or must have data no more than 30 days old, or must sell for $100 rather than $150—although any of these changes would be welcomed by the customer, if all other things were held constant—so, we believe, Wisconsin would not let the buyer pick and choose among terms. Terms of use are no less a part of ‘the product’ than are the size of the database and the speed with which the software compiles listings. Competition among vendors, not judicial revision of a package’s contents, is how consumers are protected in a market economy. Digital Equipment Corp v Uniq Digital Technologies, Inc, 73 F3d 756 (7th Cir 1996). ProCD has rivals, which may elect to compete by offering superior software, monthly updates, improved terms of use, lower price, or a better compromise among these elements. As we stressed above, adjusting terms in buyers’ favor might help Matthew Zeidenberg today (he already has the software) but would lead to a response, such as a higher price, that might make consumers as a whole worse off.

review question Compare the reasoning and findings in ProCD with that in MacRobertson Miller. What are the similarities and differences?

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• 3.6 Termination of offers An offer can be revoked at any time before it is accepted.63 The exception is if the offeree has paid to keep the offer open by option, as was held in Goldsborough Mort & Co Ltd v Quinn.64 Where options are concerned, a promise to hold an offer open is binding if consideration has been made  for that promise.65 In Goldsborough Mort, the plaintiff paid the respondent for an option to purchase land. When the respondent sought to renege on the promise, the plaintiff sued and won. It was held that the option was both enforceable and non-revocable. The difference between an option and an ordinary offer is that where the latter is concerned, no payment has been given to keep the offer open. In the case of an option, some payment or other consideration has been provided. An offer must be communicated in order to be effective. Similarly, a revocation must be communicated in order to be effective. Where the revocation has not been communicated to the  offeree and where the offeree accepts the offer without knowledge of the intended revocation, a binding contract will form between the parties. In Byrne v van Tienhoven66 the defendants made an offer to the plaintiffs. Having not heard from the plaintiffs for a few days, the defendant then wrote a letter of revocation. The letter did not reach the plaintiffs until after they had sent a letter of acceptance to the defendants. It was held that a binding contract had formed. Where an offer has been made to the world at large, the revocation must take place in the same way. In Shuey, Executor v United States67 it was held that an offer made in a newspaper could be withdrawn in the same way. A counter-offer occurs where the offeree does not accept the offeror’s original offer but instead puts another offer to them. This suggests that the party offering the counter-offer still wants to contract, but wishes to do so on terms that differ from the original offer. A counter-offer effectively rejects the original offer and the bargaining process begins again.68 On the other hand, a mere enquiry is neither a counter-offer, a rejection nor an acceptance. It is simply a request for further information and the possibility of an acceptance or a rejection is still afoot. An offer may also terminate because it has lapsed. The proposition that applies here is that an offer is effective for a reasonable time only and after that time has passed the offer lapses and cannot be validly accepted. The amount of time that might be regarded as ‘reasonable’ will depend upon the context in which the offer is made. In Fong v Cilli 69 an offeror died before the offeree accepted the offer. The offeree was aware of the offeror’s death at the time of the purported acceptance. It was held that there was no valid acceptance. An offer may also fail because a condition precedent was not fulfilled. A condition precedent is an event that must happen or a requirement that must be fulfilled before an offer will be effective. If the condition is not satisfied, then the potential offer fails to take effect, notwithstanding the fact that the terms of that offer might have already been made plain. An offer can be revoked at any time before it is accepted.

63 Payne v Cave (1789) 100 ER 502. 64 (1910) 10 CLR 674. 65 Ibid. 66 (1880) LR 5 CPD 344. 67 92 US 73 (1876) 68 See further Chapter 4, section 4.1.1. 69 (1968) 11 FLR 495.

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3.6.1  Revoking a unilateral contract Unilateral contracts raise particular issues in relation to the termination of an offer. The fundamental question is whether it is possible to revoke a unilateral contract once the offeree has commenced performance. In Mobil Oil Australia v Wellcome International 70 it was held that in general, an offer made in return for the performance of an act is revocable at any time prior to the commencement of performance. In that case, the appellant had told its franchisees that if they received 90 per cent or better in Circle of Excellence judgings from 1992 to 1997 they would be granted a renewal of their franchise. Mobil did, however, make it clear that work still needed to be done on the proposal before it could be implemented. Justice Wilcox at first instance found that Mobil had made an offer to enter into a unilateral contract and could not revoke, but the Full Court held that there had been no offer because the scheme was too vague and developmental. The Full Court also held that in certain cases a person offering to enter a unilateral contract may not be able to revoke due to an implied ancillary contract not to revoke. Revocation of that contract would give rise to damages, and estoppel might also arise if there was detrimental reliance. But the Full Court found that there was no principle that an offeror is forbidden from revoking once an offeree has commenced performance of the required acts of acceptance. Mobil Oil Australia v Wellcome International (1998) 81 FCR 475 The Full Court at 500–505: A unilateral contract is one in which the act of acceptance of the offer is also an executed consideration for the promise offered. The act of acceptance called for by the offer, once completed by the offeree, leaves the contract executory only on the part of the offeror. A  familiar illustration is the offer of a reward for the return of lost goods or for the provision of information. The supposed nine-for-six promise was the offer of a reward (nine years’ free tenure) in return for an act (the attaining of 90 per cent or better in Circle of Excellence judgings over the six years 1992–1997). A distinction must be recognised. In the case of some unilateral contracts, it may remain within the offeree’s power unilaterally to complete the act of acceptance, and thereby to furnish the executed consideration sought, that is to say, without the necessity of cooperation by the offeror and even notwithstanding a purported revocation of the offer. An example is the furnishing of sought information by posting it in an envelope addressed in a particular way. There may also be a case (it is, perhaps, difficult to imagine one) in which the offeror may prevent the offeree from completing the act of acceptance, and thereby furnishing the executed consideration sought, yet the offer will be held not to have been revoked. In the present case, Mobil made it clear to its dealers that its supposed nine-for-six offer was revoked. But, in addition, by terminating the system of Circle of Excellence judgings, it made it impossible for its dealers to complete the act of acceptance called for by that supposed offer. In the present section of these Reasons, we address only the question whether Mobil effectively revoked its supposed offer.

70 (1998) 81 FCR 475.

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… It will be recalled that it was in January 1996 that Mobil announced, without giving reasons, the abandonment of the Circle of Excellence awards. The sequence of events, then, is that there was a purported revocation after which Mobil made it impossible for franchisees to complete the act of acceptance by attaining 90 per cent or better in Circle of Excellence judgings in the last two of the six years (1996 and 1997). His Honour referred to discussions of the question whether an offeror of a promise for an act can effectively revoke the offer where performance of the act of acceptance has been embarked upon but not completed. He referred to Cheshire & Fifoot The Law of Contract (2nd Australian edition) at 137–139; Carter & Harland, Contract Law in Australia (3rd ed) at 67–69; Abbott v Lance (1860) Legge 1283; Daulia Ltd v Four Millbank Nominees Ltd [1978] 1 Ch 231; and Veivers v Cordingley [1989] 2 Qd R 278. He considered that the weight of authority was in favour of the proposition that, … a person who makes an offer susceptible of acceptance by performance of an act, may not revoke that offer after the offeree has embarked upon performance of the act.

… We would make several observations at the outset. It has been suggested to be unjust that an offeror should be at liberty to revoke the offer once performance of the act, which is at once the act of acceptance and the executed consideration, has commenced. This proposition is usually stated as if its truth were self evident and universal. We do not think that it is either. (a) The respective positions of offeror and offeree vary greatly from the case of one unilateral contract to another. The following factors illustrate: (i) The offeror may or may not know that the offeree has commenced performance; (ii) The offeree may or may not have an understanding that the offeror is at liberty to revoke and that any incomplete performance of the act of acceptance by the offeree will be at his or her risk; (iii) The notion of ‘commencement of performance of the act of acceptance’ or ‘embarking upon the act of acceptance’ is problematical and can lead to a result which is unjust to the offeror. By reference to the facts of the present case, could it be suggested that attainment of ninety per cent in the first year or even perfect operation of a service station for a day, a week or a month, albeit by reference to the offer, represents a commencement of attainment of ninety per cent in all six years so as immediately to bind Mobil not to revoke? (iv) The act called for by the offer may be detrimental to the offeree, or of some benefit to the offeree as well as to the offeror, as in the present case; (v) Although the offeree is not obliged to perform, or to continue performing, the act of acceptance and is at liberty to cease performing at any time, ex hypothesi, the offeror remains bound, perhaps over a lengthy period as in the present case, to keep its offer open for completion of the act of acceptance, without knowing whether the offeree will choose to complete or not to complete that act;

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(vi) The circumstances of the particular case may or may not, by reference to conventional criteria, suggest that the parties intended that the offeror should not be at liberty to revoke once the offeree had performed the act of acceptance to some extent. We do not accept that it is universally unjust that an offeror be at liberty to revoke once the offeree has ‘commenced’ or ‘embarked upon’ performance of an act which is both the sought act of acceptance of the offer and the sought executed consideration for the promise. (b) A juristic basis which has been suggested to support the general proposition is that of an implied ancillary unilateral contract by which the offeror promises not to revoke once the offeree commences the act of acceptance of the principal offer. But even if such an ancillary contract should be implied in all cases, it is one thing to say that there is a contractually binding promise not to revoke and another thing to say that a purported revocation will be ineffective. The normal remedy for a revocation in breach of the ancillary contract would be an award of damages, the amount of which would be assessed, no doubt, by reference to the prospect that the act of acceptance would have been completed, and, by the same act, the offered promise duly ‘paid for’. No doubt it might be possible for the offeree to seek specific relief in the form of an injunction restraining the offeror from revoking the offer and from preventing the offeree from providing the executed consideration. In the present case, the franchisees did not seek orders that Mobil maintain its Circle of Excellence judgings and that it not act upon or implement its purported revocation. Perhaps no-one thought of doing so. Perhaps the view was taken that an application for such relief would probably fail. We make no comment as to the prospects of success which any such application would have enjoyed. (c) It seems that the general undifferentiated proposition could produce unintended and unjust results. Assume that X made a public offer of payment for the collection and supply of information of a kind described in the offer; that A, B and C embark upon collecting the information; and that A supplies it to X. According to the general proposition, X is bound not to revoke the offer made to B and C, notwithstanding the inutility of their subsequently supplying to X the information that A has already provided. It may be replied that the terms of the offer would include an implied qualification. But this very response bespeaks the inadequacy of a universal rule.

Ke y p o ints for re v ision An offer and an acceptance are essential to the formation of a contract. An offer is an invitation to enter into a contract that contains specific conditions and terms. An offer must be accompanied by an intention to be bound in contract. An offer is to be distinguished from an invitation to treat. An invitation to treat is merely an attempt to solicit offers. An offer may be revoked before it has been accepted. However, the revocation must be communicated if it is to be effective. A counter-offer made by the offeree will also have the effect of terminating the offer made by the offeror.

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problem-solving practice Jill runs a bike store in Hawthorn. She has recently heard from friends that a company known as Outdoor Venture Bikes has been producing an impressive range of bikes. Miguel tells Jill that he does not have a set price for his bikes, but he invites her to come and see them. When Jill arrives at the company’s premises Miguel shows her around. Jill asks Miguel what price he wants for his bikes. Miguel seems unsure. Eventually Miguel says to Jill, ‘I think that they might be worth about $500. I reckon that’s a fair price.’ A day later Jill calls Miguel from Outdoor Venture Bikes and offers to buy 50 bikes from him at $500 each so that she can resell them in her store. However, in the interim Miguel has had a visit from another prospective buyer. Miguel tells Jill that the price for the bikes is now $700 each. Did Miguel make an offer to Jill at their first meeting?

ANSWER The issue here is whether Miguel’s statement that ‘I think that they might be worth about $500. I reckon that’s a fair price’ constitutes an offer which Jill can validly accept. Jill must demonstrate that Miguel’s ‘offer’ is actually an offer within the meaning of the common law of contracts. An offer is a statement of terms upon which the offeror is prepared to be contractually bound. The  question then is whether Miguel’s statement fits within the parameters of an intention to be bound in contract. The situation in the present matter is somewhat similar to that of Australian Woollen Mills Pty Ltd v Commonwealth where a statement of policy by the Australian Government was held not to be a contractual offer. In Australian Woollen Mills, the High Court stated that, ‘it is necessary that what is alleged to be an offer should have been intended to give rise, on the doing of the act, to an obligation’. In the present matter, Miguel’s statement might be seen as an attempt to determine a fair price rather than a definite offer. That is to say, Miguel might be regarded as ‘thinking aloud’. Miguel might argue that his statement and his overall conduct in inviting Jill to the premises constitutes an invitation to treat; that is, that he was merely soliciting offers from Jill (see Harvey v Facey). Miguel may also argue that as he did not make a clear and definite statement of offer to Jill, it cannot be said that he intended to make a concrete offer; that is, the context of the discussion was more of an attempt to set a price rather than a true statement of the price. In this regard an offer might not exist as the requisite intention is lacking (see Leonard v Pepsico). In response to Miguel’s arguments, Jill might argue that (i) Miguel’s statement was made in response to her direct question about the price of the bikes. The situation is thus different to that of Harvey v Facey, where only a minimum price was quoted in response to a request for information. Jill might also argue that (ii) in the case of Australian Woollen Mills the statements of the Australian Government were mere statements of policy and it is common knowledge that governments may alter their policies. In contrast, Miguel was a vendor responding to a question from a potential buyer. Jill could also argue that (iii) if Miguel’s statement was an offer, he failed to revoke it before she purported to accept it (see Shuey v United States). It is likely that Miguel’s statement constitutes an offer.

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4

Acceptance

Chapt e r o v e rv i e w 4.0

Introduction  54

4.1

Acceptance  54 4.1.1 ‘A meeting of minds’   54 4.1.2 Consciousness of the offer   56

4.2

Communication of the acceptance   57 4.2.1 Silence as acceptance   59 4.2.2 Acceptance by conduct   59

4.3

Prescribed mode of acceptance   61 4.3.1 The postal rule   61 4.3.2 Instantaneous methods of communication   64

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• 4.0 Introduction When an offeror may make an offer to contract to an offeree, the offeree has the options of accepting, rejecting or suggesting new terms to the offeror. If the offer is met by a clear and unqualified acceptance, then an agreement is formed.1 An acceptance is a clear and unconditional assent to the terms of an offer.2 However, the circumstances of a particular case may be such that  it is not abundantly clear as to whether an acceptance has been effectively made by the offeree. Similarly, different rules might apply depending upon the mode by which the parties decide that the acceptance can be made.3 Where the parties have agreed that it will be the preferred method of acceptance, an acceptance made by the post will be subject to the postal rule,4 which dictates that an acceptance is effective from the moment that it is posted. In contrast, where methods of instantaneous communication are used the acceptance will be effective only when the communication is received.5 It is also open to the parties to agree that the acceptance need not be communicated to the offeror, however the offeror cannot unilaterally force a contract upon the offeree by suggesting that the latter’s silence will denote consent.6 It does seem clear that the rules of contract law require communication of an acceptance subject to certain exceptions,7 for example the conduct of an offeree may be such as to demonstrate that an acceptance has taken place.8

• 4.1 Acceptance 4.1.1  ‘A meeting of minds’ For a contract to come into existence between two parties there must be mutual assent to the terms of the bargain. This is commonly put as the requirement that there must be ‘a meeting of minds’.

For a contract to come into existence between two parties there must  be mutual assent to the terms of the bargain. This is commonly put as the requirement that there must be ‘a meeting of minds’. It is for this reason that a reply which proposes new terms cannot be regarded as a meeting of the minds between the contracting parties.9 The acceptance must correspond to the offer and must clearly constitute an assent by the offeree to the terms set out in the offer.10 In the absence of an offer there can be no acceptance. Further, though the acceptance must be communicated

1 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; Smith v Hughes (1871) LR 6 QB 597, 607; Taylor v Johnson (1983) 151 CLR 422, 428. 2 Dunlop v Higgins (1848) 9 ER 805; Carter v Hyde (1923) 33 CLR 115; Redowood Pty Ltd v Mongoose Pty Ltd [2005] NSWCA 32. 3 Adams v Lindsell (1818) 2 B & Ald 681; Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93; Bressan v Squires [1974] 2 NSWLR 460. 4 Ibid. 5 Entores Ltd v Miles Far East Corp [1955] 2 QB 327. 6 Felthouse v Bindley (1862) 142 ER 1037. 7 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523. 8 Ibid; Farmer’s Mercantile Union and Chaff Mills Ltd v Coade (1921) 30 CLR 113. 9 Turner Kempson & Co Pty Ltd v Camm [1922] VLR 498. 10 Ibid; Dunlop v Higgins (1848) 9 ER 805.

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in some way, it may still be either express or implied. Note also that as a contract can arise through conduct, it follows that an acceptance may be communicated by conduct.11 Further, the acceptance may only be given by the party to whom the offer was made or by their agent. Once the acceptance is made, it cannot be revoked unless the offeror agrees to release the other party from their contractual obligations. The common law has adopted an objective approach to determining the existence of a contract. This objective approach has effect in the legal rules on the acceptance of contractual offers. In Taylor v Johnson,12 the High Court stated that the objective approach looks to the external manifestations of consent; that is, the objective approach considers whether an impartial third party observer would believe that the offeree was giving their assent to the terms of the offer. The objective approach is to be contrasted with the subjective approach, which considers the actual intentions and understanding of the parties. In Toll (FCGT) Pty Ltd v Alphapharm Pty Ltd,13 the High Court stated: ‘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.’14 If the purported acceptance contains qualifications or proposes any changes to the transaction, then it cannot be considered to be an acceptance, but it is instead a counter offer. The effect of a counter-offer is that it amounts to a rejection of the offer.15 Once a counter-offer has been made, the initial offeror will then have the option of deciding whether or not they want to accept the offeree’s counter-offer. The offeree cannot suggest that their counter-offer constitutes an acceptance. In Turner Kempson & Co Pty Ltd v Camm,16 Turner had made an offer to sell Camm 15 tons of raspberry pulp. Camm agreed, but added that he wanted the pulp delivered ‘in three lots of 5 tons each, approximately 10 days between each delivery’. The Supreme Court of Victoria held that the inclusion of new terms meant that this was a counter-offer, rather than an acceptance. In contrast, in Dunlop v Higgins,17 an offeree purported to accept an offer and included with the acceptance a request that the goods be delivered on a certain date. It was held that this was a valid acceptance because the request for delivery on a particular date was merely a request, rather than a new condition. An error made by the offeree in giving their acceptance will not necessarily amount to a counter-offer. In Carter v Hyde,18 Carter offered to sell his hotel to Hyde with all the furniture in the hotel at the time of the offer. When Hyde accepted, his letter of acceptance made reference to the furniture in the hotel at the time of acceptance. Carter then argued that this constituted a counter-offer. The High Court held that this was a mere error and that an effective acceptance had been given.19 11 This is discussed below, section 4.2.2; see also Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523. 12 (1983) 151 CLR 422. 13 (2004) 219 CLR 165. 14 (2004) 219 CLR 164, 179. 15 See also Chapter 3, section 3.6. 16 [1922] VLR 498. 17 (1848) 9 ER 805. 18 (1923) 33 CLR 115. 19 Ibid, 126, 128.

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4.1.2  Consciousness of the offer An acceptance can only occur once the offeree has become aware of the offer. For example, if I lose my dog and place notices around my neighbourhood offering a $500 reward for anybody who finds my dog, will I be contractually bound to pay the reward if you return my dog to me having never seen any of the notices? Under the rules of contract law I will not be bound to pay you the $500 because the prospect of a reward as set out in the terms of my offer was not operating on your mind at the time that you found the dog and delivered it to me. An act which would otherwise have constituted valid acceptance, but which was performed in ignorance of the offer, cannot therefore be a valid acceptance.20 The offer must be present in the mind of the offeree when they accept. Furthermore, if it is evident that the offeree did not have the offer in mind when they accepted, even where they were generally aware of the offer, this will not constitute acceptance.21 Motive for acceptance is immaterial, provided that the offer was present in the offeree’s mind.22 The case of R v Clarke 23 illustrates the principle that the offer must be present in the mind of the offeree at the time of acceptance. The Crown had offered a reward of £1000 in return for information leading to the arrest of the killers of two police officers. Clarke was arrested in relation to one of the murders, but gave evidence which led to the identification of the two killers and secured his release. Clarke tried to claim the reward, but the Crown refused to pay it to him as he had given his information to secure his release rather than to gain the reward. The High Court held that there was no consensus between the parties when the acts were done. Clarke had not undertaken the act of providing information in order to seek the reward. As Higgins J stated: My view is that Clarke did not act on the faith of, in reliance upon, the proclamation; and that although the exact fulfilment of the conditions stated in the proclamation would raise a presumption that Clarke was acting on the faith of, in reliance upon, the proclamation, that presumption is rebutted by his own express admission.24

In the extracts below from the decision of Isaacs ACJ in R v Clarke, his Honour outlines how central acceptance is to contract formation. R v Clarke (1927) 40 CLR 227 Isaacs ACJ at 231–235: The facts of this case, including inferences, are not, as I understand, in dispute. They amount to this: The information for which Clarke claims the reward was given by him when he was under arrest with Treffene on a charge of murder, and was given by him in circumstances which show that in giving the information he was not acting on or in pursuance of or in reliance upon or in return for the consideration contained in the

20 21 22 23 24

Fitch v Snedaker 38 NY 248 (1886). R v Clarke (1927) 40 CLR 227. Williams v Cawardine [1833] EWHC KB J44; 110 ER 590. (1927) 40 CLR 227. (1927) 40 CLR 227, 241.

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proclamation, but exclusively in order to clear himself from a false charge of murder. In other words, he was acting with reference to a specific criminal charge against himself, and not with reference to a general request by the community for information against other persons. It is true that without his information and evidence no conviction was probable, but it is also abundantly clear that he was not acting for the sake of justice or from any impulse of conscience or because he was asked to do so, but simply and solely on his own initiative, to secure his own safety from the hand of the law and altogether irrespective of the proclamation. He has, in my opinion, neither a legal nor a moral claim to the reward. The learned Chief Justice held that Clarke never accepted or intended to accept the offer in the proclamation, and, unless the mere giving of the information without such intention amounted in law to an acceptance of the offer or to performance of the condition, there was neither ‘acceptance’ nor ‘performance,’ and therefore there was no contract. … It is unquestionable—putting aside what are called formal contracts or quasicontracts—that to create a contractual obligation there must be both offer and acceptance. It is the union of these which constitutes the binding tie, the obligatio. The present type of case is no exception. It is not true to say that since such an offer calls for information of a certain description, then, provided only information of that description is in fact given, the informant is entitled to the reward. That is not true unless the word ‘given’ is interpreted as ‘given in exchange for the offer’—in other words, given in performance of the bargain which is contemplated by the offer and of which the offer is intended to form part. Performance in that case is the implied method of acceptance, and it simultaneously effects the double purpose of acceptance and performance. But acceptance is essential to contractual obligation, because without it there is no agreement, and in the absence of agreement, actual or imputed, there can be no contract. … Instances easily suggest themselves where precisely the same act done with reference to an offer would be performance of the condition, but done with reference to a totally distinct object would not be such a performance. An offer of £100 to any person who should swim a hundred yards in the harbour on the first day of the year, would be met by voluntarily performing the feat with reference to the offer, but would not in my opinion be satisfied by a person who was accidentally or maliciously thrown overboard on that date and swam the distance simply to save his life, without any thought of the offer. The offeror might or might not feel morally impelled to give the sum in such a case, but would be under no contractual obligation to do so.

• 4.2 Communication of the acceptance An acceptance will be effective only when it has been communi­ cated to the offeror.25 If the offeror is not aware of the acceptance, neither the offeree nor the offeror will be bound in contract. 25 Tinn v Hoffman & Co (1873) 29 LT 271, 278.

An acceptance will be effective only when it has been communicated to the offeror.

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The rationale for this rule is that it would be unfair for an offeror to be bound in contract to another party without having any knowledge of the acceptance. The notification of the acceptance establishes the meeting of the minds that is required for the formation of a contract.26 The one exception to this rule is the postal rule, which is discussed below. The acceptance must be communicated by the person who received the offer, or by their agent. In the case of Powell v Lee,27 the plaintiff applied for a position as a headmaster. A meeting of the school managers, who collectively had the power to offer him the position, narrowly decided to appoint him. One of the managers wrote to Powell, without the authority of the other managers, and offered him the position. When the managers met again they rescinded their decision. Powell sued, but lost because the acceptance had not been communicated by the proper offeree or by an authorised agent. It is possible for the offeror to waive communication of the acceptance. In particular, notification  of acceptance may not be necessary in unilateral contracts. The case of Carlill v Carbolic Smoke Ball Co28 illustrates this point. In Carlill, the Carbolic Smoke Ball Co had made an offer to the world at large. Mrs Carlill, who purported to accept the offer and who conducted herself in compliance with the terms of the offer, did not immediately communicate her acceptance to Carbolic and the House of Lords dismissed the contention that she should have done so. Bowen LJ stated: But there is this clear gloss to be made upon that doctrine, that as notification of acceptance is required for the benefit of the person who makes the offer, the person who makes the offer may dispense with notice to himself if he thinks it desirable to do so, … and if the person making the offer, expressly or impliedly intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification … In the advertisement cases it seems to me to follow as an inference to be drawn from the transaction itself that a person is not to notify his acceptance of the offer before he performs the condition … From the point of view of commonsense no other idea could be entertained. If I advertise to the world that my dog is lost, and that anybody who brings the dog to a particular place will be paid some money, are all the police or other persons whose business it is to find lost dogs to be expected to sit down and write me a note saying that they have accepted my proposal?29

The situation is somewhat different where bilateral contracts are concerned. In Latec Finance Pty  Ltd v Knight,30 an acceptance that failed to reach the offeror was found to be ineffective. Mr Knight had signed a hire purchase agreement in relation to a television. Latec Finance had decided to accept his application and this was noted on a file, but it was not communicated to Mr Knight. Later, Mr Knight found the television to be unsatisfactory and returned it and attempted to revoke his offer. Latec sought to enforce the agreement. The New South Wales Supreme Court of Appeal held that no contract had come into existence between the parties as the acceptance had not been communicated. 26 27 28 29 30

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. (1908) 99 LT 284. [1893] 1 QB 256. Ibid, 269–270. [1969] 2 NSWR 79.

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4.2.1  Silence as acceptance An offeror cannot unilaterally impose a condition upon an offeree A contract cannot that their silence will constitute  consent31—a contract cannot come into existence come into existence simply because the offeree has failed to simply because the reply to the offeror. This principle has become quite crucial in offeree has failed to reply to the offeror. consumer contracts as unscrupulous merchants have sought to entrap consumers into sales contracts by sending them unsolicited goods.32 The Australian Consumer Law contains a specific protection to guard against this practice.33 To allow a contract to form without the demonstrated consent of the offeree would be contrary to the bargain theory of contract34 and the settled principles of contract law. The case of Felthouse v Bindley35 illustrates the principle that the offeror cannot designate silence as a method of acceptance without the acquiescence of the offeree. In Felthouse, a man wrote to his nephew seeking to buy a horse. In his letter the man stated: ‘If I hear no more about him, I consider the horse mine at that price.’36 The nephew did not reply to the letter. However, the nephew did tell an auctioneer, who was selling his stock that the horse should be set aside. The horse was sold by accident and the man sued for conversion. The Court held that the plaintiff could not sue for conversion as he had no title in the horse. Despite the fact that the nephew was agreeable to sell the horse to his uncle, he had not communicated this intention to the uncle.37

4.2.2  Acceptance by conduct The principle that silence cannot be imposed as the method of contractual acceptance is not unlimited.38 Even though silence, without more, cannot constitute acceptance to a contractual offer, the conduct of an offeree may amount to acceptance. This might occur because the offeror is aware that the offeree has accepted through their conduct. Similarly, the dealing between the two parties might be such that an overt communication of acceptance by the offeree is not necessary. The crucial distinction that might be drawn between such instances and the case of Felthouse v Bindley 39 is that in Felthouse, the uncle was unaware of the actions of his nephew.40 Felthouse v Bindley (1862) 142 ER 1037; White Trucks Pty Ltd v Riley (1948) 66 WN (NSW) 101. Australian Consumer Law, ss 39–43. Australian Consumer Law, s 41. See Chapter 2. (1862) 142 ER 1037. Ibid, 1037. Greig and Davis have suggested that the fact that the nephew sought to have the auctioneer set the horse aside demonstrated consent to the sale to the uncle: see D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 302. However, Seddon and Ellinghaus make the point that in cases where conduct may constitute acceptance the offeror is aware of the offeree’s conduct, but in Felthouse the uncle was unaware of the nephew’s request to the auctioneer: N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 137. 38 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523; Farmers’ Mercantile Union and Chaff Mills Ltd v Coade (1921) 30 CLR 113. 39 (1862) 142 ER 1037. 40 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 137. 31 32 33 34 35 36 37

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Nonetheless, an acceptance by conduct can occur if the offeror has waived the communication of the acceptance.41 In Brogden v Metropolitan Railway Co,42 the plaintiff had been supplying coal to the defendant for a period of several years. The defendant sent the plaintiff a contract, which differed in some of its terms from their previous dealings, and the plaintiff filled in some blanks in the contract but failed to send it back to the defendant. The parties then had dealings between themselves that were consistent with the terms of the written contract. When a dispute arose, the plaintiff sought to stop supplying coal to the defendant. The Court held that there was a contract between the parties and that it had arisen from the way in which the parties conducted themselves. In Empirnall Holdings v Machon Paull,43 the New South Wales Court of Appeal affirmed the rule stated in Felthouse v Bindley but found that the facts in Empirnall went beyond the scope of those in Felthouse.44 In Empirnall, a property developer, Empirnall, engaged two architects to do construction work. The architects did some work and then sought both a progress payment and an executed contract. The architects sent a contract to Empirnall for signature, but were told that Eric Jury, a major shareholder and director of Empirnall, ‘does not sign contracts’.45 The contract was left unsigned. The architects wrote to Empirnall and stated that they would be proceeding on the basis that contract had been accepted. The architects continued to do their work and they did receive progress payments. Empirnall later became insolvent and the Court had to determine whether part of the contract was effective. The Court of Appeal held that the contract had come into effect. McHugh JA stated: Where an offeree with a reasonable opportunity to reject the offer of goods or services takes  the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to the terms.46

In Empirnall, there had been ample opportunity for the offeree to reject the terms of the contract or to conduct themselves in a way that signalled a rejection of the offer. In many respects, saying that a director ‘does not sign contracts’ was a deeply unsatisfactory response to what was clearly an evolving contractual relationship. That is not to say that the plaintiff was deliberately trying to come within the shelter of the Felthouse principle, but a contract cannot be denied when the conduct of the parties clearly demonstrates to third parties that a contract exists between the parties. review questions 1 What is the principle established in Felthouse v Bindley? 2 How do the facts in the case of Felthouse v Bindley differ from the facts in Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd ? What is the significance of the difference between the two cases?

41 42 43 44 45 46

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. (1877) 2 App Cas 666. (1988) 14 NSWLR 523. Ibid, 527. Ibid, 526. Ibid, 535.

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Acceptance

• 4.3 Prescribed mode of acceptance It is open to the offeror to prescribe the mode of acceptance that they require,47 and different rules of acceptance apply depending on the prescribed mode of acceptance. For example, if the mode of acceptance that is agreed is the post, then the postal rule will apply,48 but if the mode is that of instantaneous communication then the general rule will apply.49 In addition, there are two particular rules that govern the prescribed mode of acceptance. First, if the offeror has indicated that only one method of acceptance will be appropriate and acceptable to them, then a valid acceptance may only be brought about by this method,50 although the offeror may still waive this requirement.51 Further, if the offeror prescribes one mode of acceptance for their offer and the offeree replies with an acceptance by a different means, which the offeror is happy to accept, this might be seen either as a waiver of the prescribed or as an acceptance of a counter-offer.52 The second rule is that if an offeror does prescribe a method of acceptance, but does not state  clearly that it is the only mode of acceptance, then an acceptance proffered by another method may be valid provided that it is not disadvantageous to the offeror.53 For example, if an offeror says ‘you can reply to me by post’, this might simply reflect a desire to have the agreement recorded in writing. Thus, if the offeree telephones the offeror or speaks to them face to face to communicate acceptance, it would defeat the intentions of the parties to hold that this is not a valid contract.54 However, if the offeror says ‘reply to me by phone’—which suggests a desire for an immediate response—and the offeree responds by mail, it is possible that this is not a valid acceptance.55 In George Hudson Holdings Ltd v French,56 the appellant, which had made a takeover attempt of a company, made an offer to shareholders which required that they post their acceptances. The respondent, a shareholder, personally delivered his acceptance and share certificates. The High Court held that this was a valid acceptance. Menzies J stated that it was clear ‘that the offeror was concerned with the delivery or receipt of the acceptance … and the receipt by the appellant company … was, without question … an acceptance’.57

4.3.1  The postal rule The postal rule is an exception to the general rule that an offer is only effective once it has been communicated. It applies only where the parties have contemplated an acceptance by mail or by telegram. The postal rule stipulates that where the post has been designated as the mode of acceptance, the offeree’s acceptance will be effective from the moment that it is posted rather 47 48 49 50 51 52 53 54 55 56 57

Quenerduaine v Cole (1883) 32 WR 185; Howard Smith & Co v Varawa (1907) 5 CLR 68. Adams v Lindsell (1818) 106 ER 250. Entores Ltd v Miles Far East Corp [1955] 2 QB 327. Diakogiannis v Johnson (1989) NSW Conv R ¶55-472; Rushton (SA) Pty Ltd v Holzberger [2003] QCA 106. Compagnie de Commerce et Commission SARL v Parkinson Stove Co [1953] 2 Lloyd’s Rep 487; Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1970] 1 WLR 241. Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR (NSW) 122. George Hudson Holdings Ltd v French (1973) 128 CLR 387. N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 140. Quenerduaine v Cole (1883) 32 WR 185. (1973) 128 CLR 387. Ibid, 394–395.

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than the time it is received. Where the offer is made by post, there are reasonable grounds to believe that acceptance by post would be contemplated. In Adams v Lindsell,58 the defendants wrote to the plaintiffs and offered to sell them wool, stipulating that post was the prescribed mode of acceptance. However, the letter of offer was incorrectly addressed and did not reach the plaintiffs until 5 September. The plaintiffs replied by post and their acceptance was received on 9 September. Had the initial offer letter been properly addressed, the plaintiffs’ acceptance would have reached the defendant on 7 September. As it was, the defendants had sold the wool elsewhere on 8 September. The plaintiffs sued for a breach of contract. The Court held that the acceptance had taken place as soon as the letter was posted. The postal rule is not without its inconveniences. Until the moment that the offeror receives the letter, they have no actual way of knowing that the acceptance has been made, unless of course the offeree also telephones to tell them that the acceptance has been mailed. At the time that the postal rule came into existence, the mail was the most effective method of communication. In modern times, however, telephone, email and fax are more convenient methods of communication when time is of the essence. The problem that the postal rule confronted, at the time in which it was created, was that either the offeror or the offeree was going to be disadvantaged by the choice of the moment of acceptance. If the offeree had to wait until their offer was received by the offeror, the offeree might well have had to wait until the offeror had written back to them to acknowledge acceptance before proceeding to perform under the contract. The solution offered by the postal rule does therefore appear to be somewhat arbitrary. However, in Re Imperial Land Co of Marseilles; Harris’ Case,59 Mellish LJ stated: No mercantile man who has received a letter making him an offer, and has accepted the offer, could safely act on that acceptance after he has put it into the post until he knew it had been received … According to the argument presented to us, if the person who has sent the offer finds that the market is falling, and that it will be a bad bargain for him he may, at any time, before he has received the answer, revoke his offer.60

Moreover, Greig and Davis have suggested that the English Courts chose the moment at which the letter was mailed because this represented the moment of formation.61 The application of the postal rule depends upon the parties contemplating that the acceptance will be by post. In Henthorn v Fraser,62 Lord Herschell stated: The circumstances [must be] such that it must have been within the contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance of an offer.63

Notwithstanding that the post may have been designated as the method of acceptance, the realities of commercial dealings may very well intrude and the postal rule may become inapplicable. For example, the negotiations between the parties may have been ongoing and 58 59 60 61 62 63

(1818) 106 ER 250. (1872) LR 7 Ch App 587. Ibid, 594. D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 310. [1892] 2 Ch 27. Ibid, 33.

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Acceptance

there may have been serious disagreements, such that an agreement cannot be properly be said to have arisen in the absence of an actual agreement. The primary example of this situation is Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd.64 In Tallerman the parties had a prolonged correspondence over an alleged breach in their contractual dealings. The plaintiff’s solicitor purported to accept an offer to compromise which the defendant had made in a previous letter. The High Court held that letter did not constitute a valid acceptance: The general rule is that a contract is not completed until acceptance of an offer is actually communicated to the offeror, and a finding that a contract is completed by the posting of a letter of acceptance cannot be justified unless it is to be inferred that the offeror contemplated and intended that his offer might be accepted by the doing of that act: see Henthorn v Fraser (1892) 2 Ch 27, at pp 35, 36, per Kay LJ In that case, as in Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) 4 Ex D 216, it was easy to draw such an inference, but, in such a case as the present, where solicitors are conducting a highly contentious correspondence, one would have thought that actual communication would be regarded as essential to the conclusion of agreement on anything.65

The postal rule will also not apply where its application would cause great inconvenience, or render the application of the rule an absurdity.66 If it is clearly not the intention of the parties that their dealings would produce an odd outcome, such as that which would result if the postal rule were applied, then the courts will not apply the postal rule. In British and American Telegraph v Colson,67 Lord Bramwell stated: If a man proposes marriage, and the woman was to consult her friends and let him know, would it be enough if she wrote and posted a letter which never reached him? … [That] would be wholly unjust and unreasonable.68

The postal rule can also be negated either expressly or by The postal rule will implication. The offeror may state quite clearly to the offeree that also not apply where its ‘for your acceptance to be effective it must be received’, or the application would cause offeror can simply state, ‘acceptance must be received’. In Holwell great inconvenience, or render the application of Securities Ltd v Hughes,69 the defendant granted the plaintiff a sixthe rule an absurdity. month option to purchase a property. The option was exercisable in writing within a six-month period. The plaintiff wrote to the defendant seeking to exercise the option. They hand-delivered a copy of the letter to his solicitors and posted a copy as well. The hand-delivered copy was lost and was never sighted by the defendant. Similarly, the copy that was posted never reached the defendant. When the defendant refused to sell the property, the plaintiff argued that they had a valid contract. The Court held that even though the parties had contemplated using the post, the question was whether they had in fact required actual communication. In their agreement as to the option, the parties had stipulated that there should be notice in writing, and the Court held this to mean that there had to

64 (1957) 98 CLR 93. 65 Ibid, 111. 66 Holwell Securities Ltd v Hughes [1974] 1 WLR 155. 67 (1871) LR 6 Exch 108. 68 Ibid. 69 [1974] 1 All ER 161.

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be actual communication. As Hughes had never received the letter, there had been no acceptance and no contract. In Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd,70 the statement, ‘this contract is forwarded to you on the basis that it will be held by you on our behalf pending receipt by us of an identical contract signed by the vendor company’ was held to require that the accepted contract must have actually been received by the offeror, rather than merely posted.71 In Elizabeth City Centre v Corralyn,72 the defendant sent the plaintiff an acceptance of an option via mail. The acceptance was not received. As the agreement between the parties had stipulated that the acceptance was to be sent by registered or certified letter, the Court held that the postal rule was excluded by the registered post condition and not intended to apply in this case.73 As the postal rule had been excluded, the general rule of acceptance applied and this meant that actual communication was required.74 Where the postal rule does apply, the contract will be concluded at the moment of posting, irrespective of whether the acceptance is lost, destroyed en route or excessively delayed.75 In Household Fire and Carriage Accident Insurance v Grant,76 the defendant had sought to buy shares in a company, but never received the company’s letter of acceptance. As the parties had made it clear that the post was to be used in reply, the defendant was liable to pay for the shares even after the company went into liquidation. There is a possible exception to the strict application of the postal rule. In the event that it can be demonstrated that the offeree failed to address the letter correctly, or failed to stamp it adequately, then the postal rule may not apply.77 However, if the letter is misdirected because the offeror supplied the wrong address, then the offeror will likely be bound by the acceptance.

4.3.2  Instantaneous methods of communication The postal rule, which applies to the mail and to telegrams, is ill-equipped to deal with the realities of modern technology. For this reason the courts have sought to reassert the application of the general rule of acceptance where instantaneous methods of communication are concerned. However, there are some limitations that apply. Consider the following example, if I email a letter to my bank manager and it is received by his secretary who then prints it out for him to read but loses the printed copy before he reads it, should I bear the burden of the bank’s mishandling of my correspondence? There must be some protection given to ordinary consumers in their contractual dealings with large, sophisticated commercial entities. It makes senses then that there should be some flexibility in how the rules of acceptance are applied in cases where instantaneous methods of communication are used.78

70 [1994] 1 VR 74. 71 A similar decision was made in Bressan v Squires [1974] 2 NSWLR 460. 72 (1994) 63 SASR 235. 73 Ibid, 238 74 Ibid, 238. 75 Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) LR 4 Ex D 216. 76 Ibid. 77 Getreide-Import GmbH v Contimar SA Compania Industrial, Commercial y Maritima [1953] 1 WLR 207. 78 See Brinkibon Ltd v Stahag Stahl und Stahlwarendhandelgesellschaft mbH [1983] 2 AC 34.

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Acceptance

In the case of Entores Ltd v Miles Far East Corp,79 the English Court of Appeal held that the postal  rule was inapplicable where instantaneous forms of communication were used by the contracting parties. The plaintiffs had telexed an offer from London to the defendants in Amsterdam. The defendants accepted it by telex. A dispute arose as to an alleged breach and a central issue was where the contract had been made. The Court of Appeal held that it had been made in England. As the postal rule did not apply, the contract was made as if the parties were in each other’s presence and when the acceptance was actually received. The receipt of the acceptance took place in England. In Brinkibon Ltd v Stahag Stahl und Stahlwarendhandelgesellschaft mbH,80 a dispute arose between an English buyer and an Austrian seller over the purchase of steel bars. The question of where the contract was made was crucial. The House of Lords held that it had been made in Vienna. There had been substantial negotiations between the parties, culminating in the English buyers sending an acceptance by telex to the sellers in Vienna. Lord Wilberforce affirmed the general rule of acceptance. However, he also recognised that the rule might not be suitable in all situations, notwithstanding that an instantaneous form of communication is used, if the message is sent outside usual business hours, via a third party, or where it is meant to be read at a later time. In the extract below, Lord Wilberforce compares the postal rule and the general rule and sets out the justification for applying the latter to instantaneous communication. Brinkibon Ltd v Stahag Stahl und Stahlwarendhandelgesellschaft mbH [1983] 2 AC 34 Lord Wilberforce at 40–42: In the present case it seems that if there was a contract … it was preceded by and possibly formed by a number of telephone conversations and telexes between London and Vienna, and there are a number of possible combinations upon which reliance can be placed. At this stage we must take the alternatives which provide reasonable evidence of a contract in order to see if the test is satisfied. There are two: (i) A telex dated May 3, 1979, from the respondents in Vienna, said to amount to a counter-offer, followed by a telex from the appellants in London to the respondents in Vienna dated May 4, 1979, said to amount to an acceptance. (ii) … The first of these alternatives neatly raises the question whether an acceptance by telex sent from London but received in Vienna causes a contract to be made in London, or in Vienna. If the acceptance had been sent by post, or by telegram, then, on existing authorities, it would have been complete when put into the hands of the post office—in London. If on the other hand it had been telephoned, it would have been complete when heard by the offeror—in Vienna. So in which category is a telex communication to be placed? Existing authority of the Court of Appeal decides in favour of the latter category, i.e. a telex is to be assimilated to other methods of instantaneous communication: see Entores Ltd v Miles Far East Corporation [1955] 2 QB 327. The appellants ask that this case, which has stood for 30 years, should now be reviewed.

79 [1955] 2 QB 327. 80 [1983] 2 AC 34.

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Now such review as is necessary must be made against the background of the law as to the making of contracts. The general rule, it is hardly necessary to state, is that a contract is formed when acceptance of an offer is communicated by the offeree to the offeror. And if it is necessary to determine where a contract is formed (as to which I have already commented) it appears logical that this should be at the place where acceptance is communicated to the offeror. In the common case of contracts, whether oral or in writing inter praesentes, there is no difficulty; and again logic demands that even where there is not mutual presence at the same place and at the same time, if communication is instantaneous, for example by telephone or radio communication, the same result should follow. Then there is the case—very common—of communication at a distance, to meet which the so called ‘postal rule’ has developed. I need not trace its history: it has firmly been in the law at least since Adams v Lindsell (1818) 1 B & Ald 681. The rationale for it, if left somewhat obscure by Lord Ellenborough CJ, has since been well explained. Mellish LJ in In re Imperial Land Co of Marseilles (Harris’ Case) (1872) LR 7 ChApp 587, 594 ascribed it to the extraordinary and mischievous consequences which would follow if it were held that an offer might be revoked at any time until the letter accepting it had been actually received: and its foundation in convenience was restated by Thesiger LJ in Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) 4 ExD 216, 223. In these cases too it seems logical to say that the place, as well as the time, of acceptance should be where (as when) the acceptance is put into the charge of the post office. In this situation, with a general rule covering instantaneous communication inter praesentes, or at a distance, with an exception applying to non-instantaneous communication at a distance, how should communications by telex be categorised? In Entores Ltd v Miles Far East Corporation [1955] 2 QB 327 the Court of Appeal classified them with instantaneous communications. Their ruling, which has passed into the textbooks, including Williston on Contracts, 3rd ed. (1957), appears not to have caused either adverse comment, or any difficulty to business men. I would accept it as a general rule. Where the condition of simultaneity is met, and where it appears to be within the mutual intention of the parties that contractual exchanges should take place in this way, I think it a sound rule, but not necessarily a universal rule. Since 1955 the use of telex communication has been greatly expanded, and there are many variants on it. The senders and recipients may not be the principals to the contemplated contract. They may be servants or agents with limited authority. The message may not reach, or be intended to reach, the designated recipient immediately: messages may be sent out of office hours, or at night, with the intention, or upon the assumption, that they will be read at a later time. There may be some error or default at the recipient’s end which prevents receipt at the time contemplated and believed in by the sender. The message may have been sent and/or received through machines operated by third persons. And many other variations may occur. No universal rule can cover all such cases: they must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgment where the risks should lie: see Household Fire and

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Acceptance

Carriage Accident Insurance Co Ltd v Grant, 4 ExD 216, 227 per Baggallay LJ and Henthorn v Fraser [1892] 2 Ch 27 per Lord Herschell. The present case is, as Entores Ltd v Miles Far East Corporation [1955] 2 QB 327 itself, the simple case of instantaneous communication between principals, and, in accordance with the general rule, involves that the contract (if any) was made when and where the acceptance was received. This was on May 4, 1979, in Vienna. Increasingly, email and other electronic communications are governed by statute. The Electronic Transaction Acts have uniform application in Australia.81 Crucially, the Electronic Transaction Acts recognise a significant difference between those situations where there is an electronic information system that is designed to receive communications for transactions, and those where no such system exists. Where a system is in place, the communication is effective from the time that it enters the system. Where there is no system, the general rule applies.

Ke y p o in ts for re v ision An acceptance of an offer is required if a contract is to be formed between two parties. The offeree must be conscious of the offer. An acceptance must be clearly communicated if it is to be effective. Silence generally cannot constitute acceptance of an offer. However, there are circumstances under which conduct can constitute an acceptance even though there has been no written or spoken statement of acceptance. It is open to the parties in their negotiations to prescribe the method of acceptance. Under the postal rule, the acceptance will be valid from the moment that the offeree’s letter is posted. Where instantaneous communications are concerned, the acceptance will be effective when received by the offeror. Where an individual or an organisation has a system in place to receive business communications, the acceptance will be effective when it enters that system.

problem-solving practice Mike Smith runs a car dealership in Melbourne. He seeks your advice on the following situations: Mike has a vintage Jaguar car at his dealership. He has received a letter from Tereza Denario in which she has written: ‘I wish to buy the Jaguar. I will give you $5000 for it. Below is my email address. If I hear no more about it I shall consider the Jag to be mine at that price.’ Mike did not write back to Tereza. However, Mike did put the Jaguar in a place aside from all the other cars at the dealership and has refused two other offers for the Jaguar from other customers. Is he bound to sell the car to Tereza?

81 See Electronic Transactions Act 2001 (ACT); Electronic Transactions Act 2000 (NSW); Electronic Transactions Act 2000 (NT); Electronic Transactions Act 2001 (Qld); Electronic Transactions Act 2000 (SA); Electronic Transactions Act 2000 (Tas); Electronic Transactions (Victoria) Act 2000 (Vic); Electronic Transactions Act 1999 (Cth).

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ANSWER As established in Felthouse v Bindley, the general rule is that silence will not constitute an acceptance. In the present matter, Mike has not communicated his acceptance to Tereza. However, what Mike has done is to put the car aside and to refuse offers from other potential buyers. If this is viewed within the context of Tereza’s letter, it would suggest that Mike has accepted Tereza’s offer. In Empirnall Holdings v Machon Paull, the offeree’s conduct in taking the benefit of the offeror’s performance was held to be an acceptance of a contractual offer. The question at hand is as McHugh J noted in Empirnall: the ‘ultimate issue is whether a reasonable bystander would regard the conduct of the offeree, including his silence, as signalling to the offeror that his offer has been accepted’.82 The difficulty in the present matter is that there may be good reasons, other than the acceptance of the offer, as to why Mike has kept the car aside and refused other offers. He might be planning to do work on the car to increase its value. The offers he has received to date might not have been satisfactory to him. Perhaps most crucially, there is a difference between the facts in the present matter and the facts in Empirnall. In the present matter, Tereza has given Mike a bare offer. However, in Empirnall, the offeror performed acts and the offeree received the benefit of those acts. As this has not happened in the present matter there is not the easy correspondence between the offeree’s actions and the offer that existed in Empirnall. Further, had Mike wished to accept the offer, he could quite easily have emailed Tereza. On balance, it is likely that Mike has not accepted Tereza’s offer.

82 (1988) 14 NSWLR 523, 535.

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5

Consideration

Chapt e r o v e rv i e w 5.0

Introduction  70

5.1

Defining consideration  70 5.1.1 The benefit/detriment requirement   71 5.1.2 The bargain requirement   72

5.2

Consideration must move from the promisee   73

5.3

Consideration need not be adequate but must be sufficient   74 5.3.1 Adequacy  74 5.3.2 Sufficiency  75

5.4

Illusory consideration  76

5.5

Past consideration is not adequate consideration   77

5.6

Compromise and forbearance to sue as consideration   78 5.6.1 Compromise  78 5.6.2 Forbearance  79

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5.7

Existing duties  79 5.7.1 Existing public duty imposed by law   80 5.7.2 Existing duty imposed by a contract in which the promisee is already bound  80

5.8

Promises to pay lesser sums   84

• 5.0 Introduction Consideration is one of the six essential elements required for the formation of a contract.1 It is consideration that makes promises enforceable. The doctrine of consideration requires that where a promisor has made a promise to the promisee, the latter must in return give the promisor something in order to make the promise binding. In this sense, consideration is concerned with the mutual exchange of promises. What the promisee may give to the promisor can vary depending on the agreement of the parties. For example, if X promises to unblock Y’s drains, then Y might give X $500 in order to make that promise binding on X. Alternatively, Y might promise to pay X $500 if X unblocks Y’s drains. The mutual exchange of promises will satisfy the consideration requirement. Provided that Y promises to give X something, or immediately provides X with something, then the promise has been paid for by Y. While consideration is not normally a controversial issue in contract formation—as contracting parties rarely agree to do something for nothing—the topics in this chapter will indicate that when consideration does become a matter in dispute, it can be difficult to define. Nonetheless, consideration is a well-settled doctrine of contract law.

• 5.1 Defining consideration As stated above, consideration makes a promise enforceable. As such, the modern doctrine of consideration is a creation of the bargain theory of contract.2 When the promisor makes their promise, the promisee buys the enforceability of that promise by exchanging something that has value in the eyes of the law.3 This may be a promise, money or some other act. In Attorney-General for England v Wales v R,4 the Court stated that ‘consideration may be provided either by a promise or by an act. A promise confers a benefit in law and an act provides a benefit in fact.’5 The doctrine of consideration came to be firmly established in English law in the case of Eastwood v Kenyon.6 A girl named Sarah Sutcliffe had been named as the sole beneficiary of her father’s estate. As she was below the age of majority her guardian, Eastwood, took care of

1 The six essential elements being: offer, acceptance, consideration, intention to create legal relations, capacity and certainty. 2 Eastwood v Kenyon (1840) 113 ER 482; see also Chapter 2. 3 Thomas v Thomas (1842) 114 ER 330. 4 [2002] 2 NZLR 91. 5 Ibid, 106. 6 (1840) 113 ER 482.

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Consideration

her  affairs. Eastwood spent his money on her education and on improving her estate. When Sutcliffe reached the age of majority she made a promise to Eastwood that she would reimburse him for his expenditure. When Sutcliffe married Kenyon he made a similar promise to Eastwood. Eventually, Eastwood sued Kenyon, but the action failed on the basis that the consideration was in the past. The problem for Eastwood was that at the time when Kenyon had made the promise to him, Eastwood had already expended the monies of Sutcliffe’s behalf several years prior to receiving the relevant promise. The condition of mutuality could not be satisfied. There existed only a moral obligation and no binding legal obligation. review questions 1 How is consideration defined? 2 Why is consideration necessary for the formation of a contract?

5.1.1  The benefit/detriment requirement Consideration can also be defined in terms of benefit and detriment. In Currie v Misa,7 Justice Lush stated: A valuable consideration, in the sense of the law, may consist 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 …8

As Carter has pointed out, this definition does suffer from the deficiency of not including the immediacy of the promisor’s promise and the need for ‘cause and effect between the promise and the benefit of detriment’.9 The definition does, however, make it clear that in exchange for receiving the promise, the promisee must either provide a benefit to the promisor or a third party (if relevant), or incur a detriment.10 Indeed, the notion of quid pro quo is well established in the doctrine of consideration; as Isaacs ACJ stated in Crown v Clarke,11 consideration entails a ‘reciprocal conventional inducement, each for the other, between consideration and promise’.12 In Hamer v Sidway,13 an uncle made a promise to his nephew that he would pay him $5000 if the nephew refrained from ‘drinking liquor, using tobacco, swearing, and playing cards or billiards for money’ until the nephew turned 21 years old. The nephew duly refrained and it was held that the promise was enforceable. The uncle received no benefit from the nephew’s performance and it might be argued that the nephew suffered no significant detriment.14 However, contract 7 (1875) LR 10 Ex 153. 8 Ibid, 162. 9 J Carter, E Peden and G Tolhurst, Contract Law in Australia, LexisNexis (2007), p. 108; see also Beaton v McDivitt (1987) 13 NSWLR 162, 181. 10 Balfour v Balfour [1919] 2 KB 571. 11 Crown v Clarke (1927) 40 CLR 227. 12 Ibid, 236. 13 124 NY 538 (1891). 14 Gooley and Radan have argued that the nephew was in fact ‘better off’: see J Gooley and P Radan, Principles of Australian Contract Law, LexisNexis (2006), p. 58. That said, the act of refraining from engaging in any of the acts listed in the uncle’s requirements might have caused the nephew some detriment which only the latter could understand.

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law does not impose any conditions to measure the adequacy of the benefit or detriment.15 It has been suggested that a single peppercorn might be sufficient consideration under certain circumstances.16 Notwithstanding the ubiquitous peppercorn principle, the benefit conferred or detriment incurred must be real. In the case of Ballantyne v Phillot17 the benefit that the plaintiff, Ballantyne, suggested that she had conferred upon the defendant, Phillot, was found to be non-existent. Phillot had earlier sought to sue Ballantyne, his former mistress, for the repayment of a large sum of  money that he had loaned her. Ballantyne had in response suggested that she could sue  Phillot  for  defamation and for another debt. Neither of her claims had any basis in fact. However, Phillot agreed to drop his claim in exchange for Ballantyne agreeing to make no claims against him. When Phillot later sought to sue Ballantyne, she invoked this contract. The High Court held  by a majority that Ballantyne had provided no consideration for Phillot’s promise as she knew that she had no claim.

5.1.2  The bargain requirement The promisee’s undertaking to either incur a detriment or confer a benefit upon the promisor must correspond to the promise made by the promisor.

The bargain requirement of consideration reflects the notion of quid pro quo that is inherent in the operation of the doctrine.18 In other words, the promisee’s undertaking to either incur a detriment or confer a benefit upon the promisor must correspond to the promise made by the promisor.19 Insofar as the putative contract is concerned, the two promises cannot be unrelated.20 In  Atco v Newtronics Pty Ltd (In liq),21 Warren CJ, Nettle and Mandie  J JA stated:

Although at one stage in the law’s development, a detriment suffered upon a promise made was ‘sufficient consideration to sustain an enforceable contract’, since the 19th Century the common law conception of consideration has been limited to a ‘reciprocal conventional inducement, each for the other, between consideration and promise’. Consequently, action in reliance upon an announcement of support is no longer sufficient in itself to create a contract to provide support. Now, in order to establish the existence of good consideration, it must be made to appear that the promise was really offered as the price or quid pro quo for the action taken.22

15 In Woolworths Ltd v Kelly (1991) 22 NSWLR 189, President Kirby explained that courts do not enquire as to the adequacy of consideration as they have no means of addressing the value that a contracting party places on the consideration. This is discussed below, section 5.3.1. 16 See N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), pp. 176–177. 17 (1961) 105 CLR 379. 18 Beaton v McDivitt (1987) 13 NSWLR 162. 19 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; Beaton v McDivitt (1987) 13 NSWLR 162; Eastwood v Kenyon (1840) 113 ER 482. 20 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424. Professor Hamson has stated that ‘Consideration, offer and acceptance are an indivisible trinity, facets of one identical notion which is that of bargain’: C J Hamson, ‘The Reform of Consideration’ (1938) 54 Law Quarterly Review 233, 234. 21 [2009] VSCA 238. 22 Ibid, [62].

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The case of Australian Woollen Mills Pty Ltd v Commonwealth23 illustrates the necessity of the bargain requirement. In that case, the plaintiff sought to enforce promises that the Commonwealth had made with respect to paying subsidies to wool manufacturers who bought and used wool for  local manufacture. It was clear that the plaintiff had acted to its detriment. However, the promises made by the Commonwealth were statements of policy. As they could not be construed as a promise to purchase the wool, the reliance by the plaintiff did not give rise to a contract. The Australian Woollen Mills case demonstrates that there is a crucial difference between an act performed by a promisee as part of the bargain for the promisor’s promise and an act that is merely done in reliance of some vague promise. There are two distinct concepts at play here. The first pertains to the common law doctrine of consideration. This arises due to the bargain of one promise in exchange for another. The second raises the question of the equitable doctrine of estoppel. This arises because the promisor has made a promise that has induced the promisee to act to their detriment.24 The case of Beaton v McDivitt 25 illustrates the dividing line between consideration and estoppel. The McDivitts expected that their land would be rezoned with the result being that they would have to pay higher rates. They subdivided their land into four lots and agreed that Beaton should have one lot if he cultivated the land using permaculture methods. Beaton was to have the land rent-free and the land would be transferred to him after the rezoning took place. Beaton farmed the lot for several years. However, after a dispute over a tai chi class, the McDivitts ordered Beaton off their land. In the New South Wales Supreme Court, Young J found for Beaton on the basis that his reliance on the McDivitts’ promise established a type of consideration.26 This decision represented a reworking of the doctrine of consideration along the lines of Dillwyn v Llewelyn,27 where there was ‘an exception to the modern requirement that a contract should be a bargain supported by a consideration in the nature of a quid pro quo’.28 In the New South Wales Supreme Court of Appeal it was held by Kirby P and McHugh JA that there could be no exception to the bargain theory of consideration. Their Honours made it clear that Dillwyn v Llewelyn formed part of a series of estoppel cases and was distinct from the doctrine of consideration. However, the members of the Court of Appeal differed in their reading of the facts of the case. Kirby P held that there was no bargain and hence, no consideration. In contrast, McHugh and Mahoney J JA held that there was consideration in the form of Beaton acquiescing to working the land on the terms set by McDivitt; and Mahoney JA found that the contract had been frustrated because the rezoning had not taken place.

• 5.2 Consideration must move from the promisee The logical inference from both the benefit/detriment and the bargain requirements of consideration is that consideration must move from the promisee to the promisor. That said, 23 (1954) 92 CLR 424. 24 See Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 25 (1988) 13 NSWLR 162. 26 Beaton v McDivitt (1985) 13 NSWLR 134. 27 (1862) 4 De G F & J 517; 45 ER 1285. 28 Beaton v McDivitt (1988) 13 NSWLR 162, 170.

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consideration need not be given directly to the promisor.29 The consideration requirement is still satisfied if the promisee confers a benefit upon a third party at the behest of the promisor. The importance of consideration moving from the promisee is most aptly illustrated in those cases decided under the doctrine of privity where a contract for the benefit of a third party is in dispute. In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd,30 for example, Lord Haldane stated that ‘only a person who is a party to a contract can sue on it’ and ‘only a person who has given consideration may enforce a contract not under seal’.31 These principles were sharply demonstrated in the case of Coulls v Bagot’s Executors and Trustee Co Ltd.32 Mr Coulls contracted on behalf of himself and his wife with a company. After Mr Coulls died the company wished to pay Mrs Coulls, but the executors of the husband’s estate argued that the wife was not a party to the contract and was as such a stranger to the consideration. Both Barwick CJ and Windeyer J held that Mrs Coulls was a joint promisee. However, a majority of the High Court held that Mrs Coulls was not a party to the contract. Both the doctrine of privity and the doctrine of consideration came under sustained criticism and analysis by the High Court in Trident v McNiece.33 However, the High Court ultimately reasoned that both doctrines were too well established to be removed from contract law.

5.3 Consideration need not be adequate but must • be sufficient 5.3.1  Adequacy It has long been recognised that the courts lack the ability to effectively assess whether the consideration the promisee has offered is adequate; therefore the courts will not give thought to this issue. Accordingly, a peppercorn may constitute good consideration, provided that the promisor deems it to be of value. In Attorney-General for England and Wales v R34 it was stated that, ‘consideration does not have to be commercially adequate to be sufficient in law’. In Woolworths Ltd v Kelly,35 Kirby P set out three reasons as to why courts do not assess the adequacy of consideration. First, contracting parties will place their own value upon certain items of consideration. What might be of immense value to one individual may be valueless to another. With this in mind, the courts cannot effectively assess the true value of the consideration. Second, judges are not trained to make commercial or other business decisions. As such, they are ill-equipped to stand in the shoes of commercial people or other contracting parties and make such decisions. Allowing judges to decide upon the adequacy of consideration would expand the scope of the doctrine with respect to issues which parties might contest, leading to more and unnecessary litigation. Third, the principle of freedom of contract requires that the courts allow parties to negotiate and settle their agreements as they wish. 29 30 31 32 33 34 35

Bolton v Madden (1873) LQ 9 QB 55. [1915] AC 847. Ibid, 853. (1967) 119 CLR 460. (1988) 165 CLR 107. [2002] 2 NZLR 91, 107. (1991) 22 NSWLR 189.

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5.3.2  Sufficiency While consideration need not be adequate, it must be legally While consideration sufficient;36 that is, consideration must have value as far as the law need not be adequate, it is concerned. The distinction between consideration which must must be legally sufficient; be ‘sufficient’ but which need not be ‘adequate’ is apt to confuse. consideration must have value as far as the law There is quite a significant difference between something that is is concerned. commercially adequate and something that is legally sufficient. This is best understood with regard to those matters which a court might legitimately turn its mind to in a dispute. A court exists in order to decide upon legal disputes. The courts do not have the responsibility of determining whether the decisions of ordinary contracting parties are commercially sound. Whether consideration is legally sufficient can be phrased as a question of law, but whether consideration is commercially adequate cannot. As a question of law, the issue of whether consideration is legally sufficient is simply concerned with whether it has a value. Putting it in another way, the difference might stated as being the difference between whether consideration has a value as opposed to the quantum of that value. The peppercorn principle allows parties to provide nominal consideration in exchange for a lucrative promise. In Thomas v Thomas37 the wife of a dying man promised to pay £1 per annum as rent in exchange for a life tenancy, and this was held to be sufficient consideration. Similarly, in Dunton v Dunton38 a promise by a wife to ‘conduct herself with sobriety, and in a respectable, orderly and virtuous manner’ was held to be sufficient consideration for a promise by her husband to pay maintenance after their separation. In contrast, in White v Bluett39 a promise by a son not to bother a father was held to not be sufficient consideration for a promise by the father not to seek repayment of a loan that he had made to the son. In Chappell & Co Ltd v Nestle Co Ltd,40 chocolate wrappers were held to be sufficient consideration. Nestle had promised to send a record to anybody who sent in to the company a small sum of money, 1s and 6d, plus three chocolate wrappers. However, Nestle did not have copyright in the song that was on the record. In the resulting dispute Nestle attempted to argue that providing 6.5 per cent of the sum of money to Chappell & Co Ltd, the copyright holder, would have satisfied the requirements of the Copyright Act. Chappell argued that the true consideration was 6.5 per cent of the 1s and 6d and the three wrappers. Nestle demurred from this proposition and suggested that the wrappers were valueless. The majority of the House of Lords held that the wrappers were part of the consideration.41 Lord Somervell stated: The question, then, is whether the three wrappers were part of the consideration or, as Lord Jenkins held, a condition of making the purchase, like a ticket entitling a member to buy at a co-operative store. I think they are part of the consideration. They are so described in the offer. ‘They’, the wrappers, ‘will help you to get smash-hit recordings’. They are so described in the record itself—‘all you have to do to get each NEW STARS record is to

36 37 38 39 40 41

Woolworths Ltd v Kelly (1991) 22 NSWLR 189. (1842) 2 QB 851. (1892) 18 VLR 114. (1853) 23 LJ (Exch) 36. [1960] AC 87. Ibid, 103, 108, 114.

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send three wrappers from Nestle’s 6d Milk Chocolate bars, together with postal order for 1s 6d.’ This is not conclusive but, however described, they are, in my view, in law part of the consideration. It is said that when received the wrappers are of no value to Nestle’s. This I would have thought irrelevant. A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn. As the whole object of selling the record, if it was a sale, was to increase the sales of chocolate, it seems to me wrong not to treat the stipulated evidence of such sales as part of the consideration.42

• 5.4 Illusory consideration The existence of a discretion as to whether to perform an act means that there is no binding promise, thereby undermining the rationale for consideration.

Where the promisor has an unfettered discretion with respect of the performance of a promise, the consideration is illusory and any agreement is unenforceable. The existence of a discretion as to whether to perform the act means that there is no binding promise, thereby undermining the rationale for consideration. In  Placer Development Ltd v Commonwealth43 a written agreement which gave the Commonwealth the right to choose from time to time the amount it would pay as a subsidy was held by the High Court to be illusory. Kitto J stated:

the general principle is … that wherever words which by themselves constitute a promise are accompanied by words showing that the promisor is to have a discretion or option as to  whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought at all. The succinct statement of the principle in Leake on Contracts, 3rd ed., p. 3: ‘Promissory expressions reserving an option as to the performance do not create a contract’ was approved by the Lord Justice, as it was later by Lord Wright in Hillas and Co Ltd v Arcos Ltd [1932] UKHL 2; (1932) 147 LT 503, 517. … The present case is not dissimilar. A promise of a governmental subsidy is meaningless in the absence of a specification of some amount or some basis of calculation. It carries no implication that at least a reasonable subsidy shall be paid, for there is no general standard of reasonableness with respect to the quantum of a subsidy. The expression in cl. 14 of the Agreement before us, ‘a subsidy … of an amount or at a rate determined by the Commonwealth from time to time’, indeed reflects the fact that a governmental or legislative determination of quantum is of the essence of a subsidy. The Commonwealth’s promise is, in substance, a promise to pay such subsidy if any as may be decided upon from time to time by or under the authority of the appropriate repository of Commonwealth power, namely the Parliament. It therefore does not create any contractual obligation.44

In the case of British Empire Films Pty Ltd v Oxford Theatres Pty Ltd,45 there was an agreement between British Empire Films and Oxford Theatres whereby the latter agreed to only display

42 43 44 45

Ibid, 114–115. (1969) 121 CLR 353. Ibid, [517]. [1943] VLR 163.

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films provided to it by the former for a period of five years. During the relevant period, Oxford Theatres wanted to display films from other distributors. British Empire sued and had to demonstrate that there was a contract. However, a clause in the agreement between the parties stipulated that British Empire Films would not be liable to Oxford Theatres if it failed to provide films. This meant that British Empire’s performance was entirely discretionary. As such, this could not be good consideration for the Oxford Theatres’ promise to display only films provided by British Empire Films. The consideration upon which British Empire Films sought to rely was held to be illusory.46

• 5.5 Past consideration is not adequate consideration It is a general rule in the doctrine of consideration that past Consideration is consideration does not amount to adequate consideration under concerned with a promise the law.47 Consideration is concerned with a promise made in made in exchange for exchange for another promise. Where something has already another promise. Where something has already been done, it cannot serve as consideration for a later promise. been done, it cannot For example, if I mow your lawn without first having sought any serve as consideration reward and you then promise to pay me $15, I cannot use my act for a later promise. of mowing your lawn as consideration for the promise to pay me $15 because that act occurred before the promise was made. In this example, the act of mowing the lawn is past consideration. In the case of Roscorla v Thomas,48 the plaintiff bought a horse from the defendant. After the sale had been completed, the plaintiff sought and received an assurance from the defendant that the horse was ‘sound and free from vice’.49 The horse turned out to be ‘vicious, restive, ungovernable and ferocious’, and the plaintiff sued. Lord Denman CJ held that the promise could not be enforced as the plaintiff had provided no consideration for it.50 The payment for the horse was made before the promise about the horse’s temperament was given, and could not be used to enforce that promise. The rule on past consideration is qualified in situations where the plaintiff undertakes an act  at  the request of the defendant. Where the defendant makes a request of the plaintiff, with the understanding that the act will be paid for, the plaintiff has a valid claim even though the act that they perform is in the past at the time that payment is sought. In the case of Lampleigh v Braithwait,51 the defendant Braithwait was imprisoned for a murder that he had committed. Braithwait asked Lampleigh to secure a pardon for him from the King. Lampleigh sought to achieve this end but failed, having spent a reasonable sum of his own money and having made substantial efforts to obtain the pardon. Braithwait then promised to pay £100 to Lampleigh, but later failed to pay. Lampleigh sued to enforce the promise and won. The principle 46 Ibid, 167. 47 Roscorla v Thomas (1842) 3 QB 234; Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239; Lampleigh v Braithwait (1616) 80 ER 255. 48 (1842) 3 QB 234. 49 Ibid, 236. 50 Ibid, 237. 51 (1616) 80 ER 255.

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at play in Lampleigh v Braithwait was later restated in Re Casey’s Patents; Stewart v Casey,52 by Bowen LJ: Now, the fact of a past service raises an implication that at the time it was rendered it was to be paid for, and, if it was a service which was to be paid for, when you get in the subsequent document a promise to pay, that promise may be treated either as an admission which evidences or as a positive bargain which fixes the amount of that reasonable remuneration on the faith of which the service was originally rendered.53

In Re Casey’s Patents; Stewart v Casey, the plaintiff had undertaken work as a manager to assist the defendants with their patent. The plaintiff was later offered a one-third share of the patent. The plaintiff sought to enforce the promise and the defendants demurred on the ground that there was no consideration. The UK Court of Appeal held that the plaintiff had provided adequate consideration, as at the time that the work was done there was an expectation that it would be paid for by the defendants.54

• 5.6 Compromise and forbearance to sue as consideration Where a dispute arises between two parties and a promise is made by one party to settle that dispute, which is accepted by the other party, the question arises as to whether the promise to settle is good consideration. There are two basic types of situations that may emerge here. In the first situation, a party may have committed some wrong or may have an actionable claim but offers a compromise. In the second, a party may have an actionable claim but will offer forbearance from suing in exchange for some other promise.

5.6.1  Compromise Where a compromise is made, the party who surrenders their claim must believe that their claim is reasonable and must honestly have believed that it would succeed. For example, in Ballantyne v Phillot,55 the plaintiff’s claim failed because her earlier claims against the defendant, for which they had entered into an agreement, were in fact vexatious. Even where the legalities of the claim ultimately do not favour the party who brought it, the compromise agreement may still be enforceable. What matters is that at the time the party brought the suit, they believed that it was bona fide. In Miles v New Zealand Alford Estate Co,56 Bowen LJ stated: It seems to me that if an intending litigant bona fide forbears a right to litigate a question of law or fact which is not vexatious or frivolous to litigate, he does give up something of value. It is a mistake to suppose it is not an advantage, which a suitor is capable of appreciating, to be able to litigate his claim, even if he turns out to be wrong … The reality of the claim which is given up must be measured, not by the state of the law as it is ultimately discovered to be, but by the state of knowledge of the person who at the time has to judge and make the concession.57

52 53 54 55 56 57

[1892] 1 Ch 104. Ibid, 115–116. Ibid, 108. (1961) 105 CLR 379. (1886) 32 Ch D 266. Ibid, 291.

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The principle espoused in Miles v New Zealand Alford Estate Co is illustrated in the case of Hercules Motors Pty Ltd v Schubert.58 In Hercules Motors, the defendant purchased a car from the plaintiff, but  later discovered that the paintwork was faulty. After the defendant made some demands, the plaintiff promised to repaint the car. This was not done to the defendant’s satisfaction and he sued. The plaintiff claimed that there was no consideration for their promise to repaint the car. The New South Wales Supreme Court held that the dispute was not vexatious or frivolous and that the defendant’s agreement to the compromise offered by the plaintiff had been a bona fide attempt to settle the dispute.

5.6.2  Forbearance The leading case on forbearance in Australia is Wigan v Edwards.59 In Wigan, the respondents had sought to purchase a house that was being built by the appellant. The respondents found that there were a number of defects with the house and brought these to the attention of the appellant. He promised to remedy the defects. The respondents paid the monies owing for the house and moved into the premises. When they discovered that the work had not been done, they sued. The  appellant argued that the respondents had provided no consideration for his promise to fix the defects in the house. A majority of the High Court held that the respondents genuinely believed that they did not have to complete the purchase unless the defects were remedied, and as such their forbearance was sufficient consideration to the promise to repair. The amount of time for which the forbearance is given is not relevant to the question of whether it is legitimate consideration for a promise.60 Similarly, where the promise of forbearance is implied, this will still constitute sufficient consideration provided that both parties share an understanding as to the nature of the forbearance. In McDermott v Black,61 the plaintiff had entered into a contract due to the fraudulent misrepresentation of the defendant. The plaintiff agreed not to press his claim if he was given more time to complete his performance. The defendant agreed, but the plaintiff failed to complete by the new date. The defendant repudiated the contract and the plaintiff sued. The High Court rejected the plaintiff’s claim.62 The withdrawal of the plaintiff’s allegations of fraud had been a legitimate forbearance, in exchange for which the plaintiff had received a new completion date.

• 5.7 Existing duties Where an existing duty is at issue, the question that must be considered is whether a promise to perform that duty is good consideration for a new promise.63 There are three discrete areas in  which the issue of an existing duty arises within the doctrine of consideration. The first is where the existing duty is a public duty imposed by law. The second is where the existing duty is imposed by a contract in which the promisee is already bound. The third is where a contractual duty exists and is owed to a third person. 58 (1953) 53 SR (NSW) 301. 59 (1973) 1 ALR 497. 60 Griffiths v Knight [1960] SR (NSW) 353. 61 (1940) 63 CLR 161. 62 Ibid, 172–173. 63 See Stilk v Myrick (1809) 170 ER 1168; Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1 All ER 512; Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723.

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5.7.1  Existing public duty imposed by law Where the law imposes a duty upon a person to do an act, a promise to do that act is not good consideration for another promise. The most obvious circumstances are those where the person in question is a police officer, a public health worker, a government official or a member of the fire-fighting services. In Collins v Godefroy,64 a man was subpoenaed to give evidence in a court case. He had been promised payment for his time by the attorney of one of the litigants. However, he was not called upon in court. He sued for payment. The Court held that as he had been under a subpoena, he was under a legal duty to attend court. As it was a duty imposed by law, the promise to give him remuneration for his time was a promise without consideration.65 While Collins v Godefroy neatly demonstrates the rule on existing duties where the duty is one imposed by law, it cannot be said that the rule is without qualification. Where the person who is under a duty imposed by the law agrees to do something that falls outside the scope of that duty, then they may validly claim further compensation. In the case of Glasbrook Bros v Glamorgan County Council,66 the police were asked to provide protection to a colliery during a strike. The police formed the view that a foot patrol would be adequate, but agreed to garrison the colliery in exchange for payment. After the strike, was over Glasbrook Bros refused to pay and argued that the police service had been under a public duty. The House of Lords held that the police had provided consideration for the promise to pay as they were doing more than was required to discharge their duties.

5.7.2  Existing duty imposed by a contract in which the promisee is already bound The traditional rule is that where the existing duty is imposed by a contract in which the promisee is already bound, a promise to perform that act cannot be good consideration for some other promise.67 For example, if you and I enter a contract in which I agree to build a house for you  in return for $200 000, and I later seek to extract an extra $5000 from you to do the work that we have already agreed upon, the existing duty rule arises. In reality, all that I would be doing in this example is promising to do work which I have already agreed to do. This cannot be good consideration for the promise of the extra $5000. There is a qualification to this rule, which will be discussed below, that arises where some new and unforeseen hardship arises.68 The existing duty rule has often been illustrated in shipping cases. In Stilk v Myrick,69 Stilk agreed to crew a ship on a voyage from London to the Baltic. In the course of the voyage two Where the existing duty is imposed by a contract in which the promisee is already bound, a promise to perform that act cannot be good consideration for some other promise.

64 65 66 67 68 69

(1831) 109 ER 1040. Ibid, 1042. [1925] AC 270. Wigan v Edwards (1973) 1 ALR 497. Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1 All ER 512; Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723. (1809) 170 ER 1168.

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crew members deserted and the captain of the ship made a promise that he would pay extra money to the remaining crew in London. The captain recanted in London and Stilk sued. The Court held that there was no consideration, as under their contract the crew had to do what was required in an emergency. The desertion of two of the crew constituted an emergency and Stilk was merely performing his duty. Notwithstanding the general rule, the qualification that applies to public duties imposed by law has the same effect with respect of duties imposed by contract. In Hartley v Ponsonby,70 Hartley was a seaman who signed a contract to crew a voyage. However, during the course of the voyage 17 crewmen deserted. The remaining 19 crewmen had to take on duties designed for 36 crewmen. Ponsonby was the captain of the ship and he promised the remaining crew additional monies to continue the voyage. He later failed to pay and Hartley sued. The Court held that Hartley had gone beyond his contractual duty and was entitled to the payment. With only 19 crewmen available, the ship had not been seaworthy and Hartley had in fact taken on extra risks in the voyage. Given the contract that was at issue in Stilk v Myrick and the vastly different circumstances in Hartley v Ponsonby, it does not appear that the two cases are inconsistent with each other. Stilk v Myrick advances the general rule on existing duties, whereas Hartley v Ponsoby supports the established qualification on that rule. The general rule has been further qualified by two leading cases—Williams v Roffey Bros & Nicholls (Contractors) Ltd 71 and Musumeci v Winadell Pty Ltd 72—both of which are discussed below. In the UK case of Williams v Roffey Bros, a contractor, Roffey Bros, entered into a contract to  renovate 27 flats and subcontracted the carpentry work to Williams. The price that Williams quoted for the carpentry work was £20 000. Under the main contract, Roffey Bros would have faced a penalty in the form of liquidated damages if it had failed to complete the job on time. Williams encountered financial difficulties while undertaking the work and informed Roffey Bros that he would have to breach the contract. In response, Roffey Bros offered Williams an extra £10 300 if he would continue the work. Williams accepted and duly continued his work. However, Roffey Bros still did not complete the project on time and was penalised under the liquidated damages clause in the main contract. Consequently, Roffey Bros refused to pay Williams the extra money. Williams sued to recover the money he had been promised. The English Court of Appeal unanimously held that Williams had provided sufficient consideration to bind Roffey Bros to its fresh promise of extra money. The basis of the decision was that by continuing to do the work, Williams had provided Roffey Bros with a practical benefit. The benefit was in the form of the potential to avoid the effect of the liquidated damages clause. Glidewell LJ enunciated a six-part test that has come to be accepted as the correct approach to take in applying the ‘practical benefits’ test. The test is not uncontroversial and this approach to consideration must account for the possibility that the offeror of the new promise has been subjected to economic duress or fraud. This is accounted for in part (v) of the test.

70 (1857) 119 ER 1471. 71 [1991] 1 QB 1. 72 (1994) 34 NSWLR 723.

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Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 Glidewell LJ at 15–16: [T]he present state of the law on this subject can be expressed in the following proposition: (i) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B and (ii) at some stage before A has  completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain and (iii) B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time and (iv) as a result of giving his promise B obtains in practice a benefit, or obviates a disbenefit, and (v) B’s promise is not given as a result of economic duress or fraud on the part of A, then (vi) the benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding. As I have said, counsel for the defendants accepts that in the present case by promising to pay the extra £10 300 the defendants secured benefits. There is no finding, and no suggestion, that in this case the promise was given as a result of fraud or duress. If it be objected that the propositions above contravene the principle in Stilk v Myrick, I answer that in my view they do not: they refine and limit the application of that principle, but they leave the principle unscathed, eg where B secures no benefit by his promise. It is not in my view surprising that a principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement and limitation in its application in the present day. It is therefore my opinion that on his findings of fact in the present case, the judge was entitled to hold, as he did, that the defendants’ promise to pay the extra £10 300 was supported by valuable consideration, and thus constituted an enforceable agreement.

There has been a cautious acceptance of Williams v Roffey Bros by many academic commentators.73 One of the main objections to Williams v Roffey Bros is that it casts doubt on Stilk v Myrick.74 However, this criticism ignores the fundamental differences in the facts between the two cases, which mean that the assumptions underpinning the judgments in the two cases are also different. In Stilk v Myrick the extra hardship that the sailor faced was minimal, in that the crew had been reduced by only two sailors. Furthermore, this possibility had been countenanced in the contract that he had signed. However, in Williams v Roffey Bros, Williams faced severe financial hardship which would have meant that he could not perform the work. The suggestion that Williams v Roffey Bros and Stilk v Myrick are deeply at odds is overstated. Nonetheless, in Antons Trawling Co Ltd v Smith,75 the New Zealand Court of Appeal rejected Stilk  v Myrick, suggesting that Stilk v Myrick no longer controlled cases such as Williams v Roffey Bros.76 However, the Court also rejected the approach to ‘practical benefits’ outlined in Williams v 73 See for example A Phang, ‘Consideration at Crossroads’ (1991) 107 Law Quarterly Review 21. 74 See M Ogilvie, ‘Of What Practical Benefit is Practical Benefit to Consideration?’, 62 University of New Brunswick Law Journal 131 (2011). 75 [2003] 2 NZLR 23. 76 Ibid, 45–46.

Chapter 5

Consideration

Roffey Bros and advanced a notion of ‘policy reasons’ as the basis upon which to not apply the general rule. It has also been suggested that there is tension between Williams v Roffey Bros and the bargain theory of contract.77 However, the decision in Williams v Roffey Bros is consistent with the notion of freedom of contract. The parties to a contract must be free to vary their agreement as the facts change. Further, party autonomy should be sacrosanct; that is, each party is capable of deciding for themselves whether to offer new consideration or not. If the peppercorn principle stipulates that the courts will not assess the value of consideration, then the courts should not assess the value of the practical benefit, but merely determine its existence. Despite, the decision of the New Zealand Court of Appeal in Antons Trawling, there has been a general acceptance of Williams v Roffey Bros at a judicial level. In Australia the practical benefit rule has been endorsed by Santow J in Musumeci v Winadell Pty Ltd.78 In Musumeci, a landlord of a shopping centre agreed that his tenants, who operated a fruit store at the centre and who were in a difficult financial position, could pay a reduced rent. The tenants had come to be in this difficult position because their landlord had leased out premises at the centre to a  larger competing fruit  store. The tenant’s business had suffered as a result. The landlord agreed  to reduce their rent but later sought to resile from this agreement. The tenants argued that he was bound by his promise. Santow J held that Williams v Roffey Bros was good law in Australia and that the landlord was bound by his promise. In applying the practical benefits test, Santow J did add the condition that the benefit of the test should only be available to the promisee in circumstances where the practical benefit of continued performance outweighed any remedy that the promisor might have had against the promisee in the event of a breach of contract. This significant qualification is contained in part (iv) of the test. Santow J stated: The present state of the law on this subject can be expressed in the following proposition: (i) If A has entered into a contract with B to do work for, or to supply goods or services to, B in return for the payment by B, and (ii) At some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or be able to, complete his side of the bargain, and (iii) B thereupon promises A an additional payment or other concession (such as reducing A’s original obligation) in return for A’s promise to perform this contractual obligation at the time, and (iv) (a) As a result of giving his promise B obtains in practice a benefit, or obviates a disbenefit provided that A’s performance, having regard to what has been so obtained, is capable  of  being viewed by B as worth more to B than any likely remedy against A (allowing for any defences or cross-claims), taking into account the cost to B of any such payment or concession to obtain greater assurance of A’s performance, or (b) as a result of giving his promise, A suffers a detriment (or obviates a benefit) provided that A is thereby foregoing the opportunity of not performing the original contract, in circumstances where such non-performance, taking into account B’s likely remedy against A (and allowing for any defences or cross-claims) is capable of being viewed by A as worth more to A than performing that contract, in the absence of B’s promised payment or concession to A.

77 J Carter, A Phang, J Poole, ‘Reactions to Williams v Roffey’ (1995) 8(3) Journal of Contract Law 248. 78 (1994) 34 NSWLR 723.

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(v) B’s promise is not given as a result of economic duress or fraud or undue influence or unconscionable conduct on the part of A nor is it induced as a result of unfair pressure on the part of A, having regard to the circumstances, then, (vi) The benefit to B or the detriment to A is capable of being consideration for B’s promise, so that the promise will be legally binding.79

In the Singapore Court of Appeal, Williams v Roffey Bros has been commented upon favourably in Sea-Land Service Inc v Cheong Fook Chee Vincent;80 while in Canada, Williams v Roffey Bros has been applied in Greater Fredericton Airport Authority Inc v NAV Canada.81 Similarly, in the UK, Williams v Roffey Bros has been followed in Anangel Atlas Compania Naviera SA v Ishikawajima-Harima Heavy Industries Co Ltd (No 2),82 Lee v GEC Plessey Telecommunications83 and WRN Ltd v Ayris.84 In Re Selectmove Ltd 85 the English Court of Appeal declined to extend the practical benefits concept to agreements to accept a lesser payment of a debt on the grounds that this would undermine the rule in Foakes v Beer,86 discussed below.

• 5.8 Promises to pay lesser sums The rule on promises to pay lesser sums is related to the existing legal duty rule, and is known as the rule in Pinnel’s Case.87 The rule is that where a debtor owes a sum of money, and where the creditor, fearing that the debt would not be repaid, accepts a smaller sum in satisfaction of the debt, the creditor is not to be prevented in suing to obtain the remainder of the amount owing.88 In Foakes v Beer,89 Mrs Beer had been awarded a judgment against Dr Foakes for £2090. It was agreed that Dr Foakes would pay £500 and that the remainder would be paid in instalments. Mrs Beer agreed not to sue on the judgment. After Dr Foakes had paid the instalments Mrs Beer sued for the interest owing on the judgment. Dr Foakes demurred and argued that the promise given by Mrs Beer not to sue was binding. The Court held that Mrs Beer was entitled to the interest, and that the promise by Dr Foakes to pay the monies awarded under the judgment was an obligation that was already owed by him under the law.

Ke y p o in ts for re v ision Consideration makes promises enforceable. Consideration can be defined in terms of a benefit or a detriment. A valuable consideration may be some right, interest, profit or benefit. It may also be a forbearance, detriment, loss or assumption of responsibility. 79 80 81 82 83 84 85 86 87 88 89

Ibid, 747. [1994] 3 SLR 631. (2008) 290 DLR (4th) 405 (NBCA). [1990] 2 Lloyd’s Rep 526. [1993] IRLR 383. [2008] EWHC 1080 (QB). [1995] 1 WLR 474. (1883) 9 App Cas 605. (1602) 5 Co Rep 117a. Martech v Energy World (2006) 234 ALR 265. (1884) 9 App Cas 605.

Chapter 5

Consideration

The bargain requirement reflects the notion of quid pro quo in the doctrine of consideration. Consideration must move from the promisee. Consideration must be sufficient, but need not be adequate. The courts will not inquire into the value that the parties place upon consideration. Illusory consideration is no consideration at all because the promisor is not committed to doing anything. Past consideration is not adequate consideration. A genuine compromise or forbearance to sue may be consideration. The existing legal duty rule was extended in Williams v Roffey Bros, and the six-part test formulated by Glidewell LJ has generally been accepted overseas.

problem-solving practice Rick is a builder in Brisbane who has entered into a contract to build a home for Ben and Shakira. The parties agree on a price of $240 000 for the house. At the start of the contract Rick has six workers and $500 000  worth of building stock and materials. One day, however, two of Rick’s workers are injured in a car crash. Later that day, Rick and his workers discover that their warehouse has been burgled and that $300 000 worth of stock and materials has been stolen. Rick tells Ben and Shakira about these developments. They are sympathetic and ask him if he can continue the project. After making some enquiries, Rick discovers that in order to continue working on the house he would have to hire at least one new worker at a higher price and pay $400 000 for the same amount of stock and materials as had been stolen. With regard to the contract with Ben and Shakira, this would amount to an extra $50 000 on top of what had been agreed. Ben and Shakira say that they are agreeable to the extra costs. However, when the work is done they refuse to pay. Rick wishes to sue for the extra $50 000 and seeks your advice.

ANSWER Consideration makes promises enforceable. Accordingly, our starting point should be to enquire as to whether Rick has done anything to make Ben and Shakira’s promise enforceable. In the present matter, Rick is agreeing to do what he has already contracted to do. However, Rick is performing his duties under difficult circumstances. An appropriate starting point may be to consider two of the earlier existing duties cases: Stilk v Myrick and Hartley v Ponsonby. In Stilk, the contract in question contained a provision for an emergency situation. In the present matter, the agreement between the parties does not appear to account for any emergency situations. In Hartley, a qualification was made to the existing legal duty rule because Hartley had gone beyond his contractual duty. The same could be said in the present matter, as in the absence of the assumptions and capabilities that supported the parties’ initial agreement, the contract could easily be said to be frustrated. An equally valid starting point would be Williams v Roffey Bros and the six-part test enunciated by Glidewell LJ. Similarly, as the dispute is in Australia, Musumeci v Winadell is equally relevant. The test stated by Glidewell LJ is:

(i) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B and (ii) at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain and (iii) B thereupon promises A an additional payment in return for A’s promise to perform

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his contractual obligations on time and (iv) as a result of giving his promise B obtains in practice a benefit, or obviates a disbenefit, and (v) B’s promise is not given as a result of economic duress or fraud on the part of A, then (vi) the benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding. In the present matter, it is clear that Rick has encountered a serious difficulty before completion of the contract. Moreover, this has occurred through no fault of his own, nor has he attempted to engage in duress. Ben and Shakira have promised him an extra payment. The couple would suffer a detriment if Rick did not perform his duties. The most serious issue is whether the benefit to Ben and Shakira could be regarded as consideration for the promise to complete in light of the difficulties and additional costs. Obviously, having a house is a serious benefit, and in light of the discussion above regarding Hartley, it is apparent that Rick is proposing to perform in a completely different context to that which was agreed and that this performance is above his duty. Moreover, the sixth element of Glidewell LJ’s test states that the benefit merely be ‘capable’ of being consideration for the new promise. In this regard, Rick’s performance in difficult circumstances is capable of being consideration for the extra monies. Ben and Shakira would be obligated to pay Rick the $50 000.

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6

Capacity to contract

Chapt e r o v e rv i e w 6.0

Introduction  88

6.1

Minors  88 6.1.1 The position under the common law   88 6.1.2 Statutory amendments to the common law   89

6.2

Mentally disabled and intoxicated persons   91

6.3

Corporations  93 6.3.1 What is a corporation?   93 6.3.2 Legal capacity to contract   94 6.3.3 Contracts preceding incorporation   95

6.4

Unincorporated associations  96 6.4.1 Liability of committees   97

6.5

The Crown  98

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6.6

Bankrupts  100 6.6.1 Vesting and transfer of property on bankruptcy   100 6.6.2 Disclaiming onerous property   101 6.6.3 Rights and responsibilities following bankruptcy   102

6.7

Married women  104

• 6.0 Introduction A contract is not enforceable if one of the parties was not capable of entering into it at the time of formation. The common law presumes that parties entering into contracts have the capacity to do so, and limits exceptions to those discussed in this chapter. Contracts with parties incapable of entering legally binding relations are voidable in the case of minors and where the contract is affected by reason of lack of mental capacity.1 However, given the law’s presumption of normal capacity in contracting parties, those attempting to avoid obligations bear the evidentiary burden.2 Two key problems arise in dealing with the issue of capacity. First is the relative rarity of case law on the topic in most jurisdictions; and second, in a number of jurisdictions common law has given way to an uneven mixture of statute, which has codified, modified or replaced common law with a combination of statutory rules and judicial discretion, raising difficulties of interpretation.

• 6.1 Minors 6.1.1  The position under the common law In general at common law, minors lack contractual capacity. However the absoluteness of the common law ban was modified in the nineteenth century to avoid potential hardship on the minor. Accordingly, contracts beneficial to the minor were enforceable.3 Minors were also bound by contracts entered into by them for ‘necessaries’—the courts’ reasoning was that infants unable to rely on adult assistance for such necessaries had therefore to rely solely on their own capacity to contract. What was ‘necessary’ was not, however, adequately defined in law. According to Lord Coke: an infant may bind himself to pay for the necessary meat, drinks, apparel, necessary physicke, and such other necessaries, and likewise for his good teaching and instruction whereby he may profite himself afterwards.4

1 Bruton v London & Quadrant Housing Trust [2000] 1 AC 406 at 417 per Lord Hobhouse; Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454. 2 Borthwick v Carruthers (1787) 1 TR 648; 99 ER 1300; In the Estate of Daniel Doull (1881) 7 VLR (IP & M) 70. 3 Examples include contracts for apprenticeships, education and employment: see Walter v Everard [1891] 2 QB 369. 4 Edward Coke, A Commentary Upon Littleton, 16th ed. (revised and corrected by Francis Hargrave and Charles Butler), Luke Hansard and Sons (1809), p. 172A.

Chapter 6

Capacity to contract

Necessaries therefore included the requirements of food, shelter, dress and health, and extended to ‘articles fit to maintain the particular person in the state, station and degree of life in which he is’.5 This rendered any understanding of what was necessary subject to the infant’s social status.6 Moreover, the necessity of the goods or services was subject to the contract being as a whole beneficial to the minor. In Flower v London and North Western Railway Company7 the contract was for the necessary transportation of the minor to and from work, but it was declared detrimental as it sought to exclude the railway’s liability for damages sustained by accident, injury loss and negligence.8 Also, if the minor was already well supplied with the goods which were the subject of the contract, these goods may not then fall within the understanding of ‘necessaries’. Further, while minors could disaffirm or avoid contracts for services, the service provider could not and the minor could sue for breach of contract—although the minor’s avoidance or enforcement had to be of the contract as a whole. This uncertainty led to the practice of suppliers seeking adults to indemnify contracts with minors, or refusing to enter agreements with minors for fear of these agreements being avoided without legal recourse. The rationale behind and the objective of the common law rules—which developed in the context of vast fortunes inherited early in life by the offspring of wealthy merchants in Victorian Britain—was to protect vulnerable and commercially unsophisticated parties from being exploited by predatory traders. However, those common law rules are not necessarily relevant or applicable in other social and economic The primary concern contexts, where the reluctance of contracting parties also prevented is to strike a balance minors wanting to enter commercial arrangements either through between protecting the purchase or lease of goods, real, estate or other commodities, minors from unscrupulous dealings, and providing or through forming commercial partnerships with others. genuine traders with The primary concern is to strike a balance between protecting certainty for their binding minors from unscrupulous dealings, and providing genuine traders agreements. with certainty for their binding agreements.

6.1.2  Statutory amendments to the common law Several common law jurisdictions have amended the common law with respect to minors’ contractual capacity by statute. South Australia has modified the common law rules by means of the Minors Contracts (Miscellaneous Provisions) Act 1979; while New South Wales has codified the previous law under the Minors (Property and Contracts) Act 1970, which replaced the common law, equitable and previous statutory rules. The New South Wales Act codifies the previous law that minors generally lack contractual capacity (s 17), and provides for exceptions whereby minors can enter into contracts, and also participate in what the Act refers to at s 8 as ‘civil acts’. This is a concept adopted from civil law,

5 6 7 8

Peters v Fleming (1840) 6 M & W 42 (Ex), 46 per Parke B. Ryder v Wombwell (1868) LR 4 Ex 32. [1894] 2 QB 65. See also Keays v Great Southern Railway Co [1941] IR 534: beneficial contracts are generally binding on minors but may not be if they contain exclusion of liability clauses that have been drawn too widely.

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referring to the legal and equitable rights and obligations arising in relation to contracts, property and choses in action (s 6(1)), and so clearly has implications beyond contract. The age of capacity for contracts and civil acts is ‘eighteen years or upwards’. This is in line with the statutory definition of the age of majority—a minor in Australia is defined as a person who has not attained the age of 18 years. This statutory determination of the legal age is set not on the basis of any view the law has of either social expectations or individual maturity and aptitude, but in order to underpin contractual certainty. At s 19 the Act states: Where a minor participates in a civil act and his or her participation is for his or her benefit at the time of his or her participation the civil act is presumptively binding on the minor.

Specific presumptively binding acts under the legislation include a disposition of property by or to a minor for adequate consideration (s 20); property which is either in whole or in part reasonably made as a gift (s 21); a civil act to which the minor is bound by contractual or other duty (s 22); and an investment in government securities (s 23). Whereas at common law the minor would escape liability under a contract on the basis of minority, under the Act the only enquiry for the court to make and the determinative question is whether the act, including a contract, is beneficial to the minor. The common law question of whether the contract is for the minor’s ‘necessaries’ is therefore obviated under the Act. ‘Benefit’ is neither defined nor given further substance under the Act. However, the concept is broad by ordinary definition. Accordingly, it follows that a benefit may be conferred by participation in a civil act in a greater range of circumstances than is captured by the common law’s requirement for a contract to provide for a minor’s necessaries in order for it to be binding. However, where the contract is for goods with which the minor is well supplied, or which the minor cannot afford, the common law principles will continue to apply.9 Minority disables the minor from entering contracts at common law. However the Supreme Court may grant the minor capacity under the Act (s 26) to participate ‘in any … or in all civil acts’, provided the court is satisfied that the act is beneficial (s 26(3)). The civil act authorised by the grant of capacity under s 26 of the Act becomes thereby presumptively binding on the minor (s 26(4)). Similarly, a Local Court may approve a beneficial (s 27(5)(b)) contract or disposition of property up to a value of $10 000 (s 27(5)(a)) entered into by a minor (s 27). A civil act involving a minor participant may be affirmed (s 30) by order of the Supreme Court (s 30(1)(a)) upon the minor obtaining their majority (s 30(1)(b)), or by the minor’s representative where the participant is deceased (s 30(1)(c)). The act constituting the affirmation need not be written, and may be by conduct, and there is no necessity that the affirmation be communicated (s 30(5)). The court’s affirmation may be in response to the minor’s or any interested person’s application (s 30(2)). However, the court must, under s 36, be convinced that the contract is beneficial to the minor (s 30(3)). Once affirmed, the civil act is presumptively binding on the minor (s 30(4)). In South Australia, a Supreme or Local Court may approve of the terms of a contract the minor is seeking to enter. Application for approval may be made by the minor, the minor’s parent or guardian, or any other interested party (s 6(2)). 9 See Nash v Inman [1908] 2 KB 1.

Chapter 6

Capacity to contract

At s 35, the New South Wales Act protects the interests of second and third parties against acts of repudiation either by the minor or the minor’s representative (in the case of the minor participant’s demise). However, a minor may—while a minor, or at any time before attaining 19 years of age—repudiate any contract which at such time is not apparently for their benefit (s 31). The court may also repudiate a contract on the minor’s behalf prior to the minor attaining majority (s 34). Effective repudiation requires that written notice of repudiation be served on the relevant person (s 33). If not effectively repudiated, contracts which are presumptively binding on the minor will become so (s 38). Only upon repudiation by a minor may a court either wholly or partly confirm the civil act, or adjust parties’ rights in accordance with the repudiation (s 37). In South Australia, the legislation alters the common law position that a minor will have to repudiate a contract within a reasonable time of attaining majority in order to avoid being bound by the contract (s 4). Further, in South Australia a minor who repudiates a guaranteed principal contract does not thereby render the guarantor liable.10 But if an indemnity is provided against the minor’s default under the principal agreement, then the indemnifier is the principal and therefore liable. Under the New South Wales Act, if the Supreme Court is satisfied that a contract is to the minor’s benefit, it may order that the minor be granted capacity to enter into any civil act (s 27). Minors who enter contracts are presumed bound unless they are able to successfully raise one of the commonly available defences of fraud, mistake or illegality, or they are able to escape because  the contract is not in fact to the minor’s benefit. It is arguable that the courts may intervene where the consideration for a contract is unconscionable for inadequacy, or where the provisions of the contract are harsh or oppressive. The courts are given wide discretion to make the necessary adjustments in order to produce a fair outcome for interested parties to an unrepudiated, non-presumptively binding contract (s 20). The contract may be affirmed wholly or in part, or repudiated. The object of this provision is to—as far as possible—return parties to the positions they occupied prior to the time the contract was entered into. This may not be possible where benefits have been transferred and restitution may prejudice one or more of the parties. A contract whereby property is disposed to a minor, or whereby a minor disposes of property to another, for valuable consideration may become presumptively binding upon completion, or may be disposed of pursuant to certification issued in accordance with ss 28(2) and 29(2) of the Act.

• 6.2 Mentally disabled and intoxicated persons In relation to the capacity of persons to contract, the principles applying to the mentally disabled are normally read as applicable to and covering persons who have become so intoxicated as to be considered unable to have the capacity to enter contracts. The emphasis in this chapter will be on the former rather than the latter, but on the understanding that remarks made are also applicable to the latter. 10 Land and Homes (WA) v Row (1936) 39 WALR 27.

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The courts are concerned to protect certainty in commercial dealings. Defences of mental disability invoke a tension between the policy consideration of upholding the validity of contracts and securing commercial relationships, and the incompatibility of the disability with established contractual principles, such as the parties’ need to understand the agreement they are entering, thereby possessing the necessary intention to enter contractual relations; the requirement that they are ad idem and how this can possibly square with a disabled mind on one side;11 and the doctrinal assumption of the autonomy and egotism of each party being sufficient to preserve and promote their own interests in the process of negotiating an agreement.12 The common law courts’ concern about parties to a contract raising a questionable defence of mental incapacity in order to avoid performance continued into the nineteenth century.13 The desire to uphold the validity of the contract determined that mental disability did not prevent a party validly entering a contract to convey or purchase land.14 However, the law modified  this doctrine to allow the defence of incapacity on the basis of mental disability when the lack of capacity could be demonstrated, and where it could be shown that the other party either knew or ought to have Precisely what known of it.15 constitutes the mental Precisely what constitutes the mental capacity from which capacity from which the disabled person deviates the disabled person deviates is without firm foundation or is without firm foundation clear definition, but generally refers to the presence of an or clear definition, but effective understanding of the nature, purpose and effect of the generally refers to the agreement being entered into.16 The question of the participant’s presence of an effective understanding of the understanding is not a general one, but rather is subject to a nature, purpose and effect double relativity: it is on the one hand trained on their mental of the agreement being capacity at the time of entering into the agreement; and on entered into. the other hand focused on the nature of and their capacity to understand that particular agreement.17 The courts may well conclude that the participant’s appreciation of the instrument was sufficient to render them capable of becoming a proper and obligated party to it, even in the context of a more general mental disability. Consequently, evidence of mental disability will not necessarily found a conclusion of contractual incapacity. In Steel-Smith v Liberty Financial Pty Ltd,18 a co-plaintiff who had been medically diagnosed as having clinical depression, chronic anxiety and episodic confusion caused by the medication she was taking was found capable of understanding the nature of a mortgage she entered in conjunction with her son.19 11 12 13 14 15 16 17 18 19

Gibbons v Wright (1954) 91 CLR 423, 442. McLaughlin v Daily Telegraph Newspaper (1904) 1 CLR 243, 273–274. York Glass Co v Jubb (1925) 134 LT 36, 39. William Blackstone, Blackstone’s Commentaries on the Laws of England (1891) (facsimile edition with introductions by Stanley N Katz, University of Chicago (1979), Book 2, para [291]. Molton v Camroux (1848) 2 Ex 487, 501; 154 ER 584,589 per Pollock CB (affirmed (1849) 4 Ex 17; 154 ER 1107); Imperial Loan Co v Stone [1892] 1 QB 599, 602–603 per Lopes LJ; approved Gibbons v Wright (1954) 91 CLR 423, 441; [1954] ALR 383. Imperial Loan Co v Stone [1892] 1 QB 599, 601 (the person must be ‘capable of understanding what he was about’); Boughton v Knight (1873) LR 3 PD 64, 72 (understanding the nature of the transaction at hand); Gibbons v Wright (1954) 91 CLR 423, 437–438 (understanding the nature and effect of the contract). In the Estate of Daniel Doull (1881) 7 VLR (IP & M) 70; Gibbons v Wright (1954) 91 CLR 423, 437–439; [1954] ALR 383. [2005] NSWSC 398 (Unreported, Palmer J, 28 April 2005). Ibid, [78].

Chapter 6

Capacity to contract

The other contract participant’s awareness of the incapacity constitutes the second branch of the enquiry. The questions that arise are whether the party will be found to have been aware only if the incapacity was reasonably evident to any person; or whether the contract can still be avoided if the incapacity is proved but not evident to or even observable by the other party.20 In McLaughlin v Daily Telegraph Newspaper Co Ltd (No 2),21 shares transferred under a power of attorney, which had been obtained from a person whose insanity was punctuated by periodic lucidity, were ordered to be re-registered in the disabled person’s name, even though the purchasers of the shares had no knowledge of the mental disability. In some cases, therefore, where a mental disability leaves a party otherwise free to function normally—such that only a specialist knowledge will enable it to be detected—a similar specialist assessment will be required to determine whether the condition was legally and medically disabling in the context of the negotiation. Where mental disability is proved, the contract is not void ab initio; it is only voidable and can be challenged by the incapacitated, or subsequently ratified.22 A disabled party acting consistently with the performance of the contract maintains it, and binds the other party. Questions may arise about whether consistent actions require affirmative conduct or simply the avoidance of inconsistent conduct, and whether ratification may be made out by positive words and acts, or equally by silence and abstinence.23 Where a mentally disabled person has been provided with necessary goods or rendered necessary services, they must pay reasonable recompense24 limited by the extent of the disabled person’s property.25 Various states’ sale of goods legislation now provide for the payment of a reasonable price—which may or may not be the contract price—for the provision of necessary goods. The Victorian Goods Act 1958, for example, provides: 7 Capacity to buy and sell Capacity to buy and sell is regulated by the general law concerning capacity to contract and to transfer and acquire property: Provided that where necessaries are sold and delivered to a minor or to a person who by reason of mental incapacity or drunkenness is incompetent to contract he must pay a reasonable price therefor. Necessaries in this section mean goods suitable to the condition in life of such minor or other person and to his actual requirements at the time of the sale and delivery.26

• 6.3 Corporations 6.3.1  What is a corporation? Corporations may be incorporated as companies, incorporated associations, under letters of patent, or by special statutory provision. Each of these enjoy a distinct legal identity from their members. 20 York Glass Co v Jubb (1925) 134 LT 36. 21 (1904) 1 CLR 243. 22 Boughton v Knight (1873) LR 3 PD 64, 72; while in other areas of law, such as the making of wills, mental incapacity voids the instrument from the outset: see Bull v Fulton (1942) 66 CLR 205. 23 Silence was treated as affirmation in both Howard v Currie (1879) 5 VLR (E) 87 and City Bank of Sydney v McLauglin (1909) 9 CLR 615; see also Crago v McIntyre (1976) NSWLR 729. 24 Re Rhodes (1890) 44 Ch D 94, 105 per Cotton LJ (CA); Re Brooks (1903) 21 WN (NSW) 4 per A H Simpson J. 25 Re Rhodes (1890) 44 Ch D 94, 105 per Cotton LJ (CA). 26 See also Sale of Goods Act 1954 (ACT), s 7; Sale of Goods Act 1896 (NSW), s 5; Sale of Goods Act 1895 (SA), s 2; Sale of Goods Act 1896 (Tas), s 7; Sale of Goods Act 1895 (WA), s 2.

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A corporation is defined at s 57A of the Corporations Act 2001 (Cth) as follows: Meaning of corporation (1) Subject to this section, in this Act, corporation includes: (a) a company; and (b) any body corporate (whether incorporated in this jurisdiction or elsewhere); and (c) an unincorporated body that under the law of its place of origin, may sue or be sued, or may hold property in the name of its secretary or of an office holder of the body duly appointed for that purpose. (2) Neither of the following is a corporation: (a) an exempt public authority; (b) a corporation sole.

6.3.2  Legal capacity to contract The legal capacity and powers of a corporation are defined at s 124 of the Corporations Act, which provides: Legal capacity and powers of a company (1) A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to: (a) issue and cancel shares in the company; (b) issue debentures (despite any rule of law or equity to the contrary, this power includes  a power to issue debentures that are irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long); (c) grant options over unissued shares in the company; (d) distribute any of the company’s property among the members, in kind or otherwise; (e) give security by charging uncalled capital; (f) grant a floating charge over the company’s property; (g) arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction; (h) do anything that it is authorised to do by any other law (including a law of a foreign country). A company limited by guarantee does not have the power to issue shares. Note: For a company’s power to issue bonus, partly-paid, preference and redeemable preference shares, see section 254A. (2) A company’s legal capacity to do something is not affected by the fact that the company’s interests are not, or would not be, served by doing it. (3) For the avoidance of doubt, this section does not: (a) authorise a company to do an act that is prohibited by a law of a State or Territory; or (b) give a company a right that a law of a State or Territory denies to the company.

A corporation, therefore, has the legal capacity of an individual to enter into and assume the rights and liabilities of contracts from the moment of its registration. The full capacity of a corporation is statutorily conferred. The provision also appears to exclude the doctrine of ultra

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vires by removing the requirement that the company act  in accordance with its objects, as stated in its constitutional memorandum. This is not to say, however, that the memorandum cannot restrict the company’s capacities and powers, thereby limiting the exclusion of ultra vires.

6.3.3  Contracts preceding incorporation

Capacity to contract

A corporation has the legal capacity of an individual to enter into and assume the rights and liabilities of contracts from the moment of its registration. The full capacity of a corporation is statutorily conferred.

Any contract made on the company’s behalf prior to its incorporation would not bind it, although the signatories to the contract may be personally bound. The nineteenth-century case of Kelner v Baxter 27 remains good law and authority for the proposition that a company can neither be bound by, nor can it adopt, pre-incorporation contracts; although in that case the signatories to the contract were bound because the wording of the contract manifested an intention to immediately bind them.28 Were the contract on the other hand to indicate clearly an intention to bind the non-existent company, which the signatures only represented, neither a party nor a contract exists.29 Note that a corporation, being an artificial person, is not corporeally equipped to do those acts necessary to enter contracts, such as ‘affix a seal, apply a pen, utter a word of offer or acceptance’30 except through the power of its directors31 or authorised agents.32 Section 131(1) of the Corporations Act provides for the ratification of a contract entered into by its promoters prior to its incorporation: Contracts before registration (1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time—within a reasonable time after the contract is entered into.

By means of the doctrine of ‘relation back’, the contract is regarded as having been made by the corporation on the date of the promoter’s contract, which the corporation can become bound by without needing to make and enter a contract on the same terms.33

27 (1866) LR 2 CP 174. 28 See also Vickery v Woods (1952) 85 CLR 336. 29 Newborne v Sensolid (Great Britain) Ltd [1953] 1 All ER 708; Vickery v Woods (1952) 85 CLR 336, 343 per Dixon J (Kitto J agreeing), 348 per Williams J (Dixon and Kitto JJ agreeing). 30 W E Patterson and H H Ednie, Australian Company Law, 2nd ed., Butterworths, (1971), Vol. 1, p. 1478. 31 Corporations Act 2001, s 126. 32 Ibid, s 127. 33 Ratification is to be distinguished, on the basis of the doctrine of relation back and other principles, from the mechanism of adoption with which it is frequently associated, if not indistinguishably identified. If the directors of a company, once incorporated, are free to enter a contract on exactly the same terms as those entered into by the company’s promoters, any reasons for restraining the company from adopting the contract are said to evaporate: see Wall v Niagara Mining and Smelting Co of Idaho 20 Utah 474, 58 P 399 (1899).

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Section 131(2) of the Corporations Act provides for the payment of damages by the company’s promoters to the other party or parties, calculated on the basis of the company’s complete failure to perform the agreement following formation and ratification: (2) The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time—within a reasonable time after the contract is entered into. The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all.

In circumstances where company registration occurs but the entity does not ratify the agreement, s 131(3) provides: (3) If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following: (a) pay all or part of the damages that the person is liable to pay; (b) transfer property that the company received because of the contract to a party to the contract; (c) pay an amount to a party to the contract.

Section 131(4) provides that promoters (‘the person’) are liable post-registration and postratification for the company’s complete or partial non-performance: (4) If the company ratifies the pre-registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay.

The promoter may be released from liabilities by the other party. The release must be in writing and signed by the parties and the promoter by means of s 132(1): Person may be released from liability but is not entitled to indemnity (1) A party to the pre-registration contract may release the person from all or part of their liability under section 131 to the party by signing a release. An unincorporated association may have existed for many years, during which its membership may have changed considerably, but it does not have a legal identity distinct from its members. While individual members will not be personally liable, the committee drawn from the association’s membership (or from outside it) will bear liability in litigation.

At subsection (2), however, the person cannot be indemnified by the company for their actions:

(2) Despite any rule of law or equity, the person does not have any right of indemnity against the company in respect of the person’s liability under this Part. This is so even if the person was acting, or purporting to act, as trustee for the company.

• 6.4 Unincorporated associations An unincorporated association is a group of persons freely associating for any lawful object or purpose at any one time. The association may have existed for many years, during which its

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Capacity to contract

membership may have changed considerably, but it does not have a legal identity distinct from its members.

6.4.1  Liability of committees Normally, the association’s rules provide for the election or appointment of a committee to manage its activities. While individual members will not be personally liable, the committee drawn from the association’s membership (or from outside it) will bear liability in litigation. Responsibility for the performance of and liability for contracts entered into on behalf of all association members by committee members, or agents authorised by them, falls to the committee. A series of cases has indicated that delictual liability between members of the association can only ‘arise directly from their personal actings as individuals’.34 It is arguable whether committee members are liable by reason of personal involvement in the making of a contract,35 or by virtue of their being committee members.36 In Smith v Yarnold 37 Herron CJ held that: Even though the appellants were sued as committee members, they were persons liable and the additional averment of the capacity in which they acted does not render untenable the respondent’s claim against them as members of the club.38

It was explained in Prole v Allen39 that committee membership does not found the liability of the committee members to other members without more. In that case, negligence against a particular committee member was based on the finding that: he was appointed by all the other members, operating through the committee, and in my judgment, he thereupon became the agent of each member to do reasonably carefully all of those things which he was appointed to do and in that way he came to owe a duty to each of the members to take reasonable care and to carry out his duties without negligence.40

It has been argued—although not on the basis of direct authority—that the association committee acts in a fiduciary capacity and with fiduciary obligations towards the association members.41 A theory of ‘committee liability’ in Australian jurisprudence on unincorporated associations has therefore arisen,42 and is widely accepted in circumstances where the committee enters into a contract on behalf of the entire membership of the association,43 although the exact legal principles on which such liability would be based have remained rather obscure.44 One of the difficulties encountered when parties contract with unincorporated associations is the changing nature of the membership over time, and the effect of this on the enforcement Kenneth Harrison v West of Scotland Kart Club [2004] SCotCS 80, [25] Smith v Yarnold [1969] 2 NSWR 410. Ward v Eltherington [1982] Qd R 561. [1969] 2 NSWR 410. Ibid, 414. [1950] 1 All ER 476. Ibid, 477–478. L S Sealy, ‘Fiduciary Relationships’ (1962) CLJ 69–81; P Finn, Fiduciary Obligations, LBC (1977); J R F Lehane, ‘Fiduciaries in a Commercial Context’ in P Finn, ed., Essays in Equity, LBC (1985). 42 K L Fletcher, The Law Relating to Non-Profit Associations in Australia and New Zealand, LBC (1986), pp. 113–132. 43 Smith v Yarnold [1969] 2 NSWR 410; City of Gosnells v Roberts [1994] ATR 61-846; Verrall v Hackney London Borough Council [1983] Qd R 561. 44 Bradley Egg Farm v Clifford [1943] 2 All ER 378; Smith v Yarnold [1969] 2 NSWR 410; Peckham v Moore [1975] 1 NSWLR 353; Ward v Etherington [1982] Qd R 561. 34 35 36 37 38 39 40 41

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of the contract. Carlton Cricket and Football Club v Joseph45 was a case in which Carlton, a company limited by guarantee, sought to restrain Fitzroy, an unincorporated association, from breaching an agreement involving the 21-year lease of St Kilda Cricket Ground, signed by Fitzroy’s president and secretary. Gowans J observed that the word ‘club’, which appeared in the agreement, did not refer to all of the current members of the participant club. Further, the committee members did not bear personal liability under the agreement, and those committee members who signed the agreement had not intended to make themselves personally liable over the life of the lease, and so could not be bound by the contract.46 Where the unincorporated association is an employer, particular difficulties may arise as to whom the employees’ contract of employment is with. In Peckham v Moore,47 Peckham signed a contract of employment with Moore in 1970, who was acting on behalf of CanterburyBankstown Leagues Club. Peckham was injured at work, specifically during training. Initially he sued the football club for workers compensation. However the Court found that the club, as an unincorporated association, had no legal identity of its own. The claim was reformulated, this time with the names of the committee members as they were at the time (1970) Peckham signed his contract as parties. Peckham obtained judgment against that committee. The committee appealed on the basis that the constitution of the committee had altered since 1970, and that they were not Peckham’s employer at the time he sustained the injury. Hutley JA (with whom Samuels and Glass JJA agreed) said: What Peckham agreed to was to enter into an arrangement with the 1970 committee that he would play for the 1972 committee, if they engaged him for that year. When they did that committee became his employer.48

It should be noted that applying Carlton Cricket and Football Social Club v Joseph would have led to the conclusion that Peckham was not employed.

• 6.5 The Crown Government plays a significant role in the economy, and in so doing frequently enters a wide range of contracts, both between its own departments and with the private sector, including individuals. Moreover, government must enter private law arrangements to undertake necessary procurements; a range of traditional government services is with increasing frequency being outsourced to private providers; and government at all levels is entering private–public partnerships, especially in large and costly infrastructure developments. This has given rise to public law debates centring on the effective accountability of such ‘government by contract’.49 External government contracts are enforceable at private law—contract law is able to conceive of the government as a legal person for the purpose applying the law. According to Hogg and 45 46 47 48 49

(1970) VR 487. Ibid, 499. (1975) 1 NSWLR 353. Ibid, 362. See for example H Street, Government Liability: A Comparative Study, Cambridge University Press (1953); T Daintith, ‘Regulation by Contract: The New Prerogative’ (1979) 32 Current Legal Problems 41.

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Monahan, the Crown is a common law corporation.50 In order to construct the Crown as a jurisitic person subject to law, legislation has had to remove government’s traditional common law immunity.51 Whereas the common law involved a distinction between the Crown and public officials and bodies corporate created by statute, under which they were conferred with legal personality so as to be liable under contract if statute provided for them to be able to sue and be sued, legislation lifting the immunity tends to construct the government both as a whole (rather than by reference to the individuals making it up) and as continuous in time, so that the government which enters the contract may be treated as the same government in breach.52 If government is constructed as a whole in relation to its capacity to contract, certain problems arise with respect to the capacity of the executive to bind the legislature. If the executive’s contractual capacity is that of an ordinary person at common law, the government’s capacity to contract is not coextensive with its legislative capacity, and contractual rights and duties are not created by statute, but by virtue of the legal person entering into the agreement.53 It is now generally accepted that the executive does not require parliamentary appropriation in order to enter contracts to purchase, nor parliamentary authorisation to enter contracts of sale. Parliamentary authority is required however to pay money, and money paid without authority is recoverable.54 Parliament may limit through the enactment of statute the contracts which the government may enter, or by the same mechanism override the obligations it has assumed. The Crown is liable for non-performance of commercial contracts subject to the availability of funds.55 Actions on contracts against the government as a matter of right may only be pursued through the various Crown Proceedings Acts. Those same acts permit the satisfaction of damages without parliament having to specifically seek appropriation.56 Government officers may enter contracts binding the crown on the basis of actual, implied and ostensible authority, the ordinary laws of agency applying.57 It is more likely that ostensible authority will be recognised where the subject matter of the contract is necessary to an established

50 P Hogg and P Monahan, The Liability of the Crown, 3rd ed., Carswell (2000), p. 219. 51 Judiciary Act 1903 (Cth), Pts IX and IXA; Crown Proceedings Act 1992 (ACT); Crown Proceedings Act 1988 (NSW); Crown Proceedings Act 1993 (NT); Crown Proceedings Act 1980 (Qld); Crown Proceedings Act 1992 (SA); Crown Proceedings Act 1993 (Tas); Crown Proceedings Act 1958 (Vic); Crown Suits Act 1947 (WA). 52 For Dicey, ‘Every official from the Prime Minister down to a constable or collector of taxes is under the same responsibility for every act done without legal justification as any other citizen’: A V Dicey, The Law of the Constitution,10th ed., Macmillan (1959), p. 11. 53 New South Wales v Bardolph (1934) 52 CLR 455, 496 per Rich J; 502–503 per Starke J; 508 and 514 per Dixon J; Commonwealth v Ling (1993) 44 FCR 397, 430–431. 54 Maguire v Simpson (1977) 139 CLR 362, 388, referring to the rule in Auckland Harbour Board v R [1924] AC 318; Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 54 FLR 439, 453. 55 New South Wales v Bardolph (1934) 52 CLR 455; Tasita Pty Ltd v Papua New Guinea (1991) 34 NSWLR 691, 698–699 per Young J. 56 For the liability of the Crown for damages on contracts, whether they be commercial or for the provision of public welfare services, see The Amphitrite [1921] 3 KB 500, 503 per Rowlatt J; Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54, 74 per Mason J. 57 J E Verrault and Fils Ltee v A-G (Quebec) (1976) 57 DLR (3d) 403; Coogee Esplanade Surf Motel Pty Ltd v Commonwealth (1983) 50 ALR 363; R v Transworld Shipping Ltd (1975) 61 DLR (3d) (304).

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Government officials who in the course of their employment make contracts which bind the crown do not impliedly warrant thereby that they possess the authority to do so. They cannot therefore be held personally liable for a breach of agreement, unless evidence is led in the clearest terms that their intention had been to enter the contract personally.

function or activity of government.58 Government officials who in the course of their employment make contracts which bind the crown do not impliedly warrant thereby that they possess the authority to do so.59 They cannot therefore be held personally liable for a breach of agreement, unless evidence is led in the clearest terms that their intention had been to enter the contract personally.60

• 6.6 Bankrupts

Bankrupts have a limited power to contract. At common law the situation of bankruptcy itself will not suffice to terminate a contract,61 although a contract may contain a termination clause providing for a party to terminate the contract should the other party become a bankrupt.62 In some cases, the bankruptcy has been held to either breach or frustrate the contract.63 All of the contracts the bankrupt has entered into are reviewed by a trustee in bankruptcy.

6.6.1  Vesting and transfer of property on bankruptcy Section 58(1) of the Bankruptcy Act 1966 (Cth) provides: Vesting of property upon bankruptcy—general rule (1) Subject to this Act, where a debtor becomes a bankrupt: (a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and (b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.

Under ss 58(1) and 116, the divisible property—including any contracts of the person who ‘becomes a bankrupt’—vests in either the Official Trustee or a registered trustee. Property is defined at s 5 of the Bankruptcy Act as the property which the bankrupt had an interest in at the ‘commencement of the bankruptcy’. It is important to attend to the phrase ‘becomes a bankrupt’ because the Act vests divisible property in the trustee on the ‘date of the bankruptcy’, but by the doctrine of relation back, the property which vests in the trustee is that dating to the ‘commencement of the bankruptcy’. 58 New South Wales v Bardolph (1934) 52 CLR 455, 496 per Rich J; 503 per Starke J; 507 per Dixon J. 59 Collen v Wright (1857) 8 E & B 647; Dunn v McDonald [1897] 1 QB 555; The Prometheus (1949) 82 LR 859. 60 Macbeath v Haldimand (1786) 1 TR 172; Gidley v Palmerston (1822) 3 B & B 275; Palmer v Hutchinson (1881) 6 App Cas 619. 61 Brooke v Hewitt (1796) 3 Ves Jun 253; Re Stapleton (1879) 10b Ch D 586. 62 Such clauses are common in lease contracts: see for example Cadogan Estates Ltd v McMahon [2001] BPIR 817. 63 Ex parte Chalmers (1873) LR 8 Ch App 289.

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Section 132 provides: Vesting and transfer of property (1) Subject to this section, and to section 158, where a trustee is appointed by the creditors, the property of the bankrupt passes to and vests in the trustee so appointed on the day on which the appointment takes effect. (2) Subject to this section, the property of the bankrupt passes from trustee to trustee and vests in the trustee for the time being during his or her continuance in office or, if the Official Trustee becomes the trustee, in the Official Trustee, without any conveyance, assignment or transfer. (3) Where a law of the Commonwealth or of a State or Territory of the Commonwealth requires the transmission of property to be registered, and enables the trustee to be registered as the owner of any such property that is part of the property of the bankrupt, that property, notwithstanding that it vests in equity in the trustee by virtue of this section, does not vest in the trustee at law until the requirements of that law have been complied with.

Legal title in property will only pass to the trustee by compliance with the relevant state laws relating to the passing of legal title. The trustee must be registered on the title of any real estate which is to be vested in them, so that they are able to exercise the rights of the legal owner of the property such as entering the property, taking possession, and selling.

6.6.2  Disclaiming onerous property Section 133 of the Bankruptcy Act (‘Disclaimer of onerous property’) includes the following provisions: (1A) Subject to this section, the trustee may at any time, by writing signed by him or her, disclaim any contract that forms part of the property of the bankrupt whether or not the trustee has endeavoured to assign the property or exercised any rights in relation to it. … (5A) A trustee is not entitled to disclaim a contract (other than an unprofitable contract) without the leave of the Court. (5B) The Court may, in relation to an application for leave to disclaim a contract under this section: (a) impose such terms as a condition of granting the leave; and (b) make such orders with respect to matters arising out of the contract; as the Court considers just and equitable.

The trustee may elect to continue or discontinue the contract’s performance, or to cause or permit it to be performed. The disclaimer of an onerous continuing contract prevents the obligations that it entails from being regarded as an expense and added to the list of priority claims on the estate. The trustee has 28 days, or an extended period as allowed by the court, to respond to a written application made by a ‘person interested’ in the contract, requiring a decision as to whether they will disclaim (s 133(6)). A trustee who ‘declined or neglected to disclaim the property … is not entitled to disclaim the property under this section and, in the case of a contract, he or she shall be deemed to have adopted it’ (s 133(6)(b)).

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Non-performance of the contract due to the trustee’s election to disclaim may be the subject of an application to the court by the injured party of an order for damages (s 133(7)), which may be proved as a debt in bankruptcy (s 133(8) and (12)).64

6.6.3  Rights and responsibilities following bankruptcy Section 133(7) provides for the rescission of the contract: The Court may, on the application of a person who is, as against the trustee, entitled to the benefit or subject to the burden of a contract made with the bankrupt, make an order rescinding the contract on such terms as to payment by or to either party of damages for the non-performance of the contract, or otherwise, as the Court considers just and equitable.

Where a party to a contract has accrued rights prior to bankruptcy, these rights are converted upon bankruptcy into a right to prove a debt in bankruptcy as a creditor. Disgorgement may be ordered against parties who have received property under the contract so that creditors’ claims can be satisfied. A credit provider may refuse to extend further credit to a bankrupt under an existing contract except for payment in cash because of the very real risk of default in payment.65 66 In Re Raatz Vaughan Williams J stated that the promisor’s repudiation by bankruptcy ‘determined the period of credit which, according to the law merchant, was given by the taking of the bill’.67 Wright J held that the creditor was entitled to ‘treat the bill as dishonoured’ by virtue of the repudiation.68 Section 269 of the Bankruptcy Act prevents a bankrupt from entering transactions without disclosing their insolvency: Where a party to a contract has accrued rights prior to bankruptcy, these rights are converted upon bankruptcy into a right to prove a debt in bankruptcy as a creditor.

Bankrupt or debtor who is a party to a debt agreement obtaining credit etc. without disclosing bankruptcy or debt agreement (1) An undischarged bankrupt or a debtor who is a party to a debt agreement shall not: (a) either alone or jointly with another person, obtain credit to the extent of $3000 or more from a person without informing that person that he or she is an undischarged bankrupt or a party to a debt agreement (as the case requires); (aa) either alone or jointly with another person, obtain goods or services from a person: (i) by giving a bill of exchange or cheque drawn, or a promissory note made, by him or her either alone or jointly with another person, being a bill, cheque or note under which the sum payable is $3000 or more; or

64 The Insolvency and Trustee Services Australia (ITSA) website explains that ‘A provable debt is a claim which entitles a creditor to share in any dividends and to vote at meetings in the bankruptcy. Generally a creditor with a provable debt is prevented from continuing any recovery proceeding against a debtor upon their bankruptcy’: http://www. itsa.gov.au/dir228/itsaweb.nsf/docindex/Creditors-%3EProvable+Debts/. 65 Ex parte Chalmers (1873) LR 8 Ch App 289. 66 [1897] 2 QB 80. 67 Ibid, 82. 68 Ibid, 82.

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(ii) by giving 2 or more such instruments under which the sums payable amount in the aggregate to $3000 or more; without informing that person that he or she is an undischarged bankrupt or a party to a debt agreement (as the case requires); (ab) either alone or jointly with another person, enter into a hire-purchase agreement with a person, or enter into a contract or agreement for the leasing or hiring of any goods from a person, being a hire-purchase agreement, contract or agreement under which the amounts payable to that person amount in the aggregate to $3000 or more, without informing that person that he or she is an undischarged bankrupt or a party to a debt agreement (as the case requires); (ac) either alone or jointly with another person, obtain goods or services from a person by promising to pay that person or another person an amount of, or amounts aggregating, $3000 or more without informing that person that he or she is an undischarged bankrupt or a party to a debt agreement (as the case requires); (ad) either alone or jointly with another person, obtain an amount of, or amounts aggregating, $3000 or more from a person by promising to supply goods to, or render services for, that person or another person without informing that person that he or she is an undischarged bankrupt or a party to a debt agreement (as the case requires); or (b) carry on business under an assumed name, in the name of another person or, either alone or in partnership, under a firm name without disclosing to every person with whom he or she or, if he or she is carrying on business in partnership under a firm name, the partnership deals, his or her true name and the fact that he or she is an undischarged bankrupt or a party to a debt agreement (as the case requires). (2) This section has effect subject to section 304A. Penalty: Imprisonment for 3 years.

Parties contracting with bankrupts who are in breach of this section may rescind the contract, and the bankrupt may not seek to enforce it.69 Section 126 of the Bankruptcy Act provides: Dealings with undischarged bankrupt in respect of after-acquired property (1) A transaction by a bankrupt with a person dealing with him or her in good faith and for valuable consideration in respect of property acquired by the bankrupt on or after the day on which he or she became a bankrupt is, if completed before any intervention by the trustee, valid against the trustee, and any estate or interest in that property which, by virtue of this Act, is vested in the trustee shall determine and pass in such manner and to such extent as is necessary for giving effect to the transaction.

A party entering a contract with a bankrupt after becoming bankrupt and completed prior to the trustee’s intervention will be enforceable against the trustee provided it was a contract executed in good faith and for valuable consideration. Property or interests vested in the trustee can be used to satisfy the transaction: (2) For the purposes of subsection (1), the receipt of any money, security or negotiable instrument from, or in accordance with the order or direction of, a bankrupt by his or her banker, and any payment of money or delivery of a security or negotiable instrument 69 De Choisy v Hynes [1937] 4 All ER 54; MacEwin & Co v Ashwin [1916] NZLR 1028.

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made to, or in accordance with the order or direction of, a bankrupt by his or her banker, shall be deemed to be a transaction by the bankrupt with that banker dealing with him or her for valuable consideration.

• 6.7 Married women Of little if any practical importance, the issue of married women’s capacity to contract has reached the historical vanishing point. At common law, a married woman was without contractual capacity. She had no power to contract without having obtained her husband’s assent, and any contract entered into by her without such assent was void absolutely.70 Upon being married, all property and rights of the woman by law became the sole right and property of her husband.71 Equity recognised married women’s right to a separate estate, but nevertheless required the husband to hold the legal interest of any property conveyed to her for her beneficial use. Women’s contractual capacity was limited to the property thus conveyed, and so was not personal but proprietary. Dicey remarked that in the space of 13 years the status of a married woman, who in English law ‘possessed at common law hardly any rights whatever’, became one in which she enjoyed ‘more complete and independent control of her property than is possessed by married women in France or Scotland’.72 This he attributed to parliamentary enactment of the equitable doctrine of ‘separate property’, which although ‘framed for the daughters of the rich, have at last been extended to the daughters of the poor’.73 The Married Women’s Property Act 1870 provided that married women would enjoy ‘separate property’, although not in terms of femme sole (single woman) rights. Married women obtained full contractual capacity when they were made personally liable, rather than liability being limited to the extent of their property. The full contractual capacity of women has subsequently been secured by legislation,74 for example s 18 of the Law Reform Act 1995 (Qld) expressly provides: 18 Capacity (1) A married person has a legal personality that is independent, separate and distinct from the legal personality of the person’s husband or wife. (2) A married person has the same legal capacity that the person would have if the person were unmarried.

Under the common law, if property was settled on a married woman with a clause against anticipation, or alienation, this preserved it as being absolutely within her power to enjoy and use as her separate property, but prevented her from disposing of it, or charging the future income or capital. The purpose of such a clause was to protect daughters who were about to marry from the danger of parting with their property under the influence or threats of their husbands. 70 Manby v Scott (1663) 1 Sid 120; 1 Lev 4; 1 Mod 128. 71 Connor v Martin 3 Wils 5: a promissory note made to Susan Connor prior to her marriage could not be indorsed by her after she was married; see also Barlow v Bishop 1 East’s Rep 432. 72 A V Dicey, Lectures on the Relationship between Law and Public Opinion in England During the Nineteenth Century, Macmillan (1905), p. 362. 73 Ibid, p. 395. 74 Garcia v National Australia Bank Ltd (1998) 194 CLR 395, 422 per Kirby J; see also Family Law Act 1975 (Cth), s 119.

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Capacity to contract

The restriction upon anticipation has now been removed, so that no restriction can be imposed upon a woman’s property that could not be imposed upon a man’s property. However, while the law in New South Wales, Tasmania, Victoria, Western Australia and the Northern Territory prevents the imposition of such restraints from the date of commencement of this legislation, existing restraints remain operative.75 Women may be released from a restriction upon anticipation where they request it and it is assessed as beneficial by courts in Tasmania, Victoria and Western Australia.76

Ke y p o in ts for re v ision At common law, contracts with minors are unenforceable on the basis of a historically entrenched legal policy protecting vulnerable youths from predatory traders and exploitative commercial arrangements. Contracts for necessaries which are beneficial to the minor are enforceable. The law of the contractual capacity of minors has been codified in New South Wales, and modified by statute in other Australian jurisdictions. The mentally disabled and intoxicated are exempted from being bound to any contract they have purportedly entered on the basis that no meeting of minds can have occurred where the mind was not capable of understanding, negotiating and appreciating the agreement. The court’s enquiry into the capacity of the contracting party will determine whether the party was lacking capacity when entering the contract. People may be parties to an agreement notwithstanding that they suffer from some incapacity as long as they were legally capable at the time of entering the agreement. Corporations share the same contractual capacity as individuals, but require human agency to enter contracts. In the case of unincorporated associations, the committee entering the contract is liable and not the association or its membership. Contracts of employment in the context of unincorporated associations such as sporting clubs may pose particular problems, with the best view being that the committee is the employer. The crown may enter contracts through persons authorised to bind it where the subject matter of the agreement is an established government function or activity, although such persons cannot be held to warrant possession of authority. Bankruptcy will not suffice to prevent a person entering or terminating a contract.

75 Married Persons (Equality of Status) Act 1996 (NSW), s 10; Married Persons (Equality of Status) Act 1989 (NT), s 3; Conveyancing and Law of Property Act 1884 (Tas), s 45; Marriage Act 1958 (Vic), s 157; Property Law Act 1969 (WA), s 31. By comparison, a similar provision was contained in the UK Law Reform (Married Women and Tortfeasors) Act 1935; but all restraints upon anticipation—irrespective of when they were made—were removed by the Married Women (Restraint Upon Anticipation) Act 1949 (UK). 76 Underwood v Gerard (1894) 15 LR (NSW) Eq 155; Re Leitch’s Will (1896) 13 WN (NSW) 58; Re Plomley (dec’d) (1923) 24 SR (NSW) 115, 117.

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7

Intention to create legal relations

Chapt e r o v e rv i e w 7.0

Introduction  107

7.1

Domestic arrangements  108 7.1.1 From presumption to construction   109

7.2

Commercial arrangements  110 7.2.1 Express exclusions  110 7.2.2 Mere representations and puffery   111 7.2.3 From presumption to construction   113 Ermogenous v Greek Orthodox Community of SA Inc  114

7.3

Particular situations  116 7.3.1 Government schemes and agreements   116 7.3.2 Voluntary associations  117 7.3.3 Registered companies  118

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Intention to create legal relations

• 7.0 Introduction A moral obligation is not enforceable by the courts.1 The intention to create legal relations is a requirement that has entered Australian law:2 ‘It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty.’ Consensus between the contracting parties is a relevant consideration in determining whether a binding contract has been made—no contract comes into existence when both parties accept that one did not intend to make the contract which the other had in contemplation. To  be  legally enforceable there must be identifiable parties, certain terms, real consideration (absent the agreement having been recorded in a deed), and ‘a common intention  of the parties to enter into legal obligations’.3 Indeed, these elements are separate but often interwoven matters. In particular, consideration may be evidence of an intention to create legal relations, and it has been suggested that intention is purchased by the provision of consideration.4 Where the parties have settled all the material terms, the contract remains proposed and the parties must take a further step of entering into the contract to be bound;5 until that further step is taken, the parties have in fact not intended to be bound. In practical terms, the intention of immediate effect is likely to avoid the complications of incompleteness and uncertainty. Where courts find incompleteness and uncertainty, they are more likely to conclude that the parties did not intend to enter enforceable relations.6 Whether the parties intended that their agreement be subject to adjudication by the courts comprehends an analysis of the numerous diverse issues constituting the state of affairs of the case, and cannot be formulated as a simple rule. It requires an investigation of the subject matter of the agreement, the status of the parties and the relationship between the parties, and can only be known by considering all the circumstances of the case. The intention may be expressly or implicitly stated,7 for example in the terms of contracts and memoranda of understanding, or otherwise inferred. The intention required by law emerges  from  an objective assessment of the facts, rather than from the subjective state of mind of either or both parties. The objectivity of the law engages the courts in an assessment of what is to  be understood from the language and conduct of the parties in the context of the  circumstances  of the case. The party who raises the existence of the contract bears the onus of proving that each of the contractual elements—including the intention to create legal relations—exists. When the search for the intention underpinning contractual relations is based on legal presumptions, the analysis of the existence of the intention commences with an examination of the category which best defines the relationship between the parties: domestic or commercial.

Rose and Franck Co v J R Crompton & Bros Ltd [1923] 2 KB 261, 282 per Bankes LJ. Australian Woollen Mills v Commonwealth (1954) 92 CLR 424, 457. Rose and Franck Co v J R Crompton & Bros Ltd [1923] 2 KB 261, 293 per Atkin LJ. Public Trustees v Bussell (1993) 30 NSWLR 111, 115 per Colten J; see also W H E Jaeger, ed., Williston on Contracts, 3rd ed., Baker Voorhis and Co Inc. (1959) Vol. 1, s. 21. 5 Ratto v Trifid Pty Ltd [1987] WAR 237. 6 Toyota Moto Corp Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106, 130–131. 7 Rose and Franck Co v J R Crompton & Bros Ltd [1923] 2 KB 261, 293 per Atkin LJ. 1 2 3 4

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• 7.1 Domestic arrangements Rebuttable presumptions regarding domestic and commercial arrangements once defined an important aspect of the approach to the identification of intention to create legal relations. The intention was said to be precluded if the contractual claim was in the context of family relations.8 In the leading case of Balfour v Balfour,9 Mr Balfour said to his wife that he would pay her an allowance, which she sought to enforce after they divorced. The Court held that there was no legally enforceable agreement. Atkin LJ observed: ‘It is the natural and inevitable result of the relationship of husband and wife, that the two spouses should make arrangements between themselves … those agreements, or many of them, do not result in contracts at all.’

It is quite common, and it is the natural and inevitable result of the relationship of husband and wife, that the two spouses should make arrangements between themselves … those agreements, or many of them, do not result in contracts at all; and they do not result in contracts even though there may be what as between other parties would constitute consideration for the agreement … it constantly happens, I  think, that such arrangements made between husband and wife are arrangements in which there are mutual promises, or in which there is consideration in form within the definition that I have mentioned. Nevertheless they are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences.10

In Jones v Padavatton11 the Court extended the principle beyond spouses to close relations. Salmon LJ, reflecting the majority view, said: ‘as a rule when arrangements are made between close relations … there is a presumption against an intention of creating any legal relationship’.12 In that case, Ms Padavatton, the divorced daughter of Mrs Jones, unsuccessfully sued for a monthly allowance promised to her by her mother if she returned to England from the United States, where she was securely employed, and study for the Bar.13 From the decided cases emerge numerous significant issues questioning the fairness and appropriateness of the presumption, both in its historical setting, and in its contemporary relevance. Lord Atkins, for example, raised the concern that the courts of England would be flooded by suits based on personal ire rather than law if familial and domestic promises were litigable.14 However, as Balfour and other cases15 demonstrate, the legal presumption appears to systematically prejudice the law against the interests of married women, whom it abandons without income, contrary to the standards expected of a civilised community. Rather than 8 Balfour v Balfour [1919] 2 KB 571. In Wakeling v Ripley (1951) 51 SR (NSW) 183 and Todd v Nicol [1957] SASR 72 the family agreement presumption was successfully rebutted. In Roufos v Brewster (1971) 2 SASR 218, the family presumption was rebutted or held not to apply in the context of a family business. 9 [1919] 2 KB 571. 10 Ibid, 578–579. In Cohen v Cohen (1929) 42 CLR 91, 96, Balfour v Balfour was cited as authority by Dixon J for the proposition that, within the circumstances of the marriage, the ‘arrangement’ between the plaintiff and the defendant was not ‘intended to affect or give rise to legal relations or to be attended with legal consequences’. 11 [1969] 2 All ER 616. 12 Ibid, 621. 13 The agreement was varied in that it was agreed that the mother purchase a house in which the daughter could reside and let rooms for income, and it appears that the Court was of the view that the agreement was uncertain, as well concluding that the requisite intention did not exist; see also Shiels v Drysdale (1880) 6 VLR (E) 126. 14 Balfour v Balfour [1919] 2 KB 571, 579–580. 15 See for example Cohen v Cohen (1929) 42 CLR 91.

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basing the presumption on the nature of the relationship, Stoljar suggests that ‘social’ promises and ‘benevolent’ promises should be differentiated on the basis that the latter gives rise to an enforceable reliance which acts as consideration for the promise, and that the presumption is thereby rebuttable.16

7.1.1  From presumption to construction The courts have moved away from the application of presumptions towards a detailed examination of the facts of the case in relation to familial and domestic arrangements. In Fleming v Beevers17 the Court did not apply a rebuttable presumption, but observed that ‘there is no substitute for a careful examination of ’ the facts of each case.18 In that case, the Court found that a husband and wife had intended to enter into legal relations by purchasing property jointly and drafting corresponding wills. In Sharp v Anderson19 Santow J adverted to the rebuttable presumption that the law did not govern family arrangements which were rather based on ‘mutual trust and affection’,20 but noted that family arrangements may become judicially enforceable where the promisee was materially prejudiced by the promise by ‘undertaking onerous obligations or giving up existing advantages’.21 Evidence of an intention to be legally bound within domestic arrangements— either  expressly,  by inference from the existence of necessary contractual elements (such as an agreement accompanied by consideration) or, where there is no contract, estopping the denial of the promise—has been held to defeat the presumption. Spouses may be legally bound as in McGregor v McGregor,22 where a husband was required to make promised payments and provide indemnification to Evidence of an intention to be legally his wife, who had in consideration abandoned certain causes bound within domestic of action against  him. In the case of promises exchanged arrangements has between  parents  and children, in Raffaele v Raffaele 23 the Court been held to defeat the presumption. enforced a promise of land to a son who had commenced building a house on it. Promises exchanged between family members where burdensome obligations have been significantly performed—for example, where parties have relocated to another country—have been held binding. This was the case where a relative moved from England to Australia, giving up good domestic conditions;24 where a couple left Scotland to live in a relative’s house in Australia in return for a provision being made in the relative’s will;25 and where a person intending to emigrate from England to Australia promised to buy a house for relatives if they did the same.26 In the extended context, personal services rendered to an elderly person have been viewed as

16 17 18 19 20 21 22 23 24 25 26

S Stoljar, ‘Enforcing Benevolent Promises’ (1989) 12 Sydney Law Review 17, 19–20. [1994] 1 NZLR 385. Ibid, 389. [1995] ANZ ConvR 501. Ibid, 503. Ibid, 504. (1888) 21 QBD 424. [1962] WAR 29. Wakeling v Ripley (1951) 51 SR (NSW) 183. Todd v Nichol [1957] SASR 72. Riches v Hogben [1985] 2 Qd R 292.

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consideration for the giving of life savings, or the transfer of title or property, to the elderly person’s carer.27

• 7.2 Commercial arrangements When parties enter agreements regulating business relationships, ‘it … follows almost as a matter of course that the parties intend legal consequences to follow’.

The opposite presumption applies to commercial agreements,28 as long as the agreement constitutes a binding contract, and is not subject to an exclusion clause or to another agreement.29 In Rose and Franck Co v J R Crompton & Bros Ltd 30 the Court observed that when parties enter agreements regulating business relationships, ‘it … follows almost as a matter of course that the parties intend legal consequences to follow’.31

7.2.1  Express exclusions When sufficiently promissory statements are made in a commercial context with no express intention that they should not be contractually observed, the courts should enforce them. This is what the Court held in Banque Brussels Lambert SA v Australian National Industries,32 where a letter of comfort from the defendant to the plaintiff constituted a contract. The express provision must be clearly stated, the denotation of the exclusion must be unambiguous, and the description of what is and is not (as the case may be) promised must be sufficient. The promise of an ex gratia payment, for example, was not seen by the Court in Edwards v Skyways Ltd 33 as sufficient to negative the intention in the contract to make remunerative payment. Infrequently, parties to a commercial arrangement may be bound in honour rather than through the creation of legal rights and obligations, as when parties use market effects to govern the performance of the contract rather than the threat of legal sanction. The question arising is whether these are binding, or whether they have the negative effect to the one they purport to carry. For example, in Rose & Frank Co v J R Crompton & Bros Ltd 34 the contract contained an ‘honourable pledge clause’, which read: This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts either in the United States or England, but is only a definite expression and record of the purpose and intention of the parties concerned, to which they each honourably pledge themselves …35

27 See Herton v Jones (1935) 53 CLR 475; Schaefer v Schulman [1972] 1 All ER 621; Palmer v Bank of NSW (1975) 133 CLR 150. 28 Edwards v Skyways Ltd [1964] WLR 349. 29 Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 WLR 379; [1989] 1 All ER 785; Banque Brussels Lambert SA v Australian National Industries (1989) 21 NSWLR 502. 30 [1923] 2 KB 261. 31 Ibid, 282 per Bankes LJ. Note, however, that the presumption in this case was rebutted by the written, express intention of the parties not to be bound legally, but in honour only. 32 (1989) 21 NSWLR 502. 33 [1964] 1 All ER 494. 34 [1923] 2 KB 261. 35 Ibid, 293.

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This was found to provide for the arrangement between the parties as expressed, which did not therefore constitute a binding contract.36 Scrutton LJ, commenting on the negative presumption in domestic and family arrangements, saw: [n]o reason why, even in business matters, the parties should not intend to rely on each other’s good faith and honour, and to exclude all idea of settling disputes by outside intervention, with the accompanying necessity of expressing themselves so precisely that outsiders may have no difficulty in understanding what they mean. If they clearly express such an intention I can see no reason in public policy why effect should not be given to that intention.37

7.2.2  Mere representations and puffery Advertising language does not normally function in the commercial context to create legal obligations, and its extravagant claims do not ordinarily provide warranties for products. However, in Carlill v Carbolic Smoke Ball Company,38 the Carbolic Smoke Ball Company’s advertised promise to pay £100 to any customer who contracted a cold after using its device was unsuccessfully defended as constituting ‘a promise in honour’. The Court found that the Carbolic Smoke Ball Company’s act of depositing £1 000 into an account as a provision against claims was evidence of its intention to be legally bound. In Esso Petroleum Co Ltd v Commissioners of Customs and Excise39 Esso produced promotional World Cup coins, each one representing a member of the England soccer squad. Esso promised in its promotional materials to give motorists one coin for each four gallons of fuel purchased. The question the Court faced was whether the coins had been ‘produced … for sale’ within the meaning of the Purchase Tax Act 1963 (UK). The tax revenue would have been significant for the government if the question was answered affirmatively, given that Esso had made millions of these coins. Relevantly, the Court was required to consider whether Esso was legally obliged to supply the coins because both sides had understood its representations as intending to create legally binding relations. The House of Lords (Lord Simon of Glaisdale dissenting) found that the petrol and not the coins were being sold. As to whether Esso had intended to enter a legally binding obligation to provide the coins, their Honours held that it had (Lord Russell and Viscount Dilhorne dissenting). The division among the Law Lords is evident in the judgments of Viscount Dilhorne and Lord Simon of Glaisdale. Viscount Dilhorne40 stated that the promotion was commercial in its purpose (namely, to sell more petrol), but that there was not thereby an intention by Esso to enter a contract to supply the coins, nor by motorists to enter a contract for the supply of the coins. His Lordship emphasised that the coins were of little intrinsic value and were expressly offered as a free gift. The consideration for a contract for Esso to supply and motorists to obtain the coins

36 Compare Home Insurance Co v Adminsitratia Asigurarilor de Stat [1983] 2 Lloyd’s Rep 674, where an ‘honour clause’ did not negate the agreement of the parties to arbitrate matters between them, the clause stating: ‘This treaty shall be interpreted as an honourable engagement rather than as a legal obligation and the award shall be made with a view to effecting the general purpose of this treaty rather than in accordance with a literal interpretation of the language.’ 37 [1923] 2 KB 261, 288. The House of Lords reversed the decision of the Court of Appeal on other grounds—see Rose & Frank Co v J R Crompton & Bros Ltd [1925] AC 445—but was in agreement with these observations. 38 [1893] 1 QB 256. 39 [1976] 1 All ER 117; 1 WLR 1 (HL). 40 Ibid, 2.

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was not the payment of money, but entering into a contract to purchase petrol. Lord Simon41 also found the context clearly commercial, and found further that the coins, while not intrinsically valuable, had real value to motorists, otherwise Esso would not have operated the promotion with the expectation that motorists would be motivated to participate. His Lordship concluded, however, that Esso intended to create legally binding relations. The contract for the coin was collateral to the main contract, and consideration for the collateral contract was entering the main contract for the purchase of the petrol. Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117; 1 WLR 1 Lord Simon of Glaisdale at 121: I am … not prepared to accept that the promotion material put out by Esso was not envisaged by them as creating legal relations between the garage proprietors who adopted it and the motorists who yielded to its blandishments. In the first place, Esso and the garage proprietors put the material out for their commercial advantage, and designed it to attract the custom of motorists. The whole transaction took place in a setting of business relations. In the second place, it seems to me in general undesirable to allow a commercial promoter to claim that what he has done is a mere puff, not intended to create legal relations (cf Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256). The coins may have been themselves of little intrinsic value; but all the evidence suggests that Esso contemplated that they would be attractive to motorists and that there would be a large commercial advantage to themselves from the scheme, an advantage in which the garage proprietors also would share. Thirdly, I think that authority supports the view that legal relations were envisaged. In Rose and Frank Co v J R Crompton and Bros Ltd [1923] 2 KB 261, Scrutton LJ said at p. 288: Now it is quite possible for parties to come to an agreement by accepting a proposal with the result that the agreement concluded does not give rise to legal relations. The reason of this is that the parties do not intend that their agreement shall give rise to legal relations. This intention may be implied from the subject matter of the agreement, but it may also be expressed by the parties. In social and family relations such an intention is readily implied, while in business matters the opposite result would ordinarily follow.

In the same case Atkin LJ said at p. 293: To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly. Such an intention ordinarily will be inferred when parties enter into an agreement which in other respects conforms to the rules of law as to the formation of contracts. It may be negatived impliedly by the nature of the agreed promise or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in the course of family life between members of a family as in Balfour v Balfour [1919] 2 KB 571.

41 Ibid, 3.

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In Edwards v Skyways Ltd [1964] 1 WLR 349 Megaw J quoted these passages at p. 355, and added: In the present case, the subject-matter of the agreement is business relations, not social or domestic matters. … I accept the proposition … that in a case of this nature the onus is on the party who asserts that no legal effect was intended, and the onus is a heavy one.

I respectfully agree. And I would venture to add that it begs the question to assert that no motorist who bought petrol in consequence of seeing the promotion material prominently displayed in the garage forecourt would be likely to bring an action in the county court if he were refused a coin. He might be a suburb Hampden who was not prepared to forego what he conceived to be his rights or to allow a tradesman to go back on his word.

7.2.3  From presumption to construction As with the analysis of alleged contracts involving family members, so too commercial agreements have been constructed in the context of the particular terms of the agreement rather than by reference to an automatic presumption. In Pirt Biotechnologies Pty Ltd v Pirtferm Ltd 42 the Court referred to the judgment in Edwards v Skyways Ltd 43 and the great burden adopted by a party intending to argue against the presumption As with the analysis of that arm’s-length commercial dealings between parties evinces alleged contracts involving the intention to be legally bound.44 Murray J then expressed the family members, so too commercial agreements view that the existence of the contract and the intention has to have been constructed be established by the party asserting it, and the inference will be in the context of the drawn not because of an unrebutted presumption, but because a particular terms of the agreement rather than by positive onus has been discharged.45 reference to an automatic Where a party raises a question as to whether a contractual term presumption. amounts to a promise or is instead a warranty, this is answered as a matter of construction. The case of Kleinvort Benson Ltd v Malaysia Mining Corp Berhad 46 turned on the ‘proper construction, in its context’ of a statement in the ‘comfort letter’, provided by the defendants, Malaysia Mining Corp Berhad, as part of a £5m cash loan facility, that ‘It is our policy to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements’. MMC Metals Limited (MMC) was a company incorporated by the defendants. The plaintiff called on the loan to be repaid by the defendants when MMC went into liquidation after the tin market crashed in 1985. The defendants argued that the letter did not impose a legal obligation on them to ensure MMC’s debts were paid because they had reviewed their policies and altered their position ‘in

42 43 44 45 46

[2001] WASCA 96. [1964] 1 WLR 349. [2001] WASCA 96, [21]. Ibid, [21]. [1989] 1 WLR 379; [1989] 1 All ER 785; followed in Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VR 510.

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the light of changing circumstances’ after the letter was provided. The Court agreed. By contrast, the Court in Banque Brussels SA v Australian National Industries Ltd 47 held that a comfort letter was provided to a bank in the context of a commercial loan with an intention to create legal relations, and that the statements contained in the letter created contractual obligations.

Ermogenous v Greek Orthodox Community of SA Inc The question of the intention to create legal relations came before the High Court in the case of Ermogenous v Greek Orthodox Community of SA Inc,48 where the High Court considered whether a minister of religion was in a contract of employment and whether a magistrate had wrongly inferred the absence of an intention to create legal relations in respect of the minister’s employment. The Full Court of the Supreme Court of South Australia had rejected the claim on the basis that the minister and the Church had not intended to enter into a legally enforceable relationship on the presumption that an agreement between a minister of religion and a church was not legally binding. In the process, the Full Court reviewed a line of cases submitted in support of the proposition that the appointment of ministers of religion was ruled by the presumption that non-commercial relations did not give rise to the intention to create legal relations. The Full Court concluded that no case expressed such a view.49 Although the cases concluded that no contract of employment existed, they did so on the basis of responses to different lines of enquiry, suggesting that no presumption was determinative, but that outcomes depended on the relevant facts in the circumstances of case.50 The High Court disagreed with the Full Court, stating that the relationship was not in essence one that could not be legally established. Indeed, the High Court found that to speak of presumptions generally was problematic, because of their tendency to obscure the assumptions on which they were founded, and develop into rigid concepts contrary to the proper application of basic principles of the law Intention must be the result of ‘an objective of contract. assessment of the state The reasons the High Court gave were that intention must of affairs between the be the result of ‘an objective assessment of the state of affairs parties’. Unquestioned assumptions would between the parties’,51 and that unquestioned assumptions undermine the would undermine the requirement of objective assessment in requirement of objective the identification of the requisite intention. The presumption-led assessment in the identification of the analysis of the existence of an intention to create legally binding requisite intention. relationships was rejected and replaced by an analysis of the facts in the circumstances. The joint judgment (Gaudron, McHugh, Hayne and Callinan JJ) identified the requirements of a legally enforceable contract as being evidenced by identifiable parties, certain arrangements 47 (1989) 21 NSWLR 502. 48 (2002) 209 CLR 95. 49 Ibid, 121 per Kirby J. 50 In Mabon v Methodist Church [1998] 3 NZLR 513 the New Zealand Court of Appeal, referring to its decision in Fleming v Beevers [1994] 1 NZLR 385, held that deciding whether there had been an intention to create legal relations required an examination of the relevant facts in the prevailing circumstances, and concluded that there had not been. 51 (2002) 209 CLR 95, 105.

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between the parties, and (absent a deed) real consideration. The objective intention of the parties was to be inferred from such things as the subject matter of the agreement, the status of the parties, their relationship to one another, and the surrounding circumstances.52 After Ermogenous the test for the existence of an intention to create legal relations discarded presumptions altogether.53 In Dowdell v Knispel Fruit Juices Pty Ltd (trading as Nippys)54 Selway J stated that ‘the issue is not to be resolved simply by applying presumptions’,55 but ‘is to be determined by considering the relevant context and the relationships between the parties and determining what inferences should be drawn from that’.56 The issue of whether a letter of comfort was legally binding was considered in Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG.57 Einstein J referred to Banque Brussels Lambert v Australian National Industries58—in which Rogers CJ had discussed the heavy onus on the party seeking to rebut the presumption that commercial arrangements between the kinds of parties established an intention to be legally bound—and championed the ‘objective approach’ against the case being seen ‘as a matter of presumption’.59 In Shahid v The Australasian College of Dermatologists60 the Court held that in the case of a voluntary association, the evidence must show a clear indication of a ‘contemplation of a legal relationship’.61 In doing so, it referred to Cameron v Hogan,62 where the Court considered that the rules of a voluntary association did not create enforceable contractual obligations: Such associations are established upon a consensual basis, but, unless there were some clear positive indication that the members contemplated the creation of legal relations inter se, the rules adopted for their governance would not be treated as amounting to an enforceable contract.63

In Tipperary Developments Pty Ltd v Western Australia 64 the Court followed Ermogenous in identifying the test for intention as involving ‘an objective assessment of the state of affairs’;65 while in McDonald v Australian Wool Innovation Ltd 66 Weinberg J stated in relation to the existence of a binding contract of employment that: In determining whether the parties have reached a legally binding agreement, it is necessary to determine what is sometimes described as their objective intention. The legal rights and obligations of the parties turn upon what their words and conduct would reasonably be understood to convey, and not upon their actual beliefs or intentions … the objective approach is said to lead to a greater degree of certainty in contractual dealings and in their

52 Ibid. 53 Re Dickson Catering Pty Ltd (in liq); Jakobkiewicz v Dickson Catering Pty Ltd [2002] ACTSC 107. 54 [2003] FCA 851. 55 Ibid, [126]. 56 Ibid, [127]. 57 [2004] NSWSC 149. 58 (1989) 21 NSWLR 502. 59 [2004] NSWSC 149, 213; see also Ashton v Australian Cruising Yacht Company Pty Ltd [2005] WASC 192. 60 [2007] FCA 693. 61 Ibid, [312]. 62 (1934) 51 CLR 358. 63 Ibid, [306]. 64 (2009) WASCA 126. 65 Ibid, [119]. 66 [2005] FCA 105; see also Wilton & Cumberland v Coal & Allied Operations Pty Ltd [2007] FCA 725, [116].

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assessment by the courts. A party who on reasonable grounds supposes that he or she has entered into a contract with another cannot be defeated by a claim by the other that despite appearances, he or she did not actually intend to enter into a contract.67

The Court observed that such an assessment may require the use of extrinsic evidence of the parties’ conduct and communication after the contract was settled.68 In FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd 69 Brooking J observed that in the process of contract construction, courts are unlikely to be assisted by admissions. Indeed, admissions—insofar as they express what parties believed the effect of their communications and conduct amounted to—are not determinative for an objective test, in which the point of view is to be that of the reasonable person looking upon the parties’ actions in the circumstances of the case.70 However, in Kovan Engineering (Aust) Pty Ltd v Gold Peg International Pty Ltd 71 Heerey and Weinberg JJ said: Mr Miller’s state of mind regarding the arrangement struck with Gold Peg is a matter to which her Honour was entitled to have regard [Miller was a director of Kovan Engineering]. It is true that when considering whether a binding arrangement was reached, and if so, its terms, courts do not engage in a search for the subjective intention of the parties. Nonetheless the understanding of the parties as to what they had agreed upon is not irrelevant when considering what a reasonable bystander might have concluded having regard to the discussion that took place.72

• 7.3 Particular situations 7.3.1  Government schemes and agreements If a beneficiary under a government scheme is aggrieved by being refused benefits (despite qualifying for assistance under the scheme), and they seek to enforce the scheme as a contract, then they may be defeated on a number of grounds, including that the scheme was not contractual in nature because the parties did not evince an intention to create legal relations.73 There appears to be a clear historical distinction between earlier74 and later cases, and currently maintaining that the government did not intend to assume contractual obligations in a commercial context is tenuous.75

67 68 69 70

71 72 73 74 75

[2005] FCA 105, [182]–[183]. Ibid, [120]. [1993] 2 VR 343, 351. ATCO Controls Pty Ltd (In liq) v Newtronics Pty Ltd (Receivers and Managers Appointed)(In liq) (2009) 25 VR 411. On the limited role of subjective intention in contract formation, see St George Football Association Inc v Soccer NSW Ltd [2005] NSWSC 1196, [5]–[19] per Barrett J, cited in Weimann (as trustee for Weimann Family Trust (No 3)) v Allphones Retail Pty Ltd (No 2) [2009] FCA 1230, [84]. [2006] FCAFC 117. Ibid, [105]. Other grounds include not being able to fit the government scheme into a classical contract framework of offer and acceptance (Australia Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424, 457); and no relevant consideration (Australia Woollen Mills Pty Ltd v Commonwealth; Logan Downs Pty Ltd v Commissioner for Railways [1960] Qd R 191). Administration of the Territory of Papua New Guinea v Leahy (1961) 105 CLR 6 at 11 per McTiernan J; see also Australia Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424. Hughes Aircraft System International v Airservices Australia (1997) 76 FCR 1; Vass v Commonwealth (2000) 96 FCR 272.

Chapter 7

Intention to create legal relations

7.3.2  Voluntary associations A contract which incorporates the contractual relations between all members of an association would consist of numerous inter se contracts. Such complexity in legal theory discourages viewing membership of associations as contractual.76 So too judicial policy has determined that ‘it is neither intrinsically desirable, nor expedient from the standpoint of despatch of [court] business’77 that the rules of unincorporated associations be treated as contracts. Actions taken against a voluntary association must be framed to fit a recognised private cause of action such as breach of contract, breach of trust, or unreasonable restraint of trade.78 Whether the rules of an association are enforceable as a contract will depend on the answer to the test laid down in the leading case of Cameron v Hogan,79 namely: did the rules provide for ‘some civil right of a proprietary nature proper to be protected’?80 The property test, which is said to embody the judicial policy of non-intervention,81 inhibits causes of action in contract82 by means of a presumption that the constitution of an unincorporated association is not intended to be a contract.83 The plaintiff in Cameron v Hogan was Edmond John Hogan, the then leader of the Labor Government in Victoria, who was allegedly wrongfully expelled from the Australian Labor Party, thus ending his premiership. Hogan took action on the bases of both breach of contract and breach of trust. On the former ground, the Court could not identify the existence of a common intention to enter a contract and found that ‘no tangible or practical proprietary right’84 accompanied membership of the party so as to give substance to a contractually enforceable right. UK case law has developed more in the years since Cameron v Hogan was decided than has Australian law. UK courts have recognised that industrial trade unions cannot be adequately characterised as voluntary associations, and have adopted the legal ‘fiction’85 that the rules of trade unions—being so all-encompassing and having such a powerful effect on their members— are contractually enforceable.86 Political parties are now treated similarly in the UK.87 76 Z Chafee, ‘The Internal Affairs of Associations Not for Profit’, 43 Harvard Law Review (1930) 993. 77 R Pound ‘Equitable Relief against Defamation and Injuries to Personality’, 25 Harvard Law Review (1915–1916) 640, 650. 78 See Australian Capital Territory Rugby League Club Inc. v ACT Leagues Club Ltd (1992) 107 FLR 303, where a cause of action had to have arisen, or be imminently about to arise, although no action had been taken to enforce it, for a declaration of relief to be available; see also Pharmaceutical Society of Great Britain v Dickson [1970] AC 403; Harbottle Brown & Co Pty Ltd v Halstead [1968] 3 NSWR 493. Neither ultra vires nor breaches of natural justice are actionable per se: see McKinnon v Grogan [1974] NSWLR 295; see also D O’Connor, ‘Actions Against Voluntary Associations and the Legal System’ (1977) 4 Monash University Law Review 87. 79 (1934) 51 CLR 358. 80 Ibid, 377 per Rich, Dixon, Evatt and McTiernan JJ. 81 Baldwin v Everingham [1993] 1 Qd 10. 82 President of the Methodist Conference v Parfitt [1984] QB 368; Knowles v Anglican Church Property Trust, Diocese of Bathurst (1999) 89 IR 47. 83 Courts have found associations’ constitutional rules to be inconsistently contractual. In Sullivan v Della Bosca [1999] NSWSC 136, declaratory relief was refused on the basis of a political party’s rule denying that the rules of the party had contractual effect. In Scandrett v Dowling (1992) 27 NSWLR 483, the Court found some rules to be contractual, while others were not. 84 (1934) 51 CLR 358, 378. 85 Enderby Town Football Club Ltd v Football Association Ltd [1971] Ch 591, 606 per Denning LJ. 86 Lee v Showman’s Guild of Great Britain [1952] 2 QB 329. 87 John v Rees [1970] Ch 345; Lewis v Heffer [1978] 1 WLR 1061; Conservative and Unionist Central Office v Burrell (Inspector of Taxes) [1982] 2 All ER 1.

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While few Australian cases involving a threat to livelihood have followed UK precedents, the High Court in Buckley v Tutty88 settled the matter by permitting suit on the basis of unreasonable restraint of trade when voluntary associations threaten a person’s livelihood without requiring the person to satisfy the Cameron v Hogan property test, or to convince the court that the associational rules constitute a contract.89 In Hawick v Flegg 90 the Court determined that the act of joining a society which has an effect on one’s livelihood evinces an intention to be legally bound by the rules of association. Cameron v Hogan should not be seen as prescribing a presumption of the non-contractual nature of associations’ rules.91 In a divergent line of more recent cases, associations’ constitutive rules have been viewed as legally binding, whether on a contractual or on other bases. The rules of the Australian Jockey Club, which held substantial property for the use of its members, were said to create members’ proprietary rights in Finlayson v Carr;92 and the rules of the Anglican Church were viewed as having created legally enforceable rights and obligations between the Church and its members in Scandrett v Dowling.93

7.3.3  Registered companies Section 140(1) of the Corporations Act 2001 (Cth) provides that a corporation’s governance rules constitute a statutory contract: Effect of constitution and replaceable rules 1 A company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract: (a) between the company and each member; and (b) between the company and each director and company secretary; and (c) between a member and each other member; under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.

However, s 140(2) states that where a modification is introduced, members are not automatically bound insofar as the modification: (a) requires the member to take up additional shares; or (b) increases the member’s liability to contribute to the share capital of, or otherwise to pay money to, the company; or (c) imposes or increases restrictions on the right to transfer the shares already held by the member, unless the modification is made: (i) in connection with the company’s change from a public company to a proprietary company under Part 2B.7; or (ii) to insert proportional takeover approval provisions into the company’s constitution.

The word ‘effect’ in s 140(1) may suggest that the rules ‘have effect as a contract’ rather than because they are legislative, or it may suggest that the rules have force as both. However, it may 88 89 90 91 92 93

(1971) 125 CLR 353. Ibid, [17]. (1958) 75 WN (NSW) 255, 258–259 per McLelland J; compare Heale v Phillips [1959] Qd R 489. See J R S Forbes, Justice in Tribunals, The Federation Press (2002), p. 39. [1978] 1 NSWLR 657. (1992) 27 NSWLR 483, 491 per Mahoney JA; but compare comments at 513, 562 and 564 per Priestly JA (Hope AJA agreeing).

Chapter 7

Intention to create legal relations

be preferable to interpret the provision as purely contractual, given that the effect of the rule is dependent on each person ‘agreeing’.94 The courts approach a breach of the rules as potentially actionable95 in contract without the need to demonstrate a proprietary interest.96 The approach the courts have taken is to interpret the constitution as a business document, the aim of the interpretation of which is to produce effective business outcomes.97 Performance is obligated from each person to the extent that the rules apply to them.98 The legal obligations on each person provided in s 140 satisfy the requirement of contractual intention.99 If the rules are provisions in a contract and other rules provide the context of the contract’s interpretation, it is possible that ‘honour clauses’ may negate the legal effect of the contract. Constitutional rules are now interpreted progressively so as to be able to embrace new developments not foreseeable when the constitution was first adopted. However, progressive interpretation must be supported by the words of the text being able to extend to cover new subject matter.100

Ke y p o in ts for re v ision The intention to create legal relations is essential to contract formation, and uncertain and incomplete contracts are more likely to manifest a lack of such intention. The relationship between intention and consideration may be complex where the consideration is viewed as evidence of the intention, or the consideration is the means by which the intention is obtained. The intention may be implied, but must be objectively determined. The existence of the requisite intention may depend on legal assumptions relating to the arrangements in place between the parties. Traditionally, courts presume that family and domestic arrangements preclude the intention to contract. However, because the presumption was inherently discriminatory against women and others lacking an income, and therefore dependent on the representations and promises of others, the courts discarded presumptions in favour of an analysis of the facts of the case. Agreements entered by family members may now be enforced. Commercial agreements are also subject to an objective analysis in context rather than being submitted to an automatic presumption regarding their legal force. Commercial agreements entered without the express intention that they create legal obligations may be enforced as binding contracts. In some circumstances even advertising language may express an intention to be legally bound. Particular situations, such as joining a society which may affect one’s livelihood, may give rise to the intention to be legally bound. 94 See H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 10th ed., Butterworths (2001), p.185. 95 McNab v Auburn Soccer Sports Club Ltd [1975] 1 NSWLR 54; Ryan v King’s Cross RSL Club Ltd [1972] ACLC 27; [1972] 2 NSWLR 79. 96 MacNamara v Northern Assurance Co Ltd [1925] AC 619; Henderson v Kane and Pioneer Club [1924] NZLR 1073. 97 Holmes v Keyes [1959] Ch 199, 215; Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294; Norths Ltd v McCaughen Dyson Capel Cure Ltd (1988) 12 ACLR 739, 746. 98 Norths Ltd v McCaughen Dyson Capel Cure Ltd (1988) 12 ACLR 739; Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294, 300. 99 Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294, 300; compare South Launceston Football Club Inc v Tasmanian Football League Ltd (1995) 4 Tas R 342, 345. 100 R v Brislan (1935) 54 CLR 262; R v Judges of the Federal Court of Australia; Ex parte WA National Football League (Inc) (1979) 143 CLR 190; 23 ALR 439.

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8

Certainty and completeness

Chapt e r o v e rv i e w 8.0

Introduction  121

8.1

Certainty  123 8.1.1 Severability  123 8.1.2 Clauses capable of more than one meaning   125 8.1.3 Discretion and ‘subject to finance’ clauses   127

8.2

Illusory promises  130

8.3

Completeness  132 8.3.1 Specific performance  133

8.4

Agreements to negotiate in good faith   135

Chapter 8

Certainty and completeness

• 8.0 Introduction For a person to be bound by a contract, they must know what they are obligated to do under that contract. In this chapter we are concerned with two concepts—certainty and completeness— and the legal issues that they raise in relation to the formation of contracts. The legal issue of certainty arises where the terms of a contract are uncertain to the extent that it cannot be said that there has been a clear meeting of the minds between the parties.1 Where the essential terms of a contract are uncertain the contract may be void.2 The legal issue of completeness arises where the contract appears not to be sufficiently complete in that one or more essential parts of the agreement have been left unfinished.3 A further issue, related to both certainty and completeness, arises in the form of agreements to negotiate in good faith. Under certain circumstances, such agreements might be enforceable.4 The two requirements of certainty and completeness are essential if it is to be said that there has been a completed agreement between the parties. While the law does not require that the certainty and completeness of a contract should permeate every single aspect of the agreement, it is clear that the rules of contract formation require the existence of a contract that can be said to be sufficiently certain and complete where the essential terms are concerned.5 What is essential will depend upon the nature of the contract. The question of essentiality is different from that of importance; the parties may decide what terms are important according to their particular needs. However, whether a contractual term is essential goes to the heart of enforceability.6 For example, a contract for a lease cannot be said to be enforceable unless the parties, the commencement date, the property being rented, the amount of rent and the term of the lease are all identified. Similarly, in a contract for the sale of land the parties, the property and the price must all be identified. In common contracts—such as leases, the sale of land and the sale of goods—the courts may feel comfortable in stating which terms are essential. However, in less common contracts, the courts may be reluctant to state which terms are essential.7 Certainty and completeness are both areas of contract law that suffer from a problem common to other doctrines of contract law—though their principles are clear, the application of the law to problems of this kind cannot be said to be an easy task, as the particular circumstances of each dispute might vary. Parties may for a variety of reasons leave some part of their agreement unfinished while they proceed with their business. Similarly, at the time of the supposed contract formation the parties to the contract may have believed that their agreement was in fact sufficiently certain and complete, only to discover at some later stage that key terms under the contract were open to wildly differing interpretations. Furthermore, the courts might find themselves grappling 1 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429. 2 Ibid; G Scammell & Nephew Ltd v H C & J G Ouston [1941] AC 251; McDermott v Black (1940) 63 CLR 161. 3 Thorby v Goldberg (1964) 112 CLR 597. 4 See Walford v Miles [1992] 2 AC 128; United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618; Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; see also Jeannie Paterson, ‘The Contract to Negotiate’ (1996) 10 Journal of Contract Law 120; Johan Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 Law Quarterly Review 433. 5 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429. 6 Ellul & Ellul v Oakes (1972) 3 SASR 377; Thorby v Goldberg (1964) 112 CLR 597. 7 Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601.

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with a problem stemming from a particular industry within which the agreement might be thought to be complete, but which for outsiders appears incomplete and uncertain. As Wright LJ observed in Hillas & Co Ltd v Arcos Ltd:8 Business men often record the most important agreements in a crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects; but, on the contrary, the court should seek to apply the old maxim of English law, verba ita sunt intelligenda ut res magis valeat quam pereat. That maxim, however, does not mean that the court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as for instance, the implication of what is just and reasonable to be ascertained by the court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail.9

Resolving a problem of certainty or completeness will depend upon the actual nature of the contract and the facts surrounding the making of the contract. How the courts negotiate these problems also depends greatly upon the willingness, or lack thereof, of judges to step into the shoes of the parties and to try and give effect to the bargain that they believe was struck. If the courts adopt a purely textual approach to interpretation, where an issue of uncertainty or incompleteness has arisen, it seems rather likely that the attempt to form a contract will be frustrated. On the other hand, in trying to preserve the bargain between the parties, the courts cannot go too far and risk becoming the creator rather than the interpreter of agreements.10 As Greig and Davis have noted: The crucial issue for any court is whether it sees its task as being purely one of applying in an entirely neutral way the text of the written agreement, or whether it is prepared, in so far as it is able by reasonable inference, to step into the shoes of the parties and to play a more constructive role.11

For the most part, the courts will do whatever they can in order to give effect to some bargain between the parties.12 Indeed, in Australia it seems clear that the courts will seek to preserve a bargain rather than to destroy it.13 In this chapter we will look at the topics of certainty and completeness separately and will consider the steps that might be taken to remedy the problems that they pose.

8 (1932) 147 LT 503. 9 Ibid, 514; see also York Air Conditioning & Refrigeration (A/sia) Pty Ltd v Commonwealth (1949) 80 CLR 11; Mrocki v Mountview Prestige Homes Pty Ltd [2010] VSC 624; The Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111. 10 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, 27. Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) NSWLR 582. 11 D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 355. 12 Hall v Busst (1960) 104 CLR 206, 239; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600, 616–617; Watson v Phipps (1985) 63 ALR 321; Hillas & Co Ltd v Arcos Ltd [1932] All ER 494. 13 Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429; Meehan v Jones (1982) 149 CLR 571.

Chapter 8

Certainty and completeness

• 8.1 Certainty The existence of vagueness and ambiguity may mean that a contractual term cannot be enforced by a court.14 It is essential that the courts should be able to reasonably ascertain what the parties intended. To this end, if the parties have in fact been performing the contract, then their actions may come to bear upon the interpretation of the uncertain term.15 Where some reasonable interpretation of the term is possible, the courts will follow that interpretation rather than strike down the bargain between the parties.16 Moreover, the fact that there might be competing interpretations of a contested contractual term does not mean that the term is without meaning.17

8.1.1 Severability For the doctrine of certainty to become a relevant matter in a For the doctrine dispute, it is important that the uncertainty relate to an essential of certainty to become term of the contract. Where a non-essential term is uncertain, a relevant matter in a such a term might be severed from the contract.18 Note that the dispute, it is important that the uncertainty relate courts do have the power to correct obvious errors,19 for example to an essential term of where a word has obviously been erroneously left out of the the contract. Where agreement by the parties. Further, the courts may rely on the use a non-essential term is uncertain, such a term of implied terms to cure uncertainty,20 and may rely on extrinsic might be severed from evidence in order to establish the purpose of the contract and the the contract. intention of the parties. In Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd Trading as ‘Uncle Bens of Australia’21 a clause relating to the determination of the price to be paid for supplies of fish included a formula. Under the formula, the price to be paid by Effem Foods was effectively the cost to Trawl Industries plus a profit margin.22 In the New South Wales Court of Appeal, Kirby P held the formula to be illusory23 and the contract void.24 However, both Samuels and Clarke JJA found that the cost could be ascertained.25

14 Whitlock v Brew (1968) 118 CLR 445; Brown v Gould [1972] Ch 53. 15 Wakeling v Ripley (1951) 51 SR (NSW) 183. 16 Watson v Phipps (1985) 63 ALR 321; Carlingford Australia General Insurance Ltd v EZ Industries Ltd [1988] VR 349; Hahndorf Golf Club Inc v John Nitschke Nominees Pty Ltd (2003) 86 SASR 221; Kowalski v Lochlee Pty Ltd [2003] SASC 95; Sunbay Projects Pty Ltd v Naughton [2010] QCA 247. 17 Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101. 18 Whitlock v Brew (1968) 118 CLR 445. 19 Hooker Town Development Pty Ltd v Jilba (1973) 47 ALJR 320. 20 G Scammell & Nephew Ltd v H C & J G Ouston [1941] AC 251, 272–273; Re Galaxy Media Pty Ltd (2001) 167 FLR 149; Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, 38. 21 (1992) 27 NSWLR 326. 22 Ibid, 331. 23 See below, section 8.2. 24 (1992) 27 NSWLR 326, 334. 25 Ibid, 343

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In Whitlock v Brew26 the appellant agreed to sell land to the respondent. The respondent paid which constituted part-payment of the deposit. A clause in their agreement, special condition 5, stipulated that the respondent would lease a petrol station on the land to Shell Co on ‘such reasonable terms as commonly govern such a lease’. The appellant sought to rescind. The respondent sued to recover the deposit monies that had been paid and argued that due to the special condition 5, the contract was void for uncertainty. A majority of the High Court held in favour of the respondent. The agreement was void because the clause was central to the agreement and uncertain because there was no lease in common usage that could establish the essential matters of the rent and term of the lease. In Whitlock the majority first considered whether the reference to an external standard in special condition 5 could be interpreted to provide the requisite degree of certainty for the contract. The majority then gave consideration to whether the uncertain term could be severed from the contract so as to save the agreement. Having decided that it could not be severed and that it could not be interpreted with certainty, they found the agreement void. The reasoning of three of the majority judges, Taylor, Menzies and Owen JJ, is extracted below.

£15 600,

Whitlock v Brew (1968) 118 CLR 445 Taylor, Menzies and Owen JJ at 460–461: The first question to be considered is whether the contention that special condition 5 is uncertain should be upheld. The appellant asserts that it should not and that, in effect, that clause simply provides that in the event of there being no agreement as to the terms of the contemplated lease, including both the period during which it is to subsist and the rent to be paid, the parties shall enter into a lease in the form settled by an arbitrator. Of course, if this were so the basis for the contention that the clause is uncertain would disappear. But the language of the clause does not permit of this view. The lease is to be ‘upon such reasonable terms as commonly govern such a lease’ and in the event of a dispute ‘as to the interpretation or operation’ of the clause the dispute is to be referred to arbitration. We are firmly of opinion that the expression ‘upon such reasonable terms as govern such a lease’ is not, in the context in which it appears, apt to refer to either the period for which the contemplated lease is to subsist or to the rent to be payable thereunder. Nor do we think that the further expression ‘as to the interpretation or operation’ of this clause covers a dispute as to either of those matters. We, therefore, are of opinion that the clause is uncertain in that it neither specifies nor provides a means for the determination as between the parties of the period for which the contemplated lease shall be granted or the rent which shall be payable thereunder. It, therefore, becomes necessary to determine whether the condition is severable from the rest of the provisions of the contract or whether the whole contract falls. On this point the learned judge of first instance after referring to the observations of Knox CJ in Life  Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60, and to Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420, held that the condition was of such a quality that it could be ignored. But those cases and Nicolene Ltd v

26 (1968) 118 CLR 445.

Chapter 8

Certainty and completeness

Simmonds (1953) 1  QB 543, to which also he made a reference, are simply particular examples of conclusions reached by the application of a general principle. That general principle is stated by Knox CJ in the first-mentioned case (1925) 36 CLR, at p. 72: When a contract contains a number of stipulations one of which is void for uncertainty, the question whether the whole contract is void depends on the intention of the parties to be gathered from the instrument as a whole. If the contract be divisible, the part which is void may be separated from the rest and does not affect its validity.

Observations in the same case make it clear that in seeking to ascertain the intention of the parties to a written contract extrinsic evidence may not be resorted to except where such evidence may be called in aid in the interpretation of the written instrument. Clearly enough, it seems to us, it is not to the point to make an independent examination of extrinsic facts, even if they were within the knowledge of both parties, and upon such evidence to conclude that a particular provision was or was not of importance to them or to either of them; the question for determination is the intention of the parties as disclosed by the contract into which they have entered. Neither Phillips’ Case [1925] HCA 18; [1925] HCA 18; (1925) 36 CLR 60 nor Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 bear any resemblance to the present case. Nor does the case of Nicolene Ltd v Simmonds (1953) 1 QB 543, the headnote of which, as was pointed out in Fitzgerald v Masters (1956) 95 CLR, at p. 427, inaccurately states the effect of the contract then under consideration. Of course, cases may arise where a vague, uncertain or meaningless clause in a contract may simply be ignored. An elementary example of this is to be found in the last clause on p. 2 of the contract in this case. But special condition 5 does not fall into any such category; nor can it be said to be a clause inserted solely for the benefit of one of the parties and capable of being waived by him. It is, in a sense, definitive of the ultimate rights which it is contemplated the purchaser is to get under his contract. The clause provides that the respondent will immediately upon taking possession grant a lease the effect of which will be to deprive him of possession of part of the land in return for a promise to pay rent. Of course, the Shell Co is in no way obliged to take a lease but it is clear enough from the terms of the contract that it was contemplated that it would.

8.1.2  Clauses capable of more than one meaning Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd 27 illustrates the general approach of the courts to the question of uncertainty, and the considerations surrounding it. In that case, the Council of the Upper Hunter had entered into a contract to supply Australian Chilling & Freezing with electricity. A contract cannot In the contract, clause 5 stated: ‘if the Supplier’s costs shall vary in be said to be uncertain simply because a other respects than has been hereinbefore provided the Supplier disputed clause is shall have the right to vary the maximum demand charge and capable of more than energy charge …’. When the Council attempted to increase its one meaning. charges, Australian Chilling & Freezing alleged that clause 5 was 27 (1968) 118 CLR 429.

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void for uncertainty. In the High Court, Barwick CJ held that a contract could not be said to be uncertain simply because a disputed clause was capable of more than one meaning.28 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 Barwick CJ at 436–437: The Council of the Upper Hunter County District (the Council) … obtained a supply of electricity in bulk successively from each of two generating sources, namely, Muswellbrook Coal Co Limited and Mepco Pty Limited at Muswellbrook. It subsold electricity in bulk as well as reticulating it in the municipal areas of Muswellbrook, Scone and Aberdeen. It also carried on some trading activities associated with the use of electricity. The Australian Chilling and Freezing Co Limited (the Company) desiring a supply of electricity in bulk at its works in Aberdeen, entered into an agreement on 18th December 1959 with the Council for such a supply. The Council thereby bound itself as from the date of the agreement until 1st October 1973 to supply at a point designated in the agreement or otherwise mutually agreed three phase alternating current at a given frequency and voltage with certain permissible tolerances. The supply was to be continuous and in such quantity as the Company might from time to time require, with an agreed minimum quantity. The price to be paid by the Company was stipulated in clauses which have given rise to disputes between the Company and the Council which form the basis of the present proceedings. Quite clearly, this clause was wide enough to cover any dispute or difference arising between the parties as to any variation in the initial charges which the Council at any time claimed to be entitled to make. … But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. Lord Tomlin’s words in this connexion in Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; (1932) 147 LT 503, at p. 512 ought to be kept in mind. So long as the language employed by the parties, to use Lord Wright’s words in Scammell (G) & Nephew Ltd v Ouston (1941) AC 251 is not ‘so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention’, the contract cannot be held to be void or uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved.

28 Ibid, 436.

Chapter 8

Certainty and completeness

I do not think there is any uncertainty or for that matter ambiguity in the expression ‘supplier’s costs’ in cl. 5, however wide may be the area of possible disagreement as to its denotation in a particular case. A contract to build a bridge at cost could not, in my opinion, be held void for uncertainty: it could not properly, in my opinion, be said to be meaningless: nor is it, in my opinion, ambiguous. Endless might be the arguments pro and con as to whether or not in marginal cases some item of expenditure is as claimed a cost, or as to how much of an expenditure is a cost, of the particular activity. But to my mind, generally speaking, the concept of a cost of doing something is certain in the sense that it provides a criterion by reference to which the rights of the parties may ultimately and logically be worked out, if not by the parties then by the courts. There are no elements in the circumstances of this contract to deprive the concept of that certainty. The obiter dictum in York Air Conditioning and Refrigeration (A/asia) Pty Ltd v The Commonwealth [1949] HCA 23; (1949) 80 CLR 11, at p. 60 may provide an instance where an attempt to limit the concept of a cost may have robbed the concept of its certainty and have introduced uncertainty incapable of resolution by construction.

The problem facing the Court in Upper Hunter County District was similar to that in Whitlock v Brew,29 in that it concerned the question of whether a machinery clause in an agreement was so uncertain as to void the contract.30 A machinery clause is one where the parties to a contract insert a clause that leaves a particular part of that contract to be resolved at a later date under a specific process.31 For example, the parties may wish for the price of a particular service to be decided by a particular formula, or for the resolution of any dispute to be arbitrated or mediated by a third party. The question that then arises is whether this machinery is capable of functioning or whether the machinery has failed. The fundamental difference between the two cases is that in Upper Hunter County District more than one meaning to the contested clause could be ascertained, whereas in Whitlock v Brew no meaning could be ascribed to special condition 5. In Upper Hunter County District, Barwick CJ was at pains to point out that if the courts can identify and support a particular meaning to a contractual term, even though there may be other meanings, that the contract will not be void for uncertainty.32

8.1.3  Discretion and ‘subject to finance’ clauses In Meehan v Jones 33 the respondent sought to sell land to the appellant. The contract for the sale of land contained a special condition that provided: This contract is executed by the parties subject to the following:— (a) The Purchaser or his nominee entering into a satisfactory Agreement or arrangement with Ampol Petroleum Limited for the supply of a satisfactory quantity of crude oil until 29 (1968) 118 CLR 445. 30 (1968) 118 CLR 429, 435. 31 See Prior v Payne (1949) 23 ALJ 298; see also Hawthorn Football Club Ltd v Harding [1988] VR 49. 32 (1968) 118 CLR 429, 436–437. 33 (1982) 149 CLR 571.

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such time as the Purchaser or his nominee has received the approval of the Federal Govt or the appropriate empowered authority for a crude oil allocation of 500 barrels per day or better; (b) The Purchaser or his nominee receiving approval for finance on satisfactory terms and conditions in an amount sufficient to complete the purchase hereunder; and should either of the above conditions not be satisfied on or before the Thirty-first day of July, 1979 (or such extended time as the parties may agree upon) then this Contract (other than for the provisions of this Clause) shall be null and void and at an end and all monies paid hereunder by the Purchaser shall be refunded in full.

The appellant appeared to comply with the clause and sought performance of the contract. The respondent demurred and argued that the contract was uncertain on the basis that the language of the clause was imprecise and indefinite and that the clause appeared to leave performance to the discretion of the appellant, so as to be illusory34 in contractual terms. The High Court unanimously upheld the appellant’s appeal on the basis that the agreement was certain even though parts of the performance were at the discretion of the appellant. The clause in question in Meehan v Jones was a ‘subject to finance’ clause. Such clauses are usually invoked by a purchaser where they have been unable to obtain finance and will ordinarily allow a purchaser to withdraw from a contract without suffering any penalty. This accounts for why theses clauses leave much of the performance to the discretion of the purchaser. However, in Meehan v Jones it was the seller who attempted to rely on the clause. In his judgment Gibbs CJ deals with the question of whether the extent of the appellant’s discretion rendered the promise in the clause illusory and uncertain. Meehan v Jones (1982) 149 CLR 571 Gibbs CJ at 575: The most important question on this appeal, and that on which the learned judges of the Full Court of the Supreme Court of Queensland were in disagreement, is whether a contract of sale of land was binding when it included a term which made the contract subject to certain conditions—particularly a condition making it subject to the purchaser or his nominee receiving approval for finance on satisfactory terms and conditions. … [577] The submission advanced on behalf of the vendors and the second respondent was that the inclusion of special condition 1 had the result that no binding contract was made between the parties. The submission rested on a number of alternative propositions which may be summarized as follows. First, the word ‘satisfactory’ in both pars. (a) and (b)  refers to the satisfaction of the vendors as well as to that of the purchaser and the nominee, so that the clause leaves vital matters to be agreed between the parties; accordingly, there is no more than an agreement to agree. Secondly, the language of the clause is so imprecise and indefinite that it is not possible for the court to say what events would satisfy the conditions which are described. Thirdly, the clause leaves it to the discretion of the

34 See below, section 8.2.

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purchaser whether he will perform the obligations which the contract purports to describe, so that what appears to be a contract is really illusory. It was further said that there was no concluded bargain because the contract left a vital matter to the determination of one of the parties, but in the circumstances of this case that was only another way of saying that the contract was illusory. … [578] The second submission raises a question that has given rise to considerable differences of opinion in the cases in which the courts have been called upon to give effect to contracts which are made conditional upon the obtaining of finance or suitable or satisfactory finance. Of course it is obvious enough that every such case must depend on the particular words of the contract in question, and that it is not profitable to compare with each other cases decided on different contractual provisions. However, it may be possible to state principles which will provide some guidance through the thicket of decisions. 7. When the words of a condition state that a contract is subject to finance, or to suitable finance, or to satisfactory finance, the question immediately arises whether the test which is required to be applied is a subjective or an objective one. On the one hand, the contract may be conditional upon the purchaser obtaining finance which he finds sufficient or satisfactory—such finance as he honestly thinks he needs to complete the purchase. On the other hand, the condition may be fulfilled if finance is available which the purchaser ought to find sufficient, or which ought reasonably to satisfy him, even though he honestly, but unreasonably, regards it as insufficient or unsatisfactory. The fact that opinions may differ as to which of these two meanings is given to the words of the clause does not mean that the clause is uncertain. If the Court, in construing the contract, can decide which of the two possible meanings is that which the parties intended, there will be no uncertainty. As Barwick CJ said in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, at p. 436: But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction …

It is only if the court is unable to put any definite meaning on the contract that it can be said to be uncertain. [579] 8. If the words of the condition are understood to import a subjective test—if the condition is fulfilled if the purchaser honestly thinks that the finance is satisfactory—it is impossible in my opinion to regard the condition as uncertain. The question whether the purchaser does think the finance satisfactory is a simple question of fact. In most cases it will be a question easily answered; if the purchaser thinks the finance satisfactory, he will normally seek to complete the ‘The state of a man’s contract, whereas if he does not think it satisfactory, usually mind is as much a fact as he will not attempt to complete. In any case, whether the the state of his digestion.’ purchaser is satisfied is simply a question of fact, because,

[ 129 ]

[ 130 ]

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to use the well known words of Bowen LJ, ‘the state of a man’s mind is as much a fact as the state of his digestion’ (Edgington v Fitzmaurice (1885) 29 ChD 459, at p. 483). However if the test is purely subjective, the question will arise whether any binding agreement has been made at all. That is a question which I shall later discuss. 9. On the other hand, if the test is an objective one, and the question is whether the finance ought reasonably to be regarded as satisfactory, I should not have thought that the clause is too indefinite for the courts to be able to attribute any particular contractual intention to the parties. It is true that the condition may, as Holland J said in Grime v Bartholomew (1972) 2 NSWLR 827, at p. 838, be ‘silent as to amount, term of the loan, rate of interest, conditions of repayment, class of lender, secured or unsecured or form of security’. Nevertheless, a court which had evidence of the financial position of the purchaser, the amount required to complete the contract and the prevailing rates and conditions on which loans are made by various classes of lenders should not find it unduly difficult to decide what finance a reasonable man, in the position of the purchaser, would regard as satisfactory.

Gibbs CJ then surveyed the different authorities in the UK on this particular point of law and reached the conclusion that a clause of this type is not void for uncertainty. The cases above demonstrate the willingness of the courts to try and uphold bargains wherever possible. It is notable that in Meehan v Jones the conduct of the parties was deemed relevant to the interpretation of the contested term.35 Though post-agreement conduct should have no direct bearing on the intent of the parties at the time that the contract was made, it can be said to shed light on what the parties thought they had agreed.36 review question In circumstances where questions of uncertainty have arisen, how have the courts approached the task of interpreting contracts? Discuss with regard to the cases outlined above.

• 8.2 Illusory promises Where there is no real consideration for a promise, or where the promise contains no substantive requirement that the promisor should do something, then the promise may be held to be illusory.37 The consequences of a finding that a promise is illusory might, if the promise relates to an essential term, be that the contract is void.38 Ordinarily the courts will try to uphold contracts, as 35 36 37 38

(1982) 149 CLR 571, 582. Re Galaxy Media Pty Ltd (2001) 167 FLR 149; Farmer v Honan and Dunne (1919) 26 CLR 183. Godecke v Kirwan (1973) 129 CLR 629; Whitlock v Brew (1968) 118 CLR 445. Whitlock v Brew (1968) 118 CLR 445; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) NSWLR 582.

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they do with respect of matters where uncertainty arises, but the courts cannot write a promise into a contract.39 In Meehan v Jones, Gibbs CJ made the following findings in relation to illusory promises. Meehan v Jones (1982) 149 CLR 571 Gibbs CJ at 582: Although there is nothing uncertain about a clause which speaks of terms and conditions which satisfy the purchaser, the question nevertheless arises, when a contract is made conditional on such a clause, whether the contract is illusory. There is a well settled general principle which was expressed as follows by Kitto J in Placer Development Ltd v The Commonwealth [1969] HCA 29; (1969) 121 CLR 353, at p. 356: … wherever words which by themselves constitute a promise are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought at all.

His Honour went on to refer to the statement of principle in Leake on Contracts, 8th ed. (1931), p. 3: ‘Promissory expressions reserving … an option as to the performance do not create a contract’. The submission on behalf of the respondents in the present case was that the condition left a discretion or option to the purchaser to decide whether he would carry out the contract and that the purported contract was therefore illusory. In my opinion that principle does not apply where the discretion or option of the contracting party relates, not to the performance of the contractual obligations themselves, but only to the fulfilment of a condition upon which the contract depends. That this is so is illustrated by the case of an option to purchase which is, in many cases at least, a contract to sell the land upon condition that the grantee gives the notice and does the other things stipulated in the option: see Laybutt v Amoco Australia Pty Ltd [1974] HCA 49; (1974) 132 CLR 57, at p. 75. Such an option gives the grantee a right, if he performs the stipulated conditions, to become the purchaser. However the fact that the grantee has a discretion as to whether or not he performs those conditions does not render the option illusory. The case of a conditional agreement is analogous. The fact that the condition is one whose performance lies wholly or partly within the power of one of the parties to the contract does not mean that there is no binding contract once the condition is fulfilled. There is a concluded agreement as to the terms of the contract which, if the condition is satisfied, leaves no discretion in either party as to whether he shall carry them out. Once the condition is fulfilled, within the time allowed by the contract for its fulfilment, the contract becomes completely binding.

39 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, 27; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) NSWLR 582; TSB Developments Pty Ltd v HCH and K Fisheries Pty Ltd [2003] TASSC 136.

[ 131 ]

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In Biotechnology Australia Pty Ltd v Pace 40 the respondent, Dr Pace, agreed to a contract of employment with Biotechnology Australia. A term of the contract stated: ‘I confirm a salary package of $36 000 per annum, [with car] and the option to participate in the Company’s senior staff equity sharing scheme.’ At the time that the contract was made there was no such scheme and no scheme was later brought into effect. A majority of the New South Wales Court of Appeal held that the promise was illusory. Kirby P held that it was illusory as it could only have effect at the discretion of the company. In Placer Development Ltd v Commonwealth41 the plaintiff and the Commonwealth entered a contract to form a timber company for the purpose of acquiring timber rights in Papua New Guinea. Clause 14 of the agreement required the Commonwealth to pay a subsidy to the plaintiff. However, no fixed amount of money nor any clear mechanism for determining the amount payable was fixed in the contract. Taylor and Owen JJ stated: But a promise to pay an unspecified amount of money is not enforceable where it expressly appears that the amount to be paid is to rest in the discretion of the promisor and the deficiency is not remedied by a subsequent provision that the promisor will, in his discretion, fix the amount of the payment. Promises of this character are treated by Pollock (Principles of Contract, 12th ed. (1946), pp. 38, 39) not as vague and uncertain promises—for their meaning is only too clear—but as illusory promises …42

review questions 1 What is an illusory promise? Under what circumstances might they arise? 2 How have the courts dealt with illusory promises?

• 8.3 Completeness Given the need of businesses to operate quickly and to seize opportunities where they can, it is not uncommon that certain aspects of an agreement can be left unfinished while the parties perform the bulk of the agreement. This commercial reality has been recognised by the courts. If the incomplete part of the contract is not essential, then it may be severed without voiding the contract.43 However, if the incomplete part is essential, then this may render the contract unenforceable. In part, incompleteness might stem from the stage at which the parties’ negotiations are in the contracting process. For example, in Scammell (G) and Nephew Ltd v H C and J G Ouston44 the contract was held to be unenforceable as the Court could not determine which hire purchase arrangement the parties were referring to in attempting to set the price. In his influential speech, Lord Wright stated: ‘the parties never If the incomplete part of the contract is not essential, then it may be severed without voiding the contract. However, if the incomplete part is essential, then this may render the contract unenforceable.

40 41 42 43 44

(1988) 15 NSWLR 130. (1969) 121 CLR 353. Ibid, 359–360. Whitlock v Brew (1968) 118 CLR 445. [1941] AC 259.

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in intention nor even in appearance reached an agreement’.45 Lord Wright was of the view that this was ‘a still sounder reason against enforcing the claim … their agreement was inchoate and never got beyond negotiations’.46 However, incompleteness can also arise where a contract appears ‘completed’, yet a clause later proves to be uncertain; that is to say, there is a significant overlap between uncertainty and incompleteness.47 Logically, where an essential clause is uncertain the contract will also be incomplete.48 Where performance has occurred under an agreement, the courts will be most reluctant to hold that it is incomplete;49 in general, a finding of incompleteness is easier to make where performance under the agreement has not yet commenced.50 The parties might have machinery in place to deal with conflicts over essential terms. Where this machinery fails, the court might be able to intervene as the House of Lords did in Sudbrook Trading Estate Ltd v Eggleton.51 However, if the court chooses not to intervene, then the agreement will be incomplete.52 It might be possible for a court to imply a term so as to cure a problem of incompleteness.53

8.3.1 Specific performance In Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd 54 the respondent leased a premises from the appellant for three years. There was an option to renew in the lease, which contained a mechanism for determining the new rent under any subsequent lease. The disputed clause first required the parties to attempt to agree on a rent. However, if no such agreement was forthcoming, the clause stipulated that the parties were to ask the President of the Queensland Law Society to appoint an arbitrator to fix the lease. The arbitrator would then be required to determine the rent. The respondent sought to utilise the clause but the appellant demurred, arguing that the clause was void for incompleteness. The High Court unanimously decided in favour of the respondent and ordered that the option be performed. Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 Gibbs CJ, Murphy and Wilson JJ at 604–606: It is established by authority, both ancient and modern, that the courts will not lend their aid to the enforcement of an incomplete agreement, being no more than an agreement of the parties to agree at some time in the future. Consequently, if the lease provided for a renewal ‘at a rental to be agreed’ there would clearly be no enforceable agreement. On the other hand, it is also well established that the parties to a contract may leave terms—

45 46 47 48 49 50 51 52 53 54

Ibid, 269. Ibid, 269. John Gooley and Peter Radan, Principles of Australian Contract Law, LexisNexis, (2006), p. 82. Whitlock v Brew (1968) 118 CLR 445. Wakeling v Ripley (1951) 51 SR (NSW) 183. Hillas & Co Limited v Arcos Limited [1932] All ER 494 [1983] 1 AC 444. Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600. May & Butcher Ltd v R [1934] 2 KB 17. (1982) 149 CLR 600.

[ 133 ]

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even essential terms—to be determined by a third person: see the cases cited in Godecke v Kirwan [1973] HCA 38; (1973) 129 CLR 629, at p. 645. In the present case, the lease itself provides the entire mechanism for determining the rental for the renewed term. There is no further agreement required of the parties. It is true that if they do agree upon that rental, then there is no occasion to resort to the independent mechanism that the lease provides. But, there being no such agreement, all that is required is that the President name a person to fix a figure being not less than the minimum rental operative during the original term. No formality is required to effect the necessary appointment. Either party may request the President to facilitate the fulfilment of the agreement. It may be assumed that if he declines to do so, or if the person nominated declines to carry out the task assigned to him, then the renewal cannot be effected, and that Wilson’s exercise of the option will have been fruitless. Nevertheless, in the circumstances as they stand at present, there is a valid agreement for the renewal of the lease subject to the fixation of a rental for the new term. The fixation of that rental is a condition precedent to the performance of the agreement. 8. It follows that at this stage an order could not be made for the specific performance of the agreement to grant a further lease: Brown v Heffer [1967] HCA 40; (1967) 116 CLR 344, at p. 350. However, in order to give business efficacy to cll. 4.01 and 3.05(b) it is necessary to imply a term that, once the conditions specified in cl. 4.01 have been performed, both parties will do all that is reasonably necessary to procure the nomination by the President of an arbitrator. If authority is needed for this proposition, reference may be made to such cases as Butts v O’Dwyer [1952] HCA 74; (1952) 87 CLR 267 where it was held that if parties entered into an agreement to transfer land subject to a condition that it was not to become effective unless the Minister’s consent had been obtained, there would be implied an obligation on the part of the person giving the transfer to do all that was reasonable on his part to the end that the Minister’s consent might be obtained (1952) 87 CLR, at pp. 279–280, and Kennedy v Vercoe [1960] HCA 64; (1960) 105 CLR 521 where a contract for sale of a business conducted in a shop of which the vendor was the lessee was subject to the purchaser being accepted by the landlord as tenant, and it was held that an implied obligation lay on the purchaser to do whatever might reasonably be required of him to enable the vendor to obtain the landlord’s consent: (1960) 105 CLR, at pp. 526, 529. In the recent decision of the House of Lords in Sudbrook Trading Ltd v Eggleton (1983) 1 AC 444 a case concerning a lease which contained an option to purchase ‘at such price not being less than 12 000 pounds as may be agreed upon by two valuers one to be nominated by the lessor and the other by the lessee and in default of such agreement by an umpire appointed by the … valuers’, Lord Diplock (1983) 1 AC, at p. 477 said that an obligation on the parties to appoint their respective valuers would be a necessary implication to give business efficacy to the option clause. It may be that in the present case the President might nominate an arbitrator at the request of one of the parties, but he might decline to do so unless both parties requested him to act. Given an effective exercise of the option, both parties were under an obligation to request him to nominate an arbitrator, if such a request was reasonably necessary to procure the nomination. 9. In those circumstances there should be a limited decree for specific performance of the kind made in Butts v O’Dwyer and Kennedy v Vercoe. The Full Court, in holding that Wilson was not entitled to a decree, relied on a line of authorities including Darbey v Whitaker

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[1857] EngR 762; (1857) 4 Drew 134 (62 ER 52) and Tillett v Charing Cross Bridge Co [1859] EngR 421; (1859) 26 Beav 419 (53 ER 959), as supporting the principle that where one of the essential elements of an agreement (such as the price or rent) has not been ascertained at the date of trial, equity will not decree specific performance. Certainly some of those authorities did hold that the courts would not decree specific performance of an agreement to name an arbitrator to fix the amount of a purchase price. The decision of the House of Lords in Sudbrook Trading Ltd v Eggleton, which was given after judgment was pronounced in the present case, shows that that is no longer the law of England. However, even before that decision, the earlier English authorities could not have been fully accepted in Australia, consistently with such decisions as Butts v O’Dwyer and Kennedy v Vercoe. If a lessor agrees to renew a lease at a rent to be fixed by a third party, and agrees (expressly or impliedly) to do all that is reasonably necessary to ensure that the rent is so fixed, it is not right to say that there is no concluded contract until the rent is fixed. There is a contract which immediately binds the lessor to perform his obligation to do all that is reasonably necessary to ensure that the rent is fixed, although the performance of the further obligation to renew the lease is conditional on the rent being fixed. There is no reason in justice or in law why the court should not make an appropriate order for specific performance in such a case, that is, an order that the lessor should do whatever is reasonably necessary to ensure that the rent is fixed, and, if the rent is fixed, should renew the lease.

• 8.4 Agreements to negotiate in good faith The law as it presently stands on the enforceability of agreements to negotiate in good faith is quite uncertain. In the aftermath of the influential and leading judgment of Kirby P in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd,55 there was some speculation that an agreement to negotiate in good faith could be enforceable under certain special circumstances. This decision stood in contradistinction to the judgment of the House of Lords in the case of Walford v Miles,56 where it was held that agreements to negotiate in good faith would be unenforceable. More recently, the New South Wales Court of Appeal held in United Group Rail Services Limited v Rail Corporation New South Wales57 that such agreements will be enforceable. This decision is supported, though not expressly, by the Queensland Supreme Court decision in AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd,58 where Douglas J held that a dispute resolution clause requiring that reasonable efforts in good faith be employed to resolve any dispute was not illusory and could be performed.59 Similarly, the West Australian Supreme Court in Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd 60 has also considered and applied an obligation to act in good faith between two parties, though in circumstances where good faith was confined to mean ‘honesty’ and excluded ‘bad faith dealings’.61 Given the judgments in United Group Rail, AMCI (IO) and 55 56 57 58 59 60 61

(1991) 24 NSWLR 1. [1992] 2 AC 128. (2009) 74 NSWLR 618. [2009] QSC 139 (4 June 2009). Ibid, [30]. Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASC 222. Ibid, [47]–[57].

[ 135 ]

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Strzelecki Holdings, it appears that while the law in relation to the enforceability of agreements to negotiate in good faith was not abundantly clear, the trend appeared to favour their enforceability. The traditional reluctance of the courts to apply agreements to negotiate in good faith might well be understandable, in the sense that if one party needs to litigate in order to compel the other party to negotiate with it in good faith, then the prospect of any good faith negotiation ever eventuating is indeed quite remote. Nonetheless, it might be argued that clauses stipulating that parties should negotiate in good faith might be seen as a form of insurance, where the act of negotiating with another party requires foregoing other negotiating opportunities with other parties. As such, the clause might serve a deterrent effect if it prevents the other party from acting in bad faith. There is of course a difference between agreements to agree,62 which are unenforceable, and agreements to negotiate in good faith, which might be enforceable.63 With regard to the latter, a sharp difference of opinion appears to be in play between the UK and Australian courts. In the UK case of Hillas & Co Limited v Arcos Limited 64 Lord Wright expressed the view that a contract to negotiate in good faith may be enforceable: The traditional reluctance of the courts to apply agreements to negotiate in good faith might well be understandable, in the sense that if one party needs to litigate in order to compel the other party to negotiate with it in good faith, then the prospect of any good faith negotiation ever eventuating is indeed quite remote.

There is then no bargain except to negotiate, and negotiations may be fruitless and end without any contract ensuing; yet even then in strict theory, there is a contract (if there is good consideration) to negotiate, though in the event of repudiation by one party the damages may be nominal, unless a jury think that the opportunity to negotiate was of some appreciable value to the injured party.65

Despite the reasonable concession that a contract to negotiate in good faith might ultimately come to be fruitless, the decision of Lord Wright in Hillas v Arcos brought a stern rebuke from Lord Denning MR in another UK case, Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd.66 Lord Denning stated: That tentative opinion by Lord Wright does not seem to me to be well founded. If the law does not recognise a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force. No court could estimate the damages because no one can tell whether the negotiations would be successful or would fall through; or if successful, what the result would be. It seems to me that a contract to negotiate, like a contract to enter into a contract, is not a contract known to the law. We were referred to the recent decision of Brightman J about an option, Mountford v Scott [1933] 3 WLR 884: but that does not seem to me to touch this point. I think we must apply the general principle that when there is a fundamental matter left undecided and to be the subject of negotiation,

62 See Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600. 63 See Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618; AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd [2009] QSC 139; Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASC 222. 64 [1932] All ER Rep 494. 65 Ibid, 505. 66 [1975] 1 WLR 297.

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there is no contract. So I would hold that there was not any enforceable agreement in the letters between the plaintiff and the defendants. I would allow the appeal accordingly.67

However, in the Australian High Court case of Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd,68 Kirby P (in the majority) disagreed with the Court of Appeal. Coal Cliff Collieries concerned a ‘heads agreement’ (an agreement to negotiate) in relation to a proposed joint venture for a coalmine. The heads agreement laid out a proposal for the joint venture and mine. Negotiation took place over 16 months, within which time numerous draft joint venture agreements were written and the heads agreement was also drafted and redrafted. Eventually, after three more years, one party withdrew from the negotiations. Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Kirby P at 26–27: I do not share the opinion of the English Court of Appeal that no promise to negotiate in good faith would ever be enforced by a court. I reject the notion that such a contract is unknown to the law, whatever its term[s]. I agree with Lord Wright’s speech in Hillas that, provided there was consideration for the promise, in some circumstance a promise to negotiate in good faith will be enforceable, depending upon its precise terms. Likewise I agree with Pain J in Donwin that, so long as the promise is clear and part of an undoubted agreement between the parties, the courts will not adopt a general principle that relief for the breach of such promise must be withheld. …I believe that the proper approach to be taken in each case depends upon the construction of the particular contract: see Australia & New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695; see note (1991) 65 ALJ 59. In many contracts it will be plain that the promise to negotiate is intended to be a binding legal obligation to which the parties should then be held. The clearest illustration of this class will be cases where an identified third party has been given the power to settle ambiguities and uncertainties: see Foster v Wheeler (1888) LR 38 Ch D 130; Axelsen v O’Brien (1949) 80 CLR 219 and Biotechnology Australia Pty Ltd v Pace [(1998) 15 NSWLR 130] (at 136). But even in such cases, the court may regard the failure to reach agreement on a particular term as such that the agreement should be classed as illusory or unacceptably uncertain: Godecke v Kirwan (at 646f) and Whitlock v Brew (1968) 118 CLR 445 at 456. In that event, the court will not enforce the arrangement. In a small number of cases, by reference to a readily ascertainable external standard, the court may be able to add flesh to a provision which is otherwise unacceptably vague or uncertain or apparently illusory: see, eg, Powell v Jones [1968] SASR 394 at 399; Sweet and Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699; cf Meehan v Jones (1982) 149 CLR 571 at 589; Jillcy Film Enterprises [593 F Supp 515 (1984)] (at 521); Ridgeway Coal Co [616 F Supp 404 (1985)] (at 408). Finally, in many cases, the promise to negotiate in good faith will occur in the context of an ‘arrangement’ (to use a neutral term) which by its nature, purpose, context, other

67 Ibid, 301. 68 (1991) 24 NSWLR 1.

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provisions or otherwise makes it clear that ‘the promise is too illusory or too vague and uncertain to be enforceable’: see McHugh JA in Biotechnology (at 156) and Adaras Development Ltd v Marcona Corporation [1975] 1 NZLR 324 at 331. Eventually, Kirby P found that though an agreement to negotiate in good faith could be enforceable, the particular agreement in Coal Cliff Collieries was illusory. As noted above, the reasoning of Kirby P has been followed in several subsequent cases.69 In Walford v Miles70 the House of Lords held that an agreement to negotiate in good faith was not enforceable. Walford v Miles [1992] 2 AC 128 Lord Ackner at 138: While accepting that an agreement to agree is not an enforceable contract, the Court of Appeal appears to have proceeded on the basis that an agreement to negotiate in good faith is synonymous with an agreement to use best endeavours and, as the latter is enforceable, so is the former. This appears to me, with respect, to be an unsustainable proposition. The reason why an agreement to negotiate, like an agreement to agree, is unenforceable is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined ‘in good faith’. However, the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. Mr Naughton [counsel for the plaintiffs], of course, accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question—how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an ‘agreement’? A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from these negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a ‘proper reason’ to withdraw. Accordingly, a bare agreement to negotiate has no legal content.71

69 United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618; AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd [2009] QSC 139; Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASC 222 70 [1992] 2 AC 128. 71 Walford v Miles [1992] 2 AC 128, 138.

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In the case of United Group Rail Services,72 Allsop P was critical of the reasoning of Lord Ackner in Walford v Miles. Indeed, it is quite difficult to see a rational basis for likening an agreement to negotiate in good faith to an agreement to agree, where the outcome of a contract of the former type is not guaranteed, but suggesting that an agreement to use reasonable endeavours is enforceable. Allsop P took issue with the suggestion that agreements to negotiate in good faith would be void for uncertainty, stating: An obligation to undertake discussions about a subject in an honest and genuine attempt to reach an identified result is not incomplete. It may be referable to a standard concerned with conduct assessed by subjective standards, but that does not make the standard or compliance with the standard impossible of assessment. Honesty is such a standard. Whether it is capable of assessment depends on whether there is a standard of behaviour that is capable of having legal content. Asserting its uncertainty does not answer the question. The assertion that each party has an unfettered right to have regard to any of its own interests on any basis begs the question as to what constraint the party may have imposed on itself by freely entering into a given contract. If what is required by the voluntarily assumed constraint is that a party negotiate honestly and genuinely with a view to resolution of a dispute with fidelity to the bargain, there is no inherent inconsistency with negotiation, so constrained. To say, as Lord Ackner did, that a party is entitled not to continue with, or withdraw from, negotiations at any time and for any reason assumes that there is no relevant constraint on the negotiation or the manner of its conduct by the bargain that has been freely entered into. Here, the restraint is a requirement to meet and engage in genuine and good faith negotiations.73

review questions 1 Compare and contrast the approaches of Australian and UK courts to agreements to negotiate in good faith. Which approach is preferable? Why? 2 If a case concerning an agreement to negotiate were to come before the High Court of Australia, how do you think the Court would treat such an agreement?

Ke y p o ints for re v ision Certainty is generally concerned with whether the meaning of terms in a contract can be said to be certain or whether they are void for uncertainty. Completeness is concerned with whether key and essential parts of the agreement have been included in the contract. There is some overlap between certainty and completeness. Courts will generally try to uphold a contract, particularly where performance has commenced. The courts might be able to uphold a contract by implying terms, ascertaining the meaning of a contractual term even where there are competing meanings, and having regard to extrinsic materials. However, courts will not write terms into a contract.

72 (2009) 74 NSWLR 618. 73 Ibid, [65].

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Parties to a contract may leave essential terms to be decided at a later date by an external party or by some other mechanism. However, where that mechanism fails the contract will be incomplete. Agreements to negotiate in good faith are enforceable under Australian law, but whether they will be certain and complete is a question of fact to be determined with respect of the particular facts of a dispute.

problem-solving practice Big Adventure enters into an agreement to lease with Grant Company over a shop in a shopping mall that Grant is building in Melbourne. Under the agreement to lease, both Grant and Big Adventure will negotiate towards achieving the lease of the shop in the shopping mall. This requires Grant to get development approval and build the mall. Grant is delayed on obtaining development approval. The agreement to lease requires Grant to notify Big Adventure of any delays and to seek its opinion on how to best continue. Grant does not inform Big Adventure, but simply terminates the agreement to lease with Big Adventure and signs an agreement to lease over the same premises with a third party. What is the nature of the agreement to lease? Is there a lease?

ANSWER The agreement to lease between Big Adventure and Grant seems akin to an agreement to negotiate in good faith. It is also similar to a ‘heads agreement’ in that it sets out the basis and process for a later agreement between the parties. In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd, Kirby P held that an agreement to negotiate in good faith may be enforceable under certain circumstances. Coal Cliff Collieries was followed by the New South Wales Supreme Court in United Group Rail Services Ltd v Rail Corporation of New South Wales. The Western Australian Supreme Court held that an agreement to negotiate in good faith may be enforceable in Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd. An agreement to negotiate in good faith is a contract to negotiate: Hillas & Co Limited v Arcos Limited. Though there is English authority to the contrary in Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd and Walford v Miles, the clear position in Australian courts has been that agreements to negotiate in good faith are enforceable. The question that would then arise is whether by terminating without consulting Big Adventure, Grant has acted without good faith. Given that good faith generally requires loyalty to the agreement and the absence of bad faith, Grant’s failure to consult Big Adventure and the fact that it entered into an agreement with a third party over the same premises would demonstrate a lack of good faith. There cannot be a lease agreement in the present context as such a contract, given the facts as they stand, would simply be an agreement to agree; that is, the essential terms of rent, commencement and the premises which are the subject matter of the lease have not been fully agreed. All that would be in place in this situation is an agreement between the parties to agree at some time in the future. An agreement to agree is not enforceable under Australian law. An agreement to agree is a contract that leaves essential terms to be agreed upon between the parties at a later date without providing a workable mechanism by which those terms may be agreed. An agreement to agree will be unenforceable due to incompleteness.

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9

Estoppel

Chapt e r o v e rv i e w 9.0

Introduction  142

9.1

The concept of estoppel   142 9.1.1 A unified doctrine of estoppel?   144 9.1.2 An argument for maintaining the distinction   146

9.2

Promissory estoppel  148 9.2.1 Elements  155 i Assumption  157 ii Inducement  157 iii Detrimental reliance  157 iv Knowledge  158 v Reasonableness  158 vi Unconscionability  158 9.2.2 Relief under equitable estoppel   159

9.3

Common law estoppel   161

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• 9.0 Introduction If one were to ask the question ‘what is an estoppel?’, the answer would be at once both quite simple and exceedingly complex. Indeed, given the long and convoluted history of the various forms of estoppel, and the failure of the High Court of Australia in three leading estoppel cases—Legione v Hateley,1 Walton Stores (Interstate) Ltd v Maher 2 and Commonwealth of Australia v Verwayen3—to achieve a unified doctrine of estoppel, the exercise would be painstakingly difficult. On a conceptual level, estoppel is rather straightforward. The Fundamentally, basic principle was identified by Dixon J in Grundt v Great Boulder estoppel protects against Mines Pty Ltd,4 where his Honour stated that ‘the basal purpose of the detriment where reliance doctrine … is to avoid or prevent a detriment to the party asserting has been induced by a the estoppel’.5 Estoppel works to prevent the unjust departure of representation. one party from representations that it has made to another party which have had the effect of enticing the other party to alter their position to their detriment. That is, the effect of the estoppel is to stop a party from acting in a way that is inconsistent with a state of affairs that they have convinced another party to think exists or will exist. As Carter has noted: ‘to say that a person is “stopped” is to say that a person is “precluded”’.6 Fundamentally, estoppel protects against detriment where reliance has been induced by a representation. However, unravelling the different forms of estoppel is a complicated task. The difficulty is compounded by the fact that in the jurisprudence which has dealt with the concept of estoppel, there has been a bewildering array of names used to describe the different types of estoppel, for example estoppel by representation, estoppel by convention, estoppel by judgment,  estoppel by acquiescence, promissory estoppel, proprietary estoppel and estoppel by deed.7 As many commentators have noted, at times these names are used interchangeably and without consistency. Nonetheless, it can safely be said that there are fundamentally two types of estoppel: common law estoppel and equitable estoppel (which itself comprises promissory estoppel and proprietary estoppel). The differences between the two might now be regarded as somewhat suspect. Traditionally, common law estoppel was directed towards representations of fact and eschewed unconscionability as a required element. In contrast, equitable estoppel was concerned with reliance on promises, assurances and inducements. This chapter focuses primarily upon promissory estoppel and also outlines the basics of common law estoppel.

• 9.1 The concept of estoppel Let us consider an example in which person A represents to person B that if B turns down an offer of cheap rent from a third party, A will rent a house out to B for one year at about the same price and will sign the lease the following week. What would happen if B turned down 1 2 3 4 5 6 7

(1983)152 CLR 406. (1988) 164 CLR 387. (1990) 170 CLR 394. (1937) 59 CLR 641. Ibid, 674. J Carter, E Peden and Tolhurst, Contract Law in Australia, 5th ed., LexisNexis (2007), p. 146. This is by no means an exhaustive list. For a more comprehensive list of the various types of estoppels and their natures, see Discount and Finance Ltd v Gehrig’s NSW Wines Ltd (1940) SR (NSW) 598, 602–603 per Jordan CJ.

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the offer of cheap rent and sought to sign a lease with A the following week, only to find that A has subsequently leased the house to some other person? It may well be said that there would be a not insubstantial injustice if A could walk away unburdened while B has foregone a benefit. In the absence of a signed contract, On a conceptual this would be a situation in which the doctrine of consideration level, estoppel works (in could play no part. Put simply, B has not paid for A’s promise.8 the absence of a binding contractual obligation) What has transpired in this example is that person A has made to prevent the offeror promises and representations which they must have known would from recanting from their be relied upon by person B. In fact, A has seen B acting to their promise in circumstances where the offeree has detriment in reliance on A’s promises. On a conceptual level, acted to their detriment estoppel works (in the absence of a binding contractual obligation) and where it would be to prevent the offeror from recanting from their promise in unfair and unjust to let the offeror resile from their circumstances where the offeree has acted to their detriment and representation. where it would be unfair and unjust to let the offeror resile from 9 their representation. There are a number of concepts relevant to estoppel that emerge from the scenario above, namely representation, reliance, assumption and detriment. Person A has made a representation to B. In turn, B has made an assumption as to A’s future conduct. In reliance on A’s representation, B has incurred a detriment. The question is whether a court of law should intervene. In Grundt v Great Boulder Pty Gold Mines Ltd,10 Dixon J stated: Before anyone can be estopped, he must have played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it. But the law does not leave such a question of fairness or justice at large. It defines with more of less completeness the kinds of participation in the making or acceptance of the assumption that will suffice to preclude the party if the other requirements for an estoppel are satisfied. A brief statement of the recognised grounds of preclusion is contained in the reasons I gave in Thompson v Palmer (1933) 49 CLR at page 547, and it is convenient to repeat it:—‘Whether a departure by a party from the assumption should be considered unjust and inadmissible depends on the part taken by him in occasioning its adoption by the other party. He may be required to abide by the assumption because it formed the conventional basis upon which the parties entered into contractual or other mutual relations, such as bailment; or because he has exercised against the other party rights which would exist only if the assumption were correct … or because knowing the mistake the other laboured under, he refrained from correcting him when it was his duty to do so; or because his imprudence, where care was required of him, was a proximate cause of the other party’s adopting and acting upon the faith of the assumption; or because he directly made representations upon which the other party founded the assumption.11

This statement by Dixon J sets out the circumstances under which it might be thought to be unconscionable for a party to abandon a representation that they have made to another. The notion of unconscionability runs through much of the jurisprudence in estoppel, both at equity and the common law, though given the centrality of unconscionability to equity its usage

8 9 10 11

But see Hamer v Sidway 124 NY 538 (1891). Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641. (1937) 59 CLR 641. Ibid, 675–676.

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in common law estoppel tends to be less pronounced.12 Nonetheless, it is clear that estoppel is concerned with preventing a departure from a representation, or in light of Walton Stores, in preventing a party from incurring a detriment, where that representation has induced conduct from the relying party.

9.1.1  A unified doctrine of estoppel? Much thought has been given to whether there is or should be one unified doctrine of estoppel. Though Mason CJ in Commonwealth v Verwayen13 expressed strong support for unification, McHugh J in the same case supported a clear separation between common law and equitable estoppel. Mason CJ stated: In conformity with the fundamental purpose of all estoppels to afford protection against the detriment which would flow from a party’s change of position if the assumption that led to it were deserted, these developments have brought a greater underlying unity to the various categories of estoppel. Indeed, the consistent trend in the modern decisions points inexorably towards the emergence of one overarching doctrine of estoppel rather than a series of independent rules.14

There has been much written about a unified doctrine of estoppel.15 However, though various theoretical models have been propounded, the law on estoppel still remains divided. On the one side is common law estoppel and on the other is equitable estoppel. The former is commonly a restraint against the assertion of rights, whereas the latter is a source of rights. The basis for the distinction between equitable estoppel and common law estoppel was stated by Dawson J in Commonwealth of Australia v Verwayen. Commonwealth of Australia v Verwayen (the Voyager case) (1990) 170 CLR 394 Dawson J at [6]–[8]: [T]he basic considerations underlying both common law estoppel and equitable estoppel have always been the same. The only thing standing in the way of their parallel development has been the persistence of the view at common law that to succumb to a doctrine of promissory estoppel would be to undermine the foundations of the law of contract. Yet the description of estoppel by conduct given by Dixon J in Thompson v Palmer

12 Although in Steria v Hutchinson [2007] ICR 445, [93], Neuberger LJ referred to unconscionability in the context of estoppel by representation, which is a form of common law estoppel. 13 (1990) 170 CLR 394. 14 Ibid, 410. 15 See for example M Spence, ‘Australian Estoppel and the Protection of Reliance’ (1997) 11 Journal of Contract Law 203; A Robertson, ‘Knowledge and Unconscionability in a Unified Estoppel’ (1998) 24(1) Monash University Law Review 115; A Robertson, ‘Situating Equitable Estoppel within the Law of Obligations’ (1997) 19 Sydney Law Review 32; J Carter, ‘Contract, Restitution and Promissory Estoppel’ (1989) 12 University of New South Wales Law Journal 30; K Sutton, ‘Contract by Estoppel’ (1989) 1 Journal of Contract Law 205.

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[1933] HCA 61; (1933) 49 CLR 507 and Grundt v Great Boulder Pty Gold Mines Ltd [1937] HCA 58; (1937) 59 CLR 641 is equally applicable to common law estoppel and equitable estoppel. The description appearing in Thompson v Palmer, at p. 547, is as follows: The object of estoppel in pais [by representation] is to prevent an unjust departure by one  person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other’s detriment. Whether a departure by a party from the assumption should be considered unjust and inadmissible depends on the part taken by him in occasioning its adoption by the other party.

The ‘unjust departure … from an assumption’ of which Dixon J speaks is equally applicable to an assumption with respect to future conduct as an assumption with respect to an existing state of affairs and the requirement that the departure must be unjust may be taken as a reference to the unconscionable conduct required to found an equitable or promissory estoppel. It is the requirement of unconscionable conduct which is now seen as the protection against undue intrusion upon the law of contract, for a voluntary promise of itself will not give rise to an estoppel. An estoppel will occur only where unconscionable conduct on the part of one gives rise to an equity on the part of another. The estoppel will then operate to take account of that equity. 7. How exactly the estoppel will operate to take account of that equity is another question. The result of an estoppel at common law was, viewed as a separate and distinct doctrine from equitable estoppel, to preclude the party estopped from denying the assumption upon which the other party acted to his detriment. It followed that the party who acted to his detriment was, in effect, given the benefit of the assumption. It was all or nothing. By contrast, the view is expressed by Mason CJ and Wilson J and by Brennan J in Waltons Stores (Interstate) Ltd v Maher, at pp. 404–405 and p. 423 respectively, that an estoppel in equity may not entitle the party raising it to the full benefit of the assumption upon which he relied. The equity is said ‘not to compel the party bound to fulfil the assumption or expectation; it is to avoid the detriment which, if the assumption or expectation goes unfulfilled, will be suffered by the party who has been induced to act or to abstain from acting thereon’: per Brennan J at p. 423. To avoid the detriment may, however, require that the party estopped make good the assumption: see Crabb v Arun District Council [1975] EWCA Civ 7; (1976) Ch 179, at pp. 190, 192, 199; Ramsden v Dyson (1866) LR 1 HL 129, per Lord Kingsdown at p. 170; Jones (AE) v Jones (FW) (1977) 1 WLR 438, at p. 443; Riches v Hogben (1985) 2 Qd R 292, at p. 302. But, depending upon the circumstances of the case, the relief required may be considerably less. 8. If this view is right, estoppel at common law and in equity may have had common origins, but there the similarity stops. While the role of estoppel at common law was largely as a rule of evidence, its role has been vastly expanded in equity to raise questions of substance. At the same time, 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.

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It has been suggested that the dividing line between common law estoppel and equitable estoppel is unconscionability.16 Whether the use of unconscionability to demarcate a dividing line between common law estoppel and equitable estoppel is tenable is a matter of some uncertainty. Leaving aside this particular question, unconscionability has not been entirely absent where common law estoppel has been discussed in the past.17 Indeed, the whole purpose of the doctrine, as developed by Dixon J in Thompson v Palmer18 and Grundt v Great Boulder Pty Gold Mines Ltd,19 has been to prevent injustices; that is, the actions of one party have been such as to encourage the other party to act to their detriment There are two and it would be both unjust and against good conscience to allow fundamental differences between common law the former party to resile from their representations. As Seddon estoppel and equitable and Ellinghaus note, the issue is not whether there has been any estoppel. First, common unconscionability, but ‘whether the conduct is sufficiently law estoppel has been confined to assumptions unconscionable’.20 of fact as opposed to Notwithstanding the issue of unconscionability, there are assumptions of future two fundamental differences between common law estoppel and conduct. Second, common law estoppel equitable estoppel that warrant consideration. First, as a result of is concerned with rules the decision in Jorden v Money,21 common law estoppel has been of evidence, whereas confined to assumptions of fact as opposed to assumptions of equitable estoppel creates future conduct. Second, common law estoppel is concerned with new rights. rules of evidence, whereas equitable estoppel creates new rights.22

9.1.2  An argument for maintaining the distinction A case for maintaining the distinction between common law estoppel and equitable estoppel was put forward by McHugh J in Commonwealth v Verwayen. Commonwealth of Australia v Verwayen (the Voyager case) (1990) 170 CLR 394 McHugh J at 499–501: I do not think that the doctrine of common law estoppel advances the plaintiff  ’s case any further than does the doctrine of equitable estoppel. Both common law and equity applied the principle of estoppel in pais. They both held that, if a person made a false representation to another about a past or present fact and the representee acted upon it, the representor was not allowed to assert the untruth of that representation: Jorden v Money

16 A Robertson, ‘Knowledge and Unconscionability in a Unified Estoppel’ (1998) 24(1) Monash University Law Review 115; see also Dixon J’s famous speech in Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641, where his Honour alludes to unconscionability but does not name it. 17 See above, section 9.1. 18 (1933) 49 CLR 507. 19 (1937) 59 CLR 641. 20 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 79. 21 (1854) 5 HLC 185; 10 ER 868; see below, section 9.2. 22 Commonwealth of Australia v Verwayen (1990) 170 CLR 394, 500 per McHugh J.

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(1854) 5 HLC 185 at p. 210 (10 ER 868 at p. 880); Waltons, at pp. 447–448. Accordingly, so far as any representation by the Commonwealth as to present or past facts is concerned, the common law doctrine of estoppel does not advance the plaintiff  ’s case any further than the equitable doctrine does. But more importantly, in the present state of authority, the common law doctrine of estoppel does not, but the equitable doctrine of promissory estoppel does, extend to representations or assumptions concerning the future: Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at pp. 432–435; Waltons at pp. 398–399, 459. Hence any representations or assumptions concerning the future can be dealt with, and on the traditional view can be dealt with only, by equitable estoppel. Even if ‘there is no acceptable reason why the doctrine of promissory estoppel should be seen, in a fused system, as exclusively equitable’, as Deane J asserted in Waltons (at p. 448), the equitable rules must prevail over the common law rules ‘concerning the same matter’: Supreme Court Act 1986 ( Vict), s 29. 30. One important difference between the common law doctrine of estoppel in pais and the equitable doctrines of promissory and proprietary estoppel is that the common law doctrine is concerned with the rules of evidence, notwithstanding that a common law claim of estoppel must be pleaded, while the equitable doctrines are concerned with the creation of new rights between the parties. The common law will not permit ‘an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations’: Grundt v Great Boulder Pty Gold Mines Ltd [1937] HCA 58; (1937) 59 CLR 641 at p. 674. In so far as the assumed fact gives rise to a cause of action or alters the legal relationship between the parties, it does so because of the operation of the general law on the assumed fact either alone or in conjunction with other facts. Equity, like the common law, also will not permit an unjust departure from an assumption of fact which one person has caused another to adopt or accept for the purpose of their legal relations: Thompson v Palmer (1933) 49 CLR 507 at p.  547. But the equitable doctrines of estoppel create rights. They give rise to equities which are enforceable against the party estopped. The equitable doctrines result in new rights between the parties when it is unconscionable for a party to insist on his or her strict legal rights. It will be unconscionable for a party to insist on his or her strict legal rights if that party has induced the other party to assume that a different legal relationship exists or will exist between them, if he or she knew that the other party would act or refrain from acting on that assumption and if, as a result, the other party will suffer detriment unless the assumption is maintained. Hence, to avoid detriment to the party who has been induced to act or refrain from acting on that assumption, equity will require the parties to act on the basis of the relationship assumed by the innocent party until the detriment is removed or the innocent party otherwise compensated. The equitable right of the innocent party will take precedence over the strict legal rights of the party estopped. And because the doctrines of promissory and proprietary estoppel create equitable rights, they operate differently from the common law doctrine of estoppel in pais. The purpose of both the common law and equitable doctrines is ‘to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting’: Grundt at p. 674. But because the common law

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doctrine of estoppel in pais is a rule of evidence, it operates to preclude the party estopped from denying the assumption of fact whenever it is necessary to do so for the purpose of determining the rights of the parties. On the other hand, because the equitable doctrines create rights, they preclude the party estopped from denying the assumption of fact (or law) only as long as the equitable right exists. Once the detriment has ceased or been paid for, there is nothing unconscionable in a party insisting on reverting to his or her former relationship with the other party and enforcing his or her strict legal rights. 31. What will be required to satisfy the equity which arises against the party estopped depends on the circumstances: Waltons, per Mason CJ and Wilson J at p. 404. Often the only way to prevent the promisee suffering detriment will be to enforce the promise. But the enforcement of promises is not the object of the doctrine of equitable estoppel. The enforcement of promises is the province of contract. Equitable estoppel is aimed at preventing unconscionable conduct and seeks to prevent detriment to the promisee. As Brennan J pointed out in Waltons, ‘in moulding its decree, the court, as a court of conscience, goes no further than is necessary to prevent unconscionable conduct’: at p. 419. Consequently, a court of equity will only require the promise or assumption to be fulfilled if that is the only way in which the equity can be fulfilled: per Brennan J at p. 416. In Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 at p. 472, Priestley JA, writing for an unanimous Court of Appeal, said: ‘The remedy granted to satisfy the equity … will be what is necessary to prevent detriment resulting from the unconscionable conduct.’

• 9.2 Promissory estoppel Prior to the revival of promissory estoppel by Lord Denning in Central London Property Trust Ltd v High Trees House Ltd,23 the most influential and limiting case on estoppel was that of Jorden v Money24 in 1854. Prior to Jorden v Money it had been the position of the English courts in equity that where a representation had been made as to future conduct, the representor could be required to make good the representation.25 In Jorden v Money, Jorden inherited part of her deceased brother’s estate. This included a bond worth £1200, owed by Money. Jorden was approached by Money’s prospective parents-in-law who enquired as to whether she would enforce the bond. Jorden said that she would not and the prospective parents-in-law consented to the marriage. Jorden later changed her mind and sought to enforce the bond. Money demurred, but the House of Lords held that estoppel, both at common law and in equity, was confined to representations of fact. Jorden’s representation had been as to her future conduct, which was not covered by estoppel in the view of the House of Lords. This limitation still prevails over common law estoppel.26 As Mason CJ and Wilson J noted in Walton Stores (Interstate) v Maher:27 If there is any basis at all for holding that common law estoppel arises where there is a mistaken assumption as to future events, that basis must lie in reversing Jorden v Money and in 23 [1947] 1 KB 130, discussed below. 24 (1854) 10 ER 868. 25 Hammersley v De Biel (1845) 12 CI & F 45; 8 ER 1312. 26 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 399. 27 Ibid.

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accepting the powerful dissent of Lord St Leonards in that case. The repeated acceptance of Jorden v Money over the years by courts of the highest authority makes this a formidable exercise.28

Equitable estoppel in fact evolved two doctrines—proprietary estoppel29 and promissory estoppel30—to confound the rule in Jorden v Money: (i) Proprietary estoppel is concerned with situations where a landowner has induced another party to believe that they would be granted an interest in the property provided. Where the party who relies on the landowner’s representation suffers a detriment, the latter may be compelled to honour their promise or compensate the other party. (ii) Promissory estoppel pertains to situations where one party has led another to believe that contractual rights would not be enforced. Where the other party has acted to their detriment, the representing party may be restrained from enforcing their rights.31 The modern doctrine of promissory estoppel, —which for the purposes of this chapter will be the title given to the form of estoppel developed by the High Court in Walton Stores (Interstate) v Maher—has its basis in the obiter comments of Denning LJ in Central London Property Trust v High Trees House Ltd.32 In that case, the plaintiffs leased a block of flats in London to the defendants on a 99-year lease. In 1940 the annual rent was £2500 and due to World War II the defendants were unable to sublet many of the flats. The plaintiffs agreed to a reduced rent of £1250 for the duration of the War. The flats began to fill, and were fully occupied by mid-1945. After the War, the plaintiffs successfully sought full rent for the future and the recovery of full rent for the last six months of 1945. However, Denning LJ commented obiter that if the plaintiffs had attempted to recover rent for the period from 1940 to 1945, they would have been unsuccessful. In doing so, Denning LJ revived equitable estoppel. The obiter comments of Denning LJ in High Trees were followed by the Privy Council in Ajayi v R T Briscoe (Nigeria) Ltd 33 and Bank Negara Indonesia v Hoalim;34 and in Legione v Hately35 the High Court of Australia endorsed the ‘new’ High Trees estoppel. In Legione, the solicitor for the purchaser of land had told the secretary of a partner at the vendor’s law firm that the purchaser wished to delay completion until seven days after the expiry of the completion period. The secretary told the purchaser’s lawyer that it should be all right, ‘but I’ll have to get instructions’. The vendors rescinded the contract some days later and the purchasers sued. The High Court held that the vendors were not estopped from their rescission.36 In Walton Stores (Interstate) Ltd v Maher,37 the Mahers owned a commercial property in Nowra. They were approached by Waltons, which wanted to lease the land. It was agreed that the Mahers would demolish their existing building and build a new one that met Waltons’ specifications and which the latter would then lease. Negotiations commenced towards a lease. About two weeks 28 29 30 31 32 33 34 35 36

Ibid, 399. Legione v Hateley (1983) 152 CLR 406, 432; Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; Hughes v Metropolitan Railway Co (1877) 2 App Cas 439. Hughes v Metropolitan Railway Co (1877) 2 App Cas 439. [1947] KB 130. [1964] 3 All ER 556. (1973) 3 PCC 27. (1983) 152 CLR 406. See ibid, 449, 454, for a discussion of the application of Central London Property Trust v High Trees House Ltd [1947] KB 130. 37 (1988) 164 CLR 387.

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later, in November 1983, lawyers for the Mahers told Waltons that the agreement would need to be concluded in order for the Mahers to complete the rebuilding. Solicitors for Waltons forwarded a new agreement to the solicitor for the Mahers and indicated that they would let their counterpart know if approval was not forthcoming. The Mahers’ solicitor returned the signed contract to Waltons’ solicitors. Waltons was aware that the demolition and rebuilding had commenced, but told its lawyers to ‘go slow’. On 18 January 1984 Waltons notified the Mahers that they were not willing to pursue the transaction. The Mahers sued for specific performance. The High Court held that Waltons was bound to the agreement by estoppel. Deane and Gaudron JJ found that the Mahers had assumed that the contract had been signed. This was Walton Stores is a significant decision in an assumption of fact and in the view of Deane and Gaudron JJ it that it established that supported common law estoppel. In contrast, Mason CJ, Wilson J estoppel could be used and Brennan J found that the Mahers had acted with respect as both a shield and a sword; that is, that of their belief as to Waltons’ future conduct. This supported estoppel could prevent promissory estoppel. the enforcement of legal Walton Stores is a significant decision in that it established rights, in response to a suit brought by the that estoppel could be used as both a shield and a sword; that promisor against the is, that estoppel could prevent the enforcement of legal rights, in promisee, where to do response to a suit brought by the promisor against the promisee, so would be a departure where to do so would be a departure from an assumed state of from an assumed state of affairs, and also serve affairs, and also serve as a cause of action for the promisee against as a cause of action for the promisor. Walton Stores also recognised that a pre-existing legal the promisee against the relationship was not necessary to support an action in promissory promisor. estoppel.

Walton Stores (Interstate) v Maher (1988) 164 CLR 387 Mason CJ and Wilson J at 397–408: The estoppel set up by the respondents and found by the primary judge was a common law estoppel in the form of a representation by the appellant constituted by its silence in circumstances where it should have spoken. Likewise, the Court of Appeal based the estoppel on common law principles as explained by Dixon J in Thompson v Palmer [1933] HCA 61; (1933) 49 CLR 507, at p. 547 and Grundt v Great Boulder Pty Gold Mines Ltd [1937] HCA 58; (1937) 59 CLR 641, at pp. 674–676 … 17. Our conclusion that the respondents assumed that exchange of contracts would take place as a matter of course, not that exchange had in fact taken place, undermines the factual foundation for the common law estoppel by representation found by Kearney J and the common law estoppel based on omission to correct a mistake favoured by the Court of Appeal. There is, as Mason and Deane JJ pointed out in Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406, at p. 432, a long line of authority to support the proposition that, to make out a case of common law estoppel by representation, the representation must be as to an existing fact, a promise or representation as to future conduct being insufficient: Jorden v Money (1854) 5 HLC 185; 10 ER 868; Maddison v Alderson (1883) 8 App Cas 467, at p. 473; Chadwick v Manning (1896) AC 231; George Whitechurch, Ltd v Cavanagh (1902) AC 117,

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at p. 130; Craine v Colonial Mutual Fire Insurance Co Ltd [1920] HCA 64; (1920) 28 CLR 305, at p. 324; … 19. If there is any basis at all for holding that common law estoppel arises where there is a mistaken assumption as to future events, that basis must lie in reversing Jorden v Money and in accepting the powerful dissent of Lord St Leonards in that case. The repeated acceptance of Jorden v Money over the years by courts of the highest authority makes this a formidable exercise. We put it to one side as the respondents did not present any argument to us along these lines. 20. This brings us to the doctrine of promissory estoppel on which the respondents relied in this Court to sustain the judgment in their favour. Promissory estoppel certainly extends to representations (or promises) as to future conduct: Legione, at p. 432. So far the doctrine has been mainly confined to precluding departure from a representation by a person in a pre-existing contractual relationship that he will not enforce his contractual rights, whether they be pre-existing or rights to be acquired as a result of the representation: Ajayi v Briscoe (1964) 1 WLR 1326, at p. 1330; 3 All ER 556, at p. 559; Bank Negara Indonesia v Philip Hoalim (1973) 2 MLJ 3, at p. 5; … But Denning J in Central London Property Trust, Ltd v High Trees House, Ltd (1947) KB 130, at pp. 134–135, treated it as a wide-ranging doctrine operating outside the pre-existing contractual relationship; see the discussion in Legione, at pp. 432–435. In principle there is certainly no reason why the doctrine should not apply so as to preclude departure by a person from a representation that he will not enforce a non-contractual right: Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd (1968) 2 QB 839, at p. 847, per Donaldson J; Attorney-General v Codner (1973) 1 NZLR 545, at p. 553. 21. There has been for many years a reluctance to allow promissory estoppel to become the vehicle for the positive enforcement of a representation by a party that he would do something in the future. Promissory estoppel, it has been said, is a defensive equity (Hughes v Metropolitan Railway Co (1877) 2 App Cas 439, at p. 448; Combe v Combe [1952] EWCA Civ 7; (1951) 2 KB 215, at pp. 219–220) and the traditional notion has been that estoppel could only be relied upon defensively as a shield and not as a sword … High Trees itself was an instance of the defensive use of promissory estoppel. But this does not mean that a plaintiff cannot rely on an estoppel. Even according to traditional orthodoxy, a plaintiff may rely on an estoppel if he has an independent cause of action, where in the words of Denning LJ in Combe v Combe, at p. 220, the estoppel ‘may be part of a cause of action, but not a cause of action in itself ’. 22. But the respondents ask us to drive promissory estoppel one step further by enforcing directly in the absence of a pre-existing relationship of any kind a non-contractual promise on which the representee has relied to his detriment. For the purposes of discussion, we shall assume that there was such a promise in the present case. The principal objection to the enforcement of such a promise is that it would outflank the principles of the law of contract. Holmes J expressed his objection to the operation of promissory estoppel in this situation when he said ‘It would cut up the doctrine of consideration by the roots, if a promisee could make a gratuitous promise binding by subsequently acting in reliance on it’: Commonwealth v. Scituate Savings Bank (1884) 137 Mass 301, at p. 302. …

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27. Some recent English decisions are relevant to this general discussion. Amalgamated Property Co v Texas Bank (1982) QB 84 in the Court of Appeal and Pacol Ltd v Trade Lines Ltd (1982) 1 Lloyd’s Rep 456, are instances of common law or conventional estoppel. However, the comment of Goff J in Texas Bank at first instance (at p. 107) is significant. His Honour observed: Such cases are very different from, for example, a mere promise by a party to make a gift or to increase his obligations under an existing contract; such promise will not generally give rise to an estoppel, even if acted on by the promisee, for the promisee may reasonably be expected to appreciate that, to render it binding, it must be incorporated in a binding contract or contractual variation, and that he cannot therefore safely rely upon it as a legally binding promise without first taking the necessary contractual steps.

The point is that, generally speaking, a plaintiff cannot enforce a voluntary promise because the promisee may reasonably be expected to appreciate that, to render it binding, it must form part of a binding contract. 28. Crabb was an instance of promissory estoppel. It lends assistance to the view that promissory estoppel may in some circumstances extend to the enforcement of a right not previously in existence where the defendant has encouraged in the plaintiff the belief that it will be granted and has acquiesced in action taken by the plaintiff in that belief. There the defendants, knowing of the plaintiff’s intention to sell his land in separate portions, encouraged the plaintiff to believe that he would be granted a right of access over their land and, by erecting gates and failing to disabuse him of his belief, encouraged the plaintiff to act to his detriment in selling part of the land without reservation of a right of way. This raised an equity in favour of the plaintiff which was satisfied by granting him a right of access and a right of way over the defendants’ land. The Court of Appeal deduced from the circumstances an equity in the plaintiff to have these rights without having to pay for them. As Oliver J pointed out in Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd (1982) QB 133, at p. 153, the Court of Appeal treated promissory estoppel and proprietary estoppel or estoppel by acquiescence as mere facets of the same general principle, a point also made by Lord Denning MR in Texas Bank, at p. 122, and seemingly accepted by the Privy Council in Attorney-General of Hong Kong v Humphreys Estate Ltd (1987) 1 AC 114, at pp. 123–124. In Taylors Fashions Oliver J also remarked (at p. 153) that what gave rise to the need for the court to intervene was the defendants’ unconscionable attempt to go back on the assumptions which were the foundation of their dealings. Indeed, Scarman LJ in Crabb saw the question in terms of whether an equity had arisen from the conduct and relationship of the parties (at pp. 193–194), concluding that the court should determine what was ‘the minimum equity to do justice to the plaintiff’ (at p. 198). See also Pascoe v Turner [1978] EWCA Civ 2; (1979) 1 WLR 431, at p. 438; 2 All ER 945, at p. 951. 29. The decision in Crabb is consistent with the principle of proprietary estoppel applied in Ramsden v Dyson (1866) LR 1 HL 129. Under that principle a person whose conduct creates or lends force to an assumption by another that he will obtain an interest in the first person’s land and on the basis of that expectation the other person alters his position or acts to his detriment, may bring into existence an equity in favour of that other person, the nature and extent of the equity depending on the circumstances. And it should be

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noted that in Crabb, as in Ramsden v Dyson, although equity acted by way of recognizing a proprietary interest in the plaintiff, that proprietary interest came into existence as the only appropriate means by which the defendants could be effectively estopped from exercising their existing legal rights. 30. One may therefore discern in the cases a common thread which links them together, namely, the principle that equity will come to the relief of a plaintiff who has acted to his detriment on the basis of a basic assumption in relation to which the other party to the transaction has ‘played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it’: per Dixon J in Grundt, at p. 675; see also Thompson, at p. 547. Equity comes to the relief of such a plaintiff on the footing that it would be unconscionable conduct on the part of the other party to ignore the assumption. 31. Before we turn to the very recent decision of the Privy Council in Humphreys Estate, which was not a case of proprietary estoppel, but one, like the present, arising in the course of negotiations antecedent to the making of a contract, we should say something of equity’s attitude to the enforcement of voluntary promises. So far equity has set its face against the enforcement of such promises and future representations as such. The support for the exercise of a general equitable jurisdiction to make good expectations created or encouraged by a defendant given by Lord Cottenham LC in Hammersley v De Biel [1845] EngR 592; (1845) 12 Cl & Fin 45; 8 ER 1312, affirmed by the House of Lords in that case, was undermined by the insistence in Jorden v Money on a representation of existing fact and destroyed by Maddison v Alderson. See the discussion in Finn, ‘Equitable Estoppel’, at pp. 62 et seq. 32. Because equitable estoppel has its basis in unconscionable conduct, rather than the making good of representations, the objection, grounded in Maddison v Alderson, that promissory estoppel outflanks the doctrine of part performance loses much of its sting. Equitable estoppel is not a doctrine associated with part performance whose principal purpose is to overcome non-compliance with the formal requirements for the making of contracts. Equitable estoppel, though it may lead to the plaintiff acquiring an estate or interest in land, depends on considerations of a different kind from those on which part performance depends. Holding the representor to his representation is merely one way of doing justice between the parties. 33. In Humphreys Estate the defendants representing the Hong Kong government negotiated with a group of companies (‘HKL’), which included the respondent Humphreys Estate, for an exchange whereby the government would acquire 83 flats, being part of property belonging to HKL, and in exchange HKL would take from the government a Crown lease of property known as Queen’s Gardens and be granted the right to develop that property and certain adjoining property held by HKL. The negotiations did not result in a contract, though the exchange of properties was agreed in principle but subject to contract. The government took possession of HKL’s property and expended a substantial sum on it. HKL took possession of Queen’s Gardens and demolished existing buildings and paid to the government $103 865 608, the agreed difference between the value of the two properties. HKL withdrew from the negotiations and sued to recover the amount paid and possession of the first property. The defendants claimed that HKL was estopped from withdrawing from the agreement in principle. The Privy Council rejected this claim

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on the ground that the government failed to show (a) that HKL created or encouraged a belief or expectation on the part of the government that HKL would not withdraw from the agreement in principle and (b) that the government relied on that belief or expectation (at p. 124). Their Lordships observed (at pp. 127–128): It is possible but unlikely that in circumstances at present unforeseeable a party to negotiations set out in a document expressed to be ‘subject to contract’ would be able to satisfy the court that the parties had subsequently agreed to convert the document into a contract or that some form of estoppel had arisen to prevent both parties from refusing to proceed with the transactions envisaged by the document.

34. The foregoing review of the doctrine of promissory estoppel indicates that the doctrine extends to the enforcement of voluntary promises on the footing that a departure from the basic assumptions underlying the transaction between the parties must be unconscionable. As failure to fulfil a promise does not of itself amount to unconscionable conduct, mere reliance on an executory promise to do something, resulting in the promisee changing his position or suffering detriment, does not bring promissory estoppel into play. Something more would be required. Humphreys Estate suggests that this may be found, if at all, in the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party. Humphreys Estate referred in terms to an assumption that the plaintiff would not exercise an existing legal right or liberty, the right or liberty to withdraw from the negotiations, but as a matter of substance such an assumption is indistinguishable from an assumption that a binding contract would eventuate. On the other hand the United States experience, distilled in the Restatement (2d 90), suggests that the principle is to be expressed in terms of a reasonable expectation on the part of the promisor that his promise will induce action or forbearance by the promisee, the promise inducing such action or forbearance in circumstances where injustice arising from unconscionable conduct can only be avoided by holding the promisor to his promise. 35. The application of these principles to the facts of the present case is not without difficulty. The parties were negotiating through their solicitors for an agreement for lease to be concluded by way of customary exchange. Humphreys Estate illustrates the difficulty of establishing an estoppel preventing parties from refusing to proceed with a transaction expressed to be ‘subject to contract’. And there is the problem identified in Texas Bank (at p. 107) that a voluntary promise will not generally give rise to an estoppel because the promisee may reasonably be expected to appreciate that he cannot safely rely upon it. This problem is magnified in the present case where the parties were represented by their solicitors. 36. All this may be conceded. But the crucial question remains: was the appellant entitled to stand by in silence when it must have known that the respondents were proceeding on the assumption that they had an agreement and that completion of the exchange was a formality? The mere exercise of its legal right not to exchange contracts could not be said to amount to unconscionable conduct on the part of the appellant. But there were two other factors present in the situation which require to be taken into

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consideration. The first was the element of urgency that pervaded the negotiation of the terms of the proposed lease … 37. The second factor of importance is that the respondents executed the counterpart deed and it was forwarded to the appellant’s solicitor on 11 November. The assumption on which the respondents acted thereafter was that completion of the necessary exchange was a formality … 38. It seems to us, in the light of these considerations, that the appellant was under an obligation to communicate with the respondents within a reasonable time after receiving the executed counterpart deed and certainly when it learnt on 10 December that demolition was proceeding. It had to choose whether to complete the contract or to warn the respondents that it had not yet decided upon the course it would take. It was not entitled simply to retain the counterpart deed executed by the respondents and do nothing … The appellant’s inaction, in all the circumstances, constituted clear encouragement or inducement to the respondents to continue to act on the basis of the assumption which they had made. It was unconscionable for it, knowing that the respondents were exposing themselves to detriment by acting on the basis of a false assumption, to adopt a course of inaction which encouraged them in the course they had adopted. To express the point in the language of promissory estoppel the appellant is estopped in all the circumstances from retreating from its implied promise to complete the contract. … 40. We therefore think that the Court of Appeal was correct in its conclusion. We would dismiss the appeal.

In the Commonwealth v Verwayen,38 a representation by the Commonwealth that it would not plead the limitations period in response to an action for negligence, on which it later reneged, was alleged to create an estoppel in favour of the respondent. The respondent had been a sailor who was injured in a naval collision in 1964. He had not sued during the limitation period as he had assumed that no duty of care was owed to him. He commenced his action in 1984 in reliance of the Commonwealth’s representation as to the limitation period. In the High Court, Gaudron and Toohey JJ held that the Commonwealth had waived its rights. Deane and Dawson JJ held that an estoppel arose against the Commonwealth.

9.2.1 Elements In order for promissory estoppel to arise as an issue, there must be a representation made by the representor to the relying party. If a representation has been made, then if certain other elements are made an estoppel may have been created. The question then is what acts satisfy the legal standard for a representation in promissory estoppel? There are two basic considerations that apply here. First, the representation may be express or implied, provided that it is sufficiently clear. Second, the representation must not be ambiguous or unclear.

38 (1990) 170 CLR 394.

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In Legione v Hately,39 Mason and Deane JJ stated: The requirement that a representation as to existing fact or future conduct must be clear if it is to found an estoppel in pais or a promissory estoppel does not mean that the representation must be express. Such a clear representation may properly be seen as implied by the words used or to be adduced from either failure to speak where there was a duty to speak or from conduct. Nor is it necessary that a representation be clear in its entirety. It will suffice if so much of the representation as is necessary to found the propounded estoppel satisfies the requirement. Thus, a representation that a particular right will not be asserted for at least x days is not rendered, for the purposes of promissory estoppel, unclear or equivocal merely because the words used are equivocal as to whether the relevant period is x days, x  plus one day or x plus two days. If what is said or done amounts to a clear and unequivocal representation that the particular right will not be asserted for a period of at least x days, a representation to that effect can be relied on to found an estoppel.40

As Mason and Deane JJ noted, the representation need not be completely unambiguous. It must however be sufficiently clear to establish a basis for the estoppel. For example, if A promises to deliver 100 tons of granite to B, and in response B alters their position and incurs a possible detriment, if A does not make the delivery, then B’s claim in estoppel will not be defeated simply because A did not specify whether they would use imperial or metric tons.41 However, where there is a high level of ambiguity in the representation, this will not be sufficient to create an estoppel. As Ipp JA stated in Australian Crime Commission v Gray,42 ‘[u]nconscionability is usually difficult to establish when the representation is ambiguous or unclear’.43 There is some disagreement as to the elements that are required to establish promissory estoppel. In Walton Stores v Maher,44 Brennan J outlined six elements that would need to be satisfied once a party had made a representation to another: In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff ’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.45

This statement has not been approved by a majority of the High Court. Nonetheless, it has commonly been applied in estoppel cases. The six elements are examined in detail below.

39 (1983) 152 CLR 406. 40 Ibid, 438–439. 41 See Australian Crime Commission v Gray [2003] NSWCA 318, [205] per Ipp JA. 42 Ibid. 43 Ibid, [200]. 44 (1988) 164 CLR 387. 45 Ibid, 428–429.

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i Assumption An assumption of existing fact induced by a representation will give rise to a common law estoppel.  In contrast, an assumption as to future behaviour will support the existence of an equitable estoppel. In Walton Stores, Brennan J confined equitable estoppel to circumstances where there existed either a legal relationship or the expectation some future legal relationship; and in that case the requirement was easily satisfied. However, where a promise is made outside a legal relationship, Brennan J’s formula would not apply. In Austotel Pty Ltd v Franklin Selfserve Pty Ltd,46 Priestley JA suggested that the assumption that a promise would be performed would be sufficient regardless of any legal relationship.47

An assumption of existing fact induced by a representation will give rise to a common law estoppel. In contrast, an assumption as to future behaviour will support the existence of an equitable estoppel.

ii Inducement It is essential that the assumption by the relying party has been induced by the representation.48 There must be a causal link between the actions of the representor and the detriment suffered by the relying party, and the element of inducement satisfies this link. The inducement must be founded upon a clear representation. As Mason and Deane JJ noted in Legione v Hately,49 the ‘representation does not need to be clear in its entirety’; however, it must be sufficiently clear and unambiguous. In Legione v Hately a statement by Miss Williams saying that she ‘would get instructions’ was held not to support an estoppel.50 Mason and Deane JJ held that Miss Williams’ statement was not a clear and unequivocal representation. Similarly, Brennan J held that as Miss Williams was employed by the vendor’s solicitors, the purchaser’s solicitors should have been aware of the limits of her authority.

iii  Detrimental reliance The party who relies upon the representation must act in a particular way or refrain from doing something. In the course of their reliance, the relying party must be likely to suffer a detriment if the representor is allowed to depart from the representation. In Thompson v Palmer,51 Dixon J stated: ‘The object of estoppel … is to prevent an unjust departure by one person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other’s detriment.’52 The forms which detriment can take vary in accordance with the circumstances of the particular case. However, the detriment must be something of value. In Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd,53 Handley JA noted the contrast between estoppel, which requires 46 47 48 49 50 51 52 53

(1989) 16 NSWLR 582. Ibid, 610. Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. (1983) 152 CLR 406, 438–439. Ibid, 449, 454. (1933) 49 CLR 507. Ibid, 547. (1991) 22 NSWLR 298.

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something of value in order to support an estoppel, and the doctrine of consideration, where a mere peppercorn may suffice to facilitate an exchange of binding promises.54 Examples of the circumstances in which a detriment has been found to exist include constructing a building,55 providing domestic services,56 improving another person’s land57 and preparing a contract.58 As the decision in Commonwealth v Verwayen59 demonstrates, the detriment need not be financial.

iv Knowledge In Walton Stores v Maher,60 Brennan J held that the representor must know that the relying party has or will act to their detriment. Knowledge will be present in most situations where a representation induces an assumption, due to the proximity of the parties. In Walton Stores, the appellants were aware that the respondents had demolished their building and commenced construction. Further, they had received a signed agreement from the respondents. In Commonwealth v Verwayen,61 the Commonwealth was aware that Verwayen was continuing his action in reliance of their representation.

v Reasonableness The actions of the relying party must be reasonable.62 In this sense, the requirement that the representor will be liable for the harm caused by their representation is limited by the requirement of reasonableness in the relying party’s reliance. There are two relevant considerations with regard to reasonableness. First, the relying party must act reasonably in their assumption. Second, the detriment must be reasonable in light of the assumption.

vi Unconscionability Unconscionability is the element upon which equity creates rights. As McHugh J stated in Commonwealth v Verwayen,63 ‘the equitable doctrines result in new rights between the parties when it is unconscionable for a party to insist on his or her strict legal rights’. More generally, unconscionability is the principle that informs estoppel. There is, however, some dispute as to whether unconscionability must be considered as a separate element in estoppel rather than as a principle underpinning estoppel.64 In Forbes v Australian Yachting Federation Inc,65 Santow J stated: ‘it is an essential Unconscionability is requirement of the principle of estoppel, that the conduct of the the element upon which parties sought to be estopped must properly be characterised as equity creates rights. unconscionable’.66 54 Ibid, 307–308. 55 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 56 Public Trustee v Wadley (1997) 7 Tas R 35. 57 Dillwyn v Llewelyn (1862) 45 ER 1285. 58 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 59 (1990) 170 CLR 394. 60 (1988) 164 CLR 387. 61 (1990) 170 CLR 394. 62 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 63 (1990) 170 CLR 394, 500. 64 See Anaconda Nickel Ltd v Edensor Nominees Pty Ltd [2004] VSCA 167, [40]. 65 (1996) 131 FLR 241. 66 Ibid, 287.

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9.2.2  Relief under equitable estoppel When the elements of equitable estoppel are established, an equity The fundamental is created in favour of the relying party.67 A court has a broad purpose of a court in discretion in applying equitable relief, and the specific remedy that applying an equitable a court provides—specific performance, equitable damages or an remedy is to prevent the relying party from suffering injunction—will depend upon the particular circumstances of the a detriment. case. The fundamental purpose of a court in applying an equitable remedy is to prevent the relying party from suffering a detriment, but not to the extent that other parties will suffer injustice. In Giumelli v Giumelli,68 the respondent received a promise from the appellants, his parents, to the effect that if he remained on their property (known as the ‘Dwellingup property’), they would subdivide it and provide him with title to the portion on which he had a house. The respondent stayed on the property and did not pursue a career that would have taken him away from it. He worked full time for his parents’ business—an orchard run as a partnership—and was later admitted to the partnership. However, the relationship between the appellants and the respondent soured when the respondent married a woman of whom the appellants did not approve. Consequently the appellants refused to transfer the property to him. The respondent left the property and another brother, Steven, moved onto the land. The respondent sued on the basis that his parents held the property on trust for him. The Full Court of the Federal Court ordered that the appellants transfer the property to the respondent. On appeal, the High Court held that the appellants should instead pay the respondent a sum of money that reflected the value of the property. In doing so, a majority of the High Court endorsed a proposition put forward by Deane J in Commonwealth v Verwayen69 that the relying party should receive relief that reflects the assumption, unless it would ‘exceed what could be justified by the requirements of conscientious conduct and would be unjust to the estopped party’.70 In the extract below, the majority in Giumelli v Giumelli outline the current approach to equitable relief in estoppel. Giumelli v Giumelli (1999) 196 CLR 101 Gleeson CJ, McHugh, Gummow and Callinan JJ at 112–120: In the present case, the constructive trust is proprietary in nature. It attaches to the Dwellingup property. Such a trust does not necessarily impose upon the holder of the legal title the various administrative duties and fiduciary obligations which attend the settlement of property to be held by a trustee upon an express trust for successive interests. Rather, the order made by the Full Court is akin to orders for conveyance made by Lord Westbury LC in Dillwyn v Llewelyn and, more recently, by McPherson J in Riches v Hogben.

67 Giumelli v Giumelli (1999) 196 CLR 101. 68 Ibid. 69 (1990) 170 CLR 394. 70 Ibid, 442–443.

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In these cases, the equity which founded the relief obtained was found in an assumption as to the future acquisition of ownership of property which had been induced  by representations upon which there had been detrimental reliance by the plaintiff. This is a well recognised variety of estoppel as understood in equity and may found relief which requires the taking of active steps by the defendant. … The relief granted by the Full Court indicates that the equity of the respondent was more than a ‘defensive equity’. This phrase was used by Deane J in The Commonwealth v Verwayen to denote laches, acquiescence or delay or a mere set-off. Further, by obliging the appellants to execute a conveyance, the equity established by the respondent did more than prevent the appellants from insisting upon their strict legal rights as present owners. On the other hand, the respondent did not establish an immediate right to positive equitable relief as understood in the same sense that a right to recover damages may be seen as consequent upon a breach of contract. The present case fell within the category identified by the Privy Council in Plimmer v Mayor, &c, of Wellington where ‘the Court must look at the circumstances in each case to decide in what way the equity can be satisfied’. Before a constructive trust is imposed, the court should first decide whether, having regard to the issues in the litigation, there is an appropriate equitable remedy which falls short of the imposition of a trust. At the heart of this appeal is the question whether the relief granted by the Full Court was appropriate and whether sufficient weight was given by the Full Court to the various factors to be taken into account, including the impact upon relevant third parties, in determining the nature and quantum of the equitable relief to be granted. In their Notice of Appeal, the appellants seek the dismissal of the respondent’s claim. However, in their written and oral submissions, they accept that, at least in respect of what was identified as the second promise, the respondent had an equity to some relief. They submit that this fell short of an order for a subdivision and the conveyance of the Promised Lot. … In this respect, we prefer the conclusions reached by Rowland J and Ipp J in the Full Court. Rowland J approached the matter on the footing that, even if it be conceded that Robert [the respondent] had not suffered an appreciable loss of income by remaining in the partnership, the detriment suffered by him was the loss of the property which he worked to improve, not to obtain immediate income from that exercise but to gain the proprietary interest. For that, Robert gave up the opportunity of a different career path. Ipp J pointed out that the reasoning of the primary judge placed no weight upon the circumstance that the partnership had no security of tenure and did not own the real estate. … [T]he consideration by the Full Court of the appropriate relief was not confined to the house and the land to which it was a fixture. The appellants challenge the width of the specific relief granted by the Full Court. In particular, they emphasise that an order for the creation and conveyance of the Promised Lot went beyond any ‘reversal’ of the detriment

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occasioned by the respondent in reliance upon [their] promise. They submit that it was not open to the Full Court, in a case such as the present, to grant relief which went beyond the reversal of such detriment. In that regard, the appellants claim decisive support from the decision in Verwayen. However, in our view and consistently with the course of Australian authority since Verwayen, that decision is not authority for any such curtailment of the relief available in this case. Rather, there is much support in the judgments for a broader view of the present matter. Detriment In their submissions, the appellants stress the need to limit the measure of equitable relief 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. However, in Verwayen, Dawson J, after pointing out that at common law the role of estoppel was largely as a rule of evidence, stated that in equity its role has been vastly expanded to raise questions of substance. His Honour continued: At the same time, 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.’

• 9.3 Common law estoppel Common law estoppel may be referred to as estoppel by representation.71 In essence, where a representor makes a representation to a relying party and the relying party acts in reliance, the representor is estopped from denying the truth of the representation. Common law estoppel applies to assumptions of fact as opposed to assumptions of future conduct.72 Common law estoppel can be used to prevent an action by the representor that is made in the context of a departure from a previous representation of fact.73 Similarly, common law estoppel can support an action based on an assumed state of affairs when the true facts are contrary to the representor’s representation.74

Ke y p o in ts for re v ision Estoppel protects a relying party in situations where a representation from the representor has induced the relying party to adopt an assumption that would cause detriment if the representor was allowed to depart from their representation. Common law estoppel is concerned with assumptions of fact and is a rule of evidence. Equitable estoppel is concerned with assumptions as to future conduct.

71 Franklin v Manufacturers Mutual Insurance Ltd (1935) 36 SR (NSW) 76, 82. 72 Ibid; Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 73 Avon County Council v Howlett [1983] 1 All ER 1073. 74 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.

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Equitable estoppel can be both a shield and a sword; that is, equitable estoppel is a shield against the strict enforcement of the representor’s legal rights in situations where the enforcement would be contrary to a representation that they made. Similarly, equitable estoppel is a source of rights and can be used as a cause of action. Though there is some disagreement on the elements of promissory estoppel, Brennan J’s formulation has been applied by several courts. Equitable estoppel will seek to do justice to the relying party, but equity does not do more than is necessary to achieve that justice. A court seeking to provide equitable remedies will not provide relief that would be unfair to the representor, but will instead try and compensate the relying party or prevent their loss.

problem-solving practice Arlanda Pty Ltd manufactures tram cars in Melbourne. It has manufactured five tram cars that it wishes to sell to a European buyer. However, the Victorian Government, realising that the tram cars are also suitable for use in Melbourne, has made an offer to Arlanda to buy them. Under the terms of the offer, the Government suggests that it would pay at least $30 000 more than the European buyer. Though a contract has not been signed, with the assurance of the Government, Arlanda rejects an offer from the European buyer. A week later, the Government purchases five tram cars at a cheaper price from a New Zealand manufacturer. Advise Arlanda.

ANSWER Leaving aside the issue of whether there is a contract in place between the parties, the matter may be resolved with regard to promissory estoppel. In the situation above, the Victorian Government has made a representation as to future conduct. Further, even though there was no contractual relationship between the parties at the time of the Government’s departure from its representation, there was the prospect of a future legal relationship. This is sufficient to invoke the six-part test stipulated by Brennan J in Walton Stores. Estoppel works to prevent the unjust departure of one party from representations that it has made to another party which have had the effect of enticing the other party to alter their position to their detriment. In the present matter, there has been a representation. The representation is suitably clear as it amounts to an offer to buy the five tram cars at a price that is at least $30 000 higher than that of the European buyer. On the facts, it is clear that there has been an assumption as to a future legal relationship (Walton Stores). Similarly, the representation has induced the assumption. In contrast to the statement by the secretary in Legione v Hately, the statement by the Government is clear and definite. It is clear also that a detriment would occur if the Government was allowed to depart from its representation, as Arlanda has rejected the offer from the European buyer. The Government has knowledge of Arlanda acting to its detriment. Arlanda will argue that its actions were reasonable given the assurances of the Government. The question of whether the Government’s actions were unconscionable is more difficult. Presumably, Arlanda is a sophisticated commercial entity. It would have been aware of the significance of having a signed contract and the consequences of rejecting a firm offer from the European buyer. To the extent that the representations of the Government have caused Arlanda to suffer loss, the Government’s conduct may be said to be unconscionable. If unconscionability is found to exist, the estoppel will be made out.

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10

Formalities

Chapt e r o v e rv i e w 10.0

Introduction  164

10.1

Statute of Frauds  164 10.1.1 Relevant provisions  166 What should the written evidence contain?   170 10.1.2 Signature  172 10.1.3 Joinder of documents   174 Parol and oral evidence   177

10.2

Sale of goods   178 10.2.1 Acceptance  178 10.2.2 Earnest and part payment   179

10.3

Effect of non-compliance   179

10.4

Part performance  180

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• 10.0 Introduction A reference to formalities is usually a reference to the requirement for certain contracts to be written, as was required by the Imperial Statute of Frauds of 1677. There is no general legal requirement for contracts to take written form; however, formal documentation may be stipulated either by law or by agreement between the parties, either for the existence or the enforcement of the contract. Note that where the stipulation is statutory, it applies equally to any variation of the original agreement. One key argument in favour of written contracts is that the document produced thereby becomes evidence of the agreement. As the Statute of Frauds (upon which the requirement of writing is ultimately based) states in its Preamble, its enactment was for ‘the prevention of many fraudulent practices which are commonly endeavoured to be upheld by perjury and subordination of perjury’.1

• 10.1 Statute of Frauds It is a procedural requirement that a defendant relying on the Statute of Frauds 1677 (Imp) must plead it specifically2 and prove facts making the enactment applicable to the contract3—such as the fact that a promise was made—and the non-compliance with formalities. There are three main functions of a signed writing requirement. First, it fulfils the evidentiary purpose of a signed writing requirement. Not pleading the Statute of Frauds unfairly prejudices the other side, who may in the circumstances be able to present relevant evidence such as evidence of part performance.4 The signed requirement also provides greater certainty and reduces costs, both in litigation and in the public funding of the court system. Second, the so-called ‘channelling function’ of legislation envisages a frontier which, if crossed, alters the legal relationship between the parties. Channelling usually refers to well-established and clear doctrine, or the use of forms required by legislation, which give rise to certainty and uniformity of understanding.5 Channelling to some extent depends on the public’s awareness of and reliance upon the ‘line’ represented by the common understanding.6 1 See Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646, 655; [1982] 3 All ER 801 per Lord Scarman (PC) (the Statute of Frauds is concerned to suppress not evidence, but fraud); Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2003] 2 AC 541, 544 per Lord Bingham (with whom Lords Woolf and Walker agreed); 549 per Lord Hoffmann (with whom Lords Lord Bingham, Woolf and Walker agreed); see also Sir William Holdsworth, A History of English Law, 2nd ed., Little, Brown (1937), Vol. VI, p. 388 for the historical context of the procedural and evidentiary rules giving rise to the enactment. 2 See for example Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 440 (the High Court made the point that the Statute of Frauds was not specifically pleaded); Take Harvest Ltd v Liu [1993] AC 552, 561–562, 568–569; [1993] 2 All ER 459 (PC), 464–465, 470. If reliance is placed on the doctrine of part performance, this should be pleaded in the plaintiff’s reply: see Darter Pty Ltd v Malloy [1993] 2 Qd R 615, 617 (CA). 3 See Marginson v Ian Potter & Co (1976) 136 CLR 161, 168; 11 ALR 64, 69–70. 4 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 186. 5 See Bills of Exchange Act 1909 (Cth), s 8(1). In Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351; 177 ALR 390, it was held that the appointment of an estate agent must be in writing. Whether the whole contract must be in writing is a matter of construction: R J T Consulting Engineers Ltd v D M Engineering (Northern Ireland) Ltd [2002] 1 WLR 2344 (CA). 6 It has been suggested that the UK approach of stricter channelling—with fewer exceptions of the Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 type, where an agreement could be enforced on the basis of estoppels despite the absence of a written contract—is a reaction to the House of Lords decision in Steadman v Steadman [1976] AC 536.

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Third, the writing requirement may be exhortative or cautionary, urging parties to give careful consideration to, and to deliberate upon, their corresponding rights and obligations under the contract and any governing law or regulation.7 The courts may enforce contracts which are wholly oral, or partly oral and partly written, or implied by the conduct of the parties, as valid. The obviation of writing means that in general it is not necessary for a contract to have been made under seal.8 In some cases, however, contracts may not be able to be performed unless the agreement is made by deed. The enforceability or unenforceability of a contract may depend on legislative requirements, and party obligations under them. Where a deed is necessary under legislation to transfer an Where a deed interest in property, either a rudimentary written contract or is necessary under conduct amounting to part performance of the agreement may legislation to transfer suffice for enforcement of the agreement.9 The equitable doctrine an interest in property, either a rudimentary of part performance enforces a contract in the absence even of the written contract or written agreement, or of written evidence of any such agreement conduct amounting to existing between the parties. On the other hand, such a contract part performance of the agreement may suffice may not be enforceable against the party liable under the contract, for enforcement of the 10 or the party who bore the onus of documenting it in written form. agreement. A condition precedent to a contract is an agreement for the parties’ rights and obligations to come into existence only once a condition has been fulfilled, for example the execution of a written contract. This is frequently encountered as a ‘subject to contract’ clause in agreements for the sale of land. Similarly, the enforceability of a contract may also be subject to a condition precedent, such as the formalisation of the agreement in writing. Variations to a contract may, by a provision of the contract itself, have to be written. However, a verbal variation, or a variation by conduct, may be valid and enforceable despite a provision to the contrary, because: (i) the provision having that effect on verbal variations has itself been varied;11 or (ii) the breadth of the provision does not capture the particular variation made;12 or (iii) one party has waived their right to insist on the other party’s obligation under the provision or under the contract;13 or (iv) the verbal variation may be the subject of specific enforcement;14 or (v) a party may, by effect of waiver or by action of estoppel, be barred from relying on the provision.15 7 It may be that a cooling-off period secures the same effect. 8 The principal exception is that an agent must be authorised by deed to execute a deed. 9 See Carberry v Gardiner (1936) 36 SR (NSW) 559, 567–570; Butts v O’Dwyer (1952) 87 CLR 267, 285; Terrex Resources NL v Magnet Petroleum Pty Ltd [1988] 1 WAR 144 (Full Court); Watson v Delaney (1991) 22 NSWLR 358, 365–366. 10 See Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; 69 ALR 577, approving Gino D’Alessandro Constructions Pty Ltd v Powis [1987] 2 Qd R 40 (Full Court). 11 Mendelssohn v Normand Ltd [1970] 1 QB 177, 183; [1969] 2 All ER 1215, 1217–1218 per Lord Denning MR (Edmund Davies and Phillimore LJ J agreeing) (CA). 12 New England Reinsurance Corp v Messoghios Insurance Co SA [1992] 2 Lloyd’s Rep 251, 255–256 per Leggatt LJ (CA). 13 Hill v Terry [1993] 2 Qd R 640, 646 per McPherson SPJ (Byrne J agreeing) (Full Court). 14 See Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723, 750–751 per Santow J. 15 See Astilleros Canarios SA v Cape Hatteras Shipping Co Inc (The Cape Hatteras) [1982] 1 Lloyd’s Rep 518, 524 per Staughton J; see also United Nations Convention on Contracts for the International Sale of Goods (1980), Art. 29(2).

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10.1.1 Relevant provisions The relevant sections of the Statute of Frauds 1677 (Imp)16 upon which the formal requirements of modern contracts are based are ss 4 and 17: 4th Sect. And be it further enacted that from and after the said 24th day of June, 1677, no action shall be brought whereby to charge any executor or administrator upon any special promise, to answer damages out of his own estate; or whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person; or to charge any person upon any agreement made upon consideration of marriage; or upon any contract or sale of lands, tenements or hereditaments, or any interest in or concerning them; or upon any agreement that is not to be performed within the space of one year from the making thereof, unless the agreement upon which such action shall be brought, or some memorandum or note thereof shall be in writing, and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorised. 17th Sect. And be it further enacted by the authority aforesaid, that from and after the said 24th day of June, no contract for the sale of any goods, wares, or merchandises, for the price of 10l. sterling or upwards, shall be allowed to be good, except the buyer shall accept part of the goods so sold, and actually receive the same, or give something in earnest to bind the bargain, or in part of payment, or that some note or memorandum in writing of the said bargain be made and signed by the parties to be charged by such contract, or their agents thereunto lawfully authorised.

Whereas s 4 applied to all promises, s 17 applied only to contracts for the sale of goods where the price of the goods was greater than £10, and not to other sales transactions. Also, under s 17 the writing stipulation had to be adhered to, but s 4 could be satisfied in other ways. ‘The Statute of Frauds does not contemplate As to the type of contract to which s 4 applies today, in Kelly v this or that mode of Webster17 Maule J said in a curial exchange with counsel that conveyance, it looks to ‘the Statute of Frauds does not contemplate this or that mode of the substance of the conveyance, it looks to the substance of the thing’. In his decision, thing.’ Maule J said: Where any thing is done which substantially amounts to a sale or parting with an interest in land, the contract is ‘for or relating to a sale of an interest in or concerning lands, tenements or hereditaments’ within the fourth section of the Statute of Frauds.18

In Boston v Boston19 Matthews LJ said: It seems to me that s 4 of the Statute of Frauds means that any contract for any interest in or concerning land must, to be enforceable, be expressed in writing, and that the contracts dealt with in the section must be contracts operating on an interest in land. In this case the contract created no obligation to acquire an interest in land, it did not affect the owner of the land mentioned, nor did it create or deal with the interest of anyone in it.20

16 17 18 19 20

For commentary, see A W B Simpson, A History of the Common Law of Contract, Clarendon Press, (1975), pp. 610–619. (1852) 12 CB 283. Ibid, 296. [1904] 1 KB 124. Ibid, 127.

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Note that a contract to convey to and purchase from a third party also falls within the statute.21 In Powercell v Cuzeno22 Campbell J conveniently summarised the cases to which the Statute of Frauds will and will not apply. Powercell v Cuzeno [2003] NSWSC 600 Campbell J at [115]: Authority establishes that the following types of contract fall within the Statute of Frauds, and hence need to be in writing to be enforceable. • The plaintiff is lessee of property, which the defendant wishes to occupy. They agree orally that the plaintiff will give up possession, and the defendant will become the tenant of the landlord, and pay a sum of money to the plaintiff: Cocking v Ward (1845) 1 CB 858; Kelly v Webster (1852) 12 CB 283. • The plaintiff wishes to obtain an assignment of a lease of a particular public house. He agrees with the defendant (a hotel broker, who has no legal rights in that public house) that the defendant would obtain the lease of the public house, for a nominated price. The agreement is in substance that the defendant will procure and convey the lease for that price to the plaintiff: Horsey v Graham (1862) LR 5 CP 9. • A landowner and a broker agree that the broker will find someone who will grant a mortgage over specified land, on specified terms, to the landowner, and the landowner agrees that he will execute such a mortgage: Dalgety & Co Ltd v Gray (1919) 26 CLR 249 at 254–255. • A defendant who holds an option to purchase certain land subject to approval of a development consent (that consent not being granted at the date of litigation so that the option is not specifically performable) agrees to transfer that option to the plaintiff: Mainline Investments Pty Ltd v Davlon Pty Ltd [1969] 2 NSWR 392. • Mortgagees of property with an accrued power of sale agree that they will enter a written contract to sell that property to the plaintiff if the plaintiff performs certain actions, which the plaintiff then fully performs: Daulia Ltd v Four Millbank Nominees Ltd [1978] 1 Ch 231. • An agreement by the highest bidder at an auction that he will sign a contract to purchase the property: Wright v Madden [1992] 1 Qd R 343. [116] The following contracts are ones not caught by the Statute: • A landlord promises to someone thinking of becoming a tenant that if he entered into a lease, the landlord will effect certain repairs and install certain additional furniture. The promise to provide these benefits is not within the Statute because it is a collateral agreement to the agreement to lease: Angell v Duke (1875) LR 10 QB 174. • The plaintiffs and the defendant agree that the plaintiff will purchase a particular mine, if he can, with finance being provided in part by the defendants, float the mine into a new company, and thereupon issue a certain proportion of the capital of the company to the plaintiffs, and a certain proportion to the defendants. (The defendants

21 See S Williston, A Treatise on the Law of Contract, 3rd ed., Baker, Voorhis (1960), Vol. 3, p. 513, [488]. 22 [2003] NSWSC 600.

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then bought the mine for themselves, and the plaintiff sued for damages.) This was not a case within the Statute of Frauds, but rather a contract whereby the parties agreed to purchase the mine if they could: Brown v Robertson (1890) 16 VLR 786. • A husband and wife orally agree that if the husband will purchase a particular house the wife will, when money comes to her from her father’s will, pay him the amount of the purchase price. The Statute does not apply because the husband has not promised that he would buy the house: Boston v Boston [1904] 1 KB 124. Contracts for the sale of land or of an interest in land are the most important form of contract referred to by the Statute of Frauds. Every Australian jurisdiction requires such contracts to be written.23 It follows that a sale that is not in written form will not be enforceable unless the doctrine of part performance applies. Because the legislative provisions refer to contracts for the ‘sale or disposition’ of an interest in land, they apply to contracts other than contracts of sale, and will include contracts to lease land,24 options to purchase or lease land,25 and contracts to transfer life interests in land.26 The Statute of Frauds writing requirement for the sale of goods has been repealed in most jurisdictions.27 In all jurisdictions except Western Australia and Tasmania contracts for the sale of goods may be made in writing, orally, or implied from the conduct of the parties. According to the Statute, contractual requirements are satisfied when a written contract or written evidence of a contract, signed by a party or person authorised by the party, have been produced. The written evidence of an existing contract may be a subsequent further document referring to and evincing an existing contract, or a contract consisting of a written offer and an oral acceptance28 (unless subject to a condition precedent of a written document).29 Contracts for the sale of land or of an interest in land are the most important form of contract referred to by the Statute of Frauds. Every Australian jurisdiction requires such contracts to be written. It follows that a sale that is not in written form will not be enforceable unless the doctrine of part performance applies.

23 See Civil Law (Property) Act 2006 (ACT), s 204(1); Conveyancing Act 1919 (NSW), s 54A(1); Law of Property Act 2000 (NT), s 62; Property Law Act 1974 (Qld), s 59; Law of Property Act 1936 (SA), s 26(1); Conveyancing and Law of Property Act 1884 (Tas), s 36(1); Instruments Act 1958 (Vic), s 126 (as substituted by the Sale of Goods (Vienna Convention) Act 1987 (Vic), s 8); Statute of Frauds 1677 (Imp), s 4 (as affected by the Law Reform (Statute of Frauds) Act 1962 (WA), s 2). 24 See Lonsdale v Whittaker (1915) 17 WALR 111; Reid v Zoanetti [1943] SASR 92; Pirie v Saunders (1961) 104 CLR 149; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 433; 76 ALR 513, 545 per Brennan J. 25 See Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146; Spiro v Glencrown Properties Ltd [1991] Ch 537, 543; [1991] 2 WLR 931, 935–6; [1991] 1 All ER 600, 605 per Hoffmann J; Tonitto v Bassal (1992) 28 NSWLR 564 (CA). 26 See McBride v Sandland (1918) 25 CLR 69. 27 Sale of Goods Act 1954 (ACT), s 3 (repealed); Sale of Goods Amendment Act 1999 (NT), s 2; Sale of Goods (Amendment) Act 1988 (NSW), s 3, Sch 1, cl 2; Statute of Frauds 1972 (Qld), s 3 (itself repealed by the Property Law Act 1974 (Qld)); Statutes Amendment (Enforcement of Contracts) Act 1982 (SA), s 4; Sale of Goods (Vienna Convention) Act 1987 (Vic), s 9. 28 See for example Heppingstone v Stewart (1910) 12 CLR 126; Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280; Gill & Duffus SA v Rionda Futures Ltd [1994] 2 Lloyd’s Rep 67, 82 per Clarke J; compare and contrast McCaul v Clark [1929] VLR 233; Bosaid v Andry [1963] VR 465, 472–473; Georgiou v Sindel [1982] 1 NSWLR 435, 441 (affirmed sub nom Sindel v Georgiou (1984) 154 CLR 661); Haydon v McLeod (1901) 27 VLR 395; Pirie v Saunders (1961) 104 CLR 149, 154 (Full High Court); Banks v Williams (1912) 12 SR (NSW) 382; Darter Pty Ltd v Malloy [1993] 2 Qd R 615, 618 (CA). 29 See for example Neill v Hewens (1953) 89 CLR 1; compare Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68, 79.

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The written evidence may be evidence of the existence of the contract even if it was made for other purposes, but it must date at the latest from the time proceedings were instigated. Secondary evidence of the content of the written evidence will suffice if the written evidence is destroyed prior to the commencement of proceedings.30 In Popiw v Popiw,31 for example, the respondent questioned the applicant’s right to an interest in the matrimonial home and this was evidence of the existence of a contract for the sale of a property. However the respondent’s affidavit was deposed after the commencement of proceedings, requiring the applicant to commence fresh proceedings. Popiw v Popiw [1959] VR 197 Hudson J at 200: But the respondent also contended that even if his affidavit is in form sufficient to provide the necessary memorandum it is not available to the applicant because it was not in existence when the present proceeding was commenced. In my view this contention is well founded. In Lucas v Dixon (1889) 22 QBD 357, the Court of Appeal decided that a note or memorandum of a contract for the purposes of the 17th section of the Statute of Frauds must in order to be available in an action on the contract have been in existence when the action was commenced. This decision was to some extent founded upon earlier decisions in relation to the fourth section and it has been uniformly recognized that under this section a writing coming into existence after action brought is insufficient. The most recent of the cases in which this is recognized is perhaps the decision of the Full Court of New South Wales in Dudgeon v Chie (1955) 55 SR (NSW) 450. The applicant sought to avoid the effect of this rule by contending that as the Statute of Frauds will not be allowed to defeat an action unless it is relied on by the party against whom it is sought to enforce the contract and as the respondent in the present case in his affidavit admitted the terms of the contract and did not raise the Statute until the hearing he should not now be allowed to say he relies on it. Whatever may have been the effect of some of the early cases in Equity the rule appears to have become established that a party resisting the enforcement of a contract is entitled to rely upon the Statute in an appropriate case provided he raises it at the proper time: see Dudgeon v Chie, supra, (where the early cases are reviewed) and Williams on the Statute of Frauds, p. 277. In the normal case of an action where there are pleadings the rules of course provide that if the Statute is intended to be relied on this shall be stated in the defence. But it was not suggested that there is any rule which requires the respondent in such a proceeding as the present to indicate his reliance on the Statute before the hearing. In my view the fact that his affidavit contains matter which is held to amount to evidence sufficient to satisfy the Statute does not deprive him of his right to rely upon the absence of such evidence at the hearing.

30 See Giasoumi v Hutton [1977] VR 294. 31 [1959] VR 197 per Hudson J; see also Buxton v Bellis (1877) 3 VLR (E) 243; compare Schaefer v Schuhmann [1972] AC 572; [1972] 1 All ER 621 (PC).

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Note that while his Honour referred to the decision in Dudgeon v Chie.32 The affidavit in that case was unsuccessful as it was produced to eject an occupant of land and strike out the occupant’s defence after proceedings had commenced.

What should the written evidence contain? As to what the written evidence should contain, the terms forming a material or substantial part of the agreement33—but not every term34—are probably sufficient. It follows that if the terms of the document are different from those proposed to be established as those bargained for, then they will not constitute evidence of the contract.35 Equally, a document missing a term which is essential or important to the contract at issue—such as the time for the commencement of a lease36 or the time that a purchase price was payable by37—is insufficient. The essential requirements to be derived from the written evidence are the names or unambiguous identification by description of the participants to the contract, the contract’s subject matter, and the consideration the plaintiff seeks enforcement of in exchange for the performance of the promise. In Dinan v Harper  38 the Court set out the requirements for sufficient evidence of a contract for the The essential sale of land that were required of a receipt. These were that the requirements to be receipt contain the names of the vendor and the purchaser, a derived from the written evidence are the description of the property, and that it acknowledge complete or names or unambiguous partial payment of the price for which the land was sold. identification by The further requirement of the intention of the participants to description of the participants to the create a contractual relationship binding them was not fulfilled in contract, the contract’s the case of Martyn v Glennan,39 where the evidence of a real estate subject matter, and the agent’s receipt was evidence that the sale was made ‘subject to the consideration the plaintiff seeks enforcement of owner’s consent’. in exchange for the As to the unambiguous identification of the parties, a name performance of the in the written evidence to the contract will suffice as long as the promise. contract identifies the parties by name or description; or the written evidence must otherwise refer to the contracting parties by other means capable of identifying them.40 In Radrick v City Mutual Life Assurance Society Ltd,41 City Mutual Life Assurance Society Ltd was sufficiently identified as the vendor of land by means of

32 (1954) 55 SR (NSW) 450. 33 See Harvey v Edwards Dunlop & Co Ltd (1927) 39 CLR 302, 307 per Knox CJ, Gavan Duffy and Starke JJ; see also Baxton v Kara [1982] 1 NSWLR 604, 607; Rhodes Pty Ltd v Galati [1961] WAR 180, 186, 187 per Virtue J (citing Johnson v Humphrey [1946] 1 All ER 460); Hawkins v Price [1947] 1 Ch 645, 658–659; [1947] 1 All ER 689, 694. 34 See Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310, 318; Ryrie v Cruickshank (1896) 13 WN (NSW) 14. 35 Smith v Lush (1952) 52 SR (NSW) 207; see also Grime v Bartholomew [1972] 2 NSWLR 827, overruled on another ground by Meehan v Jones (1982) 149 CLR 571. 36 Tooth & Co Ltd v Bryen [No 2] (1922) 22 SR (NSW) 541; see also Lonsdale v Whittaker (1915) 17 WALR 111; King v Cornell (1932) 50 WN (NSW) 50. 37 Lalor v Winfield [1925] VLR 306; see also South Suburban Land and Finance Co Ltd v Hughes (1889) 15 VLR 751; Rhodes Pty Ltd v Galati [1961] WAR 180. 38 [1922] VLR 49. 39 [1979] 2 NSWLR 234; see also Coogee Esplanade Surf Motel Pty Ltd v Commonwealth (1976) 50 ALR 363; compare Mogg v Lord Raglan & St Arnaud Gold Mining Co (NL) (1878) 4 VLR (E) 138. 40 See Sims v Robertson (1921) 21 SR (NSW) 246; MacCormac v Bradford [1927] SASR 152, 160, 164. 41 (1897) 18 LR (NSW) Eq 128.

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a reference to ‘The City Mutual Life’. However, a memorandum omitting the name of a vendor has been held to be insufficient evidence of the contract.42 Note that where an unnamed party is sought to be identified by reference or description only, extrinsic evidence may be relied upon for the purpose of identification.43 The description of the subject matter in the written evidence must be sufficient to identify it as the subject matter of the contract, and depending on the facts and circumstances of the case. Examples of insufficiently described subject matter include the reference to the sale of ‘my property’44 or ‘part of Lot B, Princes Highway, Sylvania Heights’.45 However, in McDowell v Meader46 the subject land was sufficiently identifiable from the description of it as being located at the intersection of two streets identified by name. Where property is incorrectly, inadequately or ambiguously described, extrinsic evidence may be resorted to in order to correct a description47 or to clarify an ambiguity.48 The consideration must be sufficiently clearly stated in the written evidence. The words ‘value received’, for example, were not sufficient as a statement of consideration in the case of Corley v Chippendale.49 The contract is unenforceable when the written evidence makes no mention of the consideration for the promise in the contract.50 On the other hand, there is no requirement to refer to consideration in relation to contracts of guarantee required to be in writing. For example, the Victorian Instruments Act 1958 states: 129. Consideration for guarantee need not appear in writing No special promise by any person to answer for the debt default or miscarriage of another person, being in writing and signed by the party to be charged therewith or some other person by him thereunto lawfully authorized, shall be deemed invalid to support an action to charge the person by whom such promise has been made, by reason only that the consideration for such promise does not appear in writing or by necessary inference from a written document.51

If a term is omitted from a contract, a court may favour providing relief to a party that submits to it.52 If a term is not documented in the written evidence, the party benefiting from it

42 Lalor v Winfield [1925] VLR 306; see also Rosser v Austral Wine and Spirit Co Pty Ltd [1980] VR 313; compare Marzo v Land and Homes (WA) Ltd (1931) 34 WALR 62. 43 See Rosser v Austral Wine and Spirit Co Pty Ltd [1980] VR 313; Di Biase v Rezek [1971] 1 NSWLR 735 (not following King v Grimwood (1891) 17 VLR 253); but see Lott v Collins (1869) 8 SCR (NSW) 104; Ford v Young (1882) 8 VLR (E) 93. 44 Corcoran v O’Rourke (1888) 14 VLR 889; see also Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21, 28–29; 102 ALR 289, 297 per Hill J (Full Court). 45 Pirie v Saunders (1961) 104 CLR 149; see also Watson v Issell (1890) 16 VLR 607. 46 (1891) 13 ALT 116; see also Parker v Barnett (1889) 16 VLR 214. 47 Corley v Chippendale (1882) 1 QLJ 69. 48 See for example Cameron v Avery (1873) 4 AJR 141, where it was permitted for a misdescription of property—namely, ‘allotment B, section 14’ as ‘allotment B, section 7’—to be cured by parol evidence. 49 (1882) 1 QLJ 69; see also Clarke v Lonergan (1960) 78 WN (NSW) 367 (where evidence was permitted to determine which 11 acres out of 12 were to be sold in order to give certainty to the agreement); Egan v Ross (1928) 29 SR (NSW) 382. 50 Burgess v Cox [1951] Ch 383; [1950] 2 All ER 1212 per Harman J: a contract which made no mention of deposits received from guests rendered an agreement to sell a holiday camp unenforceable. 51 See also Property Law Act 1974 (Qld), s 56(2); Law of Property Act 2000 (NT), s 58(2); Mercantile Law Act 1935 (Tas), s 12; Instruments Act 1958 (Vic), s 129; Mercantile Law Amendment Act 1856 (UK), s 3 (adopted by 31 Vic No 8) (WA). 52 See Scott v Bradley [1971] Ch 850; [1971] 1 All ER 583 (not following Burgess v Cox [1951] Ch 383; [1950] 2 All ER 1212, Harman J on this point).

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may waive it.53 Neither situation will obtain where the written evidence of a contract contains terms which in essence deviate from those of an oral contract and the applicant seeks specific performance by waiving beneficial rights, or submitting to detrimental terms.54

10.1.2 Signature Where a document is required to be signed55 the absence of a signature makes the written evidence inadequate. What constitutes a signature, however, has been broadly interpreted by the courts, and may include initials, a mark, or a stamped or printed signature.56 The Statute of Frauds expressly permits signature by a person ‘lawfully authorised’, such as an agent.57 Stamped and printed signatures are subject to the ‘authenticated signatures fiction’, which amounts to the document being taken as having been signed if the person against whom an agreement is alleged, or their agent, adopts it as the completed record of the agreement.58 This does not apply where the party intends to subscribe the document with their own signature at a later date.59 In Sturt v McInnes60 Wilson J identified the following elements of the authenticated signatures fiction: (a) the contract, or the memorandum containing the terms of the contract, must have been prepared by the party sought to be charged, or by his agent duly authorised in that behalf, and must have the party’s name written or printed on it; (b) it must be handed or sent by that party, or his authorised agent, to the other party for that other party to sign; (c) it must be shown, either from the form of the document or from the surrounding circumstances, that it is not intended to be signed by anyone other than the party to whom it is sent and that, when signed by him, it shall constitute a complete and binding contract between the parties.61

It has been asserted that the authenticated signature fiction is an example of judges, in the face of the Statute of Frauds, being ‘determined to see that where justice required the protection of reasonable expectations a remedy should be found’.62 The High Court considered the authenticated signature fiction in Pirie v Saunders,63 accepting on that basis Saunders’ claim that the handwritten notes of the other party’s solicitor in 53 Bicknell v Bell (1897) 19 ALT 45: this case included oral terms that the vendor was to provide fence posts in a contract for the sale of land, which the purchaser was entitled to waive. 54 Contrast Bastard v McCallum [1924] VLR 9. 55 See Smith v Lush (1952) 52 SR (NSW) 207. 56 Shiel v Colonial Bank of Australia; Shiel v Colonial Bank of Australia (1870) 1 VR (E) 40. 57 Williams v Mason (1873) 37 JP 264; 28 LT 232, 233 per Grove J (Common Pleas); Swift v Jewsbury (1874) LR 9 QB 301, 310–312; [1874–80] All ER Rep Ext 2009 per Lord Coleridge CJ; compare Statute of Frauds Amendment Act 1828 (Imp), s 6; Re Commonwealth Homes and Investment Co Ltd [1943] SASR 211, 239 per Mayo J; Nguyen v Taylor (1992) 27 NSWLR 48, 61 per Meagher JA (Kirby P agreeing), 62 per Sheller JA (Kirby P agreeing) (CA). 58 Farrelly v Hircock (No 1) [1971] Qd R 341, 356; see also Neill v Hewens (1953) 89 CLR 1, 13; Pirie v Saunders (1961) 104 CLR 149, 154 (Full Court). 59 Neill v Hewens (1952) 53 SR (NSW) 113. 60 [1974] 1 NZLR 729. 61 Ibid, 732–734. 62 S M Waddams, The Law of Contracts, 3rd ed., Canada Law Book Inc (1993), para 248. Other examples include the doctrine of part performance, the availability of rectification, and the incorporation into the signed writing of documents by reference. 63 (1961) 104 CLR 149.

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preparation for a commercial property lease was a note or memorandum satisfying the statutory requirement of writing under s 54A of the Conveyancing Act 1919 (NSW). The Court explained its understanding of the fiction as being: if the name of the party to be charged (not being a signature in the ordinary sense of the word) is placed on the document said to constitute the written memorandum of the contract, it is to be treated as a signature for the purposes of the statute if such party expressly or impliedly indicates that he recognizes the writing as being an authenticated expression of the contract.64

In Leeman v Stock 65 and Neill v Heavens,66 however, the principle appears not to be capable of applying to notes or memoranda which are not of concluded agreements; whereas in Pirie v Saunders the written evidence was accepted without its indicating the existence of a existing contract.67 Statutory construction68 will determine whether the signature that is required is personal69 or falls within the scope of an agent’s authority to provide,70 but note that cases determined upon statutory requirements derived from the Statute of Frauds permit authorised agents to sign.71 In Thomson v McInnes72 Griffith CJ said that a signature may be by the hand of the party to the contract from whom performance is sought, even if the name they sign is a false name;73 or the name of a person directing or witnessing an amanuensis to produce the signature; or that of a ‘lawfully authorised’ person or agent, such as a solicitor of a party.74 Persons qualifying as lawfully authorised include estate agents with express authority75 but not acting outside the scope of their authority,76 and solicitors executing explicit instructions.77 In Victoria, s 126 of the Instruments Act 195878 provides for written authorisation of agents acting in relation to contracts disposing of interests in land: 126. Certain agreements to be in writing (1) An action must not be brought to charge a person upon a special promise to answer for the debt, default or miscarriage of another person or upon a contract for the sale 64 65 66 67

Ibid, [7]. [1951] Ch 941. (1953) 89 CLR 1. See also Thirkell v Cambi [1919] 2 KB 590, where a note that did not recognise the existence of a binding contract could not be regarded as the note or memorandum of one. 68 See Bosaid v Andry [1963] VR 465. 69 See Re Whitely Partners Ltd (1886) 32 Ch D 337, 340 per Bowen LJ (with whom Fry LJ concurred) (CA). For further discussion, see L C Voumard, Sale of Land in Victoria, 4th ed., Law Book Company (1986), pp. 92–94; R M Stonham, The Law of Vendor and Purchaser, Law Book Company (1964), pp. 69–72. 70 See for example Williams v Mason (1873) 28 LT 232 (CP); Swift v Jewsbury (1874) LR 9 QB 301, 310–312 per Lord Coleridge CJ; Re Prince Blücher; Ex parte Debtor [1931] 2 Ch 70 (CA); Re Teller Home Furnishings Pty Ltd; Electronic Industries v Horsburgh [1967] VR 313, 318 per Gowans J. 71 See for example R v Moore; Ex parte Myers (1884) 10 VLR (L) 322, 324 per the Full Court; Muirhead v Commonwealth Bank of Australia (1996) 139 ALR 561, 565 per McPherson JA, with whom Davies JA agreed (Qld CA). 72 (1911) 12 CLR 562, 573 per Griffith CJ (with whom Barton J agreed). 73 See Byers v Brown (1859) 2 Legge 1136; Williams v Mason (1873) 28 LT 232, 233 per Grove J (CP). 74 But see Russell v Slater [1912] St R Qd 237. 75 See Byers v Brown (1859) 2 Legge 1136. 76 In Thomson v McInnes (1911) 12 CLR 562, 573 per Griffith CJ (Barton J agreeing) refers to s 5 of the Statute of Frauds, which expressly permitted signature at the direction of another. 77 See Kalnenas v Kovacevich [1961] WAR 188; Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646; [1982] 3 All ER 801 (PC); contrast Buxton v Bellis (1877) 3 VLR (E) 243, 248. 78 See also Property Law Act 1958 (Vic), s 53(1)(a).

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or other disposition of an interest in land unless the agreement on which the action is brought, or a memorandum or note of the agreement, is in writing signed by the person to be charged or by a person lawfully authorised in writing by that person to sign such an agreement, memorandum or note. (2) It is declared that the requirements of subsection (1) may be met in accordance with the Electronic Transactions (Victoria) Act 2000.79

The writing is required to be signed by the person against whom the agreement is alleged. The signature may appear in any part of the document. Note that while signature is necessary, subscription is not.80 Auctioneers are agents of both purchaser and vendor and are authorised to sign and bind parties in relation to the auctioned property.81 Authentication by implied or express acknowledgment by the party to be charged will satisfy the signature requirement (the authenticated signature fiction) even though that party did not write their name on the document, or the signature was not produced by hand but was typed.82 The document must, however, be recognisably written evidence of a contract.83 It is immaterial whether the signatory to a note or memorandum to a contract intends that it be such a document. Only the existence of the signature matters.84 Signatures need not accompany each part or page purported to be included in the document.85 Neither does a document which is to be used to explain a signed document need to be signed; however the signatory to the signed document must be aware of the existence and contents of the unsigned document at the time of signing.86

10.1.3  Joinder of documents The written evidence of the contract can be an aggregate of two or more documents as long as they are able to be read together,87 or, as Griffiths CJ said in Thomson v McInnes,88 referring to 79 See Rhodes Pty Ltd v Galati [1961] WAR 180. 80 Clohesy v Maher (1880) 6 VLR (L) 357, 359; Gladstone v Ball (1862) 1 W & W (E) 277. 81 Anders v Schluter (1973) 6 SASR 325; see also Egan v Caveny [1921] VLR 27. 82 Re Byrne; Ex parte Norco Co-op Ltd (1986) 15 FCR 255; see also Kalnenas v Kovacevich [1961] WAR 188; Nguyen v Taylor (1992) NSWLR 48, 61 per Meagher JA (with whom Kirby P agreed), 62 per Sheller JA (with whom Kirby P agreed) (CA); Leeman v Stocks [1951] Ch 941; Neill v Hewens (1953) 89 CLR 1; Pirie v Saunders (1961) 104 CLR 149, 154 per the Full High Court; Firstpost Homes Ltd v Johnson [1995] 4 All ER 355; [1995] 1 WLR 1567, 1574 per Peter Gibson LJ (Hutchison and Balcombe LJJ agreeing) (CA). 83 As required by Instruments Act 1958 (Vic), s 126 (as substituted by the Sale of Goods (Vienna Convention) Act 1987 (Vic), s 8). See Jones v Peters [1948] VLR 331; Grummitt v Natalisio [1968] VR 156; Collin v Holden [1989] VR 510; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217, 220, 232 per Ormiston J. See Nguyen v Taylor (1992) 27 NSWLR 48, 61 per Meagher JA (with whom Kirby P agreed), 68 per Sheller JA (with whom Kirby P agreed) (CA) (there is nothing in provisions derived from the Statute of Frauds to require the written authorisation of an agent); but see Parker v Manessis [1974] WAR 54, 58–59 per Virtue SPJ, based on the application of the Property Law Act 1969 (WA), s 34(1). 84 See Nguyen v Taylor (1992) 27 NSWLR 48, 61 per Meagher JA (with whom Kirby P agreed), 68 per Sheller JA (with whom Kirby P agreed) (CA). 85 Gladstone v Ball (1862) 1 W & W (E) 277; see also Firstpost Homes Ltd v Johnson [1995] 1 WLR 1567, 1573; [1995] 4 All ER 355, 359–360 per Peter Gibson LJ (Hutchison and Balcombe LJJ agreeing) (CA). 86 See Di Biase v Rezek [1971] 1 NSWLR 735, not following King v Grimwood (1891) 17 VLR 253. 87 Burgess v Cox [1951] Ch 383; Stokes v Whicher [1920] 1 Ch 411 De Leuil v Jeremy (1964) 65 SR (NSW) 137; Timmins v Moreland Street Property Co Ltd [1958] Ch 110; Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646; Grime v Bartholomew [1972] 2 NSWLR 827; Thomson v McInnes (1911) 12 CLR 562, 569. 88 (1911) 12 CLR 562.

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settled doctrine, where ‘the note signed by the party to be charged refers to some other document in such a way to incorporate it with the document signed, so that they can be read together’.89 The circumstances in which such joinder of documents may be used, and the extent to which parol evidence may be used, are matters of argument. Griffiths CJ applied a narrow test holding that the other document must be a written document.90 On a broader reading, endorsed in Stokes v Whicher91 and affirmed in Harvey v Edwards Dunlop & Co Ltd,92 the other document is not restricted to a written document but may include a transaction or event. In Stokes v Whicher the Court held: if you can spell out of the document a reference in it to some other transaction, you are at liberty to give evidence as to what that other transaction is, and, if that other transaction contains all the terms in writing, then you get a sufficient memorandum by reading the two together. 93

In Kalmenas v Kovacevich,94 the engrossment and lessor’s solicitor’s letters constituted the note or memorandum; while in Harvey v Edwards Dunlop & Co Ltd the power of attorney intended to be created in order to complete a property sale was evidenced by four letters exchanged between the solicitors. All four letters were connected by reference to the same transaction and, while the first two only referred to the power of attorney, the third and fourth referred to the first two letters and had subject matter in common with them and each other.95 The leading case establishing the broader test as law is Elias v George Sahely & Co (Barbados) Ltd,96 where it was held that in appropriate cases, a sufficient memorandum in writing may be constituted by two or more documents which are capable of being read together97 if the note signed by the party to be charged refers expressly to some other document in such a manner as to incorporate it by reference in the note signed.98 In contemporary contract law it is not necessary for the reference to the second document to be express; it may be the result of a compelling implication.99 89 Ibid, 569 (Barton J agreeing); see also M’Levy v Matthews (1863) 2 W & W (L) 63; Simms v Habich (1879) 13 SALR 89; Braunbeck v Mercantile Building Land & Investment Co Ltd (1887) 9 LR (NSW) 9; Ballantine v Harold (1893) 19 VLR 465; Tooth & Co Ltd v Bryen (No 2) (1922) 22 SR (NSW) 541. 90 Thomson v McInnes (1911) 12 CLR 562, 569: ‘The reference may, of course, be made in various ways. Whether there is a reference or not depends, first of all, upon the construction of the document which is signed.’ 91 [1920] 1 Ch 411. 92 (1927) 39 CLR 302, 307 per Knox CJ, Gavan Duffy and Starke JJ. 93 [1920] 1 Ch 411, 418; compare Ballantine v Harold (1893) 19 VLR 465; see also Tomlinson Bros & Co v Daniels (1930) 33 WALR 101; Di Biase v Rezek [1971] 1 NSWLR 735, 748–750; Ellul v Oakes (1972) 3 SASR 377, 383; Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212, 218. 94 Kalnenas v Kovacevich [1961] WAR 188; see also Ellul v Oakes (1972) 3 SASR 377, 383; Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212; Tonitto v Bassal (1992) 28 NSWLR 564, 570 per Sheller JA (with whom Handley JA and Hope AJA agreed) (CA). On joining physically connected documents, see M’Ewan v Dynon (1877) 3 VLR (L) 271; see also Chambers v Rankine [1910] SALR 73. 95 See also Riley v Melrose Advertisers (1915) 17 WALR 127 (Full Court); Subdivisions Ltd v Payne [1934] SASR 214; compare Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21; 102 ALR 289 (Full Court); Corcoran v O’Rourke (1888) 14 VLR 889. 96 [1983] 1 AC 646. 97 Ibid, 655; see also Burgess v Cox [1951] Ch 383; Stokes v Whicher [1920] 1 Ch 411 De Leuil v Jeremy (1964) 65 SR(NSW) 137; Timmins v Moreland Street Property Co Ltd [1958] Ch 110; Grime v Bartholomew [1972] 2 NSWLR 827; Thomson v McInnes (1911) 12 CLR 562, 569. 98 [1983] 1 AC 646, 655; see also Thomson v McInnes (1911) 12 CLR 562. 99 Thomson v McInnes (1911) 12 CLR 562, 569.

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Incorporation may arise by necessary implication.100 As Jenkins LJ said in Timmins v Moreland Street Property Co Ltd:101 it is still indispensably necessary, in order to justify the reading of documents together for this purpose, that there should be a document signed by the party to be charged, which, while not containing in itself all the necessary ingredients of the required memorandum, does contain some reference, express or implied, to some other document or transaction. Where any such reference can be spelt out of a document so signed, then parol evidence may be given to identify the other document referred to, or, as the case may be, to explain the other transaction, and to identify any document relating to it. If by this process a document is brought to light which contains in writing all the terms of the bargain so far as not contained in the document signed by the party to be charged, then the two documents can be read together …102

In Elias, the note signed by the party to be charged was a receipt in the following terms: $39 000 Barbados 10.2.1975. Received from Fauzi Elias the sum of thirty nine thousand dollars and … cents being deposit on property at Swan Street B’town agreed to be sold by George Sahely & Co B’dos Ltd to Fauzi Elias and/or his nominees. R G Mandeville & Co per E Clarke.103

The purchaser in a letter had set out all the terms of the agreement, including the purchase price of $390 000, and had endorsed a cheque. The receipt was provided pursuant to this letter, but the receipt omitted reference to the purchase price. The Privy Council said: The first inquiry must, therefore, be whether the document signed by or on behalf of the person to be charged on the contract contains some reference to some other document or transaction. The receipt in this case clearly did refer to some other transaction, namely an agreement to sell the property in Swan Street. Parol evidence can, therefore, be given to explain the transaction, and to identify any document relating to it … If, therefore, a document signed by the party to be charged refers to a transaction of sale, parol evidence is admissible both to explain the reference and to identify any document relating to it. Once identified, the document may be placed alongside the signed document. If the two contain all the terms of a concluded contract, the statute is satisfied.104

Their Lordships accordingly were of the view that, on the facts of that case, the requirements of a sufficient note or memorandum were satisfied. The narrowness of the basis of the statement of law in Thomson v McInnes105 has been the subject of criticism. In Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd,106 Holland J asserted that the principle enunciated in Thomson v McInnes conflicted with English authority, in particular

100 Timmins v Moreland Street Property Co Ltd (1911) 12 CLR 562, 134 per Romer LJ; Stokes v Whicher [1920] 1 Ch 411, 418; compare Griffiths CJ in Thomson v McInnes (1911) 12 CLR 562, 569. 101 [1958] 1 Ch 110; [1957] 3 All ER 265 (CA); see also De Leuil v Jeremy (1964) 65 SR (NSW) 137; Bosaid v Andry [1963] VR 465, 475; Cable (1956) Ltd v Caratti [1971] WAR 86; Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212, 218–219. Jenkins LJ was approved by the Privy Council in Fauzi Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646, 655; [1982] 3 All ER 801, 807. 102 [1958] 1 Ch 110, 130; [1957] 3 All ER 265, 276 per Jenkins LJ (with whom Romer and Sellers LJJ agreed) (CA). 103 Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646, 651–652. 104 Ibid, 655. 105 (1911) 12 CLR 562. 106 [1976] 2 NSWLR 212, 218.

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Harvey v Edwards, Dunlop & Co Ltd.107 In Harvey, the majority of the Court stated the law in this way: It is also well settled that the memorandum ‘need not be contained in one document; it may be made out from several documents if they can be connected together’. They may be connected by reference one to the other; but further, ‘if you can spell out of the document a reference in it to some other transaction, you are at liberty to give evidence as to what that other transaction is, and, if that other transaction contains all the terms in writing, then you get a sufficient memorandum within the statute by reading the two together’.108

Note that the documents brought together to be read need not themselves constitute a contract. Thus, in Thomson v McInnes there was not a sufficient note or memorandum where the document referred to a contemplated payment of a deposit under a sale of land contract, but failed to fix the amount.109

Parol and oral evidence The role of parol evidence in identifying the written evidence to the contract is unsettled law. Parol evidence was admitted in Thomson v Mcinnes110 to establish that a word said to refer to a particular thing did in fact refer to the thing in question. For Griffiths CJ in that case, parol evidence was an application of the latent ambiguity doctrine—he cited the ambiguity in Ridgway v Wharton111 surrounding the word ‘instructions’ and the document it referred to, which was clarified by admitting parol evidence. The modern view of the law in this area is stated by Jenkins LJ in Timmins v Moreland Street Property Co Ltd:112 It is still indispensably necessary, in order to justify the reading of documents together for this purpose, that there should be a document signed by the party to be charged, which, while not containing in itself all the necessary ingredients of the required memorandum, does contain some reference, express or implied, to some other document or transaction. Where any such reference can be spelt out of a document so signed, then parol evidence may be given to identify the other document referred to, or, as the case may be, to explain the other transaction, and to identify any document relating to it. If by this process a document is brought to light which contains in writing all the terms of the bargain so far as not contained in the document signed by the party to be charged, then the two documents can be read together …113

Oral evidence may be used to explain a later document; and it is permissible for oral evidence to point to a further document and provide evidence to link it with another document. The document however can only be joined if their terms are consistent and they cross reference each other.114 107 (1927) 39 CLR 302. 108 Ibid, 307, referring to Stokes v Whicher [1920] 1 Ch 411. 109 Thomson v McInnes (1911) 12 CLR 562, 569; see also Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646, 655; [1982] 3 All ER 801, 807 per Lord Scarman, delivering the advice of the Privy Council; Burgess v Cox [1951] Ch 383, 388; [1950] 2 All ER 1212, 1215 per Harman J. 110 (1911) 12 CLR 562. 111 (1857) 6 HLC 238, cited by Griffiths CJ in Thomson v McInnes (1911) 12 CLR 562, 569. 112 [1958] 1 Ch 110. 113 Ibid, 130 (emphasis added). 114 Such as in Corcoran v O’Rourke (1888) 14 VLR 889, where terms in documents alleged to evidence the sale of land were inconsistent with respect to price.

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Harvey v Edwards, Dunlop & Co Ltd115 was followed (and the approach in Thomson v McInnes rejected) in Commonwealth v John White & Sons (NT) Pty Ltd,116 where Blackburn J admitted oral evidence of a transaction to connect an architect’s note with a notice in the Government Gazette, in which the vendor, the sale property and the laws governing the sale were identified.

• 10.2 Sale of goods Where a note or memorandum is required in relation to the sale of goods, the written evidence must document every material term,117 bear the signature of the party to be charged118 or a person lawfully authorised to sign on their behalf (such as an agent) and bind them.119 In addition, where a number of documents are to be read together, the relationship between them must be clear and sufficient.120 Contracts for the sale of goods may be satisfied by other means as well as by writing. For example, the contract may be performed by conduct, such as the purchaser: (i) accepting the goods actually or constructively; (ii) making a payment in earnest; or (iii) making part payment for the goods in question. Where it is not possible to satisfy these alternative requirements in a contract involving the sale of the goods and which requires writing, then the writing requirement must be complied with.

10.2.1  Acceptance If writing is a requirement for the sale of goods, acceptance of the goods is satisfied if the purchaser has accepted all or part of the goods. The test of acceptance is whether the buyer recognises the existence of a contract for the sale of the goods by any form of conduct.121 Whether the buyer has acted in the requisite way will depend on the facts of the case.122 Actual receipt of the goods by the purchaser and thereafter dealing with them as their own property will satisfy the acceptance requirement.123 Constructive delivery effecting acceptance and receipt of the goods occurs if the nature of the seller’s possession is altered.124 An act of rejection of the goods on the buyer’s part may result in acceptance by recognising that a prior contract exists.125

115 (1927) 39 CLR 302. 116 (1967) 13 FLR 172, 177–178. 117 See Pratt v Rush (1879) 5 VLR (L) 421; Parbury Henty & Co Pty Ltd v General Engineering & Agencies Pty Ltd (1973) 47 ALJR 336; J B & B L Nominees Pty Ltd v McCormack [1982] WAR 258. 118 See Bastard v McCallum [1924] VLR 9; Cohen v Roche [1927] 1 KB 169. 119 See Farr Smith & Co Ltd v Messers Ltd [1928] 1 KB 397; see also Wilson & Sons v Pike [1949] 1 KB 176; [1948] 2 All ER 267. 120 See Integrated Lighting & Ceilings Pty Ltd v Philips Electrical Pty Ltd (1969) 90 WN (Pt 1) (NSW) 693; Parbury Henty & Co Pty Ltd v General Engineering & Agencies Pty Ltd (1973) 47 ALJR 336. 121 See Sale of Goods Act 1972 (NT), s 9(3); Sale of Goods Act 1896 (Tas), s 9; Sale of Goods Act 1895 (WA), s 4(3); see also Metropolitan Knitting and Hosiery Co Ltd (in liq) v Thomas Burnley & Sons Ltd (1924) 35 CLR 232, 240. 122 Metropolitan Knitting and Hosiery Co Ltd (in liq) v Thomas Burnley & Sons Ltd (1924) 35 CLR 232, 243. 123 Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167. 124 See Dublin City Distillery (Great Brunswick Street, Dublin) Ltd v Doherty [1914] AC 823, 844. 125 Abbott & Co v Wolsey [1895] 2 QB 97.

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Metropolitan Knitting and Hosiery Co Ltd (in liq) v Thomas Burnely & Sons Ltd126 was a case in which a dispute arose as to which of two contracts was in place between the parties. The plaintiff claimed the defendant had accepted part of the goods under the contract sought to be enforced. The defendant claimed that the contract sought to be enforced had been denied on the basis of its not complying with s 17 of the Statute of Frauds. The High Court upheld the materiality of the defendant’s belief that it was receiving goods under a contract other than the contract the subject of the litigation. However, as to the word ‘act’ in relation to acceptance, Isaacs J stressed that the test was objective, and said that it could not extend to ‘secret qualification and undisclosed error’.127 Further, acceptance was satisfied as long as the defendant recognised ‘some contract of sale’ between the parties, not necessarily the particular contract of sale.128

10.2.2  Earnest and part payment To have given ‘something in earnest’ to bind the purchaser to the fulfilment of the contract usually refers to a monetary deposit129 or a part payment130 for the goods, but not to a promise to do so. Note that a deposit differs from a part payment in being forfeitable upon the parties’ default. The leading case is that of Farr Smith & Co Ltd v Messers Ltd.131 In a contract for the sale of wood sought to be enforced by the buyers against the sellers, the buyers argued that they had given something in earnest in making a promise to pay by means of cash and bills of exchange. For Wright J, nothing in earnest had been given, since an earnest was a guarantee for the fulfilment of the contract in the form of something ‘tangible’ given ‘at the moment when the contract is concluded’.132 However, under the terms of the contract, the buyers had made payment, so the defence failed. Because the Statute of Frauds is still applicable to sale of goods contracts in Western Australia and Tasmania, in those states action for specific performance cannot be brought for such contracts unless the buyer accepts or receives the goods; binds the contract by providing something in earnest, or makes a part payment; or the party to be charged has signed a note or memorandum to the contract.133

• 10.3 Effect of non-compliance Where the requirement of writing is created by statute, the effect of non-compliance will be determined by statutory interpretation. The prevailing view is that the contract will not be void for non-compliance, but will be unenforceable.134 126 (1924) 35 CLR 232. 127 Ibid, 240 per Isaacs J. 128 Ibid, 242 per Isaacs J. 129 Dougan v Ley (1946) 71 CLR 142. 130 Gardiner v Grigg (1938) 38 SR (NSW) 524. 131 [1928] 1 KB 397. 132 Ibid, 408. 133 Sale of Goods Act 1895 (WA), s 4; Sale of Goods Act 1896 (Tas), s 9. 134 See Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146, 157; Smith v Hartshorn (1959) 60 SR (NSW) 391, 394; Popiw v Popiw [1959] VR 197, 200 (an oral promise was unenforceable for want of writing, but not void); see also Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646, 655; [1982] 3 All ER 801, 807 per Lord Scarman, delivering the advice of the Privy Council; Take Harvest Ltd v Liu [1993] AC 552, 568; [1993] 2 All ER 459, 470 (PC); Smith v Hartshorn (1959) 60 SR (NSW) 391, 394 (Full Court).

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Not all of several promises in a contract may require written evidence. Even so, the whole contract becomes unenforceable unless first, the promises not requiring a note or memorandum are severable, and second, consideration for each of those promises is either independent, or can be divided from the consideration given for the complete performance of the contract and allocated to the several promises. The Statute of Frauds is then a defence against damages for breach of contract,135 or a claim that a debt is now due, or an attempt to recover a restitutionary payment. How the Statute functions in relation to a defence or counterclaim is not settled. It has been said on the one hand (by the High Court) that oral contracts cannot be relied upon in defence or counterclaim,136 and on the other hand (by the Privy Council) that the party relying on the oral contract in defence should not be, in effect, attempting to enforce the contract.137

• 10.4 Part performance The Court of Chancery established the doctrine of part performance so that a court could provide equitable relief for a contract that was non-compliant with the Statute of Frauds and therefore unenforceable at law. Most commonly, the doctrine of part performance is pleaded by parties seeking the relief of specific performance. However, the doctrine may also provide a basis for an injunction to perform a provision of the contract,138 or other equitable remedy.139 The doctrine of part performance is not relevant to an action for damages for breach of contract, since that is a common law action. In O’Rourke v Hoeven140 Glass JA (with whom Reynolds and Hutley J JA agreed) said: The doctrine of part performance was developed in the Equity courts and has never been available in an action at law for damages to excuse absence of the writing which the Statute of Frauds demanded. As Dixon J, as he then was, said in J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282, at p. 297, ‘An action of damages could not but fail, because, when a common law remedy is sought, part performance never did and does not now afford an answer to the Statute of Frauds … if the doctrine is not confined to cases in which a decree might be made for the specific performance of the contract, it is at least true that the doctrine arose in the administration of that relief and has not been resorted to except for that purpose’ (and see per Starke J and Evatt J (1931) 45 CLR 282, at pp. 294, 306). The position is in no way altered by the concurrent administration of law and equity directed by Pt IV of the Supreme Court Act. This is not a fusion of two systems of principle but of the courts which administer the two systems: Britain v Rossiter (1879) 11 QBD 123, at p. 129. The rules continue to be influenced by the system to which they belong, so as to disentitle a party claiming damages at law from praying in aid an exemption from writing on equitable grounds.141 135 See Freedom v A H R Constructions Pty Ltd [1987] 1 Qd R 59 per McPherson J; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217, 246 per Ormiston J. 136 Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146, 153 per Gavan Duffy CJ, Starke and McTiernan JJ, 155 per Evatt J; see also Head v Kelk [1963] SR (NSW) 340, 348; [1962] NSWR 1363 per Herron J, following Miles v New Zealand Alford Estate Co (1886) 32 Ch D 266. 137 Take Harvest Ltd v Liu [1993] AC 552 at 569; [1993] 2 All ER 459, 478 per the Privy Council. 138 See R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 4th ed., Butterworths LexisNexis (2002), para 20-220. 139 Jones v Baker [2002] NSWSC 89; (2002) 10 BPR 19, 115. 140 [1974] 1 NSWLR 622. 141 Ibid, 626.

Chapter 10

Formalities

The doctrine of part performance is often pleaded by a party who, having entered an agreement  and acted in reliance upon it, finds the other party unwilling to perform their obligations in an attempt to defraud the performer.142 Specific performance may also be available to the plaintiff under promissory estoppel143 if no legally enforceable contract is found. The High Court in Waltons Stores (Interstate) Ltd v Maher,144 however, distinguished promissory estoppel and part performance as follows: Because equitable estoppel has its basis in unconscionable conduct, rather than the making good of representations, the objection … that promissory estoppel outflanks the doctrine of part performance loses much of its sting. Equitable estoppel is not a doctrine associated with part performance whose principal purpose is to overcome non-compliance with the formal requirements for the making of contracts. Equitable estoppel, though it may lead to the plaintiff acquiring an estate or interest in land, depends on considerations of a different kind from those on which part performance depends. Holding the representor to his representation is merely one way of doing justice between the parties.145

Equity intervenes because of the unconscientiousness of the defendant defeating the plaintiff’s claim by relying on the statute after the plaintiff’s part performance.146 Hardwicke LJ observed in Walker v Walker147 that ‘to allow any other construction upon the statute of frauds and perjuries, would be to make it a guard and protection to fraud, instead of a security against it’. It is said that the first clear application of the doctrine of part performance was in the 1686 case of Thomas Butcher v Stapely and Richard Butcher,148 although it is also said to have been known in some form earlier than this.149 In Thomas Butcher v Stapely and Richard Butcher, Richard Butcher had made a parol agreement to sell to Thomas Butcher certain lands for £700. Subsequently, Stapely offered to pay £740, so Richard Butcher decided to sell the lands to Stapely instead. In his defence, Richard Butcher relied on s 4 of the Statute of Frauds, claiming the lack of signature on documents evidencing the agreement. The parol agreement for the sale of lands was enforced. Lord Jeffreys found a ‘contreivance’ between the defendants, and also found that circumstances showed the lands to have been delivered to the plaintiff. Early cases such as this one already indicate a persistent historical pattern—that the doctrine of part performance applies to contracts involving the sale or other disposition of land. Note too that the effect of s 4 of the Statute of Frauds in this regard is preserved in current legislation.150 142 See E Fry, A Treatise on the Specific Performance of Contracts, 6th ed. W D Little (1985), p. 269; see also I C F Spry, Equitable Remedies, 5th ed., LBC Information Services (1997), pp. 248–288. The doctrine no longer applies in the because the Law of Property (Miscellaneous Provisions) Act 1989 (UK), s 2, states that a contract for the sale or other disposition of an interest in land can only be made in writing: see Yaxley v Gotts [2000] Ch 162, 172; [2000] 1 All ER 711, 717 per Robert Walker LJ (CA). 143 See Chapter 9. 144 (1988) 164 CLR 387. 145 Ibid, 405 per Mason CJ and Wilson J. 146 See R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 4th ed., Butterworths LexisNexis (2002), para 20-225. 147 (1740) 2 Atk 98, 100. 148 (1686) 1 Vern 363; see A W B Simpson, A History of the Common Law of Contract—The Rise and Fall of the Action of Assumpsit, Clarendon (1975, reprinted 1987), p. 614. 149 A W B Simpson, A History of the Common Law of Contract—The Rise and Fall of the Action of Assumpsit, Clarendon (1975, reprinted 1987), p. 614. One case in which the doctrine was probably relied upon prior to Thomas Butcher v Stapely and Richard Butcher (1686) 1 Vern 363 was Hollis v Edwards (1683) 1 Vern 159. Other cases referred to in the development of the doctrine include Floyd v Buckland (1703) 2 Freeman 268 and Oldham v Lichford (1705) 2 Freeman 285. 150 See for example the Property Law Act 1958 (Vic), s 55(d).

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The doctrine’s relevance to contracts whose subject matter is land is strongly based on the remedy of specific performance available under it, and applied to and sought in actions under those contracts.151 The doctrine is, however, also applicable to other types of contracts, and there is no conceptual obstacle to applying the doctrine to any situations where specific performance of a contract is sought.152 However, the practical importance of the doctrine is largely supported by the continued relevance of the writing requirement in contracts involving land, a requirement which has disappeared from other contracting situations. While estoppel153 is normally the preferable course of action, part performance may be relied on in courts of equity, which can award damages in lieu of specific performance, or order injunctions. Whether particular acts will constitute part performance in satisfaction of the doctrine will be the courts’ particular focus. The law in Australia is stated in Australia and New Zealand Banking Group Ltd v Widin.154 Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21 Hill J at [68]: In Millett v Regent, at first instance (22 July 1974, unreported) Holland J of the Supreme Court of New South Wales applied the rule stated in Kingswood Estate Co Ltd v Anderson. By the time the appeal was heard, the House of Lords had decided Steadman. The New South Wales Court of Appeal [in Millett] (1975) 1 NSWLR 62 expressed differing views as to the applicability of Steadman. Glass JA was of the view that, the High Court having expressed the test in terms of the traditional view in Maddison v Alderson, the Court of Appeal was bound by that formulation and could not apply the more liberal test in Steadman. Neither Hutley nor Mahoney J JA found it necessary to consider whether Steadman was consistent with Australian authority. However, Mahoney JA said at p. 74: The term ‘unequivocally’, and the similar terms which have been used in this regard in other cases, do no more than indicate that, in being satisfied that such a contract was made, the Court will require evidence of the appropriate degree of cogency to establish that, e.g., the appropriate basis for the intervention of equity against the statute requiring the contract to be in writing is made out. cf Briginshaw v Briginshaw (1938) 60 CLR 336 at p. 365.

69. When Regent v Millett went on appeal to the High Court (reported at [1976] HCA 40; (1976) 133 CLR 679) the Court was unanimously of the view that part performance was made out. None of the judges found it necessary to consider the questions raised by Steadman. Gibbs J with whose judgment Stephen, Mason, Jacobs and Murphy JJ agreed, said at p. 683 that the Earl of Selborne’s test in Maddison v Alderson (supra) at p. 479 … has been consistently accepted as a correct statement of the law. It is enough that the acts are unequivocally and in their own nature referable to some contract of the general nature of that alleged (see McBride v Sandland [1918] HCA 32; (1918) 25 CLR 69, at p. 78). 151 See Marsh v Mackay [1948] St R Qd 113, 123 (Full Court); R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 4th ed., Butterworths LexisNexis (2002), para 30-215. 152 See for example J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282. 153 See Nobleza v Lampl (1986) 85 FLR 147; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; see also Chapter 9. 154 (1990) 26 FCR 21.

Chapter 10

Formalities

The UK case of Steadman v Steadman,155 referred to above, held that acts of part performance need only indicate, on the balance of probabilities, that there is some agreement between the parties, and those acts are consistent with that agreement.156 This ‘balance of probabilities’ test is not law in Australia. Instead, under Australian law the act or acts must unequivocally refer to the alleged contract, and be those of a party performing the contract. It settled law that ‘usually the mere payment of money, even the whole of it, is not a sufficient act of part performance in the case of a contract of purchase’157 to be an unequivocal reference to the alleged contract. This is because the ‘best explanation’ of this principle seemed to be that ‘the payment of money is an equivocal act, not (in itself), until the connection is established by parol testimony, indicative of a contract concerning land’.158 The doctrine of part performance has its foundations in the speech of Lord Selbourne in Maddison v Alderson.159 Maddison v Alderson (1883) 8 App Cas 467 Lord Selbourne at 474–476: That equity has been stated by high authority to rest upon the principle of fraud: ‘Courts of Equity will not permit the statute to be made an instrument of fraud’. By this it cannot be meant that equity will relieve against a public statute of general policy in cases admitted to fall within it; and I agree … that this summary way of stating the principle (however true it may be when properly understood) is not an adequate explanation, either of the precise grounds, or of the established limits, of the equitable doctrine of part performance. In a suit founded on such part performance, the defendant is really ‘charged’ upon the equities resulting from the acts done in execution of the contract, and not (within the meaning of the statute) upon the contract itself. If such equities were excluded, injustice of a kind which the statute cannot be thought to have had in contemplation would follow. Let the case be supposed of a parol contract to sell land, completely performed on both sides, as to everything except conveyance; the whole purchase-money paid; the purchaser put into possession; expenditure by him (say in costly buildings) upon the property; leases granted by him to tenants. The contract is not a nullity; there is nothing in the statute to estop any Court which may have to exercise jurisdiction in the matter from inquiring into and taking notice of the truth of the facts. All the acts done must be referred to the actual contract, which is the measure and test of their legal and equitable character and consequences …

155 [1976] AC 536. 156 See Ogilvie v Ryan [1976] 2 NSWLR 504, 520. In Steadman, the House of Lords treated the payment of money as an act of part performance even though payment—even of the full purchase price of land—has in the past been regarded as an equivocal act. See also Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21, 37 per Hill J (Wilcox and Foster JJ agreeing) (Full Court), where although part performance of an oral contract under which a bank agreed to provide finance in return for a security in the form of a mortgage over land resulted in the receipt of money, the bank did not need to rely on payment as an act of part performance; I C F Spry, Equitable Remedies, 5th ed., LBC Information Services (1997), p. 274. 157 R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 4th ed., Butterworths LexisNexis (2002), para 20-205. 158 Maddison v Alderson (1883) 8 App Cas 467, 478 per Lord Selbourne. Knox CJ made similar observations in Cooney v Burns (1922) 30 CLR 216, 222–223. 159 Ibid.

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The line may not always be capable of being so clearly drawn … but it is not arbitrary or unreasonable to hold that when the statute says that no action is to be brought to charge any person upon a contract concerning land, it has in view the simple case in which he is charged upon the contract only, and not that in which there are equities resulting from res gestae subsequent to and arising out of the contract. So long as the connection of those res gestae with the alleged contract does not depend upon mere parol testimony, but is reasonably to be inferred from the res gestae themselves, justice seems to require some such limitation of the scope of the statute, which might otherwise interpose an obstacle even to the rectification of material errors, however clearly proved, in an executed conveyance, founded upon an unsigned agreement. … The doctrine, however, so established has been confined by judges of the greatest authority within limits intended to prevent a recurrence of the mischief which the statute was passed to suppress. The present case, resting entirely upon the parol evidence of one of the parties to the transaction, after the death of the other, forcibly illustrates the wisdom of the rule, which requires some evidentia rei to connect the alleged part performance with the alleged agreement. There is not otherwise enough in the situation in which the parties are found to raise questions which may not be solved without recourse to equity. It is not enough that an act done should be a condition of, or good consideration for, a contract, unless it is, as between the parties, such a part execution as to change their relative positions as to the subject-matter of the contract … it may be taken as now settled that part payment of purchase-money is not enough; and judges of high authority have said the same even of payment in full … Some of the reasons which have been given for that conclusion are not satisfactory; the best explanation of it seems to be, that the payment of money is an equivocal act, not (in itself), until the connection is established by parol testimony, indicative of a contract concerning land. I am not aware of any case in which the whole purchase-money has been paid without delivery of possession, nor is such a case at all likely to happen. All the authorities [show] that the acts relied upon as part performance must be unequivocally, and in their own nature, referable to some such agreement as that alleged … The acts of part performance, exemplified in the long series of decided cases in which parol contracts concerning land have been enforced, have been (almost, if not quite, universally) relative to the possession, use, or tenure of the land. The law of equitable mortgage by deposit of title deeds depends upon the same principles.

It follows that ‘acts relied upon as part performance must be unequivocally and in their own nature, referable to some such contract as that alleged’.160 Cases will turn on their particular facts

160 Maddison v Alderson (1883) 8 App Cas 467, 479 per Lord Selborne LC; see also McBride v Sandland (1918) 25 CLR 69, 77 per Isaacs and Rich JJ; Cooney v Burns (1922) 30 CLR 216, 243; J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282, 291–292 per Starke J, 318 per McTiernan J; Regent v Millett (1976) 133 CLR 679, 683per Gibbs J; Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59, 71 per McPherson J; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 431 per Brennan J; Watson v Delaney (1991) 22 NSWLR 358, 362.

Chapter 10

Formalities

and circumstances. In McBride v Sandland,161 the plaintiff and her husband took possession of land in relation to an option to buy the land, but this did not constitute part performance because it was an act also referable to a lease between the plaintiff and the defendant’s husband. However, part performance was sufficiently established in the plaintiffs being given and taking possession of land in Regent v Millett162 because there was no other contract to which the act was referrable and so no equivocation arose as per McBride v Sandland. The case in Regent v Millett was probably strengthened by the plaintiffs’ other actions, such as the work they had performed on the land and the mortgage payments made by them, and the courts will probably look favourably upon plaintiffs who have expended money or labour on the property in question.163 However, those expenditures will not displace equivocal circumstances, such as continued rental payment in a claim for part performance of a lease.164 In Australia acts of part performance must be referable to the contract alleged. Thus the basis upon which part performance referred to the relevant agreement in Regent v Millett165 is narrower than that in the House of Lords decision of Steadman v Steadman,166 which rejected any requirement for referability to ‘some such contract’. Also, in Australia the acts of part performance must be acts in ‘actual performance’ of the contract between the parties.167 Acts in preparation of the performance of a contract—such as surveying land in order to prepare a contract of a sale of land168—are, however, not acts of part performance. Acts not specifically required by the contract may nevertheless be acts of part performance by force of the agreement under which they are performed.169 The High Court views the effectiveness of equity as diminished if it were held to and restricted by compliance with contractual provisions.170 As to whether acts neither required nor permitted under the contract are capable of amounting to acts of part performance, judicial opinion was divided in Regent v Millett. Only two of the three members of Court of Appeal offered opinions on the matter.171 For Hutley JA, fulfilment of the condition of an act or acts being unambiguously referable to an agreement, regardless of whether they are ‘required by the contract … [or] expressly authorised’, is sufficient to satisfy part performance.172 On the other hand, Glass JA was of the opinion that acts which did not constitute a performance of the contract could not be considered in an assessment of part performance.173 161 (1918) 25 CLR 69. 162 (1976) 133 CLR 679; 10 ALR 496. 163 See for example Raffaele v Raffaele [1962] WAR 29, 32 per D’Arcy J. 164 See Kalnenas v Kovacevich [1961] WAR 188, 193. 165 Regent v Millett (1976) 133 CLR 679, 683 per Gibbs J (Stephen, Mason, Jacobs and Murphy J J concurring). 166 Steadman v Steadman [1976] AC 536; [1974] 2 All ER 977. 167 J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282, 300 per Dixon J (Gavan Duffy CJ agreeing); see also Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21. 168 Grummitt v Natalisio [1968] VR 156; see also Cooney v Burns (1922) 30 CLR 216. 169 See McBride v Sandland (1918) 25 CLR 69, 79 per Isaacs and Rich JJ. 170 Regent v Millet (1976) 133 CLR 679, 683 per Gibbs J (Stephen, Mason, Jacobs and Murphy J J concurring); see also Riley v Osborne [1986] VR 193; contrast Reid v Zoanetti [1943] SASR 92, 101. 171 See [ I975] 2 NSWLR 62. Mahoney JA expressed no view on the matter. The High Court did not comment on the matter, although Gibbs J (Stephen, Mason, Jacobs and Murphy J J agreeing) said that White v Neaylon (1886) 11 App Cas 171 (PC) appeared to endorse the view that acts of part performance may be acts that are not required nor permitted under the contract. 172 [1975] 1 NSWLR 62, 66. 173 Ibid, 71.

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Ke y p o ints for re v ision Contracts are not required to be in writing unless they are subject to the Statute of Frauds (such as the sale of land), or writing is stipulated by statute or by agreement. The writing requirement satisfies a number of objectives: it is evidence of the existence of the agreement; it provides certainty and uniformity; and it exhorts the parties to carefully consider the rights and obligations they are trading. Contracts requiring but not satisfying the writing requirement may be enforceable if partly performed; the act of part performance must refer to an alleged contract. Where a written contract cannot be found or has been destroyed, written evidence of the existence of a contract may suffice to establish an agreement and the terms of the agreement between the parties. Where the document lacks vital terms it will not be sufficient, but resort may be had to extrinsic evidence to clarify ambiguous identifications or descriptions. Documents that are capable of being read together may be so joined to constitute evidence of the existence of a contract. Whether parol evidence can be used to identify a written document is debatable, although it has been used to clarify ambiguities within identified documents.

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chapter

11

Express terms

Chapt e r o v e rv i e w 11.0

Introduction  188

11.1

Pre-contractual terms  188 11.1.1 Promissory nature  190

11.2

Incorporation of terms   196 11.2.1 Incorporation by signature   197 11.2.2 Incorporation by reference and reasonable notice   198 11.2.3 Incorporation through course of dealing   199

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• 11.0 Introduction Express terms of a contract are those terms which the parties have objectively intended to include in it. They include those terms which have been expressly written or adopted by the parties, as well as those which can be incorporated into the contract either by reference or by citation or, alternatively, by course of prior dealings. These terms should be distinguished from implied terms,1 as implied terms are not based on the actual intention of the parties; instead they are based on hypothetical or presumed intention of the parties. To constitute a term of a contract, a particular statement must have been incorporated into the contract at the time of its formation. Issues usually arise when particular pre-contractual statements have not been included in a contract document or where the contract document is unsigned, as well as when terms of prior dealing are at issue.

• 11.1 Pre-contractual terms As will be discussed in Chapter 12, evidence of pre-contractual terms may be inadmissible under the parol evidence rule unless exceptions to the rule, such as collateral contract or estoppel, can be successfully argued. It should however be noted that even if the parol evidence rule is circumvented and the evidence is then admissible, the contract recorded in the document normally supersedes or overrides any prior oral agreement not incorporated in it. This principle was applied by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd.2 The facts of Equuscorp are as follows. In mid-1989, the respondents, which comprised a number of parties, decided to make a ‘tax-effective’ investment in a large-scale aquaculture project (the ‘project’) in north Queensland. In order to do so, the respondents were required to purchase units in a limited partnership. The terms of the partnership were recorded in a partnership deed between Eagle Star, Forestell and others. The partnership deed authorised Forestell to retain Johnson Farm Management Pty Ltd ( JFM) as manager of the project. On 30 June 1989, the respondents applied for units. Each executed a written loan agreement, agreeing to borrow from the second appellant, Rural Finance, the whole of the purchase price of the units. On the same date, at a Melbourne branch of Westpac, the following transactions then occurred: Rural Finance paid the amount of the respondents’ investment to Eagle Star, and Eagle Star paid that amount to Forestell, which paid it to JFM. The respondents made repayments but stopped when the project failed. Rural Finance, the financier, assigned the loan to Equuscorp. Equuscorp then sued the respondents for the amount still due. The respondents alleged that the loan agreements were wholly oral and were made in June 1989, prior to the execution of the written loan agreement. They alleged that pursuant to these oral loan agreements, they intended to invest on a ‘limited recourse’ basis, involving repayment of part of the loan out of project profits only. The High Court unanimously held that each respondent, having executed a written loan agreement, was bound by it. The respondents’ limited recourse argument therefore failed. The contract recorded in a document normally supersedes or overrides any prior oral agreement not incorporated in it.

1 See Chapter 13. 2 [2004] HCA 55.

Chapter 11

Express terms

However, the Court made it clear that this approach to the incorporation of pre-contractual terms is subject to any relief ‘afforded by statute, or some legal or equitable principle … proved according to established categories’.3 Some of these categories which have expressly or implicitly been recognised by the High Court include partly oral and partly written contracts, collateral contracts, rectification, mistake (non est factum), misrepresentation, fraud,4 statutory relief  5 and estoppel. Based on the facts of the case, the Court held that the limited recourse term could not constitute a term of a partly oral, partly written contract, as it was inconsistent with the signed document.6 In addition, rectification had not been sought and collateral contract had not been argued.7 Moreover, neither mistake, misrepresentation nor any other invalidating element had been invoked. The case was remitted for the determination of misleading conduct and estoppel. On its facts, both causes of action failed. Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ at [33]: The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents’ case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified. The respondents attempted neither. [34] There are reasons why the law adopts this position. First, it accords with the ‘general test of objectivity [that] is of pervasive influence in the law of contract’. The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions. [35] Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time-consuming, expensive and problematic. Where parties enter into a written agreement, the court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case. Different questions may arise where the execution of the written agreement is contested; but that is not the case here. In a time of growing

3 4 5 6 7

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55, [35]. Including unconscionable dealings, duress, undue influence, breach of confidence and other equitable wrongs. For example, misleading or unconscionable conduct in trade or commerce. [2004] HCA 55, [36]. Ibid, [36].

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international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside. [36] The conclusion that the respondents are bound by the written loan agreements may leave open the possibility that an earlier consensus reached by the parties was in each case a collateral agreement (made in consideration of the parties later executing the written agreement), but that has never been the respondents’ case. In another case it may leave open the possibility that the contract is partly oral and partly in writing. But that cannot be so here. The oral limited recourse terms alleged by the respondents contradict the terms of the written loan agreement. If there was an earlier, oral, consensus, it was discharged and the parties’ agreement recorded in the writing they executed. It is the written loan agreement which governed the relationship between Rural Finance and each respondent. [37] It is as well to add, however, that it may be doubted that the evidence at trial revealed that the parties reached any consensus about the loan being a ‘limited recourse’ loan that would be sufficiently certain to admit of enforcement. For the reasons given earlier, it is not necessary to reach this point in order to decide this aspect of the case. It is enough to say that the oral evidence given by certain witnesses, which the primary judge accepted as true, was evidence which, when examined in transcript, appears to have been far less than definite about who agreed what, with whom. … [41] The respondents’ contention about limited recourse therefore fails. The agreements between Rural Finance and the respondents were recorded wholly in the written loan agreements. It can be seen that the binding force of a signed contract document has both exclusionary and inclusionary effects. On the one hand, it can exclude incorporation of pre-contractual terms, while on the other hand it can simultaneously be a vehicle of incorporation of all the contract’s terms, read and unread.8 Even if precontractual statements can be admitted as evidence, they will not be binding on the parties and constitute terms of the contract unless they are promissory in nature. In other words, they must be distinguished from mere representations.

11.1.1  Promissory nature Even if pre-contractual statements can be admitted as evidence, they will not be binding on the parties and constitute terms of the contract unless they are promissory in nature. In other words, they must be distinguished from mere representations. It should be noted that although the latter are non-promissory in nature and might carry no contractual force, they may nevertheless give rise

8 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 419.

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to other forms of legal liability, such as the liability for misleading and deceptive conduct under the Australian Consumer Law. The question of whether a statement is a promise will be determined objectively; that is, with reference to the totality of the case. Hospital Products Ltd v United States Surgical Corp9 provides a good example of the application of the objective test. The facts of the case are as follows. United States Surgical Corporation (USSC) was a manufacturer in the United States of surgical stapling devices and disposable loading units. In late 1978 it agreed with Blackman to appoint him as its exclusive Australian distributor. Hospital Products International Pty Ltd (HPI) was later substituted for Blackman. Unknown to USSC, Blackman and HPI had commenced, by reverse engineering of USSC products, to develop a manufacturing capacity, and held a stock of demonstration products which could be sterilised, repackaged and sold. HPI acted as exclusive distributor from April to December 1979, when it terminated the agreement on spurious grounds. It then supplied existing customers with its own products, which were identical to those of USSC. In June 1981 the business and assets of HPI were acquired by the appellant (Hospital Products Ltd), which was controlled by HPI and Blackman. USSC sued HPI, Blackman and related companies in the Supreme Court of New South Wales, where at first instance USSC was held entitled to the amount of profits made by HPI by selling non-USSC-brand surgical stapling products on the Australian market between December 1979 and November 1980, with payment secured by an equitable lien over its assets. On appeal, the Court of Appeal held that USSC was entitled to relief by way of constructive trust over all the assets of HPI, and that this bound the appellant. On appeal to the High Court, Mason, Dawson, Wilson and Deane JJ found the relevant pre-contractual statements to be promissory. On the other hand Gibbs CJ, based on the facts, was not convinced that the relevant pre-contractual statements were actually promissory. In coming to his decision, His Honour applied the objective test. Hospital Products Ltd v United States Surgical Corp (1984) 55 ALR 417 Gibbs CJ at 423: The terms of the contract To determine the rights of USSC it is necessary first to consider what were the terms of the contract between that corporation and Mr Blackman, which became the terms of the contract between USSC and HPI, when the novation took effect. It is therefore necessary to consider in further detail the circumstances in which the contract between USSC and Mr Blackman was made. It was found by the learned trial judge that when, at the meeting early in November 1978, Mr Blackman put to Mr Hirsch [the President of USSC] and Ms Josefsen [the Vice President in charge of marketing at USSC] his proposal that ASSC appoint him its exclusive Australian distributor, he made statements to the following effect in support of that proposal:— (a) that there was a great potential market for USSC surgical stapling products in Australia which was not being tapped by the existing distributor;

9 (1984) 55 ALR 417.

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(b) that with his long experience of, and accumulated knowhow in, marketing such products, and his long association with USSC, he could do an outstanding job for USSC and perform better than anyone else in building up sales of USSC products; (c) that this would be a great opportunity both for himself and for USSC; [424] (d) that he would set up a marketing organization with sales representatives trained in the use and demonstration of USSC products in a manner similar to that used in USSC’s training program in the United States; (e) that after he had got the Auto Suture business built up, ‘really rolling’, he might take on other non-competing product lines and build up a broad-based surgical distributorship, but not so as to interfere with his giving proper attention to USSC’s products; (f) that because establishment of the new business would take some time and would be expensive he would need some financial help in the form of credit and would like to rent instruments from USSC with the option of purchasing them in the future. … [426] There can be no doubt that the parties reached a concluded agreement when the letter of 27 December 1978 was signed by Mr Blackman, or that they intended themselves to be bound to performance of that agreement, notwithstanding that they left open the possibility that the terms might be restated in an ampler form (cf Masters v Cameron (1954) 91 CLR 353 at 360). The question, however, is whether the statements made by Mr Blackman to Mr Hirsch and Ms Josefsen, in the course of the negotiations in November 1978, became terms of the contract which is, in part at least, embodied in that letter. The letter purports to state the effect of the previous discussion between the parties, and the fact that Mr Blackman was asked to, and did, endorse it ‘Accepted and agreed’ provides an indication that the letter itself was intended to state all the terms of the agreement then made between the parties, although it was envisaged that further terms might be added if the agreement were put into more formal shape. In these circumstances, the rule that oral evidence is not allowed to be given [427] to add to a written contract might have made it difficult to treat the statements made in the course of negotiations as part of the agreement, were it not for the fact that it was admitted on the pleadings that the distributorship agreement reached by the parties in November and December 1978 was partly in writing, partly oral and partly implied … There was, however, no admission that all the representations made by Mr Blackman in November 1978 became part of the distributorship agreement. A representation made in the course of negotiations which result in a binding agreement may be a warranty—i.e. it may have binding contractual force—in one of two ways: it may become a term of the agreement itself, or it may be a separate collateral contract, the consideration for which is the promise to enter into the main agreement. In either case the question whether the representation creates a binding contractual obligation depends on the intention of the parties. In J J Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 at 442 and Ross v Allis-Chalmers Australia Pty Ltd (1980) 32 ALR 561 at 567 and 568; 55 ALJR 8 at 10 and 11, it was said that a statement will constitute a collateral warranty only if it was ‘promissory and not merely representational’, and it is equally true that a statement which is ‘merely representational’— i.e. which is not intended to be a binding promise—

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will not form part of the main contract. If the parties did not intend that there should be contractual liability in respect of the accuracy of the representation, it will not create contractual obligations. In the present case Mr Blackman, who made his statements fraudulently, had of course no intention that they should amount to contractual undertakings, but he could not rely on his secret thoughts to escape liability, if his representations were reasonably considered by the persons to whom they were made as intended to be contractual promises, and if those persons intended to accept them as such. The intention of the parties is to be ascertained objectively; it ‘can only be deduced from the totality of the evidence’: Heilbut, Symons & Co v Buckleton [1913] AC 30 at 51. In other words, as Lord Denning said in Oscar Chess Ltd v Williams [1957] 1 WLR 370 at 375: ‘The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice.’ The intelligent bystander must, however, be in the situation of the parties, for ‘what must be ascertained is what is to be taken as the intention which reasonable persons would have had if placed in the situation of the parties’: Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 996. In the present case I am unable to agree with the conclusion reached by the learned judges in the Supreme Court that the statements made by Mr Blackman in November 1978 were intended by the parties to be warranties. The fact that Mr Blackman intended Mr Hirsch and Ms Josefsen to act on the representations by entering into an agreement, and that they did so, does not mean that the parties intended the representations to be terms of the agreement. The representations were not made at the time when the parties concluded an agreement, but about a month before that time. They were followed up by further discussions and correspondence in which no reference was made to them. The explanation suggested for the fact that [428] the representations were not incorporated into the letter of 27 December 1978 was that the letter dealt largely with the procedures for determining the dealership and commencing the distributorship, but the absence from the letter of any mention of the suggested terms is nevertheless an indication, although not a conclusive one, that the parties did not intend them to be warranties. With one exception, the representations were not promissory in form, but were statements of fact or of belief or of self-commendation. The possible exception was the statement (immaterial for present purposes) that Mr Blackman would set up a marketing organization with sales representatives trained in the use and demonstration of USSC’s products in a manner similar to that used in USSC’s training program in the United States. The critical terms found by McLelland J to be warranties were, as was stated in the judgment of the Court of Appeal, ‘a distillation of the words which Blackman actually employed’. Although it might well have been thought that Mr Blackman was making a proposal that would be for the benefit of both parties, he made no promise to act for the common benefit. The suggested term that he would not deal in competitive products is sought to be implied from the statement that after he had got the Auto Suture business ‘really rolling’ he might take on non-competitive product lines—a statement which falls far short of a promise

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not to deal in competitive products. The form of the representations is not decisive, but is nevertheless relevant in determining the intention, actual or imputed, of the parties. Although the suggested terms now appear to have great significance, it is by no means clear that they were so regarded at the time. When agreements had been made by USSC with other distributors, such as Downs, it was not a term of those agreements that the distributor should act for the common benefit of the parties and should not deal in products competitive with those of USSC. The Australian market seems to have been regarded as of so little significance to USSC that company did not at the time of the agreement bother to protect itself by applying for patents or seeking to register a trade mark, and in the same way it did not require Mr Blackman to enter into a formal agreement containing express warranties of the kind now sought to be based on the representations made in the conversation of November 1978. The proper conclusion to be drawn from the evidence, in my opinion, is that neither Mr Blackman nor Mr Hirsch and Ms Josefsen intended the statements made in November to be anything more than mere representations. [In contrast to Gibbs CJ’s decision on this issue, Mason J, along with Dawson, Wilson and Deane JJ, decided that the statements were promissory and were part of the distributorship agreement between the two parties.] Mason J at 448: The ultimate decision of the parties to dispense with the execution of a formal agreement does not necessarily compel the conclusion that the letter of 27 December was a complete statement of the contract between the parties. Although Hirsch and Josefsen participated in the earlier discussions with Blackman believing that a formal contract governing the Australian distributorship should be executed, it does not follow that the discussions had no contractual significance. It sometimes happens that parties arrive at an oral agreement without knowing whether the oral agreement will constitute a contract in its own right or whether it will lead to the execution of a formal written contract. If the parties then proceed on the footing that they have entered into a contract without executing a formal contract, the terms of their contract are to be found in their oral discussions. Here the problem has an extra dimension in that the oral discussions were followed by the countersigned letter which evidenced an agreement on a number of topics and contemplated the possibility of the execution of a formal contract governing the appointment of Blackman as Australian distributor … Although USSC’s decision not to insist on a formal contract [449] might suggest that it was content to rely on the contract as set out in the countersigned letter, it is equally consistent with USSC’s reliance on a contract consisting of that letter and the earlier discussions between Blackman, Hirsch and Josefsen. The importance of the discussions is acknowledged in the penultimate sentence of that letter which indicates that the discussions constituted the contract. The letter itself does not purport to be a contract between the parties; it begins by confirming ‘the continuance of our relationship’ and ends by making it clear that the object of the letter is to record USSC’s ‘understanding’ of the antecedent discussions. In those discussions USSC had agreed to appoint Blackman as its exclusive

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distributor in Australia and to provide financial assistance, factors which support the view that the discussions were contractual in some aspects at least. In addition to these matters there is the conclusion reached by the primary judge, a conclusion with which I agree, that some of the matters conveyed by Blackman to Hirsch and Josefsen at the restaurant meeting were ‘of a promissory nature and not merely representational’, amounting in substance to an offer by Blackman to USSC which was accepted by USSC by its agreement to appoint him as Australian distributor. This acceptance had the effect of incorporating these promises, subject to later modifications of them in discussion and correspondence, as express terms of the contract. The express terms of the contract as found by McLelland J and accepted by the Court of Appeal, were:— (1) That the distributor would establish a marketing organization for USSC surgical stapling products in Australia having one or more sales representatives specifically trained in the use and demonstration of those products. (2) That the distributor would devote its best efforts to distributing USSC surgical stapling products, and building up the market for those products, in Australia, to the common benefit of USSC and itself. (3) That the distributor would not deal (scil in Australia) in any products competitive with USSC surgical stapling products. (4) That the distributor would not deal (scil in Australia) in any other products in such a manner as would diminish its efforts in distributing USSC surgical stapling products and building up the market for those products in Australia. Each was to endure for the term of the distributorship. In summary, as has been shown in Hospital Products Ltd v United States Surgical Corp, before a particular pre-contractual statement forms part of the contract, the court will ask whether the statement would reasonably be considered a promise by a reasonable person placed in the situation of the parties.10 The strength of the language used by the parties can be an important factor; for instance, a distinction can be drawn between words which suggest a promise (‘agree’, ‘guarantee’ or ‘warrant’) vis-à-vis an expression of an opinion or a hypothesis (‘I would estimate’, ‘I would guess’ or ‘It is estimated’).11 In addition, the relative expertise of the parties might also be a useful factor in determining the parties’ intentions in making the relevant pre-contractual statement. A statement made by a party with expertise to a person who is inexperienced is more likely to be promissory than a statement made by a party known to be inexperienced, or even statements made between two highly experienced parties.12 Another important factor in this determination is the importance of the statement. A statement which is highly significant or important to the transaction is more likely to be regarded as a promise than a statement of lesser significance.13 10 11 12 13

Oscar Chess Ltd v Williams [1957] 1 WLR 370. J J Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435. [1957] 1 WLR 370. Van den Esschert v Chappell [1960] WAR 114.

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Other factors which might be relevant include, first, the time lapse between the making of the  statement and the agreement—a longer time suggests that statement is a mere representation.14  Second, whether the party making the statement is in a better position to ascertain the truth might also be determinative. Third, whether the statement is subsequently omitted when the agreement is embodied in a more formal written document can also be probative. Finally, the fact that a statement is intended to induce or is likely to induce or in fact induced a party to make the contract is not by itself enough to make it a term of the contract. This was illustrated in J J Savage & Sons Pty Ltd v Blakney,15 where the High Court held that although the relevant pre-contractual statement was on a matter of importance, and that it was intended to induce and in fact induced the buyer, it was not promissory.16 However, in the subsequent case of Ellul v Oakes,17 the High Court held that if a statement is reasonably likely to induce and in fact induces, ‘it is prima facie a term of the contract, and the onus is on the representor to displace this inference’.18 There will be cases where inducement can play an important role in establishing the promissory character of pre-contractual statements; for instance, if the maker of the statement has more expertise or information than the recipient, then the statement is likely to be promissory.19 review questions 1 Based on the High Court case of Equuscorp Pty Ltd v Glengallan Investments Pty Ltd, explain the importance of a written contractual document. 2 Explain the legal test which is commonly adopted by the courts in determining the nature of a particular statement made in a contractual context.

• 11.2 Incorporation of terms The issue of whether a pre-contractual statement is promissory and capable of being admitted in identification of contractual terms usually arises in the context of signed contracts. It is common for terms which are not actually found in the signed contractual document to be incorporated into the contractual relationship between the parties and to consequently bind them. A very good example would be in the context of standard form contracts which incorporate other terms that might be available in some other documents or places. For example, a contract of employment may incorporate the terms of the employer’s Occupational Health and Safety policy which is

14 Ellul v Oakes (1972) 3 SASR 377; see also Hospital Products Ltd v United States Surgical Corp (1984) 55 ALR 417, 427 per Gibbs CJ. 15 (1970) 119 CLR 435. 16 Ibid, 443 per Barwick CJ, Kitto, Menzies, Owen and Walsh JJ; see also Hospital Products Ltd v United States Surgical Corp (1984) 55 ALR 417, 427 per Gibbs CJ. 17 (1972) 3 SASR 377. 18 Ibid, 387 per Zelling J; compare 382 per Bray CJ. 19 Ellul v Oakes (1972) 3 SASR 377, 382 per Bray CJ.

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available on the employer’s website or a staff handbook. A similar process of incorporation can also be applied to purely oral contracts. The ultimate question as to whether a term has been effectively incorporated into the contract depends on the intention of the parties. This intention must be determined on an objective basis and by reference to one of the three principal methods of incorporation of terms: (i) incorporation by signature; (ii) incorporation by reference and reasonable notice; or (iii) incorporation by a course of dealing.

Express terms

It is common for terms which are not actually found in a signed contractual document to be incorporated into the contractual relationship between the parties and to consequently bind them, for example in the context of standard form contracts which incorporate other terms that might be available in some other documents or places.

Before an in-depth analysis of the process of incorporation is provided, some points in relation to the different types of contracts must be made. First, a written contract can include a signed document which is executed as a contract, or an unsigned document which is a written offer accepted by words or conduct. Second, an oral contract can include a purely verbal transaction, either where the contract is formed by conduct and no document is prepared at all; or where a document is prepared (whether signed or not) which is merely intended to evidence the contract. Last, it is also common for contract to be partly oral and partly written. Generally, the courts are reluctant to incorporate unsigned terms into contracts. This is especially the case with exclusion or limitation of liability clauses which attempt to exclude or limit a particular party’s liability under the contract. Therefore, clear evidence that proper and adequate notice has been given is required to justify the incorporation of such terms, particularly when they are onerous or unusual.20

11.2.1  Incorporation by signature The most traditional rule of incorporation of terms relates to signed contractual documents. When parties sign a contractual document, the terms in that document will be incorporated into the contract. This reinforces the importance of reading documents which are contractual, as the mere failure to read or understand such a document is insufficient to negate the adoption of all of its terms into the contractual relationship. In Wilton v Farnsworth,21 Latham CJ said: In the absence of fraud or … special circumstances … a man cannot escape the consequences of signing a document by saying, and proving, that he did not understand it. Unless he was prepared to take the chance of being bound by the terms of the document, whatever they might be, it was for him to protect himself by abstaining from signing the document until he understood it and was satisfied with it. Any weakening of these principles would make chaos of everyday business transactions.22 20 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163; Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433. 21 (1948) 76 CLR 646. 22 Ibid, 649; see also Toll (FGTC) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, [57]. A similar formulation can be found in L’Estrange v Graucob [1934] 2 KB 394, 403 per Scrutton LJ.

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Similarly, in Toll (FGTC) Pty Ltd v Alphapharm Pty Ltd,23 the High Court applied this so-called ‘signature rule’: The general rule, which applies in the present case, is that where there is no suggested vitiating  element, and no claim for equitable or statutory relief, a person who signs a document which is known by the person to contain contractual terms, and to affect legal relations, is bound by those terms, and it is immaterial that the person has not read the document.24

This statement illustrates the three qualifications to the ‘signature rule’: vitiating factors, any conduct which may give rise to equitable or statutory relief, and lack of knowledge that the document contains contractual terms (that is, where the document is not contractual in nature). These qualifications have the indirect effect of protecting consumers in commercial transactions which often involve lengthy and complex documents. For instance, actual knowledge or reasonable notice of terms in a document is required in some circumstances. Although there are In these circumstances, the fact that a document has been signed possible qualifications does not automatically establish its contractual nature. This is to the ‘signature rule’, especially the case if the document is not reasonably understood the High Court has as serving a contractual function. continually shown a strong commitment to In summary, although there are possible qualifications to the the objective enforcement ‘signature rule’, the High Court has continually shown a strong of signed contract commitment to the objective enforcement of signed contract documents. documents.

11.2.2  Incorporation by reference and reasonable notice Terms may be incorporated into a contract by reference or citation. The reference or citation cannot be too generalised, as terms which are purported to be incorporated by generalised reference will apply only to the extent to which they are consistent with the parties’ actual agreement.25 Terms located in an unsigned document may be incorporated into a contract if reasonable notice has been given of them.26 Issues relating to adequacy of notice of terms typically arise in cases involving informal contracts. For example, a readable sign on an entrance door to premises containing conditions of entry into those premises would be adequate notice of the conditions written on the sign and would therefore bind all entrants to the premises. The adequacy of notice will vary from case to case; the harsher the potential effects of the terms which are purported to be incorporated by notice, the higher the burden on the party who would rely on those terms to bring adequate notice of them to the other contracting party.27 What is crucial is the timing of the notice. Notice must be given prior to the formation of the contract to enable meeting of the minds between the parties. 23 [2004] HCA 52. 24 Ibid, [57]. 25 Hume Steel Ltd v The Attorney General for Victoria (1927) 39 CLR 455, 462–463, 465; International Harvester Co v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644, 653; Godecke v Kirwan (1973) 129 CLR 629, 637. 26 Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379; affirmed in [1910] AC 295. 27 For example, notice of exclusion or limitation of liability clauses must clearly be given before such clauses can be incorporated into the contract.

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In summary, three important factors which can determine the effectiveness of incorporation of terms through notice are the timing of the notice, access to the notice, and the legibility of the terms as they appear in the signage or the unsigned document.

11.2.3  Incorporation through course of dealing A party may rely on a prior course of dealing as a basis for incorporating terms into a contract. The two requirements which must be established in such cases are first, a consistent and sufficiently long course of dealing and second, evidence of assent to the terms. In relation to the second requirement, mere prior use does not establish an actual intention or assent to incorporate a particular term in subsequent transactions. Therefore, there must be some objective evidence of assent to the terms, such as the failure to object to the term at issue. At the end of the day, however, satisfaction of each requirement depends on the particular circumstances of the case.28

Ke y p o in ts for re v ision Express terms of a contract are those terms which the parties have objectively intended to include in it. To constitute a term of contract, a particular statement must have been incorporated into the contract at the time of its formation. The ultimate question as to whether a term has been effectively incorporated into the contract depends on the intention of the parties. This intention must be determined on an objective basis and by reference to the three principal methods of incorporation of terms, namely incorporation by signature, by reference and reasonable notice, and by a course of dealing. Even if pre-contractual statements can be admitted as evidence, they will not be binding on the parties and constitute terms of the contract unless they are promissory in nature.

problem-solving practice Mr Chris Brown is one of the directors of Meditech Excellence Inc (ME), an international manufacturer of surgical knives headquartered in the United States. The company is currently seeking a distributor in Australia which will be responsible for distributing its range of lightweight, high-precision surgical knives (the ‘Precision ME EX Range’). In January 2009, Mr Brown visited Australia in order to meet Ms Andrea Marini. Ms Marini has been running a successful medical and surgical equipment distributorship business. During their first meeting, Ms Marini put to Mr Brown her proposal that ME appoints her as its exclusive Australian distributor. She made statements to the following effect in support of that proposal: (a) that there was a great potential market for ME products in Australia which was not being tapped by the existing distributor;

28 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31; Hawkins v Clayton (1988) 164 CLR 539, 573; Esso Australia Resources Ltd v Plowman (1995) 69 ALJR 404; Breen v Williams (1996) 186 CLR 71, 79, 91.

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(b) that with her long experience of, and accumulated know-how in, marketing such products, she could do an outstanding job for ME and perform better than anyone else in building up sales of ME products; (c) that this would be a great opportunity both for herself and for ME; (d) that she would ensure that her sales representatives were trained in the use and demonstration of ME’s products in a manner similar to that used in ME’s training program in the United States; (e) that after she had got the ‘Precision ME EX Range’ business built up, ‘really rolling’, she might take on other non-competing product lines and build up a broad-based surgical distributorship, but not so as to interfere with her giving proper attention to ME’s products. Mr Brown was impressed with Ms Marini’s attitude. However, Mr Brown did not, at that stage, agree to grant to Ms Marini the exclusive distributorship. He told Ms Marini that he needed to deliberate with the other board members. In addition, he told Ms Marini that he was going to see a couple of other potential Australian distributors who might also be interested to promote the ME EX Range. Two months after this initial meeting and after a couple of exchanges of phone calls and emails, both Mr Brown and Ms Marini met again in early April 2009. They discussed some of the logistical requirements for the potential distributorship arrangement. Mr Brown produced a document which was titled ‘Meditech Excellence Inc Commencement of Distributorship Procedures’. The letter began by confirming ‘the continuance of our relationship’ and ended by making it clear that the object of the letter was to record ME’s ‘understanding’ of all the discussions which had taken place between the parties, and ultimately culminated in the appointment of Ms Marini as the exclusive distributor of ME’s ME EX Range in Australia. He asked Ms Marini to read it and to sign at the bottom of the page, precisely under the statement ‘Accepted and agreed’, which Ms Marini did. Does the contract between ME and Ms Marini contain any of the preceding statements made by Ms Marini? Advise Ms Marini.

ANSWER In this case, we have a signed written contract which does not expressly include the oral statements made by Ms Marini during the negotiation phase. The facts of the question are slightly similar to the case of Hospital Products Ltd v United States Surgical Corp. Ms Marini could claim that those statements were not intended to be part of the contract and alternatively, even if they are found to be part of the contract, that they were never intended to be promissory. She could also argue that she did not intend that there should be contractual liability in respect of the accuracy of her representations. In addition, she could argue that the alleged representations were not made at the time when the parties concluded the agreement between them and that all other correspondences made no specific reference to those representations. A long time lapse between the making of the statement and the making of the agreement can suggest that a particular statement is a mere representation: Ellul v Oakes. In contrast, ME might argue that the representations made in the course of negotiations which result in a binding agreement may have binding contractual force if they become terms of the agreement itself, or if they constitute the basis for a separate collateral contract, the consideration for which is the promise to enter into the main agreement.

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As part of the first argument, ME could argue that the contract is not wholly in writing and hence the parol evidence rule does not apply. Alternatively, ME might argue that the contract incorporated the prior discussions between the parties as it in fact made reference to these discussions. This was argued and accepted in Hospital Products Ltd v United States Surgical Corp. It is, however, important to note that not all of Ms Marini’s representations were promissory in nature. Some of them might be mere representations and therefore carry no legal force. As has been shown in Hospital Products Ltd v United States Surgical Corp, before a particular pre-contractual statement or representation forms part of the contract, the court will ask whether the statement would reasonably be considered a promise by a reasonable person placed in the situation of the parties. Generally, a statement which is highly significant or important to the transaction is more likely to be regarded as a promise than a statement of lesser significance. Hence, ME might argue that Ms  Marini’s statement not to take up competing lines and thereby interfering with her role as ME’s exclusive distributor is of such importance to ME that a reasonable person in its shoes would regard it as a promise: Van den Esschert v Chappell. ME might also argue that this statement induced it into entering into the contract with Ms Marini, as was argued in Hospital Products Ltd v United States Surgical Corp. However, the fact that a statement is intended to induce or likely to induce or in fact induced a party to make the contract might not by itself be enough to make it a term of the contract. This was illustrated in JJ Savage & Sons Pty Ltd v Blakney. As part of the second argument, ME might argue that even if the contract was wholly in writing, and hence the parol evidence rule applies, the doctrines of collateral contract and estoppel may apply to circumvent the operation of the rule: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd. Furthermore, although pre-contractual representations might carry no contractual force, they may nevertheless give rise to other forms of legal liability, such as the liability for misleading and deceptive conduct under the Australian Consumer Law or misrepresentation under the common law.29

29 See Chapters 16 and 17.

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chapter

12

Construing terms

Chapt e r o v e rv i e w 12.0

Introduction  203

12.1

Admissibility of evidence   203 12.1.1 Parol evidence rule   203 Partly oral and partly written contracts   206 Collateral contracts  209 Variation of contracts and rectification of documents   210

12.2

Extrinsic evidence admitted in the interpretation of documents   211 12.2.1 Evidence of subjective intention   212 12.2.2 Evidence in support of implication of terms   214 12.2.3 Evidence of customary or common usage   214 12.2.4 Evidence of subsequent conduct   215 12.2.5 Inoperative or contingent documents   216

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12.3

Summary of Australian courts’ approach to the construction process  216

12.4

Estoppel and the construction of written contracts   216

Construing terms

• 12.0 Introduction Once a contract is entered into, it is common for issues relating to the obligations under the contract to arise. In fact, most breach of contract cases will involve a disagreement as to the meaning of a particular obligation or term in the contract. This in turn necessitates a process of construction of the terms of the contract. The construction process is usually a two-step process involving first, identification of terms under the contract and second, interpretation of those terms. The first step is a pre-requisite to the second step, since if the term is not part of the contract, it might not be necessary to interpret it as it does not have a strict binding force on the parties. In short, the ultimate aim behind the undertaking of a contractual construction process is to determine the rights and obligations of the parties and, subsequently, to determine whether there has been a breach of those rights and obligations which will entitle the plaintiff to remedies. It is hoped that the process will help the court to discover the common intention of the parties to the agreement.1 Not all evidence can easily be admitted to prove the intentions of the contracting parties, therefore the first part of the chapter will focus on the issue of admissibility of evidence as relevant to the construction of contract process.2

• 12.1 Admissibility of evidence As mentioned above, the process of identifying the terms of a contract is the first step in the construction process. Issues often arise as to whether evidence, other than the relevant written  contract, can be admitted as evidence in this process. For instance, it is common for one party to the contract to allege that although a written contract has been entered into and that they have signed it, pre-contractual statements should also be incorporated or become part of the said contract, or alternatively should be used to explain or interpret the words used in the contract. One of the main obstacles for the party who is trying to admit this so-called ‘extrinsic evidence’ is the parol evidence rule.

12.1.1  Parol evidence rule The parol evidence rule excludes evidence of extrinsic terms which ‘subtract from, add to, vary or contradict the language of a written instrument’.3 Its operation is not confined to oral 1 Marquis of Cholmondeley v Clinton (1821) 4 ER 721. 2 This chapter should be read in conjunction with Chapter 11 (on express terms) and Chapter 13 (on implied terms). 3 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 347 per Mason J.

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evidence; for example, it has been taken to exclude extrinsic matter in writing such as drafts,4 preliminary agreements5 and letters of negotiation.6 Similarly, the so-called ‘signature rule’7 also operates as a barrier to the examination and inclusion of pre-contractual statements, oral or in writing. Note that the signature rule is additional to and independent of the parol evidence rule, although apparently subject to the same exceptions.8 These two rules have been justified on the basis that it is desirable to preserve finality in written instruments and not allow ‘written words to be altered or qualified by the uncertain testimony of slippery memory’.9 The execution of contractual documents would carry no significance if such documents were given no particular weight as evidence of the parties’ agreement. It has also been said that the parol evidence rule helps to reduce the time and expense of litigation.10 Despite these seemingly powerful justifications, an extremely rigid approach to documents would also be counter-productive. The courts must have the flexibility, when necessary and justified, to look beyond a contract document to determine the parties’ rights and obligations. After all, a contract cannot be viewed in isolation. The factual matrix or context of the transaction is just as important.11 The parol evidence rule has therefore been applied in a less restrictive way and is subject to many exceptions. For example, in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd,12 the High Court examined the parties’ pre-contractual conduct. This extrinsic evidence was admissible although it clearly contradicted the contract document. No explanation was given as to why this was the case. The Court based its ultimate decision on an objective approach to the incorporation of terms, according to which a signed contract normally supersedes any inconsistent prior oral agreement. The parol evidence rule excludes evidence of extrinsic terms which ‘subtract from, add to, vary or contradict the language of a written instrument’.

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ at [31]: Written agreements or oral? Debate in the courts below, about whether the loan agreements were wholly oral, as the respondents alleged, or wholly written, as Equuscorp and Rural Finance contended, proceeded upon the premise that the critical question was whether the primary judge should have acted on his acceptance of oral evidence given on the respondents’ behalf of some conversations

National Bank of Australasia v Falkingham & Sons [1902] AC 585. General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ 735. Mercantile Bank of Sydney v Taylor [1893] AC 317. See Chapter 11, section 11.2.1. L’Estrange v Graucob Ltd [1934] 2 KB 394; see also Toll (FGTC) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52. Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (1919) 26 CLR 410, 451–452 per Higgins J; see also Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55, [35]. 10 LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74, [35]–[47]. 11 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52. 12 [2004] HCA 55. 4 5 6 7 8 9

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that were said to have occurred before the written loan agreements were signed. That, in turn, was seen as a question to be decided by reference to whether subsequent events (including those we have mentioned) made it more or less probable that during these conversations some consensus was reached that the loans were ‘limited recourse’. But behind these arguments lies a more fundamental issue which the respondents’ contentions did not address, whether in the courts below or on appeal to this Court. [32] It is, and always has been, common ground that each of the respondents executed a written loan agreement on 30 June 1989. The respondents alleged that the ‘operative agreement’ was not contained in that writing. It was said that the relevant agreement was reached earlier and was wholly oral. Yet it was not said that the written agreement should be rectified. It was not said that a defence of non est factum was available. It was not said that the written agreement was executed by mistake, or that its execution was procured by misrepresentation as to its contents or effect. (The misrepresentation alleged was as to what had been said in the conversations, not what the document was or provided.) [33] The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents’ case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified. The respondents attempted neither. [34] There are reasons why the law adopts this position. First, it accords with the ‘general test of objectivity [that] is of pervasive influence in the law of contract’. The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions. [35] Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time-consuming, expensive and problematic. Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case. Different questions may arise where the execution of the written agreement is contested; but that is not the case here. In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside.

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[36] The conclusion that the respondents are bound by the written loan agreements may leave open the possibility that an earlier consensus reached by the parties was in each case a collateral agreement (made in consideration of the parties later executing the written agreement), but that has never been the respondents’ case. In another case it may leave open the possibility that the contract is partly oral and partly in writing. But that cannot be so here. The oral limited recourse terms alleged by the respondents contradict the terms of the written loan agreement. If there was an earlier, oral, consensus, it was discharged and the parties’ agreement recorded in the writing they executed. It is the written loan agreement which governed the relationship between Rural Finance and each respondent. [37] It is as well to add, however, that it may be doubted that the evidence at trial revealed that the parties reached any consensus about the loan being a ‘limited recourse’ loan that would be sufficiently certain to admit of enforcement. For the reasons given earlier, it is not necessary to reach this point in order to decide this aspect of the case. It is enough to say that the oral evidence given by certain witnesses, which the primary judge accepted as true, was evidence which, when examined in transcript, appears to have been far less than definite about who agreed what, with whom.

Some have argued that the role of the parol evidence rule has diminished in the interpretation of contracts. According to Seddon and Ellinghaus:13 The rule may indeed be in terminal decline. If so, its demise is unlikely to be regretted, it has its defenders, but on the whole the cases show that the trouble it causes is greater than  its worth. As Equuscrop demonstrates, a lid can be kept on the incorporation of extrinsic  terms  without resort to special evidentiary restrictions. Both in relation to the incorporation and interpretation of terms, the integrity of written contracts can be preserved  by adherence to an objective approach to the construction of contract documents,  based on the simple premise that ‘a party executing a written agreement is bound by it’.14

It is now necessary to discuss some of the established exceptions to the parol evidence rule.

Partly oral and partly written contracts If the parties intend for their contract to be partly oral and partly in writing, extrinsic evidence is admissible to prove the oral part of the agreement.

Since the nineteenth century, the courts have been prepared to admit extrinsic evidence of terms additional to those contained in the written document if it is shown that the document was not intended to express the entire agreement between the parties. Therefore, if the parties intend for their contract to be partly oral and partly in writing, extrinsic evidence is admissible to prove the oral part of the agreement.15

13 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008). 14 Ibid, p. 339. 15 Deane v City Bank of Sydney (1904) 2 CLR 198, 209; Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348, 357; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 61, 89–90, 120.

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The intention of the parties is to be judged by reference to the entire case, including pre‑contractual negotiations. The reason for this is that it may be inadequate to simply examine the executed document, even where the document, on its face, portrays an entire and final record of the parties’ agreement. In LG Thorne & Co Pty Ltd v Thomas Borthwick & Sons (A’asia) Ltd,16 Herron J said: often [the question of intention of the parties] can be resolved by merely looking at the document tendered. Thus, in a conveyance, a deed, a lease or a will, the intention may be self-evident; equally so in formal contracts required by law to be in writing, e.g., a contract for the sale of land. But in many commercial dealings the rule is not so easily applied. Two businessmen may offer, counter-offer, suggest conditions, withdraw or modify these and finally conclude the bargain with some degree of formality. It is not always the last statement of agreement that contains the only evidence of contract. The court must look at the intention of the parties. The writing must in a proper case be compared with the negotiations, which must be provisionally received in evidence, before it can safely be said what was covered by the suggested final writing.17

However, the High Court in Equuscorp expressed the view that a contract cannot be regarded as partly oral and party in writing if the relevant extrinsic term contradicts the written contract. Therefore, the primacy of the complete written contract still exists and evidence is admissible only of oral terms that ‘add to’ rather than ‘vary’ the document.18 In the more recent case of Masterton Homes Pty Ltd v Palm Assets Pty Ltd,19 Campbell JA set out the principles that are applicable in deciding whether an agreement that the parties have entered is one that is wholly in writing, or partly written and partly oral. Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234 Campbell JA at [87]: The principles concerning the parol evidence rule that the judge quoted could be applicable only if it had first been found that the agreement here was one that was wholly in writing (see para [90] below). Similarly, his Honour’s remark at [35] that the claim to rectification let into evidence material that otherwise would have been unlikely to have been admissible on any basis seems to presuppose that the agreement in question in this case was not one that was partly written and partly oral. [88] While it was common ground between the parties that they had reached an agreement on 8 December 2006, that common ground did not extend to whether the agreement was wholly in writing, or partly written and partly oral. (Neither party contended that it was wholly oral.) Deciding whether the agreement was wholly in writing,

16 (1955) 56 SR (NSW) 81. 17 Ibid, 94. Although Herron J gave the dissenting judgment, his view has since prevailed: see for example State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, 191–192; Norwest Beef Industries Ltd v Peninsula and Oriental Steam Navigation Co (1987) 8 NSWLR 568, 570; Bruce v AWB Ltd [2000] FCA 594, [8]; Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833. 18 See also Computer World (Victoria) Pty Ltd v Internet Centre of Excellence 2000 Pty Ltd [2006] FCA 752, [21] per Weinberg  J. 19 [2009] NSWCA 234.

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or partly written and partly oral, was a necessary first step in analysing the legal relations between the parties that arose on 8 December 2006. [89] The common ground was not explicit about whether the agreement that was reached on 8 December was itself a contract, rather than a consensus of a non-contractual type, but the flavour of the submissions below seems to assume that the agreement was a contractual one. [90] The principles that are applicable in deciding whether an agreement that parties have entered is one that is wholly in writing, or partly written and partly oral, include the following: (1) When there is a document that on its face appears to be a complete contract, that provides an evidentiary basis for inferring that the document contains the whole of the express contractual terms that bind the parties: Gillespie Brothers & Co v Cheney, Eggar & Co [1896] 2 QB 59 at 62 per Lord Russell of Killowen CJ; … State Rail Authority (NSW) v Health Outdoor Pty Ltd (1986) 7 NSWLR 170 at 191G–2C per McHugh JA (with whom Kirby P at 172G–3C and Glass JA at 180G agreed on this point); Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; … Jessop v McInteer [2003] QCA 170 (FC) at [53] per Muir J (with whom Fryberg J agreed). (2) It is open to a party to prove that, even though there is a document that on its face appears to be a complete contract, the parties have agreed orally on terms additional to those contained in the writing: Gillespie Brothers at 62 per Lord Russell of Killowen CJ; … Jessop v McInteer at [51] per Muir J; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at 483–4 [35]–[36] per Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ. Conversely, it is open to a party to prove that the parties have orally agreed that a document should contain the whole of the terms agreed between them: NSW Cancer Council v Sarfaty (1992) 28 NSWLR 68 at 77A–B per Gleeson CJ and Handley JA. (3) The parol evidence rule applies only to contracts that are wholly in writing, and thus has no scope to operate until it has first been ascertained that the contract is wholly in writing: Turner v Forwood [1951] 1 All ER 746 (EWCA) at 749F per Denning LJ; … Branir v Owston Nominees at 508 [287] per Allsop J; County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [8] per Spigelman CJ; Nicolazzo v Harb [2009] VSCA 79 at [90] per Dodds-Streeton JA (with whom Ashley and Neave JJA agreed). (4) Where a contract is partly written and partly oral, the terms of the contract are to be ascertained from the whole of the circumstances as a matter of fact: Moore v Garwood (1849) 4 Exch 681 at 689–90; … (5) In determining what are the terms of a contract that is partly written and partly oral, surrounding circumstances may be used as an aid to finding what the terms of the contract are: Stones v Dowler at LJ Ex 124; RR 884 per Martin B; … If it is possible to make a finding about what were the words the parties said to each other, the meaning of those words is ascertained in the light of the surrounding circumstances: Deane v The City Bank of Sydney (1904) 2 CLR 198 at 209; … If it is not possible to make a finding about the particular words that were used (as sometimes happens when a

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contract is partly written, partly oral and partly inferred from conduct) the surrounding circumstances can be looked at to find what in substance the parties agreed: County Securities v Challenger Group Holdings at [7]–[8] per Spigelman CJ. 6 A quite separate type of contractual arrangement to a contract that is partly written and partly oral is where there is a contract wholly in writing and an oral collateral contract: … Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 at 144–5 per Isaacs J; Equuscorp v Glengallan Investments at 484 [36] per Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ.

Collateral contracts In some cases, even though the parties intended to express the whole of their agreement in a particular document, extrinsic evidence will nevertheless be admitted to prove a contract or warranty collateral to that agreement. For instance, a promise made by A to B prior to the execution of a contract document constitutes a collateral contract if A’s promise was made in consideration of B’s entry into the contract recorded in that document. This collateral agreement neither alters nor adds to the written contract because it is an independent agreement. In LG Thorne v Thomas Borthwick,20 the buyer argued that there should be an undertaking to supply oil conforming to sample and that this was a term of the contract. In the alternative, if this was not found to be a term of the contract, then the buyer argued that it should have been regarded as a prior collateral contract, in consideration of which the buyer entered into the contract of sale for the oil. The Court accepted that extrinsic evidence was admissible to determine this issue.21 Following this line of argument, it is possible for almost any prior The courts are often reluctant to hold statement not included in a document to potentially be accommodated statements which are in this way. The courts are therefore often reluctant to hold statements being put forward as which are being put forward as collateral contracts to be such unless collateral contracts the statements are promissory and not merely representational, to be such unless the statements are and unless they are consistent with the main written contract.22 For promissory and not 23 example, in Hoyt’s Pty Ltd v Spencer, a lease conferred on the lessor merely representational, the right to terminate it on four weeks’ notice. The lessee claimed and unless they are consistent with the that the lessor had given a prior undertaking that the right would not main written contract. be exercised. This was held to be inconsistent with the lease and was therefore not a collateral contract. Similarly, in Gates v City Mutual Life Assurance Society Ltd24 it was held that there was no collateral  contract because the agent’s oral statement that an insurance policy covered occupational disability was inconsistent with an express term of the contract, which covered only total disability. 20 (1955) 56 SR (NSW) 81. 21 Ibid, 89, 96. 22 Shepperd v Council of Ryde (19852) 85 CLR 1, 13 per Dixon, McTiernan, Fullagar and Kitto JJ; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217, 232. 23 (1919) 27 CLR 133. 24 (1986) 160 CLR 1.

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Note that one way of circumventing the rigid requirements of collateral contract, especially the consistency requirement, is to rely on the doctrine of estoppel.25 Last, some contracts might include a clause stating that the document contains the entire agreement or contract between the parties and that all other terms are thus excluded. This is commonly referred to as an ‘entire agreement’ or ‘merger’ clause. For example: This Agreement contains the entire and only agreement between the parties and supersedes all previous agreements between the parties respecting the subject-matter hereof; each party acknowledges that in entering into the Agreement it has not relied on any representation or undertaking, whether oral or in writing, save such as are expressly incorporated herein.

The purpose of such a clause is to achieve the exclusion of liability for statements other than those set out in the written contract. In most cases, it might operate to exclude evidence of collateral contracts in the same way the requirement of consistency with the main contract will.26 It should however be noted that such a clause does not prevent the admission of evidence of precontractual conduct in support of a claim of deceit or misleading conduct,27 or of rectification,28 or of equitable estoppel.29 In addition, unless the wording of the entire agreement clause specifically excludes implied terms, such terms can be implied to give business efficacy to the contract.30 Similarly, generic terms implied by law cannot also be excluded unless the relevant legislation allows for their exclusion.31

Variation of contracts and rectification of documents The parol evidence rule applies only to the incorporation of pre-contractual terms. Hence, evidence of a subsequent variation or discharge of a written contract is always admissible.32 Similarly, evidence of the negotiations of the parties and of other facts extrinsic to the document is admissible in support of an application to rectify a document. This is because the error sought to be rectified cannot be established without such evidence. Importantly, such evidence is not limited to evidence of an objective background, as proof of the subjective intention of the parties to the contract is fundamental to the grant of rectification.33

25 See for example Liangis Investments Pty Ltd v Daplyn Pty Ltd (1994) 117 FLR 28; Edensor Nominees Pty Ltd v Anaconda Nickel Ltd [2001] VSC 502, [193] (affirmed on other grounds in Anaconda Nickel Ltd v Edensor Nominess Pty Ltd [2004] VSCA 267; compare State Rail Authority of NSW v Heath Outdorr Pty Ltd (1986) 7 NSWLR 170, 193; DKB Investments Pty Ltd v Belcote Pty ltd (No 2) (1993) 113 FLR 290; Wright v Hamilton Island Enterprises Ltd [2003] QCA 36; Lahoud v Lahoud [2006] NSWCA 169, [109]; see also Chapter 9. 26 Marks v Hunt Bros (Sydney) Pty Ltd [1958] SR (NSW) 381; Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190, 196; Skywest Aviation Pty Ltd v Commonwealth (1995) 126 FLR 61, 105. 27 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41. 28 Macdonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152. 29 Budget Stationery Supplies Pty Ltd v National Australia Bank Ltd (1996) 7 BPR 14, 891 (affirmed in National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (Unreported, CA (NSW), 23 April 1997), where Santow J was prepared to assume (without deciding) that extrinsic evidence was admissible to found an estoppel notwithstanding an ‘entire contract’ clause; see also Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833, [440]; Arnot v Hill-Douglas [2006] NSWSC 429. 30 See for example Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190, 196; Etna V Arif [1999] 2 VR 353, 371; National Roads and Motorists’ Association (NRMA) [2007] NSWCA 81, [97]. 31 See for example GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50, [922]; Vodafone Pacific Ltd v MI Ltd [2004] NSWCA 15, [199]. 32 Morris v Baron & Co Ltd [1918] AC 1. 33 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65, [316] per Campbell JA.

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review questions 1 Using case law, explain the reasoning behind the less-restrictive application of the parol evidence rule.

2 Explain the nature of a collateral contract.

12.2 Extrinsic evidence admitted in the interpretation • of documents Extrinsic evidence can be admitted to aid the interpretation process of a written contract, especially if the language of the contract is ambiguous or susceptible to more than one meaning. However, the evidence will not be admissible if it will contradict the language of the contract when that language has a plain meaning. Mason J in Codelfa Constructions Pty Ltd v State Rail Authority of NSW 34 made the following comments: 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 … When the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract,  except in so far as they are expressed in the contract,  but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting.35

Extrinsic evidence can be admitted to aid the interpretation process of a written contract, especially if the language of the contract is ambiguous or susceptible to more than one meaning.

In regard to the first part of his Honour’s statement, recent cases have retreated from a strict application of the requirement of ‘ambiguity’. In fact, the factual matrix or context of a contract has regularly been considered in numerous cases without advertence to the issue of admissibility. Moreover, many post-Codelfa judgments have applied a more liberal approach in admitting evidence of objective background in interpretation of contracts. Significantly, although the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council 36 adhered formally to the requirement of ambiguity, it also counselled Australian courts to follow Codelfa until otherwise instructed. Interestingly, however, no mention of the requirement of ambiguity—or indeed the parol evidence rule—was found in the subsequent cases of Pacific Carriers Limited v BNP Paribas,37 Andar Transport Pty Ltd v Brambles Limited 38 or International Air Transport Association v Ansett Australia Holdings Ltd.39 This wave of new cases seems to cement the law that the meaning of the terms of a particular contract is to be determined by what a reasonable person would have understood them to mean.40 This in turn requires consideration not only of the text, but also of the surrounding circumstances 34 35 36 37 38 39 40

(1982) 149 CLR 337. Ibid, 352. [2002] HCA 5. [2004] HCA 35. [2004] HCA 28. [2008] HCA 3. This was unequivocally expressed by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, [41].

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known to the parties and the purpose and the object of the transaction.41 Subsequent decisions in the Federal Court and the New South Wales Court of Appeal approved this, and therefore there is no need for a court to find that the language of a contract is ambiguous before it can consider its meaning by reference to the commonly known context and purpose of the transaction; that is, the objective circumstances of the case.42 Last, it should be noted that although evidence of objective context may now be admissible even if there is no ambiguity, the objective meaning of the terms of a contract document remains the starting point in the process of construction. The New South Wales Court of Appeal made this clear in Ryledar Pty Ltd v Euphoric Pty Ltd,43 when it quoted with approval the words of the trial judge (Palmer J) who, while accepting that ambiguity was not a pre-requisite to the consideration of context and purpose, stated: That does not mean when the Court begins the task of construction it puts the words of the [contractual] document aside and endeavours first to ascertain the commonly known factual context and purpose of the transaction, … then look at the words of the contract and, if they do not readily accommodate the context and purpose so found, force them to do so by a process of interpretation. When the Court is construing a commercial contract, it begins with the words of the document … But the court is alive to the possibility that what seems clear by reference only to the words on the printed page may not be so clear when one takes into account as well what was known to both parties but does not appear in the document.44

12.2.1  Evidence of subjective intention Although the courts have taken a more liberal approach when it comes to the requirement of ambiguity, they have persisted in their disregard of subjective intention. This is because ‘statements and actions of the parties reflective of their actual intentions and expectations reveal the contract which the parties intended or hoped to make. They are superseded by the contract itself ’.45 Therefore, only evidence which is mutually known to the parties can be admitted to aid the process of interpretation of the contractual terms, and the genesis and the aim of the particular transaction.46 The case of Pacific Carriers Limited v BNP Paribas 47 provides a good illustration of the distinction between what on the one hand is a subjective intention, and what on the other hand is an ‘Statements and actions of the parties reflective of their actual intentions and expectations reveal the contract which the parties intended or hoped to make. They are superseded by the contract itself.’

41 Ibid, [41]. 42 See for example Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1812, [78]; Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65, [107]–[109], [263]–[265]; Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234. 43 [2007] NSWCA 65. 44 Ibid, [108]; see also Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, [68], [70] per Kirby J; Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61, [24], [31]–[32], 61; Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114, [122]; Taylor v Dexta Corporation Ltd [2006] NSWCA 310, [33]. 45 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352 per Mason J. 46 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 429 per Stephen, Mason and Jacobs JJ: construction of a contract must be distinguished from the process of rectification. Within the latter, proof of subjective intention is not only permitted, but required. 47 [2004] HCA 35.

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objective background. In mid-1998, New England Agricultural Traders Pty Ltd (NEAT) sold a cargo of legumes to Royal Trading Company (‘Royal’). The cargo was to be delivered to Calcutta, India. The appellant, Pacific, was the charterer of the vessel on which the cargo was carried. The respondent, BNP, was NEAT’s Sydney banker and was financing the export transaction. Royal was financed by Singapore Overseas Enterprises Pte Ltd (SSOE). The vessel arrived in India in early 1999 and problems were encountered with the discharge of the cargo. SSOE made claims against Pacific. SSOE’s claims went to arbitration and settled on the basis that Pacific pay substantial damages. NEAT became insolvent. Pacific claimed to be indemnified by BNP in respect of the losses it suffered on the basis of two letters of indemnity signed by NEAT and BNP and addressed and delivered to Pacific. In contrast, BNP argued that as a matter of construction it had not agreed to indemnify Pacific (‘the construction issue’) and that the letters of indemnity were signed without its authority (‘the authority issue’). In relation to the construction issue, the two letters of indemnity were both signed by Ms Dhiri of BNP in the space reserved for ‘Banker’s signature’ and she affixed BNP’s stamp. She sent the first letter of indemnity to NEAT and NEAT forwarded it by facsimile to Pacific. The second letter of indemnity was sent by facsimile from BNP to Pacific. Ms Dhiri gave evidence that she told NEAT that execution by BNP was only for the verification of signatures. BNP contended that on the proper construction of the letters of indemnity, NEAT only was bound to indemnify Pacific and that BNP’s role was merely to verify NEAT’s execution of the documents. In relation to the authority issue, Ms Dhiri was the manager of the Documentary Credit Department of BNP and it was not the function of that department to issue indemnities. The trial judge found that Ms Dhiri did not have authority to bind BNP to an indemnity. The trial judge also found that there was nothing to put Pacific on notice as to Ms Dhiri’s lack of actual authority to bind BNP. BNP contended that it was not liable under the letters of indemnity as Ms Dhiri had no authority to bind BNP to an indemnity. The High Court unanimously held in favour of Pacific. First, in relation to the construction issue, Ms Dhiri’s subjective intention about her understanding of what she was doing when she signed the letters of indemnity was held not to be important. The meaning of commercial documents was to be determined objectively, and the construction of the letters of indemnity was to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That required consideration, not only of the text of the documents, but also of the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction: What is important is not Ms Dhiri’s subjective intention … Pacific did not know what was going on in Ms Dhiri’s mind, or what she might have communicated to NEAT as to her understanding or intention. The case provides a good example of the reason why the meaning of commercial documents is determined objectively; it was only the documents that spoke to Pacific.48

Second, there was nothing in the documents to indicate that BNP was merely verifying NEAT’s execution of the documents. A reasonable reader in the position of Pacific would have 48 Ibid, [22].

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understood that BNP was undertaking liability as an indemnifying party to support the liability undertaken by NEAT.49 Third, in relation to the issue of authority, commercial documents—such as letters of indemnity—are commonly relied upon, and intended to be relied upon, by third parties who act on an assumption of authenticity created or reinforced by their mode of execution, and by the fact and circumstances of their delivery.50 Pacific’s reliance upon the letters of indemnity was based on their form and contents, the signature of a person who appeared to be (and was) an officer of BNP, the stamp, and the fact that BNP sent copies of the documents, either directly or indirectly, to Pacific. BNP’s organisation structure was such that Ms Dhiri was the officer to whom P’s request, would be, and was, communicated by NEAT. She dealt with the request and communicated BNP’s response to P. That response, involving her signature and BNP’s stamp on the letters of indemnity, would signify to a reasonable third party, and signified to P, agreement to what was requested.51 All these factors combined to form the objective background behind the particular transaction. The High Court concluded that the assumption made by Pacific, upon which it acted to its detriment, was induced and assisted by the conduct of BNP in placing Ms Dhiri in a position which equipped her to deal with letters of indemnity as requested by Pacific. It held that it would be unjust to permit BNP to depart from this assumption.52

12.2.2  Evidence in support of implication of terms Using rationale similar to that which lies behind the admission of objective evidence, the High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales 53 rejected the view that an implied term must be derived from the text of the contract document without reference to its setting. It held that objective background may be taken into account in determining whether a particular term should be implied in a contract.54 Note that the parol evidence rule is rarely invoked in relation to the implication of terms. This is especially the case with universal terms which are implied into all contracts, regardless of the parties’ subjective or objective intention. An example of such a term would be one which obliges parties to cooperate.

12.2.3  Evidence of customary or common usage Extrinsic evidence is also admissible to show the custom of a particular locality or the usage of a particular trade. Evidence may therefore be admitted first, to prove that the words of a contract are used in a peculiar sense and different from the meaning which they ordinarily bear, and second, to attach incidents to the contract upon which the contract is silent.

49 50 51 52 53 54

Ibid, [25]. Ibid, [40]. Ibid, [42]. Ibid, [44]. (1982) 149 CLR 337. Ibid, 372.

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The first type is generally admitted on the ground that ‘the intention of the parties, though perfectly well known to themselves, would often be defeated if the language were construed according to its ordinary import in the world’.55 The second type is often admitted because the parties commonly reduce into writing the terms of the contract without specifying the custom or usage applicable to those terms; they nevertheless would have mutually agreed on that custom or usage, albeit unwritten in the contract. The contract can therefore be said to be partly express and in writing or partly implied or alternatively, understood and unwritten.56 In other words, both types of evidence are admitted because they are clearly known to the parties and thus of an objective background.

12.2.4  Evidence of subsequent conduct In the UK, the House of Lords has decisively ruled that it is not legitimate to use ‘as an aid in the construction of the contract anything which the parties said or did after it was made’.57 This objection appears to be based on the possibility for post-contractual conduct to be deliberately tailored to give veracity to a meaning not intended at the time of formation. There are however exceptions to this seemingly rigid rule. For example, evidence of postcontractual conduct can be admitted where the contract is oral or partly oral,58 or where evidence is needed to show that an agreement or a term of that agreement is a sham59. Evidence can also be admitted to show whether there was a contract and what the terms of the contract were,60 as well as to show whether the terms of the contract have been varied or enlarged.61 Last, such evidence may also be admitted in order to determine the application of the law of estoppel.62 Australian courts have not been unanimous on this issue. There is some support for the view that such evidence is inadmissible,63 but there are also authorities to the contrary.64 However, what is clear is that evidence of post-contractual conduct may be admissible on the issue of implication of terms.65 55 Brown v Byrne (1854) 3 E&B 703, 715. 56 Ibid. 57 James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 572, 603. 58 Maggs v Marsh [2006] EWCA Civ 1058, Build L R 395. 59 Bankway Properties Ltd v Pensfold-Dunsford [2001] EWCA Civ 528. 60 James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 572, 603; Great Northern Eastern Ry Ltd v Avon Insurance Plc [2001] EWCA Civ 780; [2001] 2 Lloyd’s Rep 649, [29]. For example of an Australian case, see Isotomic Pty Ltd v Adelaide International Raceway Pty Ltd [2007] SASC 111, [54]. 61 Ferguson v John Dawson & Partners (Contractors) Ltd [1976] 1 WLR 1213; Carmichael v National Power Plc [1999] 1 WLR 2042, 2051. 62 Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] 2 QB 84, 119; Carmichael v National Power Plc [1999] 1 WLR 2042, 2051. 63 Administrative of Papua New Guinea v Daera 91973) 130 CLR 353, 446; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 348. 64 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68, 78; Hart v MacDonald (1910) 10 CLR 417; Farmer v Honan (1919) 26 CLR 183, 197; White v Australian and New Zealand Theatres Ltd (1943) 67 CLR 266; Terrex Resources NL v Magnet Petroleum Pty Ltd [1988] 1 WAR 144, 160. In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, [108], Kirby J acknowledged the existence of ‘different views’ on the matter, but found it unnecessary to resolve them. 65 Council of the City of Sydney v Goldspar Australia Pty Ltd [2006] FCA 372, [164].

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12.2.5  Inoperative or contingent documents In cases where a contractual document can only come into operation once an unstated contingency is fulfilled, or where it may not be intended to operate at all,66 or where the parties have intended to mask a different transaction, evidence on such matters is always admissible.67

12.3 Summary of Australian courts’ approach to the • construction process As can be seen from the preceding discussions, Australian courts place a heavy reliance on the objective intentions of the contracting parties. This means that the courts consider the meaning of the terms which would be understood by reasonable persons in the position of the parties, as opposed to the actual subjective opinions or assumptions of the parties.68 However, it should not be forgotten that the starting point in the construction process will always be the written terms in the contract. The courts will interpret these terms in accordance with their plain meanings. Therefore, the parol evidence rule still applies to some extent. Notwithstanding, the courts have been willing to circumvent the operation of the rule in order to fully ascertain the factual matrix or context of a particular contractual relationship with the hope of uncovering the objective intentions of the parties. Another instance where the operation of the parol evidence rule can be circumvented is where estoppel is pleaded.

• 12.4 Estoppel and the construction of written contracts Since the decision of the High Court in Waltons Stores (Interstate) Ltd v Maher,69 promissory estoppel has been regarded as a source of obligation independent of the formation of a contract, and it can therefore be utilised as a source of enforcing pre-contractual promises and representations not incorporated in a written contract. In addition—as opposed to the case of collateral contracts, where one must prove that the pre-contractual statement is consistent with the main written contract—under estoppel, there is no inherent consistency requirement. Similarly, in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd,70 the High Court held that, although because of the binding effect of signature a pre-contractual promise is normally discharged by the subsequent execution of an inconsistent contract, this principle is subject to any relief ‘afforded by statute or some legal or equitable principle applicable to the case’, such as estoppel. 71

66 For example because it is intended to be a sham or a joke. 67 Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60, 71; Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424, 442; Air Great Lakes Pty Ltd v KS Easter (Holdings) Oty Ltd (1985) 2 NSWLR 309, 318, 333–334, 336. 68 Except for cases involving rectification. 69 (1988) 164 CLR 387. 70 [2004] HCA 55. 71 Ibid, [35].

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Ke y p o ints for re v ision Most breach of contract cases will involve a disagreement as to the meaning of a particular obligation or term in the contract. The starting point in the construction process will always be the written terms in the contract. The courts will interpret these terms in accordance with their plain meanings. The construction process is usually a two-step process involving first, identification of terms under the contract and second, interpretation of those terms. Issues often arise as to whether evidence, other than the relevant written contract, can be admitted as evidence in this process. The parol evidence rule excludes evidence of extrinsic terms which ‘subtract from, add to, vary or contradict the language of a written instrument’. Similarly, the ‘signature rule’ also operates as a barrier to the examination and inclusion of precontractual statements, oral or in writing, that is additional to, and independent of, the parol evidence rule, although apparently subject to the same exceptions. Courts consider the meaning of the terms which would be understood by reasonable persons in the position of the parties, as opposed to the actual subjective opinions or assumptions of the parties. Promissory estoppel has been regarded as a source of obligation independent of the formation of a contract, and it can therefore be utilised as a source of enforcing pre-contractual promises and representations not incorporated in a written contract.

problem-solving practice Critically analyse the following statements: The outcome of interpretation litigation is notoriously difficult to predict. This is partly because questions of interpretation are often seen as ‘matters of impression’ or intuition, and inevitably the way in which judges mentally process language and apply it to the facts will vary according to their background and experience. Even so, the division of opinion that one finds in the cases is remarkable. Time and again judges will disagree on such elementary questions as whether particular words have a plain meaning and what is the ‘commonsense’ or ‘commercially realistic’ interpretation (D McLauchlan, ‘Contract Interpretation: What is it About?’ [2009] (31) Sydney Law Review 5, 6).

GUIDE TO ANSWERING The first step in tackling any essay question is to analyse the topic and, in this question, the statements. This assists you in understanding exactly what you are required to do and will help you to frame your response. From this topic analysis, you will also be able to develop a plan which will focus your reading on the topic. Key process or directive words in the question will inform you of the direction you need to take to respond successfully. Therefore you must be clear of the meanings of such words as ‘discuss’, ‘analyse’, ‘evaluate’, ‘assess’, ‘explain’, ‘outline’, ‘examine’ and ‘compare’.

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For the purposes of this question, critical analysis involves thinking actively and examining texts with a questioning mind, assessing the validity of their perspectives or arguments and giving your own opinion on the credibility of these perspectives or arguments. Obviously the maker of these statements is referring to cases and the different interpretative methods adopted by different judges. Therefore, your paper will have to include a critical analysis of relevant case law, as well as journal articles or other relevant scholarly materials. You are then to prepare a plan which will map out the approach you are intending to take and the arguments you wish to develop. After doing your topic analysis and plan, the following steps will be involved in the process of writing your essay: • researching the topic; • taking notes in your own words; • sifting and selecting relevant material from these notes to slot into different sections of your plan; • composing your essay; • writing your final draft; • editing and checking this final draft; • submitting your essay for assessment. Research If you are reviewing case law, ask the following questions (note that this is not an exclusive list): • What is the court’s rationale behind a particular judgment in a particular case? • Do you agree/disagree with the judgment? Why? • Are there any cases which have similar facts but have been decided differently? Why? • What do you think could have been decided differently here? • Is there some sort of trend visible in the cases? • Has there been a change in judges’ attitude towards the same issue over time? • Are there any policy reasons behind the judgment? • Is it possible to make a comparative analysis between this topic and other topics in other jurisdictions in Australia or overseas? (See for example Investors Compensation Scheme Ltd v West Bromwich Building Soc; Royal Botanic Gardens and Domain Trust v South Sydney City Council; Codelfa Pty Ltd v NSW State Rail Authority; Gardiner v Agricultural and Rural Finance Pty Ltd.) If you are reviewing relevant scholarly journal articles, ask the following questions (note that this is not an exclusive list): • Is it scholarly? • Is it relevant for your work? • Is it recent? • What is the author of the article trying to convey? • Are there other authors who try to convey the same points?

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• Do you agree with the author(s)? Why or why not? • What original argument(s) can be made based on the information or arguments found in the article(s)? Composing your essay When writing the paper, ensure that: • The introduction brings forward for consideration the relevant statements as found in the question. You must clearly set out your response(s)/argument(s) to these statements. Subsequently, you can explain the structure of the paper. Through these, you will be able to set the tone for the rest of the paper. • The body of the paper contains a discussion of the key arguments as introduced in the introduction of the paper. • These arguments should flow in a logical sequence from one paragraph to the next and each paragraph should be thoughtfully constructed. • You must also ensure that there is a transition to the next paragraph. • Importantly, you must refer back to the question as often as possible to ensure the inclusion of relevant materials which clearly respond to the question and those which are consistent with your introduction and the tone of the paper. • Acknowledge your sources. • The conclusion summarises the main arguments of the paper and reinforces the tone of the paper as introduced in the introduction and discussed throughout the body of the paper.

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chapter

13

Implied terms

Chapt e r o v e rv i e w 13.0

Introduction  221

13.1

Terms implied in fact   221 13.1.1 Formal contracts  222 Reasonable and equitable   223 Business efficacy  223 Obviousness  224 Clarity  226 Consistency  226 13.1.2 Informal contracts  227

13.2

Terms implied by custom   227

13.3

Terms implied by law   229 13.3.1 The implied duty of good faith   231 The development of the implied duty of good faith   232 13.3.2 The implied duty to cooperate   236

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• 13.0 Introduction In general, there are three ways in which a term may come to be implied into a contract. First, the term may be implied in fact from the specific circumstances of the contract. Second, the term may be implied by custom. Third, the term may be implied by law. Where terms are implied by law there are two methods by which such terms might be implied: through the common law and through statute. This chapter considers two terms implied through the common law: the implied duty of good faith and the implied duty to cooperate.

• 13.1 Terms implied in fact Where a court is faced with implying a term in fact, the general presumption is that the contract is effective without the implication.1 Also, it should be noted that the party who alleges the existence of an implied term in a contract bears the burden of proving that it exists.2 There are competing principles that come into play where an implied term in a contract is concerned. On the one hand, a detailed and all-encompassing contract must by its very nature leave little room for implication.3 As Mason J noted in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,4 ‘the more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue’.5 The likelihood of an implied term being found will also be diminished where the parties employ an ‘entire contract’ clause. The desired effect of an entire contract clause is to confine the contractual rights and obligations to those expressly stated in the contract. It must be borne in mind that implied terms are gap fillers and that they are generally brought into existence where they are needed to make an agreement workable.6 This raises the prospect that, on the other hand, terms might need to be implied where they are the necessary extrapolation of express terms in the contract. This would defeat any potentially over-reaching application of an entire contract clause; that is, where a term must necessarily exist in order to give proper meaning and effect to an Provided that a express term, then that term must be implied. As Isaacs J stated putative implied term is 7 in Hart v McDonald, an entire contract clause ‘excludes what is not barred by an express extraneous to the written contract: but it does not in terms exclude term in the contract, it implications arising on a fair construction of the agreement itself ’.8 might be safely implied where it is necessary to Accordingly, provided that a putative implied term is not barred by support the operation of an express term in the contract, it might be safely implied where an express term in the it is necessary to support the operation of an express term in the contract. contract.

1 John Gooley and Peter Radan, Principles of Australian Contract Law, LexisNexis (2006), p. 134; J Carter, E Peden and G Tolhurst, Contract Law in Australia, LexisNexis (2007), p. 221. 2 Heinmann v The Commonwealth (1938) 38 SR (NSW) 691, 695. 3 Codelfa Construction Pty Ltd v State Rail Authority of New SouthWales (1982) 149 CLR 337, 346. 4 Ibid. 5 Ibid, 346. 6 Liverpool City Council v Irwin [1977] AC 239. 7 (1910) 10 CLR 417. 8 Ibid, 427.

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Where implied terms in fact are concerned there are two different types of contracts where the implications may be made: informal contracts and formal contracts. The legal requirements for implying terms into formal and informal contracts differs somewhat.

13.1.1  Formal contracts The legal requirements for implying a term into a formal contract were considered in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.9 In that case a contract had been made between BP Refinery and the Shire of Hastings. Pursuant to the contract BP Refinery was to construct an oil refinery  within the shire. The contract allowed BP Refinery to have preferential status with respect of land rates. When BP Refinery handed over occupation of the site to a subsidiary company, the latter sought the benefit of the preferential rates. The Shire sought to levy the general rates on the subsidiary company, and the Privy Council found that the terms relating to rates allowed the preferential rate to be given to other members of the BP company group who were associated with the contract. In BP Refinery, the Privy Council stated five key requirements that must be satisfied in order for a term to be implied: 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 will be 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 terms of the contract.10

This test has been approved by the High Court in numerous cases.11 The requirements have been regarded as ‘strict’12 and ‘stringent’13 and, as Carter notes, they might in fact be overly strict and stringent.14 In part, this explains the less exacting standard for implying terms into an informal contract.15 There has been some academic criticism of the BP Refinery test on the grounds that it is the intentions of the parties and their expectations that should bear upon any implied terms, rather than a more abstract inquiry.16 Nonetheless, the test articulated in BP Refinery is consistent on a  theoretical level with the rationale for implying terms in a contract that was expounded by Isaacs J in Hart v McDonald,17 in that the potential implying of any term depends greatly upon the express terms in the contract. This chapter will now consider the elements of the BP Refinery test in detail. 9 (1977) 180 CLR 266, 282–283. 10 Ibid, 282–283. 11 Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596, 605–606; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 347; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 66, 117–118; Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274, 274; Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 422, 441. 12 Wright v TNT Management Pty Ltd (1989) 85 ALR 442, 459. 13 Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32, 68. 14 J Carter, E Peden and G Tolhurst, Contract Law in Australia, LexisNexis (2007), p. 223. 15 Hawkins v Clayton (1988) 164 CLR 539; Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 422, 442; see also below, section 13.1.2. 16 See J Paterson, A Robertson and A Duke, Principles of Contract Law, 3rd ed., Thomson (2009), p. 266. 17 (1910) 10 CLR 417. This would seem also to be consistent with the requirements under the Statute of Frauds 1677 (Imp) requirements: see Chapter 10.

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Reasonable and equitable It is essential that any implied term is reasonable and equitable with respect to the contracting parties. A term cannot be implied where it would operate in a ‘partisan fashion’.18 In BP Refinery the Shire of Hastings proposed to imply a term into its contract with BP Refinery that would effectively have required BP Refinery to have a particular corporate structure before the preferential rate deal would be applied to any subsidiary. The Privy Council held that this proposed term was neither reasonable nor equitable.19 In Peters American Delicacy Co Ltd v Champion20 it was argued that A term cannot be an implied term of reasonableness affected an express clause in the implied where it would contract which allowed the manufacturer to alter prices by giving operate in a ‘partisan the retailer seven days’ notice. It was argued that any prices fixed by fashion’. the manufacturer had to be reasonable. The High Court rejected this argument on the grounds that such a term was not fair and reasonable to the manufacturer, as they would be forced to enter litigation to prove that their prices were reasonable.21

Business efficacy Any implied term must give business efficacy to the contract.22 This requirement is not unbounded and does not extend so far as to require that the contract would be unworkable without the term. However, the term must at least make the contract commercially effective.23 The requirement might well be phrased, as Paterson rather aptly puts it, as asking whether a ‘reasonable person’ would regard the proposed implied term as ‘necessary to enable the contract to operate in a businesslike manner’.24 In The Moorcock25 the parties to a contract agreed that a vessel would rest on the mud at the bottom of the River Thames at low tide. Unfortunately, the vessel was rested on hard ground and was subsequently damaged. The English Court of Appeal held that it was an implied term that the jetty owners would ensure that the bottom of the River Thames upon which the vessel was rested was actually fit for the purpose of resting the vessel. Unless the bottom of the river was in fact fit in this way, then the relevant term of the contract could not operate in a businesslike manner.26 Bowen LJ stated: The parties also knew that with regard to the safety of the ground outside the jetty the ship-owner could know nothing at all, and the jetty owner might with reasonable care know everything. The owners of the jetty, or their servants, were there at high tide and low tide, and with little trouble they could satisfy themselves, in case of doubt, as to whether the berth was reasonably safe. The ship’s owner, on the other hand, had not the means of verifying

Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 442. (1977) 180 CLR 266, 284. (1928) 41 CLR 316. Peters American Delicacy Co Ltd v Champion (1928) 41 CLR 316, 324. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41. Bell v Lever Bros Ltd [1932] AC 161, 226; Heinmann v The Commonwealth (1938) 38 SR (NSW) 691, 695; Australian Meat Industry Employees’ Union v Frugalis Pty Ltd [1990] 2 Qd R 201. 24 J Paterson, A Robertson and A Duke, Principles of Contract Law, 3rd ed., Thomson (2009), p. 267. 25 (1889) 14 PD 64. 26 Ibid, 68. 18 19 20 21 22 23

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the state of the jetty, because the berth itself opposite the jetty might be occupied by another ship at any moment. … In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances.27

In Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd 28 the High Court held that a term should be implied into a contract concerning an option for a lease where the rent was to be set by an arbitrator. The term that the High Court held to be implied was that the parties should do that which was reasonably necessary to secure an arbitrator. In Breen v Williams29 it was held that a contract between a doctor and his patient did not require a term giving the patient the right to access his medical records in order for there to be business efficacy in the contract.

Obviousness Under the requirement of obviousness, the implied term must be one that is so obvious that it goes without saying. The logic that attends this requirement is that where a written contract has been completed by the parties, that which they have left out and which needs to be implied into the agreement is something which the parties themselves would suggest was so obvious that it did not need to be remarked upon. In Shirlaw v Southern Foundries (1926) Ltd,30 Mackinnon LJ stated: Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’.31

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales32 the parties had assumed that their contract could be performed with work taking place in three shifts per day. However, after local residents complained, an injunction was granted and as a result restrictions were placed on the amount of work that could be done. This naturally led to an increase in the costs borne by the construction company. Codelfa ‘Prima facie that sought payment for these costs from the State Rail Authority which in any contract is left to be implied and which declined to pay them for the increased costs. Codelfa need not be expressed is sued, alleging that there was an implied term in the contract that something so obvious that afforded it a right to payment. Codelfa lost in the High Court after it goes without saying.’ it was held that such a term would not be obvious.

27 28 29 30 31 32

Ibid, 67–68. (1982) 149 CLR 600. (1996) 186 CLR 71. [1939] 2 KB 206. Ibid, 227. (1982) 149 CLR 337.

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Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Mason J at 345–347, 356: For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is  the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question. 7. Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. So in Heinmann v The Commonwealth (1938) 38 SR (NSW) 691, at p. 695 Jordan CJ, citing Bell v Lever Brothers Ltd [1931] UKHL 2; (1932) AC 161, at p. 226, stressed that in order to justify the importation of an implied term it is ‘not sufficient that it would be reasonable to imply the term … It must be clearly necessary’. To the same effect are the comments of Bowen LJ in The Moorcock (1889) 14 PD 64, at p. 68; Lord Esher MR in Hamlyn & Co v Wood & Co (1891) 2 QB 488, at pp. 491–492; Lord Wilberforce in Irwin (1977) AC, at p. 256; Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) (1918) 1 KB 592, at pp. 605–606. 8. The basis on which the courts act in implying a term was expressed by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939) 2 KB 206, at p. 227 in terms that have been universally accepted: ‘Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying …’ 9. The conditions necessary to ground the implication of a term were summarized by the majority in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40; (1977) 52 ALJR 20, at p. 26: ‘(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.’ … [T]here remains an insurmountable problem in saying that ‘it goes without saying’ that had the parties contemplated the possibility that their legal advice was incorrect and that an injunction might be granted to restrain noise or other nuisance, they would have settled upon the term implied by the Court of Appeal or that implied by the Arbitrator and by Ash J at first instance. I doubt whether the fiction of treating the parties as reasonable and fair makes the problem any the less difficult. 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 that matter might have yielded any one of a number of alternative provisions, each being regarded as a reasonable solution.

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36. The difficulty which I have with the implication of a term here is much the same as the difficulty that Lord Reid had in Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3; (1956) AC 696 in accepting that the doctrine of frustration rests on an implied term (1956) AC, at pp. 719–721. It is greater because in many situations it is easier to say that the parties never agreed to be bound in a fundamentally different situation which has unexpectedly emerged than it is to assert that in a like situation the parties have impliedly agreed that the contract is to remain on foot with a new provision, not adverted to by them, governing their rights and liabilities. 37. My reluctance to imply a term is the stronger because the contract in this case was not a negotiated contract. The terms were determined by the Authority in advance and there is some force in the argument that the Authority looked to Codelfa to shoulder the responsibility for all risks not expressly provided for in the contract. It is a factor which in my view makes it very difficult to conclude that either of the terms sought to be implied is so obvious that it goes without saying.

Clarity The implied term must be capable of clear expression.33 The rationale for this requirement is closely linked to that of obviousness: if a term is to be implied into a contract, it must be one which the parties can readily and easily identify. In Shell (UK) Ltd v Lostock Garage Ltd 34 Lostock agreed to obtain its petrol from Shell, but sought to source it elsewhere when a price war erupted. During the price war, Shell offered subsidies to some garages but not to those which Lostock operated. Lostock claimed that Shell had breached an implied term not to discriminate in terms of subsidies. The English Court of Appeal rejected this contention, as it was not capable of being formulated with ‘sufficient precision’.35

Consistency The implied term must be consistent with the other terms in the contract. It would not be possible to imply a term into a contract where that term contradicts the other terms of the contract.36 review questions 1 What are the requirements for a term to be implied by fact into a formal contract? 2 Are there any particular dangers that you can identify with regard to attempts by the courts to imply terms into contracts? If so, have these been identified in the case law?

33 34 35 36

Ansett Transport Industries v Commonwealth (1977) 139 CLR 54. [1977] 1 All ER 481. Ibid, 488. BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 284.

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13.1.2  Informal contracts The requirements for implying terms into a formal contract are more exacting than those which are required with respect to an informal contract. Where an informal contract is concerned, it is essential that the terms of that contract be ascertained before any implied terms are considered. This is because the existence or otherwise of an implied term will invariably owe its existence to an express term of a contract. In Hawkins v Clayton,37 Deane J stated: In a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, the court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case.38

The High Court has in subsequent decisions approved this statement.39 In Byrne v Australian Airlines Ltd,40 McHugh and Gummow  JJ noted also the importance of obviousness in this context.

Where an informal contract is concerned, it is essential that the terms of that contract be ascertained before any implied terms are considered. This is because the existence or otherwise of an implied term will invariably owe its existence to an express term of a contract.

• 13.2 Terms implied by custom The particular market or commercial context of certain transactions will lead to terms being implied into a contract. This arises because certain practices and customs in a market or industry are well known and have reached the level where they bind all players, new and old. In ­Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd 41 the High Court addressed this issue. Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 160 CLR 226 Gibbs CJ, Mason, Brennan, Wilson and Dawson JJ at 232: The circumstances in which trade custom or usage may form the basis for the implication of terms into a contract have been considered in many cases. The cases have established the following propositions: (1) The existence of a custom or usage that will justify the implication of a term into a contract is a question of fact: Nelson v Dahl (1879) 12 ChD 568, at p. 575. The critical

37 38 39 40 41

(1988) 164 CLR 539. Ibid, 573. See for example Byrne v Australian Airlines Ltd (1995) 185 CLR 411. (1995) 185 CLR 411, 442. (1986) 160 CLR 226.

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dependence of a finding of custom on the facts of the particular case means there is little to be gained by referring (as counsel for the appellant urged us to do) to the practices of the London marine market in the last century, notwithstanding that those practices formed the basis for the implication, in contracts of marine insurance, of a term similar to the first of the terms alternatively contended for in this case (see Power v Butcher [1829] EngR 162; (1829) 10 B & C 329, at p. 340; [1829] EngR 162; 109 ER 472, at p. 476; Xenos v Wickham (1867) LR 2 HL 296, at p. 319; Universo Insurance Company of Milan v Merchants Marine Insurance Company (1897) 2 QB 93, at pp. 95–97, 99). (2) There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract: Young v Tockassie [1905] HCA 17; (1905) 2 CLR 470, at p. 478; Summers v The Commonwealth [1918] HCA 33; (1918) 25 CLR 144, at p. 148; Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd [1973] HCA 22; (1973) 129  CLR  48, at pp. 60-61. In the words of Jessel MR in Nelson v Dahl, at p. 575, approved by Knox CJ in Thornley v Tilley [1925] HCA 13; (1925) 36 CLR 1, at p. 8: [The custom] must be so notorious that everybody in the trade enters into a contract with that usage as an implied term. It must be uniform as well as reasonable, and it must have quite as much certainty as the written contract itself.

However, it is not necessary that the custom be universally accepted, for such a requirement would always be defeated by the denial by one litigant of the very matter that the other party seeks to prove in the proceedings. (3) A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement: Summers v The Commonwealth, at p. 148; Rosenhain v Commonwealth Bank of Australia [1922] HCA 41; (1922) 31 CLR 46, at p. 53. One explanation of this principle is that, in so far as it relates to written contracts, it is simply an application of the parol evidence rule, by which extrinsic evidence is generally inadmissible to add to, vary or contradict the express terms of a contract which has been reduced to writing: Bacchus Marsh Concentrated Milk Co Ltd (in liquidation) v Joseph Nathan & Co Ltd [1919] HCA 18; (1919) 26 CLR 410, at p. 427; Hoyt’s Proprietary Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133, at pp. 143–144. A more fundamental explanation is that the presumed intention of the parties, on which the importation of the custom rests (Produce Brokers Company Limited v Olympia Oil and Cake Company Limited (1916) 1 AC 314, at p. 324; cf. Treitel, The Law of Contract (1983) 6th ed., at p. 164), must yield to their actual intention as embodied in the express terms of the contract, regardless of whether the contract is written or oral. It has sometimes been said that the implication of a term into a contract does not depend on the parties’ intention, actual or presumed, but on broader considerations: Shell UK Ltd v Lostock Garage Ltd (1976) 1 WLR 1187, at p. 1196; (1977) 1 All ER 481, at p. 487; Lister v Romford Ice and Cold Storage Co Ltd [1956] UKHL 6; (1957) AC 555, at pp. 576, 579; Liverpool City Council v Irwin [1976] UKHL 1; (1977) AC 239, at pp. 257–258. But these statements are directed to situations in which the courts have been asked to imply terms amounting to rules of law applicable to all contracts of a particular class.

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The present case is of a different kind in which it may be necessary to speak of presumed intention. In matters of this kind, that phrase means no more than that the general notoriety of the custom makes it reasonable to assume that the parties contracted on the basis of the custom, and that it is therefore reasonable to import such a term into the contract. (4) A person may be bound by a custom notwithstanding the fact that he had no knowledge of it. Historically the courts approached this question in a rather different way. It was said that, as a general rule, a person who was ignorant of the existence of a custom or usage was not bound by it. To this rule there was a qualification that a person would be presumed to know of the usage if it was of such notoriety that all persons dealing in that sphere could easily ascertain the nature and content of the custom. It would then be reasonable to impute that knowledge to a person, notwithstanding his ignorance of it (see Halsbury’s Laws of England 4th ed., vol.12, pars. 467–468; Jones v Canavan (1972) 2 NSWLR 236, at p. 243). In this way, the issue of notoriety discussed in (2) above came to be co-extensive with the question of imputed knowledge. The achievement of sufficient notoriety was both a necessary and sufficient condition for knowledge of a custom to be attributed to a person who was in fact unaware of it. The result is that in modern times nothing turns on the presence or absence of actual knowledge of the custom; that matter will stand or fall with the resolution of the issue of the degree of notoriety which the custom has achieved. The respondent’s contention that industry practices unknown to the assured are incapable of forming the basis of an implied term of the contract cannot be sustained. In order to establish a custom to the effect that a broker is alone liable to an insurer for payment of a premium on a policy of insurance, it is not sufficient to show that in the ordinary course of events the premium is paid to the insurer by the broker, nor is it sufficient to show that where a broker has failed to pay a premium the insurer makes its first demand for payment from the broker. Both circumstances are consistent with the continued liability of the assured. It is necessary to establish a clear course of conduct under which insurers do not look to the assured for payment of the premium. This may be established by proving either an absence of claims by insurers against assured, or the existence of claims directed exclusively to brokers as a practice rarely if ever departed from. Having examined the evidence of custom that was led in the present case, we do not think this requirement is satisfied. The evidence to which we shall refer shortly revealed a number of instances of insurers seeking a second payment from the assured notwithstanding that they had already paid their brokers.

• 13.3 Terms implied by law Terms are implied by law where they are suitable for a certain class or category of contracts. The implying of these terms does not depend upon the intention of the parties or the express terms of their contract; rather it is achieved by the operation of either statute or the common law. Where statutory law is concerned, terms are implied under Sales of Goods legislation into contracts for the sale of goods. With the commencement of the Australian Consumer Law, most

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of the implied terms in the Sale of Goods Acts applies to business-to-business contracts for the sale of goods. These terms often encompass such matters as fitness for purpose, merchantable quality, sale by description, sale by sample and the implied right to sell. The Australian Consumer Law contains the Consumer Guarantees regime and provides much the same implied terms with respect of consumer contracts for the sale of goods. The common law has two major implied terms. The first is the implied duty of good faith.42 This duty is well recognised at the common law, but the extent of its application is somewhat controversial, as we will see below. The second is the implied duty to cooperate. This duty is well established and effectively requires parties to take ‘reasonable’ steps to ensure that the other party gets the benefit of the contract.43 There are two requirements that must be met before a term will be implied by the law. First, the term must be capable of applying to a defined class of contracts.44 Second, the term must be suitable for that class of contracts; this requirement effectively calls for the standard of ‘necessity’.45 In Liverpool City Council v Irwin46 it was held that a landlord had an implied obligation to take reasonable care of common areas in a block of flats and that this applied in contracts of tenancy. Lord Wilberforce stated: [The stairs and lifts] are not just facilities, or conveniences provided at discretion: they are essentials of the tenancy without which life in the dwellings, as a tenant, is not possible. To leave the landlord free of obligation as regards these matters, and subject only to administrative or political pressure, is, in my opinion, inconsistent totally with the nature of this relationship. The subject matter of the lease (high rise blocks) and the relationship created by the tenancy demand, of their nature, some contractual obligations on the landlord.47

In Liverpool, the necessity of the implied term was apparent from the nature of the landlord– tenant relationship. Without the obligation on the landlord to take care of the common areas, the tenant would not have the benefit of the contract. In this sense, the requirement of necessity may be seen as being directly connected to the question of whether but for the existence of the term, would the other party—in a contractual relationship of this type—fail to get the benefit for which they had contracted. In Byrne v Australian Airlines Ltd,48 McHugh and Gummow JJ made the following comment on necessity: Many of the terms now said to be implied by law in various categories of case reflect the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined. Hence, the reference in the decisions to ‘necessity’ … This notion of ‘necessity’ has been crucial in the modern cases in which the courts have implied for the first time a new term as a matter of law.49

42 See Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 266–267. 43 Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596, 607. 44 Scally v Southern Health and Social Services Board [1992] 1 AC 294, 307. 45 See Byrne v Australian Airlines Ltd (1995) 185 CLR 410; Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468, 487. 46 [1977] AC 239. 47 Ibid, 254. 48 (1995) 185 CLR 410. 49 Ibid, 450.

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In this regard, necessity is tied to the notion that a particular term must be implied in order to preserve the bargain that the parties have struck between themselves.

13.3.1  The implied duty of good faith No other term in contract law has caused so much ink to be spilled as the implied duty of good faith. In fact, an exceptional body of academic literature has developed that has examined the various issues relating to good faith.50 Broadly speaking, the major controversy at present is whether good faith is an implied term in all commercial contracts, including those between very large and sophisticated commercial entities.51 There is a very significant issue at play here as to whether the basis for the implications comes from The major controversy law or from the facts. The state Supreme Courts have been quite at present is whether good faith is an implied willing to recognise the existence of an implied term of good faith. term in all commercial However, it has quite often been somewhat unclear as to whether contracts, including those the implied term of good faith is derived from law or from fact.52 between very large and sophisticated commercial Further, as will be outlined below, there has been some judicial entities. scepticism as to whether good faith should be implied in law between sophisticated commercial parties. The central problem may well be that the High Court is yet to endorse the implied term of good faith, although (as noted above) the implied duty is well established at common law by the state Supreme Courts.53 The High Court in Royal Botanic Gardens and Domain Trust v South Sydney Council 54 declined to either endorse or reject the implied duty of good faith, though Kirby J did note that: in Australia, such an implied term appears to conflict with fundamental notions of caveat emptor that are inherent (statute and equitable intervention apart) in common law conceptions of economic freedom. It also appears to be inconsistent with the law as it has developed in this country in respect of the introduction of implied terms into written contracts which the parties have omitted to include.55

The following section surveys the development of the implied duty of good faith in Australian contract law and addresses the key uncertainty of the basis for the term as an implication derived from law. 50 See for example A Mason, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 Law Quarterly Review 66; The Hon Mr Justice Steyn, ‘The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy’ (1991) 6 Denning Law Journal 131; H K Lucke, ‘Good Faith and Contractual Performance’ in P Finn, ed., Essays on Contract, The Law Book Co Ltd (1987), pp. 155–182; T Carlin, ‘The Rise (and Fall?) of Implied Duties of Good Faith in Contractual Performance in Australia’ (2002) 25 University of New South Wales Law Journal 99; J Carter and E Peden, ‘Good Faith in Australian Contract Law’ (2003) 19 Journal of Contract Law 155. 51 See Burger King Corporation v Hungry Jack’s Pty Ltd (2001) NSWCA 187. For a contrary view, see Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228. 52 See Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; see also B Dixon, ‘Good Faith in Contractual Performance and Enforcement—Australian Doctrinal Hurdles’ (2011) 39 Australian Business Law Review 227, 235. 53 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 266–267; Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [68]–[71]; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477, [133]–[134]. 54 (2002) 186 ALR 289. 55 Ibid, 312.

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The development of the implied duty of good faith When two parties enter into a contract with each there is without doubt an assumption that each party is self-interested. Nonetheless, the fact that the parties have reached an agreement suggests that there is at least some point of mutual self-interest and that the contract will yield some shared benefits. If one party were to act so as to undermine the entire agreement and to deprive the other party of the benefit that they had clearly sought to obtain, there would have been little point in the injured party entering into the contract in the first place. The implied duty of good faith seeks to address this problem. In Renard Constructions (ME) Pty Limited v Minister for Public Works,56 a principal under a building contract sought to rely on a ‘show cause procedure’ clause against a contractor. Under the clause, if the contractor failed to demonstrate adequate grounds for a default the principal could penalise the contractor by either cancelling the contract or taking over the whole or part of the work remaining under the contract. The contractor failed to get certain work done in time. However, this default was in part attributable to the principal. The majority of the New South Wales Court of Appeal implied a duty in fact or law that the principal must act in good faith and reasonably. Priestly JA stated: The result is that people generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.57

The opinion of Priestley JA in Renard was wholeheartedly endorsed by the New South Wales Court of Appeal in Burger King Corp v Hungry Jack’s Pty Ltd.58 In that case the Burger King Corporation entered into four agreements with Hungry Jacks. In the contractual relationship between the parties, Burger King was the franchisor and Hungry Jacks was the Australian franchisee. Under the one of the agreements Hungry Jacks was required to develop at least four restaurants per year. In order to do this Hungry Jacks would have to recruit third-party franchisees, usually small business owners, to open up new Hungry Jacks restaurants in different parts of Australia. However, Burger King decided that it wanted to enter into the Australian market in its own right. As a result, Burger King put in place a freeze on Hungry Jacks’ ability to recruit third-party franchisees and it withdrew financial and operational approval. In effect, this meant that Hungry Jacks could not develop any further restaurants. Burger King then served termination notices on Hungry Jacks. When the dispute came before the New South Wales Supreme Court, Hungry Jacks won at first instance and in the Court of Appeal. The Court of Appeal held that Burger King’s actions had ‘effectively put an end to HJPL’s valuable development rights under the Development Agreement for reasons which could not be justified on the facts if they were accurately ascertained’.59 As noted above, for a term to be implied in law two particular elements must be satisfied. The first is that the implication must apply to a particular class of contracts. The second is that the implication must be necessary for contracts of that class. The particular difficulty that emerges 56 57 58 59

(1992) 26 NSWLR 234. Ibid, 268. [2001] NSWCA 187. Ibid, [177].

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from the jurisprudence that addresses the implied duty of good faith is that in the pivotal decisions of Burger King Corp v Hungry Jack’s Pty Ltd 60 and Alcatel Australia Ltd v Scarcella61 the New South Wales Court of Appeal did not expressly state that the implied term of good faith was to be implied into all commercial contracts as an implication made at law. Nonetheless, a close reading of the Court of Appeal’s decision in Burger King suggests that the Court viewed commercial contracts as being a class of contracts to which the duty of good faith should be implied. In Burger King the Court of Appeal stated: A review of cases since Alcatel indicates that courts in various Australian jurisdictions have, for the most part, proceeded upon an assumption that there may be implied, as a legal incident of a commercial contract, terms of good faith and reasonableness.62

In the preceding paragraph, the Court cited favourably the obiter remarks of Finn J in Hughes Aircraft Systems International v Airservices Australia,63 where his Honour stated that a ‘more open recognition [of an implied term of good faith] in our own contract law is now warranted’.64 The Court of Appeal noted that Finn J in Hughes was ‘pointedly’ disagreeing with the view expressed by Gummow J in Service Station Association Limited v Berg Bennett & Associates Pty Ltd,65 where his Honour stated that a ‘leap of faith’ was required to use the existing rules of equity and the common law so as to create ‘a new term as to the quality of contractual performance implied by law’.66 If the Court of Appeal’s discussion of good faith in Burger King 67 is read as a whole, there is reason to believe that the Court intended for the duty of good faith to be implied into commercial contracts.68 Certainly, subsequent courts have relied on Burger King to found a duty of good faith in commercial contracts as an implication of law.69 From the discussion above, it is apparent that there are two points of controversy in the debate over good faith. The first concern is the basis for the implication at law, and the second—and intimately related—concern is whether commercial contracts are a class of contract into which the term of good faith must necessarily be implied. On the first point there has been some strong academic criticism from Professor Peden as to the basis of the implication.70 One suggestion that Professor Peden has made is that a construction-based approach to good faith might be preferable.71 This approach has drawn criticism from the judiciary in Vodafone Pacific Ltd v Mobile

60 Ibid. 61 (1998) 44 NSWLR 349. 62 [2001] NSWCA 187, [159]. 63 (1997) 76 FCR 151. 64 Ibid, 192, cited with approval by the Court of Appeal: [2001] NSWCA 187, [158]. 65 (1993) 45 FCR 84, 96. 66 Ibid, 96. 67 [2001] NSWCA 187, [141]–[168]. 68 See in particular the Court of Appeal’s reasoning at [2001] NSWCA 187, [155]–[164]; but contrast [2001] NSWCA 187, [165]–[167], which seems to fall short of implying the term into all commercial contracts. 69 See Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635; State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503; Overlook v Foxtel (2002) Aust Contracts Rep 90-143; Commonwealth Bank of Australia v Spira (2002) 174 FLR 274; Commonwealth Development Bank of Australia Ltd v Cassegraine [2002] NSWSC 965; Softplay v Perpetual [2002] NSWSC 1059. 70 See E Peden, Good Faith in the Performance of Contracts, Butterworths (2003); E Peden, ‘When Common Law Trumps Equity: The Rise of Good Faith and Reasonableness and the Demise of Unconscionability’ (2005) 21 Journal of Contract Law 226; see also E Peden, ‘Implicit Good Faith—Or Do We Still Need an Implied Term of Good Faith?’ (2009) 25 Journal of Contract Law 50. 71 E Peden, Good Faith in the Performance of Contracts, Butterworths (2003), p. 39.

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Innovation Ltd 72 and Insight Oceania Pty Ltd v Philips Electronics Australia Ltd.73 Nonetheless, while there is a vagueness in the judicial approaches to implying the term of good faith, at least there appears to be some uncertainty as to whether good faith applies to all commercial contracts, and confining the implication to being a question of fact would have the advantage of certainty with respect of the approach to implying the term. However, in Central Exchange Ltd v Anaconda Nickel Ltd,74 Steytler J noted that ‘the preference for the implication as a matter of law is … due to the difficulty of complying with the criteria for an implication in fact’ as laid out in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council 75 or in those situations where the contract is uncertain or incomplete. As noted, there has been some judicial concern that the implied term of good faith is not suitable with respect to contracts between large commercial entities on the basis that such entities are sufficiently strong and sophisticated to protect themselves. In Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL,76 Warren CJ in the Victorian Court of Appeal qualified her acknowledgment of good faith by adding a caution with respect of large commercial entities: It is apparent that there are two points of controversy in the debate over good faith. The first concern is the basis for the implication at law, and the second—and intimately related— concern is whether commercial contracts are a class of contract into which the term of good faith must necessarily be implied.

Ultimately, the interests of certainty in contractual activity should be interfered with only when the relationship between the parties is unbalanced and one party is at a substantial disadvantage, or is particularly vulnerable in the prevailing context. Where commercial leviathans are contractually engaged, it is difficult to see that a duty of good faith will arise, leaving aside duties that might arise in a fiduciary relationship. If one party to a contract is more shrewd, more cunning and out-manoeuvres the other contracting party who did not suffer a disadvantage and who was not vulnerable, it is difficult to see why the latter should have greater protection than that provided by the law of contract.77

Similarly, Buchanan JA stated: I am reluctant to conclude that commercial contracts are a class of contracts carrying an implied term of good faith as a legal incident, so that an obligation of good faith applies indiscriminately to all the rights and power conferred by a commercial contract. It may, however, be appropriate in a particular case to import such an obligation to protect a vulnerable party from exploitive conduct which subverts the original purpose for which the contract was made. Implication in this fashion is perhaps ad hoc implication meeting the tests laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings, rather than implication as a matter of law creating a legal incident of contracts of a certain type.78

If the concerns of the Victorian Court of Appeal are heeded by other courts, then there should be substantial doubt as to whether good faith can apply to all commercial contracts. The 72 [2004] NSWCA 15 [206]. For Professor Peden’s response, see Peden, ‘When Common Law Trumps Equity: The Rise of Good Faith and Reasonableness and the Demise of Unconscionability’ (2005) 21 Journal of Contract Law 226. 73 [2008] NSWSC 710, [173]. 74 [2002] WASCA 94, [52]. 75 (1977) 180 CLR 266. 76 [2005] VSCA 228. 77 Ibid, [3]. 78 Ibid, [25].

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remarks of Warren CJ and Buchanan JA seem to draw on the notion of caveat emptor, at least in relation to large sophisticated commercial entities. There is much to commend this approach to the question of good faith. A similar skepticism as to whether large commercial entities need legal protection from harsh dealings can be found in cases concerning estoppel and statutory unconscionability.79 In Austotel Pty Ltd v Franklins Selfserve Pty Ltd,80 Kirby P stated: courts should, in my view, be wary lest they distort the relationships of substantial, welladvised corporations in commercial transactions by subjecting them to the overly tender consciences of judges.81

There can be no doubt that large, sophisticated commercial entities are clever enough to fend for themselves and to recover when they suffer losses due to the harsh dealings of their trading partners. However, the good faith duty has a logical basis in the bargain theory of contract. Why should a contracting party be allowed to say and do everything to entice another party to enter into a contract, and then be allowed to do everything they can to undermine the basis of that agreement and walk away from their conduct unscathed, simply because the other party was a large commercial entity? The type of conduct at issue in Burger King 82 is an anathema to commercial dealings. To restrain good faith from having even some limited application in commercial contracts may well be to allow unproductive and wasteful commercial conduct to go unchecked. Notwithstanding the issue of the existence of the implied duty of good faith, the next most crucial issue is the actual content of such a duty. In his 1993 Cambridge Lecture, Sir Anthony Mason defined ‘good faith’ as consisting of both ‘loyalty to the promise’ and ‘excluding bad faith behaviour’.83 This formulation of good faith has been applied by the New South Wales Supreme Court in Alcatel Australia Ltd v Scarcella,84Burger King Corporation v Hungry Jack’s Pty Ltd,85Overlook Management BV v Foxtel Management Pty Ltd 86 and United Group Rail Services Ltd v Rail Corporation of New South Wales.87 Other state Supreme Courts have recognised the existence of good faith and adopted the Mason formulation.88 Good faith has also been defined as either solely excluding bad faith89 or comprising loyalty to the contract.90

79 See Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582; ACCC v Samton Holdings Pty Ltd [2000] 1725; see also Qantas Airways Ltd v Dillingham Corporation Ltd (Unreported, NSW SC, 8 April, 1987) per Rogers J: ‘for a successful and wealthy international conglomerate to appeal to the safeguards the law provides for the elderly, the illiterate and the financially oppressed is to move into a totally inappropriate field of discourse’. 80 (1989) 16 NSWLR 582. 81 Ibid, 586. 82 Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558: see above. 83 Sir Anthony Mason, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 Law Quarterly Review 66, 69. 84 (1998) 44 NSWLR 349, 368. 85 (2001) 69 NSWLR 558, [169]–[173]. 86 [2002] NSWSC 17, [64]–[65]. 87 (2009) 74 NSWLR 618, [70]. 88 See for example Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33; Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASC 160. 89 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 266–267; Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [68]–[71]; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477, [133]–[134]. 90 South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541, [426].

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While good faith is not a term of art,91 its meaning will depend on the context and contract in which it is employed.92 Accordingly, the term ‘good faith’ must be given a meaning that a reasonable person would understand it to mean within the particular contractual context within which it is suggested that the term must be implied.93 This might well include having regard to the contract as a whole.94 There is a crucial limitation upon good faith in that the obligation does not prohibit a party from acting in its own legitimate self-interest.95 However, it does restrain a party from acting so as to unreasonably interfere with the benefit that the other party contracted to enjoy with the effect of rendering the bargain ‘nugatory’ or ‘seriously undermined’.96 review questions 1 What is good faith? 2 Why has the implied term of good faith been controversial?

13.3.2  The implied duty to cooperate An implied duty to cooperate exists in all contracts and extends to each party, allowing the other to have the benefit of the contract.97 That benefit, as properly defined, is cooperation and negotiation towards achieving a benefit for which each party has contracted and of which the other has knowledge under the contract.98 As Mason J noted in Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd,99 the obligation encompasses acts that ‘are necessary to entitle the other contracting party to a benefit under the contract’. The following extract from Secured Income outlines the scope of the implied term. Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596 Mason J at 607: But it is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract. As Lord Blackburn said in Mackay v Dick (1881) 6 App Cas 251, at p. 263: as a general rule … where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both

91 92 93 94 95 96 97

98 99

Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASC 222, [47]. United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618, [70]. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165. Australian Broadcasting Commission v Australian Performing Right Association Limited (1973) 129 CLR 99, 109. South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541, [426]; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, 369–370. Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [65]. Butt v M’Donald (1896) 7 QLJ 68, 70–71; Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596, 607; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 137–138; Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635, 647; Idoport Pty Ltd v National Australia Bank [1999] NSWSC 828, [217]–[218]; Concrete Pty Ltd v Parramatta Design and Developments Pty Ltd [2006] HCA 55, [14]. Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596, 607. Ibid, 607.

Chapter 13

Implied terms

concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.

26. It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith CJ said in Butt v M’Donald (1896) 7 QLJ 68, at pp. 70–71: It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.

27. It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party’s obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.

The implied duty to cooperate is confined to obligations that are enforceable under the contract.100 In contrast, there is an implied duty of ‘best efforts’ with respect of discretionary obligations.101

Ke y p o in ts for re v ision Terms may be implied into a contract by fact, law or custom. There are five requirements for a term to be implied by fact: (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 will be 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 terms of the contract. Terms may be implied by the common law or by statute. There are two requirements for terms implied by law. The first is that the term must be capable of applying to a defined class of contracts. The second is that the term must be suitable for that class of contracts. Terms may be implied by custom owing to the nature of a particular industry or market.

100 Australis Media Holdings Pty Ltd v Telstra Corporation (1998) 43 NSWLR 104, 124. 101 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 63.

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problem-solving practice Johann enters into a contract for the lease of office space, in a building that he owns, to Lisa. Under the contract, Lisa’s company will rent the tenth floor of the office building. The subject matter of the lease concerns the office spaces only. Six months after Lisa and her company move in, the elevator stops working. Johann refuses to fix the elevator. There is no clause in the lease that applies to this situation. Lisa’s clients are struggling to come and see her company as there is no working elevator. Is Johann in breach of an implied term of the lease?

ANSWER This raises a question of whether a term can be implied in fact. The facts of this matter are similar to those in Liverpool City Council v Irwin, in that the facility that needs to be used is essential to the proper operation of the lease agreement. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings, the Privy Council addressed the question of implied terms of fact. The Privy Council held that there are five requirements for a term to be implied by fact: (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 will be 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 terms of the contract. In this case it would be reasonable and equitable for Johann to fix the lift as this would allow Lisa to gain the benefit of the contract. Her enjoyment of the lease is obviously being curtailed if her clients cannot easily come to see her company. Such a term is necessary to give business efficacy to the lease. The lease was clearly negotiated in a given commercial environment. It is obvious that the premises must be accessible. The term of fixing the lease is capable of clear expression. It does not appear to contradict an express term. Accordingly, a term may be implied into the contract requiring Johann to fix the elevator.

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14

Privity of contract

Chapt e r o v e rv i e w 14.0

Introduction  240

14.1

The development of the privity rule   240

14.2

Privity of contract   243 14.2.1 Privity and the doctrine of consideration   245

14.3

Remedies  247 14.3.1 Damages at common law   248 14.3.2 Remedies in equity   251 Trusts  254

14.4

Trident v McNiece   256

14.5

Exceptions to the privity rule   267

14.6

Third party beneficiaries and exclusion clauses   268

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• 14.0 Introduction This chapter discusses the privity doctrine; in particular, it canvasses the various circumstances under which exceptions to the privity rule are warranted. At the end of this chapter you should have a clear understanding of the concept of privity of contract, as well as the situations under which it might be desirable to limit the operation of the privity rule. The doctrine of privity exists as a consequence of both the bargain theory of contract law and the rules of formation.1 It is underpinned by the same considerations that support the doctrine of consideration.2 There are two fundamental propositions that are central to the doctrine of privity. These are that one who is a stranger to the consideration cannot be said to have accepted any obligations or to have become entitled to any of the benefits of the contract.3 In this manner, the doctrine reflects the fundamental principle that a contract only imposes obligations and benefits upon those who are immediate parties to the agreement.4 Any right of enforcement would only vest in the parties. This is the rule of privity of contract. Privity has emerged as a rule that exists because other rules of contract law exist, namely those of formation, and because of its consistency with the underlying theory of contract law: bargain theory. Sir Anthony Mason has written: The privity rule accordingly gives expression to the notion that the legal conception of a contract is that it is a bargain between the parties to it and that it creates rights and obligations only as between the parties to it. The rule rests primarily on a legal conception rather than on any functional or policy consideration, the legal conception itself embracing the idea that a person who makes a promise is accountable at law to the person to whom it is made and not to anyone else.5

• 14.1 The development of the privity rule It is well worth considering the historical development of the privity rule, as this will demonstrate both its rationale and its entrenchment in contract law. The historical development of the doctrine has not been uncontroversial.6 In the time before the common law acknowledged the rules of formation, privity was not a barrier to third parties seeking benefits under a contract.7 In the seventeenth-century case of Dutton v Poole,8 for example, the absence of privity did not 1 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847; see also Chapter 2. 2 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70; Midland Silicones Ltd v Scruttons Ltd [1962] AC 446; Beswick v Beswick [1968] AC 58; see also Chapter 5. 3 Tweddle v Atkinson (1861) IB & S 393; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460. 4 See Tweddle v Atkinson (1861) IB & S 393; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; see also Sir Anthony Mason, ‘Privity—A Rule in Search of Decent Burial’ in Peter Kincaid, Privity: Private Justice or Public Regulation, Ashgate (2001), pp. 88–103, 90. 5 Sir Anthony Mason, ibid, pp. 88–103, 90. 6 See for example the attempts of Lord Denning MR to overrule the doctrine in both the House of Lords and the Court of Appeal, sparking a lively judicial debate: Smith v River Douglas Catchment Board [1949] 2 All ER 179, 188; Drive Yourself Hire Co (London) Ltd v Strutt [1953] 2 All ER 1475; Beswick v Beswick [1966] 3 All ER 1, 7; see also Robert Flanigan, ‘Privity—The End of an Era (Error)’ (1987) 103 Law Quarterly Review 564, 572–575. 7 Dutton v Poole (1678) 85 ER 523. 8 Ibid.

Chapter 14

Privity of contract

stop the King’s Bench from finding that a brother owed an obligation to his sister, even though she was a stranger to the contract between the brother and their father.9 However, the courts of the common law soon left Dutton v Poole behind as the rules of contract law and theories of obligation developed.10 It has been suggested that the decision in Dutton v Poole weakened rather than strengthened the position of third parties because the right of action was based on the ‘familial nearness of relationship between the third party and the promisee’.11 Indeed, in the centuries that followed, the position of third party beneficiaries—inadequately safeguarded by the decision in Dutton v Pool —was challenged as the doctrine of privity struggled to establish itself in the seventeenth, eighteenth and nineteenth centuries. In the case of Bourne v Mason,12 which was in fact decided prior to Dutton, it was held that a third party was a ‘mere stranger to the consideration’. However, in Pigott v Thomson13 and Carnegie v Waugh14 the courts upheld the rights of third party beneficiaries. In contrast, in Price v Easton15 the Court held that a third party was not entitled to sue upon a contract. In Tweddle v Atkinson16 the controversy was settled in favour of privity. Wightman J stated that ‘no stranger to the consideration can take advantage of a contract, although made for his benefit’.17 The rule was again affirmed by Viscount Haldane LC in Dunlop Pneumatic Tyre Company, Limited v Selfridge and Company, Limited.18 Viscount Haldane LC stated: My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor’s request. These two principles are not recognized in the same fashion by the jurisprudence of certain  Continental countries or of Scotland, but here they are well established. A third proposition is that a principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again, in order to entitle him so to sue, he must have given consideration either personally or through the promisee, acting as his agent in giving it.19

This rule has proved inconvenient at times, as aptly demonstrated by the facts in Coulls  v Bagot’s  Executor & Trustee Co Ltd,20 which is discussed below.21 It is very clear that the doctrine 9 In Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460, 498–499, Windeyer J suggested that Dutton v Poole rested on an expansive view of the doctrine of consideration. 10 See Tweddle v Atkinson (1861) IB & S 393; 121 ER 762. 11 Robert Flanigan, ‘Privity—The End of an Era (Error)’ (1987) 103 Law Quarterly Review 564, 570–571. 12 [1726] 86 ER 5. 13 [1802] 127 ER 80. 14 (1823) 1 LJ (KB) 89. 15 [1833] 110 ER 518. 16 (1861) IB & S 393; 121 ER 762. 17 Ibid, 764. 18 (1915) AC 847. 19 Ibid, 853. 20 (1967) 119 CLR 460. 21 See below, section 14.2.1.

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Outside the doctrinal concerns of contract law, the utility of the privity rule is of dubious value. This is particularly true in a commercial context where third parties are in existence and are directly contemplated by the immediate contracting parties.

of privity has the potential to cause serious injustices where third party beneficiaries are concerned. Those justifications that do exist  with respect of the doctrine of privity relate primarily to internal coherency within the doctrines of contract law, rather than to any social or economic concerns. Outside the doctrinal concerns of contract law, the utility of the privity rule is of dubious value. This is particularly true in a commercial context where third parties are in existence and are directly contemplated by the immediate contracting parties. With the comparatively recent development of the doctrine of privity, at least from the standpoint of the centuries-old traditions of English law, Professor Atiyah has written:

There is a sense in which the new doctrine of privity was an important development in the law at a time of increasing complexity in multilateral commercial relationships. The appearance of middlemen in all sorts of commercial situations served to separate the parties at either end of the transaction, and it was generally accepted that no privity existed between them. Economically, this may have served a useful purpose, in that it encouraged the development of a more market-based concept of enterprise liability. But on some occasions the results were not only economically dubious but socially disastrous.22

The courts of England and Australia have not been unaware of the adverse implications of the privity doctrine. Lord Diplock once famously remarked that the doctrine was ‘an anachronistic shortcoming that has for many years been regarded as a reproach to English private law’.23 Similarly, Lord Reid in Beswick v Beswick24 suggested that if there was a long delay in legislative action, then the courts might have to review the doctrine of privity.25 Lord Scarman also queried whether a review might be required of the jurisprudence that ‘stand[s] guard over an unjust rule’.26 Lord Steyn in Darlington Borough Council v Wiltshire Northern Ltd 27 endorsed this view. It is thus unsurprising that the courts have on occasion either sought to find exceptions to the privity rule or to evade the doctrine altogether. However, as Lord Reid noted in Scruttons Ltd v Midland Silicones,28 these well-established exceptions may in fact be the result of the interaction between the doctrine of privity and other well-established doctrines. One of the most famous attempts to overrule the doctrine of privity was that engineered by Lord Denning MR in the House of Lords and the Court of Appeal. In a series of cases, Lord Denning attacked the basis of the privity doctrine.29 His attempts in the Court of Appeal met with a stern rebuff from the House of Lords, to the extent that in Beswick v Beswick, where Lord Denning had stated his opinion in the Court of Appeal, counsel for the plaintiff sought not to 22 23 24 25 26 27 28 29

P S Atiyah, The Rise and Fall of Freedom of Contract, Clarendon Press (1979), pp. 413–414. Swain v The Law Society [1983] 1 AC 598, 611. [1968] AC 58, 72. Lord Reid’s concerns were eventually answered in part by the passage in the UK of the Contracts (Right of Third Parties) Act 1999. Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277, 300. [1995] 3 All ER 895. [1962] AC 462. Smith v River Douglas Catchment Board [1949] 2 All ER 179, 188; Drive Yourself Hire Co (London) Ltd v Strutt [1953] 2 All ER 1475; Beswick v Beswick [1966] 3 All ER 1, 7.

Chapter 14

Privity of contract

press his argument before the House of Lords.30 Nonetheless, the House of Lords made their disagreement with Lord Denning quite plain and the doctrine of privity remained. Lord Reid in Scruttons Ltd v Midland Silicones engineered a four-part test based on agency law that confined the privity rule and provided a benefit to stevedores and other third parties who might be benefited by the terms contained in a bill of lading. This test could not be immediately applied in Scrutton. However, the test remedied a situation where the doctrine of privity was increasingly out of step with the commercial realities of the shipping industry.31 The test developed by Lord Reid was applied by the Privy Council in New Zealand Shipping Co Ltd v A M Satterthwaite; ‘The Eurymedon’.32 It has been further applied in the UK and Australia, and demonstrates the peculiar vulnerability of the privity rule when confronted with other doctrines of general commercial law.33 In Australia, the most famous case to consider the doctrine of privity is the High Court’s decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd.34 In Trident, a majority of the High Court criticised and circumvented the privity doctrine on various grounds. The result of Trident is that the future of the doctrine of privity in Australia is uncertain; though, it cannot be said that the doctrine has been vanquished because at best only three judges from the majority in Trident can be cast as seeking to overturn the doctrine of privity.35

• 14.2 Privity of contract Let us assume that Person A enters a contract with Person B so that the latter will build a house for the benefit of Person C. Person A and Person C might be related, and it may be the heartfelt wish of Person A that Person C has and enjoys the benefit of a house. So to achieve that end, Person A—who has the money to pay for the building of the house—must contract with Person B. It might well be that Person C, though very deserving, lacks the financial capacity to pay for the building of their own house. Accordingly, Person C is quite dependent upon Person B to ensure that the house is built. If Person A pays the money but then dies, Person C will be relying upon Person B to build the house. But what can Person C do if Person B refuses to build the house? Under the doctrine of privity, Person C is a stranger to the consideration in the contract between Person A and Person B.36 This means that there is not an enforceable contract between Person C and Person B.

30 See J Crawford, ‘Third Party Rights—Two Recent Cases’ (1968) 3(2) The Adelaide Law Review 260, 261: ‘It is first of all quite clear that C cannot himself sue at common law for the promisor’s breach of contract. That this proposition is even necessary to state since the case of Midland Silicones v Scruttons is due to the amazing but unfortunately fruitless efforts of Lord Denning. In this case [Beswick v Beswick] he allowed Mrs Beswick to recover in her personal capacity at common law: nevertheless it appears that her counsel conceded before the House of Lords that the point was untenable. In such summary manner is the learned Master of the Rolls dismissed!’ 31 See below, section 14.6. 32 [1975] AC 154. 33 See for example Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon Pty Ltd (The New York Star) (1978) 139 CLR 231 (HC); (1980) 144 CLR 300 (PC). 34 (1988) 165 CLR 107: see below, section 14.4. 35 See Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363, 368. 36 Tweddle v Atkinson (1861) IB & S 393; 121 ER 762; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460.

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The contract that exists between Person A and Person B can be enforced by either party.37 But it cannot be enforced by Person C as they are neither bound by the contract nor able to enforce it.38 The rule pertaining to third party beneficiaries is derived from the doctrine of consideration. As has been discussed in Chapter 6, consideration makes promises enforceable.39 Moreover, consideration must move from the promisee to the promisor. Having provided no consideration for any promise, and not having been a direct party to the bargain, the third party lacks a basis in contract law to enforce a promise that has been made to another person.40 41 In Tweddle v Atkinson a contract was made between William Guy and Tweddle’s father. Both Guy and Tweddle’s father promised to pay Tweddle a sum of money after his marriage to Guy’s daughter. It was agreed between the parties to the contract that Tweddle could sue on the contract. Guy subsequently died without having paid any money to Tweddle. Tweddle then sued Atkinson, who was Guy’s executor. The Court found that Tweddle could not enforce the contract as he was a stranger to the consideration. Just as the contract cannot confer an enforceable benefit upon the third party, it cannot create any obligations for a third party. This principle was affirmed in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd.42 Dunlop contracted with Dew & Co for the sale of tyres on the basis that the latter would not sell Dunlop’s tyres below the list price, and that they would bind any subsequent reseller to the same terms. Dew & Co sold the tyres to Selfridge & Co, which then sold them below the list price despite expressly agreeing to observe the list price. Dunlop sued Selfridge & Co. The Court held that as Selfridge was not privy to the original contract, it was not bound by any of its terms.43 The famous ratio of Viscount Haldane LC, quoted above,44 affirmed that the doctrine of privity was fundamental to English law. The fact that the contract cannot be enforced by the third party does not render the agreement ineffective—a contract that seeks to confer a benefit upon a third party is effective both in law and equity. In Cathels v Commissioner of Stamp Duties45 a man took out an aircraft accident insurance policy covering death and injury. He named his wife as a beneficiary and paid the premium by himself. The man and his wife were subsequently killed in an aircraft accident. The insurer made payment to the wife’s executors. The man’s executors challenged the payment on the grounds of privity, but the New South Wales Supreme Court held that the wife’s executors were entitled to retain the money. Even in the absence of privity, once the contract had been performed it was effective. Having provided no consideration for any promise, and not having been a direct party to the bargain, the third party lacks a basis in contract law to enforce a promise that has been made to another person.

37 See Cathels v Commissioner of Stamp Duties (1959) 79 WN (NSW) 271. 38 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847. 39 See Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424; Beaton v McDivitt (1987) 13 NSWLR 162. 40 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460, 478 per Barwick CJ. 41 (1861) IB & S 393; 121 ER 762. 42 [1915] AC 847. 43 Ibid, 854, 855–856. 44 See above, section 14.1. 45 (1959) 79 WN (NSW) 271.

Chapter 14

Privity of contract

14.2.1  Privity and the doctrine of consideration It cannot be doubted that the privity doctrine can operate in ways that create unfairness and inconvenience. In the scenario above, even in Person A were still alive, if they were unwilling to sue then Person C would have no means of redress. The justification for denying Person C any means of redress under the contract is that they have provided no consideration for the contract. There has been some debate as to whether the doctrines of privity and consideration are two separate doctrines or whether they are in fact different expressions of the same proposition. As Barwick CJ noted in Coulls v Bagot’s Executor and Trustee Co Ltd,46 ‘questions of consideration and of privity are not always kept distinct’. Coulls v Bagot’s Executor and Trustee Co Ltd illustrates the harshness of the privity doctrine and the importance of consideration. Mr Coulls entered into a contract with O’Neil Constructions which gave O’Neil the right to quarry stone from Mr and Mrs Coulls’ property. Under the contract, O’Neil was required to pay both Mr and Mrs Coulls as joint tenants. Eighteen months after the contract had commenced Mr Coulls died. In his will Coulls had appointed Bagot’s Executor and Trustee Co as his executors. O’Neil Constructions continued to pay Mrs Coulls, but Bagot’s queried whether the payments were appropriate. The majority of the High Court47— Taylor, Owen and McTiernan JJ—found that the contract was between Mr Coulls and O’Neil Constructions alone. As such, Mrs Coulls was a stranger to the contract and was not entitled to payment direct from O’Neil Constructions. The minority of Barwick CJ and Windeyer J dissented on the grounds that Mr and Mrs Coulls were joint promisees.48 Below are extracts from the dissenting but very influential judgment of Barwick CJ in Coulls v Bagot’s Executor and Trustee Co Ltd. While the decision of Barwick CJ in this instance rests on the specific facts of the case, and as such could not be hoped to generate much traction in the overall development of privity law, it was noted in several subsequent judgments here in Australia and in the UK. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 Barwick CJ at 478–479: It must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligations. For my part, I find no difficulty or embarrassment in this conclusion. Indeed, I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another. But that does not mean that it is not possible for that person to obtain the benefit of a promise made with another for his benefit by steps other than enforcement by himself in his own right: see the recent case of Beswick v Beswick (1966) Ch 538. I  would myself, with great respect, agree with the conclusion that where A promises B for a consideration supplied by B to pay C then B may obtain specific performance of

46 (1967) 119 CLR 460, 478. 47 Note that only five justices sat in this case. 48 Ultimately, O’Neil Constructions was directed to pay Bagot’s and Mrs Coulls received her interest as a beneficiary under the will.

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A’s promise, at least where the nature of the consideration given would have allowed the debtor to have obtained specific performance. I can see no reason whatever why A in those circumstances should not be bound to perform his promise. That C provided no part of the consideration seems to me irrelevant. Questions of consideration and of privity are not always kept distinct. Indeed, on some occasions when lack of privity is the real reason for not allowing a plaintiff to succeed on a promise not made with him, an unnecessary and irrelevant reason is given that the plaintiff was a stranger to the consideration; that is to say, that he was not merely not a party to the agreement but was not a party to the bargain. In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1; (1915) AC 847 privity was not lacking because it was assumed, but the promise made by the defendant to the plaintiff was as between them gratuitous. But in this case whether the promise was made by the company to the deceased alone or to the deceased and the respondent, it was not as between promisor and promisee a gratuitous promise. 32. But as I construe this writing, we have here not a promise by A with B for consideration supplied by B to pay C. It was, in my opinion, a promise by A made to B and C for consideration to pay B and C. In such a case it cannot lie in the mouth of A, in my opinion, to question whether the consideration which he received for his promise moved from both B and C or, as between themselves, only from one of them. His promise is not a gratuitous promise as between himself and the promisees as on the view I take of the agreement it was a promise in respect of which there was privity between A on the one hand and B and C on the other. Such a promise, in my opinion, is clearly enforceable in the joint lifetime of B and C: But it is only enforceable if both B and C are parties to the action to enforce it. B, though he only supplied the consideration, could not sue alone. If C were unwilling to join in the action as plaintiff, B no doubt, after suitable tender of costs, could join C as a defendant. And A’s promise could be enforced. But the judgment would be for payment to B and C. If B would not join in an action to enforce A’s promise, I see no reason why C should not sue joining B as a defendant. Again, in my opinion, A’s promise would be enforced and a judgment in favour of B and C would result. In neither of these cases could A successfully deny either privity or consideration. I find nothing in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1; (1915) AC 847 to suggest that he could. 33. Upon the death of one of the joint promisees the promise remains on foot and remains enforceable but it is still the same promise given to B and C though, because of the death of one and the right of survivorship, the promise is now to pay the survivor. C, it seems to me, being the survivor, may enforce the promise by an action to which both B’s estate and C are parties. However, C could not, in any event, in my opinion, be the sole plaintiff against A because A’s promise was not made with C alone. Consequently, B’s personal representative would need to be either a co-plaintiff or joined as a defendant, though in this case the judgment would be for C alone, the promise with B and C being to pay the survivor of them: see Attwood v Rattenbury (1822) 6 Moo CP 579, at p. 584 (23 RR 633, at p. 636).

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The decision of Barwick CJ in Coulls, and to some extent that of Windeyer J, is most curious in that he held fast to the precedents established in Tweddle49 and Dunlop,50 stating that he found nothing strange in the rule that they establish, yet toiled manfully to establish Mrs Coulls as a joint promisee so as to afford her relief at common law. The contract did not expressly identify Mrs  Coulls as a contracting party, so Barwick CJ had to draw the implication that she was a promisee from the contract. This involved a somewhat selective reading of the contract. For example, at paragraph [18] of Barwick CJ’s judgment he pointed out that the contract referred to the deceased’s ‘living partner’. Barwick CJ noted that this term might have had a colloquial meaning, but noted that it imbued the word ‘partner’ with a legal significance which would suggest the wife was a joint promisee. However, at paragraph [22] Barwick CJ dealt with the words ‘I authorise’ in a very different manner. He stated: ‘the construction of the document involves a search for what the parties by their expressions really meant and is not to be answered by any narrow view of the customary legal significance of any particular word’. One might suggest that Barwick CJ, the legal formalist, appears to have unconsciously sought to secure justice as between the parties, albeit through flawed means, notwithstanding the strictures of privity. To this end, the judgments of Barwick CJ in Coulls, and those of Lord Denning MR in the cases discussed below, demonstrate the uneasy relationship created by the doctrine of privity between the aims of justice and judicial method. review question What is the relationship between the doctrine of privity and the doctrine of consideration?

• 14.3 Remedies As noted above, the situation that commonly arises in cases The fundamental concerning the privity rule and third party beneficiaries is principle pertaining to where both Person A and Person B are obligated to each other damages is that they in a contract and where Person C would receive a benefit under must compensate the that contract. Should Person B default upon their obligations to non-breaching party for the loss that they alone Person  A, the effect of the privity rule is that Person C has no have suffered, rather than standing to sue Person B. Further, should Person A sue Person B, for the loss that another Person A is only entitled to those damages that represent the entity has suffered. benefit Person  A would have received under the contract had it been performed. In circumstances where Person A does not suffer any real loss, then the damages Person A would receive would only be nominal. It should be noted that the fundamental principle pertaining to damages is that they must compensate the non-breaching party for the loss that they alone have suffered, rather than for the loss that another entity has suffered. 49 Tweddle v Atkinson (1861) IB & S 393; 121 ER 762. 50 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.

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14.3.1  Damages at common law Nonetheless, there are situations under which the non-breaching party might receive substantial damages. If real loss has been suffered, then substantial damages will be payable. The relevant principles that apply in this area were neatly set out by Windeyer J (in dissent) in Coulls v Bagot’s Executor & Trustee Co Ltd.51 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 Windeyer J at 501–502: [T]he case I have supposed, a contract by A with B that B will pay C $500, is a transaction at law devoid of any equity in C. Yet I do not see why, if A sued B for a breach of it, he must get no more than nominal damages. If C were A’s creditor, and the $500 was to be paid to discharge A’s debt, then B’s failure to pay it would cause A more than nominal damage. Or, suppose C was a person whom A felt he had a duty to reward or recompense, or was someone who, with the aid of $500, was to engage in some activity which A wished to promote or from which he might benefit—I can see no reason why in such cases the damages which A would suffer upon B’s breach of his contract to pay C $500 would be merely nominal: I think that, in accordance with the ordinary rules for the assessment of damages for breach of contract, they could be substantial. They would not necessarily be $500; they could I think be less, or more. That is as I see it. I realize that … there are statements in Cleaver v Mutual Reserve Fund Life Association (1892) 1 QB 147 (by Lord Esher at p. 153 and by Fry LJ at pp. 157, 158) which suggest that the promisee could recover not unliquidated damages but the sum which the promisor had agreed he would pay to the third party: but I find difficulty in seeing how this could be so.

In Jackson v Horizon Holidays52 Mr Jackson paid £1200 for an expensive holiday to Ceylon (now Sri Lanka) for himself and his family, which he arranged through Horizon Holidays, a travel agent. He and his wife and three small children were to stay at a hotel resort. When they arrived in the south of Ceylon they found that the hotel rooms were quite dirty with mildew and fungus, the food was poorly prepared and at times inedible, the toilets were stained and the shower was dirty. Mr Jackson had specifically requested that a bath be available and that the children’s room should be adjoining to the parents’ room. Neither condition was met. As they were unhappy with the conditions at the first hotel, they moved to a second hotel, which in fact was the hotel first advertised to Mr Jackson when he booked the trip. This hotel had been made unavailable after the booking due to building work being done there, which in turn had necessitated Mr Jackson and his family accepting the hotel in which they first stayed. The conditions in the second hotel were slightly better.

51 (1967) 119 CLR 460. 52 (1975) 3 All ER 92.

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When he returned to the UK, Mr Jackson sued Horizon Holidays. For their part Horizon Holidays admitted liability. The only question was the quantum of damages. The judge at first instance held that under the privity rule Mr Jackson could only recover for his own loss. This would have entailed a sum of less than the suggested figure of £1100 which comprised £600 for the diminished value of the holiday and £500 for mental distress. In the Court of Appeal, Lord Denning MR (  James and Orr LJ J concurring) held that where one person makes a contract for the benefit of another party, that person should be able to recover for the loss suffered by the party in the event of a breach. Lord Denning’s judgment addressed the issue of the amount which could be recovered rather than who would be entitled to sue. He regarded it as settled law that the privity rule allowed only the parties to the contract to sue upon it.53 In reading the following extract, consider how Lord Denning has developed the law in relation to damages so as to ameliorate against the possible harsher effects of the privity doctrine. Jackson v Horizon Holidays [1975] 3 All ER 92 Lord Denning MR at 95–96: We have had an interesting discussion as to the legal position when one person makes a contract for the benefit of a party. In this case it was a husband making a contract for the benefit of himself, his wife and children. Other cases readily come to mind. A host makes a contract with a restaurant for a dinner for himself and his friends. The vicar makes a contract for a coach trip for the choir. In all these cases there is only one person who makes the contract. It is the husband, the host or the vicar, as the case may be. Sometimes he pays the whole price himself. Occasionally he may get a contribution from the others. But in any case it is he who makes the contract. It would be a fiction to say that the contract was made by all the family, or all the guests, or all the choir, and that he was only an agent for them. Take this very case. It would be absurd to say that the twins of three years old were parties to the contract or that the father was making the contract on their behalf as if they were principals. It would equally be a mistake to say that in any of these instances there was a trust. The transaction bears no resemblance to a trust. There was no trust fund and no trust property. No, the real truth is that in each instance, the father, the host or the vicar, was making a contract himself for the benefit of the whole party. In short, a contract by one for the benefit of third persons. What is the position when such a contract is broken? At present the law says that the only one who can sue is the one who made the contract. None of the rest of the party can sue, even though the contract was made for their benefit. But when that one does sue, what damages can he recover? Is he limited to his own loss? Or can he recover for the others? Suppose the holiday firm puts the family into a hotel which is only half built and the visitors have to sleep on the floor? Or suppose the restaurant is fully booked and

53 Note that Jackson v Horizon Holidays [1975] 3 All ER 92 was decided after the House of Lords had delivered a stern rebuff to Lord Denning’s attempts to overrule the privity doctrine—this is discussed below, section 14.3.2, in relation to the case of Beswick v Beswick [1968] AC 58.

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the guests have to go away, hungry and angry, having spent so much on fares to get there? Or suppose the coach leaves the choir stranded half-way and they have to hire cars to get home? None of them individually can sue. Only the father, the host or the vicar can sue. He can, of course, recover his own damages. But can he not recover for the others? I think he can. The case comes within the principle stated by Lush LJ in Lloyd’s v Harper: I consider it to be an established rule of law that where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B, and recover all that B could have recovered if the contract had been made with B himself.

It has been suggested that Lush LJ was thinking of a contract in which A was trustee for B. But I do not think so. He was a common lawyer speaking of the common law. His words were quoted with considerable approval by Lord Pearce in Beswick v Beswick. I have myself often quoted them. I think they should be accepted as correct, at any rate so long as the law forbids the third persons themselves to sue for damages. It is the only way in which a just result can be achieved. Take the instance I have put. The guests ought to recover from the restaurant their wasted fares. The choir ought to recover the cost of hiring the taxis home. There is no one to recover for them except the one who made the contract for their benefit. He should be able to recover the expense to which they have been put, and pay it over to them. Once recovered, it will be money had and received to their use. (They might even, if desired, be joined as plaintiffs.) If he can recover for the expense, he should also be able to recover for the discomfort, vexation and upset which the whole party have suffered by reason of the breach of contract, recompensing them accordingly out of what he recovers.

The judgment of Lord Denning makes perfect sense within the context of the facts presented within Jackson. Yet it sits ill at ease with the fundamental principles contained within the doctrine of privity. This much was noted again by the House of Lords in Woodar Investment Development Ltd v Wimpey Construction UK Ltd.54 In that case Lord Wilberforce expressed concern over Lord Denning’s judgment, yet stated that he was not prepared to overrule the actual decision in Jackson. In Woodar it is notable that both Lord Wilberforce and Lord Keith of Kinkel were eager to confine Jackson to its facts. Similarly, the dissenting judges—Lord Salmon and Lord Russell of Killowen—both expressed concern over the judgment of Lord Denning in Jackson. It might be said then, that while Lord Denning made a valiant attempt to expand the rule on damages to bring some relief to third parties, that attempt has in fact been effectively overruled by a majority of the House of Lords on this point. However, this point has not been expressly made by the House of Lords and Jackson stands as an awkward precedent within the jurisprudence of the doctrine of privity.55

54 [1980] 1 WLR 277. 55 In Trident v McNiece (1988) 165 CLR 107, Mason CJ and Wilson J stated that the ‘uncertain status of the decision in Jackson v Horizon Holidays is a telling indictment of the law as it presently stands’: see below, section 14.4.

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14.3.2  Remedies in equity Note that Person A may sue for damages in equity as a trustee on behalf of Person C; if such an action were to be successful, then Person A would hold any damages received on trust for Person C.56 However, the more common remedy under equity is specific performance. The leading decision on equitable remedies in the context of privity is Beswick v Beswick.57 Mr Beswick sold his coal business to his nephew on the condition that the nephew would employ Mr Beswick as a consultant for the rest of his life and that the nephew would pay an annuity to Mr Beswick’s wife after his death. After Mr Beswick died, the nephew failed to honour the promise to pay an annuity to Mrs Beswick. The House of Lords was unanimous in its view that specific performance could be awarded to Mrs Beswick. The Beswick case is most notable for the disagreement between Lord Denning MR in the Court of Appeal58 and the entirety of the judges of the House of Lords on the question of whether Mrs Beswick could circumvent the privity rule by means of the common law as a third party beneficiary, or whether she had to sue as adminstrator of her late husband’s estate and rely upon equity to provide specific performance. Lord Denning was of the view that s 56 of the Law of Property Act 1925 (UK), which protected the effectiveness of restrictive covenants made in relation to the sale of land, had in fact destroyed the common law rule on privity. Accordingly, in the Court of Appeal Lord Denning held that Mrs Beswick was entitled to judgment under the common law. In a famous and widely rejected argument—which he had developed chiefly in the cases of Smith v River Douglas Catchment Board,59 Drive Yourself Hire Co (London) Ltd v Strutt60 and Adler v Dickson61—Lord Denning suggested that the common law could sustain the Mrs Beswick’s action. In part, this argument rested on the notion that Tweddle v Atkinson62 had been wrongly decided. In Beswick, Lord Denning sought to cast the privity doctrine as a mere rule of procedure;63 while in Smith, he correctly pointed out that the doctrine of privity did not become rooted in English law until Tweddle and later Dunlop v Selfridge64 had been decided. As such, the lineage of the doctrine covered barely 100 years. Lord Denning argued that in the cases of contracts pertaining to third party beneficiaries, an interest existed vested in the third party which was enforceable against the promisor. In Smith, Lord Denning noted that this had been available since 1368 in relation to covenants made with the owner of land, but his Lordship failed to acknowledge that this principle was peculiar to contracts in relation to the sale of land.65 Lord Denning again drew upon these arguments in Beswick. In Beswick, the House of Lords strongly rejected Lord Denning’s argument, holding instead that specific performance was in fact available based on the peculiar facts of the case. As such, 56 Coulls v Bagot (1967) 119 CLR 460; Beswick v Beswick [1968] AC 58. 57 [1968] AC 58. 58 Beswick v Beswick [1966] 3 All ER 1, 7 (CA). 59 [1949] 2 All ER 179, 188. 60 [1954] 1 QB 250, 272–275. 61 [1955] 1 QB 158, 193. 62 (1861) IB & S 393; 121 ER 762. 63 [1966] 3 All ER 1, 7. 64 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847. 65 See Tulk v Moxhay (1848) 41 ER 1143.

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the substance of the decision arrived at by the House of Lords was much the same as that of the Court of Appeal. The extract below from the judgment of Lord Hodson makes this plain. Beswick v Beswick [1968] AC 58 Lord Hodson at 79–82: One cannot deny that the view of Lord Denning MR expressed so forcibly, not for the first time, in his judgment in this case, reinforced by the opinion of Danckwerts LJ in this case, is of great weight notwithstanding that it runs counter to the opinion of all the other judges who have been faced by the task of interpreting this remarkable section, namely, section 56 of the Act of 1925. Contained, as it is, in a consolidation Act, an Act, moreover, dealing with real property, is it to be believed that by a side wind, as it were, Parliament has slipped in a provision which has revolutionised the law of contract? Although the presumption is against such an Act altering the law, the presumption must yield to plain words to the contrary. … Although, therefore, the appellant would succeed if the respondent relied only upon section 56 of the Act of 1925, I see no answer to the respondent’s claim for specific performance and no possible objection to the order made by the Court of Appeal on the facts of this case. Indeed, on this aspect of the case it seems that most of the appellant’s defences were down before the case reached your Lordships’ House. For example, it was argued at one time that the equitable remedy of specific performance of a contract to make a money payment was not available. This untenable contention was not proceeded with. Further, it was argued that specific performance would not be granted where the remedy at law was adequate and so should not be ordered. The remedy at law is plainly inadequate, as was pointed out by the Court of Appeal … The peculiar feature of this case is that the plaintiff is not only the personal representative  of the deceased but also his widow and the person beneficially entitled to the money claimed. Although the widow cannot claim specific performance in her personal capacity, there is no objection to her doing so in her capacity as administratrix, and when the moneys are recovered they will be in this instance held for the benefit of herself as the person for whom they are intended.

The circumstances surrounding Beswick are unique. The result is that where a third party cannot enforce a contract at common law, and where the party who contracted for their benefit is a trustee of the promise, the contract is enforceable on action by the contracting party in circumstances where the damages that they would have received from the promisor under the common law would be inadequate. These principles were neatly set out by Dillon LJ in Darlington BC v Wiltshier Northern Ltd.66 In that case a finance company assigned its rights under a building contract with Wiltshier, a builder, 66 [1995] 3 All ER 895.

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to the Darlington Borough Council. There were defects with the work done by Wiltshier. The Council sued to force Wiltshier to remedy the defects, but Wiltshier responded that the Council could have no greater rights than those which would have been available to the finance company. However, as the assignee of the rights the Council could sue as trustee of the promise made on behalf of the third party (itself).

Darlington BC v Wiltshier Northern Ltd [1995] 3 All ER 895 Dillon LJ at 900–901: Thus in the first place the general principle for the assessment of damages for breach of contract is compensatory—to compensate the plaintiff for the damage, loss or injury he has suffered through the breach. See Lord Wilberforce in Johnson v Agnew [1980] AC 367, at page 400 and Viscount Haldane LC in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673, at page 689. In the second place, though the doctrine has been much criticised, it remains the law binding on this court that a third party cannot sue for damages on a contract to which he was not a party. See the decisions of the House of Lords in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, Midland Silicones Ltd v Scruttons Ltd [1962] AC 446 and Beswick v Beswick [1968] AC 58. In the third place, the general position is that if a plaintiff contracts with a defendant for the defendant to make a payment or confer some other benefit on a third party who was not a party to the contract, the plaintiff cannot recover substantial damages from the defendant for breach of that obligation on the part of the defendant. See Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277. The plaintiff can, prima facie, only recover for his own loss. Thus the case of Wiltshier … is simply that Morgan Grenfell, the employer under the building contracts, having no proprietary interest in the Dolphin Centre and no obligation to Darlington for the quality of Wiltshier’s workmanship or for Wiltshier’s due performance of the building contracts, has suffered no damage or loss at all from whatever defects there may have been in the construction of the Dolphin Centre, and cannot recover by way of damages from Wiltshier whatever loss Darlington may have suffered from the defects. It has been recognised in the House of Lords, however, that there are certain exceptions to the general principles I have mentioned. One exception, recognised in Woodar v Wimpey, is where the plaintiff made the contract as agent or trustee for the third party, and was enforcing the rights of a beneficiary, there being a fiduciary relationship; see per Lord Wilberforce at page 284A–B and per Lord Russell of Killowen at page 293H. This is recognised in the decision of this court in Lloyd’s v Harper 16 ChD 290 where it was held that the corporation of Lloyd’s as successors to the committee of Lloyd’s were entitled to enforce a guarantee of the liabilities of an underwriting member which had been given to the committee, (which had itself suffered no loss) for the benefit of all persons, whether members or not, with whom the member had contracted engagements as underwriting member.

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Trusts In Trident v McNiece,67 Deane J advocated the use of a trust to provide justice to a third party beneficiary under circumstances where the doctrine of privity would otherwise preclude the possibility that any benefit might be conferred to them. Trident v McNiece (1988) 165 CLR 107 Deane J at 146–149: In the course of his judgment in Wilson v Darling Island Stevedoring, Fullagar J (at p. 67) pointed to the fact that ‘equity could and did intervene in many cases’ involving circumstances in which the common law requirement of privity could operate unjustly ‘by treating the promisee as a trustee of a promise made for the benefit of a third party, and allowing the third party to enforce the promise, making the promisee-trustee, if necessary, a defendant in an action against the promisor’. His Honour went on to comment (ibid) that it is ‘difficult to understand the reluctance which courts have sometimes shown to infer a trust in such cases’ (see, for a helpful discussion of the main earlier decisions, JG Starke, ‘Contracts for the Benefit of Third Parties’ Pt. IV, Australian Law Journal, vol. 22 (1948), 67 at p. 69). That comment of Fullagar J was, in my view, fully justified. Indeed, the ‘reluctance’ of courts to find a trust in such cases seems often to have been caused by a misunderstanding of the nature of equity’s requirement of an intention to create an express trust, or put differently, by a failure to appreciate the innate flexibility of the law of trusts (cf., per Cardozo J, Adams v Champion [1935] USSC 24; (1935) 294 US 231, at p. 237). In equity, ‘intention alone will not constitute a trust obligation (and) … mere conduct without such intention is ineffectual to impose it, or, as Lewin, 12th ed., at p. 88, says, to “impute” it’ (per Isaacs J, Commissioner of Stamp Duties (Qld) v Jolliffe [1920] HCA 45; (1920) 28 CLR 178, at p. 189 and see, now, Lewin, 16th ed., at p. 35). The requisite intention to create a trust of a contractual promise to benefit a third party can, however, be formed and carried into effect (either by the contract itself or some other act) by a promisee who would be bemused by the information that the chose in action constituted by the benefit of a contractual promise is property and uncomprehending of the distinction between law and equity … In the context of such a contractual promise, the requisite intention should be inferred if it clearly appears that it was the intention of the promisee that the third party should himself be entitled to insist upon performance of the promise and receipt of the benefit and if trust is, in the circumstances, the appropriate legal mechanism for giving effect to that intention. A fortiori, equity’s requirement of an intention to create a trust will be at least prima facie satisfied if the terms of the contract expressly or impliedly manifest that intention as the joint intention of both promisor and promisee. A trust can attach to the benefit of the whole contract or of the whole or part of some particular contractual obligation. In the case of a policy of liability insurance under which the insurer agrees to indemnify both a party to the contract and others, there is

67 (1988) 165 CLR 107, discussed in more detail below, section 14.4.

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no reason in principle or in common sense why the party to the contract should not hold the benefit of the insurer’s promise to indemnify him on his own behalf and the benefit of the promise to indemnify others respectively upon trust for those others. Where the benefit of a contractual promise is held by the promisee as trustee for another, an action for enforcement of the promise or damages for its breach can be brought by the trustee. In such an action, the trustee can recover, on behalf of the beneficiary, the damages sustained by the beneficiary by reason of breach. If the trustee of the promise declines to institute such proceedings, the beneficiary can bring proceedings against the promisor in his own name, joining the trustee as defendant. An intention to create a trust of the benefit of a contractual promise can be evidenced and/or carried into effect by the contract itself or by action of the promisee aliunde. When the trust is created by the actual contract between promisor and promisee, the beneficiary can nonetheless properly be described as a stranger to the creation of the contract. Indeed, he may be quite unaware of its existence. It would, however, be misleading to say that the promisor, in such a case, is a stranger to the creation of the trust in that the overall effect of the contract itself, to which he is a party, may be that the relevant promise is made by him to the promisee in the latter’s capacity as trustee for the designated beneficiary or class of beneficiaries and that the intention to create a trust which the contract manifests and carries into effect is a joint intention of both promisor and promisee who might both be regarded as settlors. It is unnecessary to consider here what, if any, rights or obligations in relation to the trust might be enjoyed by or imposed upon the promisor in such a case. What is relevant for present purposes is that, in such a case, there will ordinarily be neither need nor occasion to seek to identify some independent intention (i.e. apart from that manifested in the contract) or action of the promisee. That is not, of course, to say that either the third party or the parties to the contract are restricted to the terms of the contract (to which the third party is a stranger) or precluded from relying on other circumstances to establish or negative the existence of a trust in the third party’s favour in any dispute between the third party and one or more of the parties to the contract (see, e.g., Royal Exchange Assurance v Hope (1928) Ch 179, at pp. 185,195). The question whether a particular contract itself creates a trust of the benefit of one or more of the promises which it contains is primarily a question of the construction of the terms of the contract. Those terms must, however, be construed in context and a trust of a contractual promise will obviously be more readily discerned in the terms of some classes of contracts than it will in others. It is difficult to envisage a class of contract in which the creation of such a trust would be more readily discernible than the type of contract which is involved in the present case, namely, a policy of liability insurance indemnifying both a party to the contract and others who are designated either by specific identification or by their membership of an identified group. In the case of such a policy, the terms of the contract itself will, in the context of the nature of insurance, ordinarily manifest an intention to the effect that each non-party assured is to be fully entitled to the benefit of the promisor’s promise to indemnify him, that is to say, that the promisee should hold the chose in action constituted by the right to enforce that promise upon trust for the relevant non-party assured …

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The judgment of Deane J in Trident is the logical extension of the trust arguments developed by the UK courts and by Fullagar J in Wilson v Darling Island Stevedoring & Lighterage Co Ltd.68 However, this aspect has found little support in subsequent cases or in commentaries on privity. The simple explanation may well be that though the courts do not prescribe any particular form for the creation of a trust they are reluctant to infer its existence in circumstances where the acts and intentions as expressed in the contract do not strongly support that implication.

• 14.4 Trident v McNiece The future of the privity doctrine after Trident v McNiece69 is unclear. There had been suggestions in Beswick v Beswick70 and Woodar Investment Ltd v Wimpey Construction UK Ltd 71 that the doctrine of privity was inappropriate in a modern context. The High Court’s decision in Trident advanced this  debate. However, as Gummow J noted in Winterton Constructions Pty Ltd v Hambros Australia Ltd,72 at best only three of the judges in Trident fully supported completely overturning the privity rule. In Trident a construction company, Blue Circle Southern Cement Ltd, had a contract of insurance with Trident General Insurance. This contract covered works being done at the Marulan construction site. The insurance policy defined Blue Circle, its subsidiaries and contractors and subcontractors as the insured. McNiece Bros were Blue Circle’s principal contractors at the Marulan site. Hammond, who was working under the direction of McNiece, suffered an injury. He sued McNiece and recovered approximately $500 000. McNiece in turn sought to be indemnified by Trident. Trident denied any liability to McNiece on the basis that the latter was not a party to the contract between Trident and Blue Circle. The question that came before the High Court was whether the doctrine of privity applied in favour of Trident or whether an exception to privity applied. A majority of the High Court found in favour of McNiece, but did so on different grounds. Mason CJ and Wilson J advocated abolishing the doctrine of privity. Toohey J supported their view but confined the operation of his judgment to the field of insurance law. The basis of the decisions of Mason CJ, Wilson and Toohey JJ was the unfairness in the operation of the privity doctrine—their Honours formed the view that where such an injustice existed within the common law that it was the proper role of judges in the highest appellate court in the land to remedy the situation. Deane J also found in favour of McNiece, but did so by virtue of an exception to the doctrine of privity. As discussed above, Deane J formed the view that the promise was held on trust by Blue Circle in favour of McNiece. The difficulty with the view of Deane J in Trident is that it fails to account for the rule in Vandepitte v Preferred Accident Insurance Corporation of New York,73 where Lord Wright in the Privy Council stated that an intention to create a trust must be affirmatively proved and not lightly inferred. 68 69 70 71 72 73

(1956) 95 CLR 43. (1988) 165 CLR 107. [1968] AC 58. [1980] 1 WLR 277. (1991) 101 ALR 363. (1933) AC 70, 79–80.

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Gaudron J affirmed the doctrine of privity, but found in favour of McNiece on the basis of unjust enrichment, holding that Trident’s promise gave rise to an obligation that was enforceable under the doctrine of unjust enrichment. Brennan and Dawson JJ, in dissent, affirmed and applied the privity rule. Trident v McNiece (1988) 165 CLR 107 Mason CJ and Wilson J at 113–124: Trident’s case in this Court is that the rules that only a party to a contract can sue on it and that consideration must move from the promisee are fundamental principles of the common law of contract. These principles evolved in the course of the nineteenth century in the development in England of the law of contract and they have been consistently applied, not only in England but also in Australia, to contracts for the benefit of third parties, including insurance contracts. The argument is that the principles are so well accepted and so embedded in our law of contract that they should not be overturned by judicial decision, even if their application to contracts for the benefit of third parties is not altogether satisfactory, a matter which Trident by no means concedes. According to Trident, the recognition in appropriate circumstances by the courts of the trust of a contractual promise provides an adequate mechanism for protecting the rights of the third party under a third party contract. The concept of the trust of a contractual promise, it is said, overcomes any serious problem which might otherwise arise if the common law principles alone were to govern third party contracts. 12. Although the principle that only a party to a contract can sue on it is described as fundamental, the early common law permitted third parties to enforce contracts made for their benefit … The decision in Bourne v Mason [1726] EngR 165; (1669) 1 Vent 6 (86 ER 5) marked the beginning of a shift in the attitude of the common law. In that case the third party, who failed in his action on the contract, was described as ‘a mere stranger to the consideration’: at p. 7 (p. 6 of ER). Thereafter, until Tweddle v Atkinson [1861] EngR 690; (1861) 1 B&S 393 (121 ER 762), the question whether the third party could bring an action on the contract was the subject of conflicting decisions. Compare, for example, Pigott v Thompson [1802] EngR 202; (1802) 3 Bos & Pul 147 (127 ER 80) and Carnegie v Waugh (1823) 1 LJ(KB) 89 (where the court upheld the right of the third party to enforce the contract) with Price v Easton [1833] EngR 334; (1833) 4 B & Ad 433 (110 ER 518) (where the court denied the third party’s entitlement to sue on the contract). With reference to the common law before 1861, Windeyer J observed in Coulls v Bagot’s Executor and Trustee Co Ltd [1967] HCA 3; (1967) 119 CLR 460, at p. 498: The law was not in fact ‘settled’ either way during the two hundred years before 1861. But it was, on the whole, moving towards the doctrine that was to be then and thereafter taken as settled.

13. The received doctrine is that Tweddle v Atkinson decided that a third party cannot sue on a contract for his benefit, though Denning L J considered that it was wrongly decided … There is much to be said for the view that the ratio of Tweddle v Atkinson was that the plaintiff third party failed because no consideration moved from him. However, this

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view was not accepted in the years that followed … The decision in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1; (1915) AC 847 firmly entrenched the two principles in the common law of England. So much emerges from the speech of Lord Haldane: at p. 853. The Privy Council in Vandepitte v Preferred Accident Insurance Corporation of New York (1933) AC 70, at p. 79 subsequently applied the law as stated in Dunlop by Lord Haldane to a policy of insurance covering a motor vehicle by which the insurer agreed to indemnify the insured and anyone operating the car with the permission of the insured against third party risks. In the result the insurer was not liable under the policy in respect of a judgment obtained against the insured’s daughter for damages for personal injury caused by her negligent driving of the motor vehicle. The Privy Council recognized (at p. 79) that the common law rules are qualified by the equitable principle that a party to a contract can constitute himself a trustee for a third party of a right under a contract so that the third party can enforce the promise, making the promisee-trustee a defendant in an action against the promisor. However, Lord Wright went on to say (at pp. 79–80) that ‘the intention to constitute the trust must be affirmatively proved: the intention cannot necessarily be inferred from the mere general words of the policy’. 14. This Court has hitherto accepted that a third party cannot sue upon a contract and that a stranger to the consideration cannot maintain an action at law upon it … 15. So far we have proceeded on the footing that there are two distinct common law rules. This accords with the law as Lord Haldane stated it in Dunlop: at p. 853 … However, as Windeyer J noted in Coulls (at p. 494), there is an opposing view that the two rules are but one. In other words, to say that A is not a party to the contract is to say only that he is not a person who gave a promise in exchange for another … As a matter of history this view has much to support it. The consideration requirement was the nub of the earlier cases. The privity requirement seems to have gained acceptance either as an alternative way of asserting the consideration requirement or as a by-product of it. Nevertheless the weight of authority points to the existence of two distinct, albeit interrelated, principles. Thus, if A, B and C are parties to a contract and A promises B and C that he will pay C $1000 if B will erect a gate for him, C cannot compel A to carry out his promise, because, though a party to the contract, C is a stranger to the consideration … For the purposes of the present case and contracts for the benefit of third parties, however, it is of little consequence whether the rules are in fact separate. 16. These ‘fundamental’ traditional rules, where they survive, have been under siege throughout the common law world. In the United Kingdom the Law Revision Committee, which included many distinguished lawyers under the chairmanship of Lord Wright, recommended the abolition of the consideration rule and the privity rule in its Sixth Interim Report. The Committee described the consideration rule in its application to the example given in the last paragraph as lacking any reason in logic or public policy: par. 37. The Committee stated that the English common law (an expression which, in the context of the Report in 1937, may be taken to include the Australian common law) was alone among modern systems of law in its insistence on the privity rule and observed that the United States had taken steps to mitigate the rigour of the rule. Even in England, the Committee noted, Parliament had found it necessary to create legislative exceptions:  par.  41. The Committee went on to make the point that the trust concept as applied to the promise

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for the benefit of the third party had not proved to be a satisfactory solution because there was uncertainty surrounding the approach of the courts to the recognition of a trust: par. 44. Another criticism of the trust concept was that, once created, the trust was not revocable by the promisor or the promisee: par. 47. A third comment was that insistence on the privity rule casts doubts on the enforceability of bankers’ commercial credits by sellers of goods as against the banker setting up the credit: par. 45. The final point made by the Committee was that the position of the third party is more analogous to that of an assignee of a contractual right than to that of a cestui que trust: par. 46. 17. The Committee recommended that the statutory recognition of third party rights should be carefully limited. The proposed limitations were: (1) no third party right should be acquired unless given by the express terms of the contract; (2) the promisor should be able to raise against the third party any defence available against the promisee; and (3) the right of the promisor and of the promisee to cancel the contract at any time should be preserved unless the third party has received notice of the agreement and has adopted it. It might be noted that this regime is much like that which has developed in the United States. There, the problems arising from the traditional rules have been avoided by not requiring that consideration move from the promisee to the promisor … As it stands now in most American states, third parties can sue directly upon contracts made for their benefit by others … 18. Despite the criticisms and the proposals for reform, the traditional rules survive in the United Kingdom … Legislative procrastination prompted Lord Reid in 1968 to suggest that, if there were to be a further long delay, then the House of Lords might be compelled to deal with the question: Beswick, at p. 72. Similarly, Lord Scarman, supported by Lord Keith of Kinkel, expressed the view in 1980 that the House of Lords might ‘reconsider Tweddle v Atkinson and the other cases which stand guard over this unjust rule’: Woodar, at p. 300; p. 591 of All ER. In Swain v The Law Society (1983) 1 AC 598, at p. 611, Lord Diplock described the doctrine of privity as ‘an anachronistic shortcoming that has for many years been regarded as a reproach to English private law’. And in this country, Windeyer J reflected similar sentiments to those of Lord Scarman when he referred in Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365, at p. 393 to the possibility ‘that someday this Court too, expounding the common law as Australia has inherited it, will see the way clear’ to reform the traditional rules. … 21. There is much substance in the criticisms directed at the traditional common law rules as questions debated in the cases reveal. First, there is the vexed question whether the promisee can recover substantial damages for breach by the promisor of his promise to confer a benefit on the third party. The orthodox view is that ordinarily the promisee is entitled to nominal damages only because non-performance by the promisor, though resulting in a loss of the third party benefit, causes no damage to the promisee … On the other hand, Lush LJ in Lloyd’s v Harper (1880) 16 ChD 290, at p. 321 said: I consider it to be an established rule of law that where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B, and recover all that B could have recovered if the contract had been made with B himself.

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Windeyer J in Coulls (at p. 501) thought, correctly in our opinion, that Lush LJ was referring to a contract where A was trustee of the promised benefit for B, a view in which Lord Upjohn acquiesced in Beswick (at p. 101). Windeyer J went on to say that the promisee could recover more than nominal damages in a situation in which he had sustained actual loss or damage by reason of the promisor’s breach of his promise to confer a benefit on the third party. Plainly his Honour correctly stated the law in this respect. His Honour then (at p. 502) expressed his disagreement with suggestions by Lord Esher MR and Fry LJ in Cleaver v Mutual Reserve Fund Life Association (1892) 1 QB 147, at pp. 153, 157, 158 that the promisee could recover not unliquidated damages but any sum which the promisor had agreed to pay to the third party. 22. It is clear enough that the availability of an action for damages at the suit of the promisee for breach of the promise to benefit the third party is not a sufficient sanction to secure performance of the promise. What is more, the uncertain status of the decision in Jackson v Horizon Holidays Ltd [1974] EWCA Civ 12; (1975) 1 WLR 1468; (1975) 3 All ER 92 is a telling indictment against the law as it presently stands. There, the plaintiff recovered substantial damages for the travel company’s breach of contract to provide a satisfactory family holiday, but the basis on which the decision can be supported is by no means clear, even after the comments by the House of Lords in Woodar: at pp. 283–284, 291, 293, 297; pp. 576–577, 577, 584, 588 of All ER Rules which generate uncertainty in their application to ordinary contracts commonly entered into by the citizen call for reconsideration. 23. Next, there is the question whether the contract to confer a benefit on the third party is capable of specific performance. In Coulls Barwick CJ considered (at p. 478) that where a promisor promises to make a payment to a third party the promisee may obtain specific performance of the promise, at least where the nature of the consideration would have allowed the remedy. Windeyer J went even further, asserting (at p. 503) that contracts to pay money or transfer property to a third party are always or very often contracts for breach of which damages are an inadequate remedy and that on this ground such contracts are susceptible of specific performance. We agree with his Honour’s comment and with his additional observations (at p. 503) which point the way to a more general recognition of the availability of specific performance as a remedy. As Lord Upjohn noted in Beswick (at p. 102), ‘Equity will grant specific performance when damages are inadequate to meet the justice of the case’ (our emphasis). See also the dissenting judgment of Sir Garfield Barwick in Loan Investment Corporation of Australasia v Bonner (1970) NZLR 724, at p. 742. There is no reason to doubt that the courts will grant specific performance of a contract of indemnity or insurance, even if it involves payment of a lump sum, at least where the payment is to be made to a third party, damages being an inadequate remedy. But, even if we assume the availability of specific performance at the suit of the promisee in a wide variety of situations, there are nonetheless situations, such as that in Jackson v Horizon Holidays Ltd, where specific performance is not a suitable remedy and damages are inadequate. In these situations the incapacity of the third party to sue means that the law gives less protection to the promisee and the third party than the promisor … And, assuming the availability of specific performance, the third party is nonetheless dependent on the willingness of

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the promisee to exercise his rights, in the absence of a trust, an agency relationship or an enforceable agreement between the promisee and the third party. 24. Then there is the trust of the contractual promise on which the appellant places particular reliance as a palliative of the difficulties generated by the common law principles. Despite the insistence in Vandepitte (at pp. 79–80) and In re Schebsman (1944) Ch 83, at p. 104, on the need for a clear expression of intention to create a trust and the warning that such an intention cannot necessarily be inferred from general words, there are a number of authorities which justify the difficulty expressed by Fullagar J in understanding the reluctance of the courts sometimes to infer trusts (Wilson, at p. 67). In Robertson v Wait [1853] EngR 77; (1853) 8 Ex 299 (155 ER 1360), Lloyd’s v Harper, Les Affreteurs Reunis Societe Anonyme v Leopold Walford (London), Ltd (1919) AC 801 and Williams v Baltic Insurance Association of London, Ld (1924) 2 KB 282 the courts readily inferred the existence of a trust from the circumstance that the contract was made for the benefit of a third party. The contrast between Vandepitte and Williams is striking. Both cases concerned motor vehicle insurance policies expressed to cover persons driving the vehicle apart from the insured. Fullagar J’s comment followed a reference to the two decisions. See also “Notes” (1933) 49 Law Quarterly Review 474. As we have seen, critics of the common law rules have pointed to the uncertainty surrounding the circumstances in which the courts will recognize a trust in contracts for the benefit of third parties as a reason for rejecting the trust concept as a sufficient answer to the difficulties caused by those rules: Corbin, ‘Contracts for the Benefit of Third Persons’ (1930) 46 Law Quarterly Review 12, esp. at p. 17. 25. This apparent uncertainty should be resolved by stating that the courts will recognize the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention. See Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, at p. 189. 26. But, even if adherence to this approach produces greater consistency of outcome, there are still the cases where the third party has no remedy because there is no sufficient intention to create a trust. And there are other consequences which flow from recognizing the existence of a trust. It may circumscribe the freedom of action of the parties to the contract, especially the promisee, to a greater extent than the existence of a right to sue on the part of the third party. How can the promisee terminate the trust once it is created? Lest it be overlooked, we should mention that the creation of a third party trust rests on ascertaining the intention of the promisee, rather than on the intention of the contracting parties. And in the ultimate analysis it seems incongruous that we should be compelled to import the mechanism of a trust to ensure that a third party can enforce the contract if the intention of the contracting parties is that he should benefit from performance of the contract. A fortiori is that so if the intention common to the parties is that the third party should be able to sue the promisor. …

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31. The variety of these responses to the problems arising from contracts to benefit a third party indicate the range of the policy choices to be made and that there is room for debate about them. A simple departure from the traditional rules would lead to third party enforceability of such a contract, subject to the preservation of a contracting party’s right to rescind or vary, in the absence of reliance by the third party to his detriment, and to the availability in an action by the third party of defences against a contracting party. The adoption of this course would represent less of a departure from the traditional exposition of the law than other legislative choices which have been made. Moreover, as we have seen, the traditional rules, which were adopted here as a consequence of their development in the United Kingdom, have been the subject of much criticism and of legislative erosion in the field of insurance contracts. Regardless of the layers of sediment which may have accumulated, we consider that it is the responsibility of this Court to reconsider in appropriate cases common law rules which operate unsatisfactorily and unjustly. The fact that there have been recent legislative developments in the relevant field is not a reason for continuing to insist on the application of an unjust rule as it stood before its alteration by the Insurance Contracts Act 1984 (Cth). 32. In the ultimate analysis the limited question we have to decide is whether the old rules apply to a policy of insurance. The injustice which would flow from such a result arises not only from its failure to give effect to the expressed intention of the person who takes out the insurance but also from the common intention of the parties and the circumstance that others, aware of the existence of the policy, will order their affairs accordingly. We doubt that the doctrine of estoppel provides an adequate protection of the legitimate expectations of such persons and, even if it does, the rights of persons under a policy of insurance should not be made to depend on the vagaries of such an intricate doctrine. In the nature of things the likelihood of some degree of reliance on the part of the third party in the case of a benefit to be provided for him under an insurance policy is so tangible that the common law rule should be shaped with that likelihood in mind. 33. This argument has even greater force when it is applied to an insurance against liabilities which is expressed to cover the insured and its sub-contractors. It stands to reason that many sub-contractors will assume that such an insurance is an effective indemnity in their favour and that they will refrain from making their own arrangements for insurance on that footing. That, it seems, is what happened in the present case. But why should the respondent’s rights depend entirely on its ability to make out a case of estoppel? 34. In the circumstances, notwithstanding the caution with which the Court ordinarily will review earlier authorities and the operation of long-established principle, we conclude that the principled development of the law requires that it be recognized that McNiece was entitled to succeed in the action. 35. For the foregoing reasons, we would dismiss the appeal.

This judgment was supported in a separate judgment by Toohey J. It has been read as a rejection of the doctrine of privity in the common law of Australia. In particular, Mason CJ and Wilson J noted the many criticisms of the privity doctrine and recognised the need for ‘the principled development of the law’. Also, while their Honours did recognise the potential

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applicability of estoppel, it is notable that they cautioned against reliance on estoppel alone in like cases. In essence, the rule that their Honours advocated in Trident is one wherein a third party beneficiary under a contract, designed to benefit the third party, can enforce their interest subject to the right of the immediate contracting parties to rescind the contract or to vary their obligations by mutual agreement. The counterpoints to the views of Mason CJ, Wilson J and Toohey J are the dissenting judgments of Brennan and Dawson JJ.74 The strong dissent of Brennan J is extracted below. In his dissent Brennan J, which is substantively extracted below, Brennan J traced the history of the privity doctrine and warned that judicial reform in privity could have unintended consequences. He was also at pains to point out that the decision of the New South Wales Court of Appeal was effectively per incuriam to the extent that it sought to overturn established High Court precedent on privity. Both Brennan and Dawson JJ stuck close to those precedents that endorsed the privity rule and declined to endorse any view that there was a need to overturn the doctrine in light of the availability of other exceptions and supervening doctrines. In a strong dissent, their judgments evince a high degree of influence from the judicial philosophy of Sir Owen Dixon, in that they are quite legalist and adhere closely to precedent.75 Trident v McNiece (1988) 165 CLR 107 Brennan J at 129–136: Privity is a doctrine which is both settled and fundamental, though it was not settled in England until the 19th century. … 10. The doctrine of privity has been treated as settled not only by the House of Lords (Beswick v Beswick [1967] UKHL 2; (1968) AC 58) but also by the Supreme Court of Canada (Greenwood Shopping Plaza Ltd v Beattie (1980) 111 DLR (3d) 257) and by this Court. In Wilson v Darling Island Stevedoring and Lighterage Co Ltd [1956] HCA 8; (1956) 95 CLR 43 Kitto J spoke (at p. 80) of ‘the elementary general rule that the only persons entitled to the benefits or bound by the obligations of a contract are the parties to it’ … The doctrine of privity has long been settled and it was settled as a doctrine of general application. 11. Can an intermediate court of appeal properly refrain from applying such a settled and fundamental doctrine of the common law? If an intermediate appellate court were free to disregard a fundamental doctrine settled by the final appellate court, an endemic uncertainty would infect the administration of justice: cf. Broome v Cassell & Co [1972] UKHL 3; (1972) AC 1027, at p. 1054. Courts are bound to apply the principles laid down by courts higher in the appellate hierarchy and observance of that rule avoids the futility of delivering judgments which will be reversed on appeal. Of course, the rule would lose much of its cogency if the final court of appeal were to regard a principle embodied in its own decisions as settled only to the extent that a majority of its members approve the principle for application in each case falling within its scope. Unless the members of the

74 Gaudron and Deane JJ having separately arrived at the same outcome as Mason CJ, Wilson and Toohey JJ, though by different means. 75 See Sir Owen Dixon, ‘Concerning the Judicial Method’ (1956) 29 Australian Law Journal 468.

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final appellate court regard themselves as generally bound by the court’s precedents, a precedent would tend to be viewed (to use the simile of Roberts J in Smith v Allwright [1944] USSC 108; (1944) 321 US 649, at p. 669) like ‘a restricted railroad ticket, good for this day and train only’. Intermediate courts would be encouraged to speculate on whether a majority of the final court would apply the principle in the instant case and the judges in the final court would be encouraged to determine the case according to their individual opinions as to what the law should be rather than by applying, so far as the traditional modes of judicial reasoning permit its ascertainment, what the law is. Judicial freedom in the application of precedent is a potent stimulus to rapid development of new fashions of legal thought and, in times of social change, the authority of some precedents will be readily questioned. On the other hand, to free the judges of an appellate court from the constraint of precedent entirely would lead to such diversity of reasoning that the ratio of a decision would be (at best) obscured and the capacity of the appellate court to settle the law would be put at risk. In this Court, the practice has been adopted of requiring leave, granted by the Court itself, to argue that an earlier decision of the Court should be departed from: Evda Nominees Pty Ltd v Victoria [1984] HCA 18; [1984] HCA 18; (1984) 154 CLR 311. Inherent in and underlying that practice is the proposition that the earlier decision will not be departed from unless the Court so determines. And in Baker v Campbell [1983] HCA 39; (1983) 153 CLR 52, at pp. 102–103, I stated my understanding that individual justices of this Court are not generally free to depart from principles laid down in earlier decisions of the Court unless the Court as a whole gives leave to reopen an earlier decision for reconsideration. That constraint may not apply to matters of practice and procedure, especially when the exercise of a discretion is called for, and special considerations apply to questions arising under the Constitution. But, in my opinion, the observance of such a constraint, coupled with the Court’s ability to re-examine its own decisions, provides the appropriate balance between a legal system on which the dead hand of the past rests too heavily and one in which the law is in continual ferment. If the constraint is observed in relation to questions of general substantive law, there can be no uncertainty as to the duty of intermediate courts faithfully to apply the decisions of this Court. Until leave to reopen a decision of this Court is given by this Court, the authority of the decision remains and its ratio should be applied. I do not suggest, of course, that the decision should not be critically examined in order to see whether the ratio is of broad or narrow application or whether the case in hand is distinguishable: these are familiar and proper judicial enquiries. But once the ratio is distilled and it is found to be applicable to the case in hand, the decision must be accepted in other courts—and, in my opinion, ought to be accepted in this Court unless leave is given by this Court to reopen it. Leave to reopen will be given from time to time not only to correct an error which has become manifest in an earlier decision but also to permit a review of doctrines which were the product of and suited to an earlier age but which work injustice or inconvenience in contemporary conditions. It is a jurisdiction to be exercised sparingly, for contemporary conditions may themselves be moulded by existing doctrines. Judicial preference for a more elegant or logically satisfying jurisprudence is insufficient to warrant a change in settled doctrine which works satisfactorily in conjunction with other legal principles. And if a change in settled doctrine is contemplated, a substitutionary doctrine sufficiently precise to admit of practical application must be at hand.

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12. In this case, unless the Court determines that the doctrine of privity be reopened and a new doctrine substituted, the appeal must be allowed. The Court of Appeal ought to have allowed the appeal to it. However, the doctrine of privity was directly challenged, at least to the extent of allowing an exception in the case of liability insurance where the third party is named in the policy. In my view, for reasons which will appear, to admit such an exception involves the overthrow of the doctrine. The true question for decision is, therefore, whether this Court should now decide to overrule the settled and fundamental doctrine of privity. 13. It is submitted that the doctrine of privity sometimes produces unjust results and that this Court should re-examine it in the light of the criticisms the doctrine has attracted. The criticisms, many of which have come from judges of great eminence and some of which may be traceable to the influence of Scots law, are rehearsed in the judgment of McHugh JA. Those criticisms tend to erode the acceptability of the doctrine and to facilitate the postulation of an exception. If it be asserted that the doctrine works injustice, an exception can be seen as a first step on a path leading to the heights of justice and therefore a step to be taken with judicial alacrity. If this case is to be decided not by reference to the law as it is but by reference to the law as it ought to be, it is useful to consider the alternative paths by which the heights of justice might be scaled: the path followed by our law for over a century or a new path of doctrine. … 17. A variety of solutions can be devised for these and other problems raised by admitting a third party’s right to sue. That is apparent from the diversity of statutory provisions which have been enacted in order to confer on C a statutory right enforceable directly against A. Those provisions have become increasingly complex … [They] are not uniform … Each of the Acts provides for discharge or variation of the promise without the beneficiary’s consent in certain circumstances, but the prescribed circumstances are not the same in the respective Acts. It is vain to expect that the common law has a solution for the problems on which Parliaments assisted by Law Reform Commissions have differed. There is no Anglo-Australian common law by reference to which the conditions and incidents of a third party’s right to sue can be ascertained. The legal systems which admit a jus quaesitum tertio see the relationships between A, B and C as a triangle … The Anglo-Australian Common law is radically different: it sees the relationships as lineal: A and B linked by contract, B and C linked by trust or contract, A and C not linked unless B either proves to be C’s agent to contract with B or assigns to C the obligation (debt or other property) owed to B by A. To admit a third party’s right to sue into the common law, it would be necessary to postulate a new source of legal rights and obligations arising independently of contract and equity and to create a new set of rules prescribing the availability of the rights and the limits of the obligations to which the third party promise gives rise. And if such a new source of legal rights were postulated, our laws with respect to agency, trusts, estoppel and damages which have been constructed around the doctrine of privity of contract would have to be reworked. 18. Of course, the problems to which a third party promise gives rise must be addressed by any developed legal system, and the rules to govern these problems may be tentative in the earlier stages of development. Fundamental rules—that is, rules which fix a reference

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point for the development of subsidiary rules—may take some time to be settled. Once settled, the subsidiary rules can be developed. So it was with the English legal system. 19. The subsidiary rules which the courts have developed to solve the problems raised by a third party promise are sometimes described as exceptions to the doctrine of privity, but (as Lord Reid suggested) the apparent exceptions are in truth applications of other legal principles to the contractual relationship of promisor and promisee. Fullagar J observed in Wilson v Darling Island Stevedoring and Lighterage Co Ltd (at p. 67): I doubt if there was any true exception at common law to the rule laid down by Tweddle v. Atkinson.

The first so-called exception is found in the law of trusts. A promisee may be or become a trustee of the promise for a third party … Where the promisee is a trustee, the third party acquires only an equitable interest in the promise. The third party does not become a party to the contract … The contract binds only the promisor and promisee and the third party beneficiary cannot enforce the promise as if he were a party to the contract. The third party can enforce the promise indirectly in an action in which the promisee is joined as a defendant … the promisee being an essential party in an action against the promisor … A second so-called exception is found in the law of agency. If a putative promisee is merely an agent for a third party, the third party is the promisee and is privy to the contract … The agency cases show that, unless the third party is in truth a promisee, he cannot take the benefit of the contract: see the discussion by McIntyre J of the cases relating to exemption clauses in ITO Ltd v Miida Electronics Inc, at pp. 663–669 … Neither the principles of trust nor the principles of agency are exceptions to the doctrine of privity. In their application to a third party promise, those principles proceed on the footing that the legal contractual right is vested solely in the promisee. There is no true exception to the doctrine of privity. If an exception were now introduced and a jus quaesitum tertio were recognized in respect of some contracts, the exception would raise at least as many problems as it might solve. The field of jus quaesitum tertio may look greener, but the brambles are no fewer.

Brennan J’s reference to ‘brambles’ is in fact a nod to an earlier quote from Lord Denning in his book The Discipline of Law76 in which his Lordship effectively remarked that the pursuit of justice through the common law was akin a to clearing a path through the woods and that old precedents of dubious value were like brambles. Clearly, Brennan J formed the view that abandoning the privity rule would raise its own set of complications. review questions 1 How has the question of privity and third party beneficiaries been dealt with by the courts in light of the doctrine of precedent? 2 Has the doctrine of precedent helped or hindered the development of fair and just rules within the doctrine of privity? Why?

76 Lord Denning, The Discipline of Law, Butterworths (1979), p. 414.

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• 14.5 Exceptions to the privity rule There are certain free-standing exceptions to the privity rule under The privity rule cannot the law. These exceptions provide a foundation for rights and easily limit the operation obligations incumbent upon third parties that have a basis in law of other legal principles quite separate from the contract at hand.77 The privity rule cannot and must accede to their operation. easily limit the operation of other legal principles and must accede to their operation. Whether these are true exceptions to the privity rule or whether this is merely the interplay of various common law rules is less clear. It may be more correct to regard these doctrines—agency, trust and the like—as supervening doctrines to which the doctrine of privity is subservient. Nonetheless, it is clear that under certain circumstances privity will not prevent third parties from gaining rights in relation to a contract. For example, agency law limits the operation of the privity rule. In the situation of an agency, the agent (A) acts on behalf of the principal (P) in order to enter into a contract with a third party  (T). The contract between A and T might appear on its face to not include P. However, as A is P’s agent for this particular transaction, P has automatically gained rights under  the contract. P can enforce the contract against T as the contract was made on P’s behalf.  In  this  situation, the operation of the privity rule is usurped by the application of agency law. One part of agency law, known as the doctrine of the undisclosed principal, is particularly inconsistent with the privity rule. Under the doctrine of the undisclosed principal—where A contracts with T and T is not aware at any time that A is P’s agent—P may still stand in A’s place under the contract if it can be shown that A was acting as P’s agent at all relevant times. As Lord Denning MR noted in Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd 78 the doctrine of the undisclosed principal exists due to commercial convenience. The effect of the doctrine is that the principal can be bound by the actions of the agent and that the third party can find themselves in a contractual relationship with the principal, despite originally having been of the view that they were bound only to the agent.79 Trusteeships can also constitute an exception to the privity rule. Under a trust arrangement a trustee owes a fiduciary duty to the beneficiary with respect of the subject matter of the trust. A  contracting party can contract for the benefit of the beneficiary. This rule was stated by Lush L  J in Lloyd’s v Harper:80 I consider it to be an established rule of law that where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B, and recover all that B could have recovered if the contract had been made with B himself.81

There have also been statutory abrogations of the privity rule. For example, in the Northern Territory, Queensland and Western Australia, legislation expressly provides benefits to third party beneficiaries to contracts.82

77 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 143 per Deane J. 78 Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 545, 552. 79 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 1 All ER 213. 80 (1880) 16 Ch 290. 81 Ibid, 321. 82 See Law of Property Act 2000 (NT), s 56; Property Law Act 1974 (Qld), s 55; Property Law Act 1969 (WA), s 11.

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• 14.6 Third party beneficiaries and exclusion clauses It is now well established that privity will not bar third party beneficiaries with respect to exclusion clauses in certain classes of contracts.83 In shipping contracts for the carriage of goods by sea, for example, exclusion clauses can now cover third party carriers and stevedores.84 For some time prior to the Privy Council’s decision in New Zealand Shipping Co Ltd v A M Sattherthwaite & Co Ltd; ‘The Eurymedon’ 85 the privity rule had been a barrier to protecting third parties in shipping contracts concerning the international sale of goods.86 Look at this scenario. Where Person A (the owner) and Person B (the carrier) contract for the transport of goods, Person B may require an exclusion clause in order to protect themselves and others who handle the goods. If the exclusion clause that is agreed to between Person A and Person B purports to extend to Person C (a third party who must of necessity handle the goods), then the privity rule would operate to prevent Person C from obtaining the benefit of the exclusion clause. In the context of international shipping this would operate against reasonable commercial expectations and practices.87 The difficulty that the privity rule created in this area of commerce was quite evident. Yet, for a time the privity rule triumphed over commercial expectations. In Wilson v Darling Island Stevedoring & Lighterage Co Ltd 88 and Midland Silicones Ltd v Scruttons Ltd,89 stevedores who negligently handled goods were unable to get the benefit of exclusion clauses. Significantly, in these cases the relevant clauses in the bills of lading applied only to the carriers and not to the stevedores. In Midland Silicones Ltd v Scrutton Ltd, Lord Reid devised a four-part test that would enable a stevedore to take the benefit of an exclusion clause: (i) The relevant bill of lading should make it clear that the stevedore was intended to be protected. (ii) The carrier should act as an agent for the stevedore with respect of the exclusion clause. (iii) The carrier should either have the stevedore’s authority or ratification should be supplied. (iv) The stevedore should provide consideration for the promise. The Privy Council in The Eurymedon followed Lord Reid’s test. The Privy Council held that the first two parts of Lord Reid’s test were satisfied by the terms of the relevant exclusion clause; the third term was satisfied as the stevedore was a related company to the carriers; and the fourth part was satisfied because the stevedores provided consideration by performing an existing legal duty. The Eurymedon’s reasoning has proved a contentious point in the commentary and case law on privity.90 However, both the High Court and the Privy Council in Port Jackson Stevedoring Pty 83 New Zealand Shipping Co Ltd v A M Sattherthwaite & Co Ltd; ‘The Eurymedon’ [1975] AC 154. 84 Ibid. 85 Ibid. 86 See Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43; Midland Silicones Ltd v Scruttons Ltd [1962] AC 446. 87 See for example the judgment of Lord Wilberforce in New Zealand Shipping Co Ltd v A M Sattherthwaite & Co Ltd; ‘The Eurymedon’ [1975] AC 154, 168–169. Note that domestic shipping is covered by the Insurance Contracts Act 1984 (Cth). 88 (1956) 95 CLR 43. 89 [1962] AC 446. 90 See The Mahkutai [1996] 2 Lloyd’s Reports 1, 8, where Lord Goff suggests that the solution provided by the application of Lord Reid’s test is too technical and that the recognition of a fully fledged exception might be preferable; see also Carrington Slipways Pty Ltd v Patrick Operations Pty Ltd (1991) 24 NSWLR 745, 747 per Kirby P; Justice David Malcolm, ‘The Negligent Pilot and the Himalaya Clause: A Saga of Disagreement’ (1993) 67 Australian Law Journal 14.

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Privity of contract

Ltd v Salmond and Spraggon Pty Ltd (The New York Star)91 endorsed Lord Reid’s four-part test. Further, the principles espoused in The Eurymedon have been followed in non-shipping cases such as Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,92 where the High Court held that an exclusion clause was applicable to a third party in a contract for the transportation of goods on land.

Ke y p o in ts for re v ision Despite much judicial and academic criticism, the privity rule still stands at common law. The operation of the privity rule has been limited by statute in some jurisdictions and in respect of certain classes of contracts. Nonetheless, in the Trident v McNiece decision, a majority of the High Court could not be found to overrule the privity rule. However, there is substantial judicial skepticism of the efficacy and fairness of the privity rule in respect of third party beneficiaries.

problem-solving practice David contracts with his son Jake with terms to the effect that Jake can use his timber yard free of charge for his logging business, but that on the death of David the yard will go to David’s daughter, Eve. David and Jake sign a contract and Jake uses the yard for several years for his business. David dies. Eve seeks to inherit the yard, but Jake challenges her on the basis of succession law. Can Eve invoke the contract between David and Jake to compel Jake to drop his claim? [For the purposes of this question, do not consider succession law.]

ANSWER Generally speaking, the privity rule would bar Eve’s claim in respect of the contract between David and Jake. The problem that Eve faces in the present context is that she has provided no consideration for Jake’s promise. In Coulls v Bagot’s Executor the privity rule was invoked by the majority of the High Court against a widow’s claim for a right under a contract on the basis that she had provided no consideration to the contract. There is precedent in Jackson v Horizon Holidays in respect of the quantum of damages that might allow a third party beneficiary to be included in the assessment of damages, but this authority is of no great value in relation to the substance of Eve’s claim. In Trident v McNiece there were leading and important judgments that could have overruled the privity doctrine; however, a majority of the judges in that case did not actually overrule the doctrine. Unfortunately, the privity rule would appear to bar Eve’s claim in this instance.

91 (1978) 139 CLR 231 (HC); (1980) 144 CLR 300 (PC). 92 (2004) 219 CLR 165.

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15

The doctrine of frustration

Chapt e r o v e rv i e w 15.0

Introduction  271

15.1

The application of the doctrine   271 15.1.1 The frustrating event   276 15.1.2 Without the fault of either party   276 Onus of proof   279 15.1.3 Radically alter the performance of the contract  283

15.2

What can constitute a frustrating event?   285 15.2.1 External events  285 15.2.2 Personality: death or incapacity   286 15.2.3 Increased burden of performance   287 15.2.4 Frustration of purpose: the principle of Krell v Henry   287 15.2.5 Uncontemplated events  288

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The doctrine of frustration

15.2.6 Disappointed expectations  289 15.2.7 Illegality  289 15.2.8 War  290 15.2.9 Delay  291 15.3

Absolute contracts  292

15.4

Land  292

15.5

Effects of frustration   296 15.5.1 Automatic discharge of obligation   296 15.5.2 Discharge in futuro   298

• 15.0 Introduction Frustration is one of the three reasons a contract may be discharged, the other two being by agreement and as a result of repudiation. However, unlike termination for breach, termination for frustration occurs automatically, and does not depend on the will of the parties—although it should be noted that agreements may contain express frustration clauses. Frustration is not selfinduced, in that neither party is responsible for the event which is said to frustrate the contract.

• 15.1 The application of the doctrine In Taylor v Caldwell  1 the plaintiffs were to use the Surrey Gardens and Music Hall for a series of concerts and fetes in June, July and August 1861. The Music Hall burned down prior to the first performance. The contract was held to have been discharged because the hall was essential to the performance of the contract. The Court stated that: where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.2

The circumstances in which the doctrine will apply are varied, and whether the doctrine applies ultimately becomes a question of fact. Frustration is a common law doctrine that may

1 (1863) 3 B & S 826. 2 Ibid, 826.

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be applied to any category of contract,3 including contracts for the sale of land4 (although its application to leases of land remains uncertain). Where frustration is proven to have occurred the court determines that the changed circumstances make it just and reasonable to relieve the parties of their obligations.5 Frustration of a contract renders the terms of the contract inoperative. Different circumstances in which a contract will be frustrated may be summarised as follows:6 (i) a particular thing essential to the performance of the contract becomes unavailable;7 (ii) in fairness and justice, the defendant’s liability to pay should be treated as having ended because of a supervening event—which neither party could be regarded as having contemplated— when the event was a risk that both parties were, or should have been, aware of; (iii) the basis or fundamental purpose of the contract—namely, allowance of deductions—has been destroyed when the allowance of deductions was no condition of the bargain; or (iv) a term relieving the defendant from liability should be implied when to imply such a term would not appear to accord with the intention of the parties as indicated by the express terms of the contract and is not necessitated so as to make the contract operate in accordance with their apparent intentions; or (v) the defendant’s obligation has become something radically different from that which the defendant undertook. A number of theories8 have been proposed to provide a satisfactory conceptual basis for the doctrine of frustration. For example, the House of Lords lists, without conclusively choosing between them, five possible theoretical bases for the doctrine of frustration: implied term, total failure of consideration, public policy, fundamental term, and construction. The construction theory was preferred by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd;9

3 Examples include construction contracts as in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC 119; licences under contract as in Krell v Henry [1903] 2 KB 740; employment contracts as in Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358 (Full Court); contracts for the lease of goods as in Consolidated Neon (Phillips Systems) Pty Ltd v Tooheys Ltd (1942) 42 SR (NSW) 152; contracts for the sale of goods as in Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada (The Julia) [1949] AC 293; voyage charterparties as in Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125; time charterparties as in Bank Line Ltd v Arthur Capel & Co [1919] AC 435; trading agreements as in Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265; contracts between members of an unincorporated association as in Re the Unley Democratic Association [1936] SASR 473; and promotional contracts as in Re Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226. 4 Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 Build LR 81. 5 See D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 1304. 6 Scanlan’s New Neon Ltd v Tooheys Ltd; N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), pp. 684–687; Davis Contractors Ltd. v. Fareham Urban District Council [1956] AC 696, 728–729 per Lord Radcliffe. 7 Cases supporting this general statement may be found collected in D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 1308. 8 Such as ‘implied term’ theory, which enabled the court to imply terms into frustrated contracts providing for the discharge of the parties; the ‘just solution’ theory, which devised an exception; the ‘disappearance of the foundation’ theory, where ‘foundation’ refers to either commercial purpose or the basis of the original agreement; the ‘impossibility of performance’ theory, although numerous cases have been decided on the basis of the impossibility of performance; the ‘failure of consideration’ theory; and the ‘mistake’ theory. Note that although mistake and frustration may be related—see Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 360— they are juristically distinct concepts. 9 [1981] AC 675; [1981] 1 All ER 161, per Lord Hailsham and Lord Simon.

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The doctrine of frustration

in fact it has been said that construction of the contract is relevant to all theories.10 Further, in National Carriers Lord Wilberforce found that the various concepts in truth ‘shade into one another and that a choice between them is a choice of what is most appropriate to the particular contract under consideration’.11 The High Court of Australia does not recognise the implied term theory. The notion of an implied term as the basis of the doctrine of frustration was rejected in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.12 Codelfa13 establishes that the doctrine of frustration is concerned with the termination of the contract by operation of law in particular circumstances, rather than by the operation of an implied condition. In the course of dealing with the implied term theory of frustration, Mason J stated: Of course, I am speaking of an implied term necessary to give business efficacy to a particular contract, not of the implied term which is a legal incident of a particular class of contract, of which Liverpool City Council v Irwin is an example. The difference between the two categories of implied term was mentioned by Viscount Simonds in Lister v Romford Ice and Cold Storage Co Ltd, where he referred to the search for the second category of implied term as being based ‘upon more general considerations,’ a comment endorsed by Lord Wilberforce in Irwin.14

Aickin J observed: The manner in which the doctrine of frustration is generally expressed has undergone some change, though it has not been suggested that its content has changed. When it was first developed it was usual to express it as arising from an implied term: see, for example, F A  Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd, per Lord Loreburn, Scanlan’s New Neon Ltd v Tooheys Ltd, where Lathan CJ adopted this view, but the other two members of the Court adopted a view much closer to that now prevailing. See also British Movietonews Ltd v London and District Cinemas Ltd. The doctrine is now generally expressed as depending on changes in the significance of the obligations undertaken and the surrounding circumstances in which the contact was made. This development was explained by the House of Lords in Davis Contractors Ltd v Fareham Urban District Council; see especially per Lord Reid, and per Lord Radcliffe.15

Aickin J quoted the now classic passage from the speech of Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council,16 which is set out below.

10 Gelling v Crispin (1917) 23 CLR 443, 454; Bank Line Ltd v Arthur Capel and Co [1919] AC 435, 444. 11 [1981] AC 675, 693. Lord Reid (at 719) maintained the distinction between the foundation and construction theories of contract, but probably on an unacceptable basis given that the foundation must be the product of a construction. 12 (1982) 149 CLR 337, 357. In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, Diplock LJ found reference to an implied term unnecessary to the decision-making process; it has also been considered fictitious by L E Trackman, ‘Frustrated Contracts and Legal Fictions’ (1983) 46 MLR 39; and unexplained in Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265, 275 per Lord Wright. 13 The law in relation to frustration of contracts is conveniently summarised in the judgments of Mason and Aickin JJ in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 356–367, 375–383; 41 ALR 367, 378–387, 393–400. It may be noted that Wilson J agreed with the reasons of Mason and Aickin JJ in respect of the application of the doctrine of frustration. 14 (1982) 149 CLR 337, 345. 15 Ibid, 394–395. 16 [1956] AC 696; [1956] 2 All ER 145.

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Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696; [1956] 2 All ER 145 Lord Radcliffe at 728–729; 159–160: Lord Loreburn ascribes the dissolution [of the contract] to an implied term of the contract that was actually made. This approach is in line with the tendency of English courts to refer all the consequences of a contract to the will of those who made it. But there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticised as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves. So long as each theory produces the same result as the other, as normally it does, it matters little which theory is avowed (see British Movietonews Ltd v London and District Cinemas Ltd, per Viscount Simon). But it may still be some importance to recall that, if the matter is to be approached by way of implied term, the solution of any particular case is not to be found by inquiring what the parties themselves would have agreed on had they been, as they were not, forewarned. It is not merely that no one can answer that hypothetical question; it is also that the decision must be given ‘irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances’ (Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 at 510). The legal effect of frustration ‘does not depend on their intention or their opinions, or even knowledge, as to the event’. On the contrary, it seems that when the event occurs ‘the meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it), but that which the parties, as fair and reasonable men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence’ (Dahl v Nelson, Donkin & Co (1881) 6 App Cas 38 at 59 per Lord Watson). By this time it might seem that the parties themselves have become so far disembodied spirits that their actual persons should be allowed to rest in peace. In their place there rises the figure of the fair and reasonable man. And the spokesman of the fair and reasonable man, who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself. So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.

The passage in Lord Reid’s speech (from Davis Contractors Ltd ) to which Aickin J referred in Codelfa included the following: It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made …

Chapter 15

On this view there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.17

Aickin J18 also referred to and adopted all that Stephen J said in Brisbane City Council v Group Projects Pty Ltd:19

The doctrine of frustration

‘The question is whether the contract which [the parties] did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.’

Furthermore there are insurmountable obstacles in the path of the defendants in seeking to persuade the court to hold that there was implied a term that the shares would be shares in a solvent company or, put another way, that the obligation to apply and pay for shares was conditional upon the company remaining solvent. No submission was made that the evidence met the necessary conditions for implication as summarised in BP Refinery (Westernport). No submission addressed the application of cl. 9.1, the entire agreement provision already referred to. In my opinion there is no basis for the implication of the term alleged.20

In accordance with Lord Radcliffe’s remarks, the following requirements need to be satisfied to make out an argument for frustration of a contract: (i) subsequent to the formation of the contract, there must be a frustrating event, or combined series of events;21 (ii) the frustrating event must occur without the fault of either party; and (iii) the frustrating event must radically alter the performance of the contract, and a mere change in the circumstances in which the contract is to be performed is insufficient. Lord Radcliffe’s remarks22 suggest that the most robust foundation is the construction of the contract, in that the court determines the parties’ obligations, both promised and altered, by subjecting the contract to construction.23 The doctrine will not operate where the contract contains provisions for the consequences which are to follow from the occurrence of specific events. In Claude Neon Ltd v Hardie 24 the resumption of land was construed as an event within a clause which provided that where the hirer’s interest in the land was ‘extinguished or transferred’, he was deemed to have defaulted on the agreement so that no frustration could be found. More often, however, contract provisions are found to not deal completely with the events relied upon as frustrating performance. In Bank Line Ltd v Arthur Capel & Co 25 a clause in a charterparty gave charterers an option to cancel in the event that the vessel was requisitioned, which it was. The Court held that the charterers had to prove not only requisition, but also a radical alteration in the nature (and hence the frustration)

17 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, 720; [1956] 2 All ER 145, 153–154. 18 (1982) 149 CLR 337, 378. 19 (1979) 145 CLR 143. 20 Ibid, 160–163. 21 Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724, 744. 22 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, 729. 23 See National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, 702 per Lord Simon; but compare 717 per Lord Roskill. 24 [1970] Qd R 93. 25 [1919] AC 435.

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of the contract resulting from that event. In Metropolitan Water Board v Dick Kerr & Co Ltd 26 a term dealing with ‘any difficulties or impediments … whatsoever or howsoever occasioned’ was not to be interpreted literally. And in Wong Lai Ying v Chinachem Investment Co Ltd 27 the doctrine was applicable despite the presence of a term expressly granting a right of rescission in the circumstances that arose.

15.1.1  The frustrating event It is not possible to exhaustively predetermine the nature of—or to define—the frustrating event. What constitutes a frustrating event will depend on the terms of the contract and the circumstances of the case. To qualify, however, the event must be severe enough to fundamentally change the agreement. It has been variously described as an event which makes the performance ‘different in substance’ from that originally agreed to;28 which creates a fundamentally different situation29 from that which pertained at the formation of the contract; or which deprives a party of ‘substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain’.30 Similarly, in Codelfa Construction Pty Ltd v State Rail Authority of NSW 31 Mason J accepted that a contract would be frustrated when the situation in which it was to be performed became ‘fundamentally different from the situation contemplated by the contract’.

15.1.2  Without the fault of either party Lord Radcliffe’s formulation of the frustration doctrine admits of no fault on either side.32 Contracts may not be frustrated due to the fault (by act or omission) of a party because the law  does not recognise self-induced frustration. As an application of the general legal principle or ‘moral rule’33 that persons should not benefit from their own wrongs, it has been said that the frustrating event or events must be external, and that they cannot be self-induced. An event is self-induced if it is in fact Contracts may not be caused by the default (either an act or an omission) of the party frustrated due to the fault (by act or omission) of a relying on it.34 Frustration may be self-induced when the party’s party because the law default is the cause of the frustrating event. The discharge of the does not recognise selfcontract will occur as the result of a breach rather than frustration induced frustration. in such cases.35

26 [1918] AC 119. 27 (1979) 13 Build LR 81; PC 7. 28 Metropolitan Water Board v Dick, Karr & Co Ltd (1917) 2 KB 1, 30; affirmed Metropolitan Water Board v Dick, Karr & Co Ltd [1918] AC 119. 29 British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166, 185. 30 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 66. 31 (1982) 149 CLR 337, [49]. 32 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, 729. 33 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 66 per Diplock LJ. 34 Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169, 186. 35 Ibid, 186 per Latham CJ.

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The doctrine of frustration

Frustration may be self-induced where it results from the deliberate but impermissible act of a party. The causal connection is imperative.36 Again, note that the discharge is by breach rather than frustration.37 An act which does not breach the contract (or is not contrary to an express term of the agreement) may frustrate the contract if it is deliberate.38 Further, an omission not breaching a contractual term may nevertheless be self-induced and therefore not a frustrating event. Negligence causing the relied-upon event is one such example.39 However, carelessness not amounting to a defaulting breach would not suffice.40 The element of causation between the frustration and the default is essential, and where there is none the parties will be discharged because the frustration cannot be considered self-induced. Examples include the contract being frustrated by a breach of contract.41 For example, although the closure of the Suez Canal prevented performance of the contract in Ocean Tramp Tanker Corp v V/O Sovfracht (‘The Eugenia’),42 the contract was not frustrated because the defendant had entered the canal contrary to an express term of the contract and was therefore in breach. Because the contract had made provision for the situation which was claimed to frustrate the contract, as Denning LJ said: We are thus left with the simple test where the situation must arise which makes the performance of the contract ‘a thing radically different from that which was undertaken by the contract’ … to see if the doctrine applies, one first construes the contract and sees whether the parties have themselves provided for the situation that has arisen. If they have provided for it, the contract must govern. There is no frustration.43

Other examples include a deliberate act preventing the performance of the contract, even if that act is not a breach by reference to the terms of the contract,44 or an omission which, although not a breach (negligence, for instance), bars the party from relying on frustration.45 The contract is not frustrated where both parties have contributed to the frustrating event, and neither may therefore rely on it. For example, the mutual default of concurrent obligations does not frustrate a contract.46 So, if an arbitration clause obliges both parties to avoid delay but both parties cause delay, then the contract is not frustrated but rather breached by both parties.47 In L’Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd,48 Lord Mustill made the following observations in reference to an arbitration clause in a contract.

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524. J Lauritzen AS v Wijsmuller BV (‘The Super Servant Two’) [1990] 1 Lloyd’s Rep 1 (CA). Denmark Production Ltd v Boscobel Productions Ltd [1969] 1 QB 699 (CA). J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 (CA). Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154, 192 per Lord Wright, 204 per Lord Porter. Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169. [1964] 2 QB 226 (CA). Ibid, 239. Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 (PC). In that case, the charterers acquired three licences for their five trawlers but decided not to apply one of them to the trawler under the charterparty. They then sought to rely on the Minister’s failure to issue a licence as frustrating the contract. The Privy Council found this to be a case of a self-induced frustration. 45 Pall Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854. 46 See L’Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486, 521; [1994] 1 All ER 20. 47 See Bremer Vulkan Schiffblau und Maschinenfabrick v South India Shipping Corp Ltd [1981] AC 909. 48 [1994] 1 AC 486; [1994] 1 All ER 20. 36 37 38 39 40 41 42 43 44

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L’Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486; [1994] 1 All ER 20 Lord Mustill at 33: [I]nactivity by the claimant attracts no sanction it needs no excuse, particularly vis-à-vis respondents who are equally to blame for failing to co-operate in applying to the arbitrator for an order setting the arbitration in motion. I cannot accept this submission. Quite apart from the known antecedents of s 13A [of the Arbitration Act 1950 ], sub-s (3) thereof demonstrates in the clearest way an intention to create for arbitrators a regime which reflects that which prevails in the High Court. This regime knows nothing of mutual obligations to apply to the court for orders that the plaintiff shall proceed. The onus is firmly on the plaintiff to make things happen without the need for an order and without the need for prompting by the defendant. If this were not enough, the language of sub-s (2) shows that the concept of each party being equally to blame for delay has no part in the new regime. I set out the words again: ‘there has been an inordinate and inexcusable delay on the part of the claimant in pursuing the claim …’ The claimant is to pursue the claim and needs an excuse if he does not do so. This is nothing to do with Bremer Vulkan [where the Court of Appeal upheld that the role of arbitrators obligated the determination of, and precluded the refusal to decide, cases]. Freed from the shackles of that doctrine the arbitrator is to be at liberty to consider whether, in terms of practicalities rather than theories, the delay was the claimant’s fault. If the claimant puts up excuses, and the arbitrator rejects them, the delay must be inexcusable within the intendment of Parliament. Finally, s 13A contemplates a situation in which the claimant has been so remiss in exercising his right to call for an award that the award when ultimately rendered may be the outcome of an unfair process. A right which the claimant regards so poorly that he has taken no trouble to enforce it is far removed from those which the courts have been so alert to protect; and in my view the presumption that Parliament did not intend to affect it is correspondingly weak. In this light I turn to the language of s 13A construed, in case of doubt, by reference to its legislative background. The crucial words are: ‘(a) … there has been inordinate and inexcusable delay …’ Even if read in isolation these words would I believe be sufficient, in the context of s 13A as a whole, to demonstrate that the delay encompasses all the delay which has caused the substantial risk of unfairness. If there were any doubt about this the loud and prolonged chorus of complaints about the disconformity between practices in arbitration and in the High Court, and the increasing impatience for something to be done about it, show quite clearly that s 13A was intended to bite in full from the outset. If the position were otherwise it would follow that, although Parliament has accepted the advice of all those who had urged that this objectionable system should be brought to an end, and has grasped the nettle and provided a remedy, it has reconciled itself to the continuation of arbitral proceedings already irrevocably stamped with a risk of injustice. I find it impossible to accept that Parliament can have intended any such thing, and with due respect to those who have suggested otherwise I find the meaning of s 13A sufficiently clear to persuade me that in the interests of reform Parliament was willing to tolerate the very qualified kind of hardship implied in giving the legislation a partially retrospective effect. Accordingly I agree with Beldam LJ that the arbitrator did have the powers to which he purported to exercise. I would therefore allow the appeal and restore the award of the arbitrator.

Chapter 15

The doctrine of frustration

Onus of proof In cases of frustration the question is, as Lord Russell of Killowen put it in the leading case of Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd,49 whether ‘frustration will excuse unless proved to be self-induced or whether frustration will not excuse unless it is proved to be self-induced’. It is often stated that frustration will discharge a contract in circumstances where neither party is in default. On this basis, if a party’s defence was that it was not self-induced, that party would be required to prove that other party was not in default either. Clearly the result of the logic of the premise is absurd. However, proof of the fact is required where it is alleged that frustration was self-induced. A party is not bound to prove frustration was self-induced merely because the defendant alleges as a defence to breach that the contract was frustrated. A party need only prove that frustration was self-induced where a non-performing promisor provides evidence that the contract was frustrated.50 The usual rule as to onus of proof is that ‘the party who asserts must prove’.51 Onus of proof lies on the party alleging the absence of an entitlement to rescind.52 The party claiming damages for breach of contract alleging, against the defence of frustration, that frustration is self-induced, bears the onus of proving their case.53 In the leading case of Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd 54 Viscount Maugham LC said: In general the rule which applies is ‘Ei qui affirmat non ei qui reget incumbit probatio’ (Proof lies upon him who asserts not on him who denies). It is an ancient rule founded on considerations of good sense and should not be departed from without strong reasons.55

The mere possibility that the frustrating event was self-induced does not disentitle the party which relies on the doctrine. The defence of frustration will succeed if the cause of the alleged frustrating event cannot be identified. It would be illogical to place the onus on the party invoking the doctrine thereby forcing them to prove their own and the other party’s default. Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd involved an event alleged by one party to a contract to have brought the contract to an end by frustration. The cause of an explosion which damaged a vessel could not be ascertained, making it impossible for the charterers to establish that the owners’ default had caused the accident. The possibility of default being the cause of the frustrating event does not disentitle a party from relying on the doctrine. The onus of proof that the frustrating event results from a breach by the other party lies with the contending party. Lord Russell of Killowen defined the options in the most adamant of terms as follows: The rival contentions may be stated thus: (1) The appellants say: ‘Frustration will excuse unless it is proved to be self-induced.’ (2) The respondents say: ‘Frustration will not excuse unless it is proved not to be self-induced.’56 49 [1942] AC 154, 172; see also G H Treitel, Law of Contract, 7th ed., Sweet and Maxwell (1987), p. 701. 50 Sharp v Batt (1930) 25 Tas LR 33. 51 See Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; 154 ALR 361; [1998] HCA 38, [99]. 52 Nina’s Bar Bistro and City of Gosford v Marim Pty Ltd (1990) 6 BPR 13871, [614F] per Glass JA, [621A] per Mahoney JA, 631G-632D per Priestley JA. 53 Allied Mills Ltd v Gwydir Valley Oilseeds Pty Ltd [1978] 2 NSWLR 26, 30; compare Plumor Pty Ltd v Handley (1996) 41 NSWLR 30, 35–36; 134 FLR 265; 7 BPR 14,735; (1997) NSW ConvR ¶55-800. 54 [1942] AC 154; [1941] 2 All ER 165. 55 Ibid, 174; 179. 56 [1941] 2 All ER 165, 177.

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Viscount Simon LC made the following observations. Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1941] 2 All ER 165 Viscount Simon LC at 170: I may observe, in the first place, that, if this were correct, there must be many cases in which, although in truth frustration is complete and unavoidable, the defendant will be held liable because of his inability to prove a negative—in some cases, indeed, a whole series of negatives. Suppose that a vessel, while on the high seas, disappears completely during a storm. Can it be that the defence of frustration of the adventure depends upon the owner’s ability to prove that all his servants on board were navigating the ship with adequate skill and that there was no ‘default’ which brought about the catastrophe? Suppose that a vessel in convoy is torpedoed by the enemy and sinks immediately with all hands. Does the application of the doctrine require that the owners should affirmatively prove that those on board were keeping a good look-out, were obscuring lights, were steering as directed, and so forth? There is no reported case which requires us so to hold. The doctrine upon which the defence of frustration depends is nowhere so stated as to place this onus of proof on the party relying on it. From the classic judgment of Blackburn J in Taylor v Caldwell I extract these passages, at pp. 833 and 839 respectively: where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor, [p. 833]. The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance [p. 839].

It is true that the earlier of these passages states the requirement that the impossibility should have arisen ‘without default of the contractor,’ and a similar qualification is insisted upon in many other cases, eg, by Viscount Haldane in Bank Line Ltd v Capel (Arthur) & Co, at p 445: where people enter into a contract which is dependent for the possibility of its performance on the continued availability of the subject-matter, and that availability comes to an unforeseen end by reason of circumstances over which its owner had no  control, the owner is not bound unless it is quite plain that he has contracted to be so.

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The doctrine of frustration

However, this is not the same thing as saying that the defendant must disprove default. The qualification means, in my opinion, no more than that, unless default is proved or ought to be inferred, the defence is complete. Where the onus lies is still to be determined. In this connection, it is well to emphasise that, when ‘frustration’ in the legal sense occurs, it does not merely provide one party with a defence in an action brought by the other. It kills the contract itself and discharges both parties automatically. The plaintiff sues for breach at a past date and the defendant pleads that at that date no contract existed. In this situation, the plaintiff could only succeed if it were shown that the determination of the contract were due to the defendant’s ‘default,’ and it would be a strange result if the party alleging this were not the party required to prove it. The doctrine of discharge from liability by frustration has been explained in various ways, sometimes by speaking of the disappearance of a foundation which the parties assumed to be at the basis of their contract, sometimes as deduced from a rule arising from impossibility of performance, and sometimes as flowing from the inference of an implied term. Whichever way it is put, the legal consequence is the same. The most satisfactory basis, I think, upon which the doctrine can be put is that it depends on an implied term in the contract of the parties. This was the basis adopted in Taylor v Caldwell, which is practically the first case of the modern line of authorities. It is the view taken in many later cases, nowhere more clearly than in the exposition of Earl Loreburn in F A Tamplin SS Co Ltd v Anglo-Mexican Petroleum Products Co Ltd, at pp. 403, 404. It has the advantage of bringing out the distinction that there can be no discharge by supervening impossibility if the express terms of the contract bind the parties to performance notwithstanding that the supervening event may occur. Discharge by supervening impossibility is not a common law rule of general application like discharge by supervening illegality. Whether the contract is terminated or not depends on its terms and surrounding circumstances in each case. Moreover, it seems to me that the explanation of supervening impossibility is at once too broad and too narrow. Some kinds of impossibility may, in some circumstances, not discharge the contract at all. On the other hand, impossibility is too stiff a test in other cases. For example, if the Coronation cases, such as Krell v Henry, are to be regarded as rightly decided on their facts, the explanation of such contracts coming to an end is not to be classed as due to impossibility, for the seats let remained available, and the actions in those cases were brought for the payment or return of money. Every case in this branch of the law can be stated as turning on the question of whether, from the express terms of the particular contract, a further term should be implied which, when its conditions are fulfilled, puts an end to the contract. If the matter is regarded in this way, the question, therefore, is as to the construction of a contract, taking into consideration its express and implied terms. The implied term in the present case may well be: ‘This contract is to cease to be binding if the vessel is disabled by an overpowering disaster, provided that disaster is not brought about by the default of either party.’ This is very similar to an express exception of ‘perils of the seas,’ as to which it is ancient law that, by an implied term of the contract, the shipowner cannot rely on the exception if its operation was brought about either (i) by negligence of his

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servants, or (ii) by his breach of the implied warranty of seaworthiness. If a ship sails and is never heard of again, the shipowner can claim protection for loss of the cargo under the express exception of perils of the seas. To establish that, must he go on to prove (i) that the perils were not caused by negligence of his servants, and (ii) were not caused by any unseaworthiness? I think clearly not. He proves a prima facie case of loss by sea perils, and then he is within the exception. If the cargo owner wants to defeat that plea, it is for him by rejoinder to allege and prove either negligence or unseaworthiness. The judgment of the Court of Appeal in The Glendarroch is plain authority for this. The point as to onus of proof is put very clearly in the third paragraph of Scrutton on Charterparties (14th Edn), art. 91, p. 297 (see also Carver on Carriage By Sea (8th Edn), § 78). The decision in The Northumbria involves the same conclusion. Another example, from the law of bailment, confirms this view. Assume a bailment of goods to be kept in a named warehouse with an express exception of loss by fire. Proof of destruction by fire would prima facie excuse the bailee. The bailor could counter by alleging either (i) that the fire was caused by the negligence of the bailee, or (ii) that the goods, when burnt, were not stored in the agreed warehouse, but it would be for the bailor, not only to allege, but to prove, either (i) or (ii), though he might rely on facts proved or admitted by the bailee as establishing his proposition. Moreover, there is at any rate an inference leading to the same view in Jackson v Union Marine Insurance Co Ltd. The plaintiff in that case had entered into a charterparty under which his vessel was to proceed from Liverpool to Newport and there take on board a cargo of iron rails for a voyage to San Francisco. The plaintiff  effected an  insurance on the chartered freight for the voyage with the defendants, and the question was whether, owing to the vessel going aground upon the rocks in Carnarvon Bay on her way from Liverpool to load at Newport, the adventure had been frustrated so as to involve the loss of the chartered freight by perils of the seas. Bramwell  B, in delivering the judgment of the majority of the Court of Exchequer Chamber, makes it plain, at p. 142, and again at p. 144, that the long delay due to the stranding, and the consequent impossibility of quick repair, would operate to bring the contract to an end only if the stranding arose by no default of the ship. The condition precedent was that the vessel should arrive at Newport in a reasonable time, and Bramwell B, said, at p. 144: The condition precedent has not been performed, but by default of neither.

What is noticeable is that, so far as appears from the report, frustration was treated as established without it being thought to be a necessary part of the plaintiff’s case to disprove default, while the defendants did not choose, or were not able, to establish default themselves. The report of the case in the court below leads to the same inference. Brett J delivering the judgment of the majority, uses the phrase ‘without default of either party,’ at p. 581. The facts as to the stranding are shortly given at p. 572, and the questions left to the jury approved in both courts) at p. 573, but it never occurred to anyone in either court to suggest that one essential question that ought to be left to the jury was: ‘Have the shipowners proved that the stranding took place without negligence or default on the part of themselves or their servants?’

Chapter 15

The doctrine of frustration

I reach the conclusion that Atkinson J took the right view in this case, and that the Court of Appeal was mistaken in holding that, once the frustration in fact was established and any inference of default alleged to arise from the fact that the ship was under the control of the appellants’ servants was negatived, it lay upon the appellants to go further and satisfy the arbitrator positively that the frustration occurred without their default.

15.1.3  Radically alter the performance of the contract Under English law the principle of pacta sunt servanda (the contract is the law of the parties) obliged parties to perform contractual obligations unless performance was an objective impossibility. In Paradine v Jane 57, on the basis that contractual obligations were absolute, and that he could take precautions against supervening events by drafting the appropriate contractual provisions, a tenant was successfully sued for rent despite demonstrating that he had been dispossessed of the subject property for two years of the lease. In Printing and Numerical Registering Co v Sampson58 Sir George Jessel (at 465) held that: [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 voluntarily shall be enforced by Courts of Justice.

Courts subsequently recognised a limited set of situations and circumstances in which the failure of an assumption shared by the parties that a thing or person central to the contract existed defeated an implied condition and excused performance.59 Lord Radcliffe defined the operation of the doctrine of frustration when circumstances have radically altered in Davis Contractors Ltd v Fareham Urban District.60 In that case a postwar labour shortage was held not to frustrate a contract even if it markedly increased the cost and the time taken for performance than contemplated when the agreement was concluded. His Lordship said: frustration occurs when the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do. There must be … such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.61

Lord Radcliffe was affirming a principle enunciated in British Movietonews Ltd v London & District Cinemas Ltd 62 in which the House of Lords stated that: if on the other hand a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a 57 58 59 60 61 62

(1647) Aleyn 26; 82 ER 897. 19 LR Eq 462 (1875). Taylor v Caldwell [1863] EngR 526; 3 B & S 826; 122 ER 309. [1956] AC 729. Davis Contractors Ltd v Fareham Urban District Council [1956] AC 729. [1952] AC 166; [1951] 2 TLR 571; [1951] 2 All ER 617.

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fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point not because the Court in its discretion thinks it just and reasonable to qualify the terms of the contract but because on its true construction it does not apply in that situation.63

In other words the contract will be frustrated when new circumstances require it to be performed in a manner substantially different from what the parties had agreed to. In Brauer & Co (Great Britain) Ltd v James Clerk (Brush Materials) Ltd 64 the increase by 20 to 30 per  cent above the agreed price in the price of Brazilian Pissava—a material used in the production of brush—according to Lord Denning, while it may have made the performance of the contract more onerous, did not radically alter the circumstances of the performance of the contract, although his Lordship opined that a one-hundred-fold increase in the price would have.65 The test for frustration was restated by Lord Simon in National Carriers Ltd v Panalpina (Northern) Ltd: 66 Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances: in such case the law declare both parties to be discharged from further performance.

The leading Australian authority for the doctrine of frustration is Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.67 Codelfa agreed to construct a tunnel for the New South Wales Rail Authority under a contract in which time was of the essence. However, the noise of construction works caused residents to obtain an injunction restricting the days of the week and times of the day during which construction was permitted. The injunction made it impossible for

63 185. 64 [1952] 2 Lloyd’s Rep. 147. 65 Refer the judgment of Viscount Simon in British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166. It was ruled that an exceptional increase or drop in price, sudden devaluation of the currency, unexpected obstacle to performance or other impediment, has no effect on the agreement made between the parties. Indeed, in this case, the contract was considered to be frustrated not because performance had become excessively onerous but because new circumstances had made performance an entirely ‘different thing’ from that which was originally agreed upon. CM Schmitthoff, The Export Trade – The Law and Practice of International Trade (4th edn, London: Stevens & Son Limited, 1962) 100; P Gallo, ‘Eccessiva Onerosità Sopravvenuta e Problemi di Gestione del Contratto in Diritto Comparato’ (1991) VII, sez civ, Digesto IV, 257; C Rossello, ‘Sopravvenienze Impreviste ed Adattamento del Contratto nel Diritto Inglese e Statunitense’ (1988), Diritto del Commercio Internazionale 469. This line of reasoning was confirmed in the so called Suez Canal cases that were filed after the sudden closure of the Suez Canal caused by the Arab-Israeli war. V Roppo, ‘Impossibilità Sopravvenuta, Eccessiva Onerosità Della Prestazione e “Frustration of Contract”’ (1973), Rivista Trimestrale di Diritto Processuale e Civile 1239–63. In these cases, although shipping costs underwent a dramatic increase as the ships had to circumnavigate the southern tip of Africa, English judges rejected the plea of frustration, ruling that the event had not rendered performance radically different from what had been agreed upon. The only case in which the plea of frustration was granted was Société Franco Tunisienne d’Armement v Sidermar SpA [1961] 2 QB 278. In this case the judge was oriented by a clause in the contract which made express reference to passage through the Suez Canal. 66 [1981] AC 675. 67 (1982) 149 CLR 337.

Chapter 15

The doctrine of frustration

Codelfa to complete construction in the time specified by the contract. The High Court held that the injunction had radically altered the circumstances in which the contract was to be performed such that the contract could be considered frustrated.

• 15.2 What can constitute a frustrating event? 15.2.1  External events In most cases, frustration occurs in circumstances where In most cases, (and historically the doctrine originates from cases wherein)68 frustration occurs in performance has become impossible, either because the subject circumstances where matter of the contract, through no default on the part of either performance has become impossible, either party, has been destroyed prior to performance, or because because the subject 69 undertaking the contract has become commercially inadvisable. matter of the contract has Destruction of the subject matter of the contract does not been destroyed prior to performance, or because amount to frustration if one of the parties has agreed to bear the undertaking the contract risk of destruction or guaranteed the continued existence of the has become commercially subject matter. Under the Sale of Goods legislation, an agreement inadvisable. to sell specific goods is avoided if those goods perish before the risk passes to the buyer. While the risk of destruction frequently passes to the buyer when the goods are transferred to them, this is not invariably the case. Once the risk has passed, destruction of the goods does not frustrate the contract and the buyer is liable to the seller. The frustrating event may be the loss not of the object itself, but of its availability. In the case of Hirji Mulji v Cheong Yue SS Co Ltd 70 the parties entered a contract on 17 November 1915 whereby the charterers were to time charter a vessel for 10 months from 1 March 1917. The requisitioning of the vessel by the government from shortly before the time charterparty was due to commence until February 1919 frustrated the contract. As to the question of when the contract was frustrated, the Court held that this occurred in late 1917, by which time it had become clear that the vessel would not be available to the charterers. The unavailability of the subject matter of the contract for the entire period of the contract will not necessarily frustrate the contract if it allows for the performance of a significant proportion of it. The courts have considered the likely period of delay relative to the contract period and have determined that, for example, a time charterparty of five years which still made three years available to the charterers did not frustrate the purpose of the contract.71 Where a contract entitles a party to an option with respect to the subject matter—enabling it to perform the contract where one option is destroyed but not the other—there will be no frustration.72 68 Taylor v Caldwell(1863) 3 B & S 826. 69 Horlock v Beal [1916] 1 AC 486, 492 per Loreburn LJ, referring to a contract becoming ‘impracticable in a commercial sense’. 70 [1926] AC 497. 71 FA Tamplin SS Co Ltd v Anglo American Petroleum Products Co Ltd [1916] 2 AC 397. 72 J Lauritzen AS v Wijsmuller BV (‘The Super Servant Two’) [1990] 1 Lloyd’s Rep 1 (CA), where a carrier which contracted to transport a drilling rig had the option to choose one of two vessels, one of which was lost prior to the option being exercised.

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In the case of a supply contract, where the source is not available, the court must be determine first, why the source was not available, and second, the scope of the supplier’s promise. Performance will be frustrated by reason of the unavailability of the subject matter if that unavailability is the result of external events of neither the supplier’s making nor responsibility, such as government prohibition, a change in the law or supervening illegality73 (which is a common law principle wider than the contract principle of frustration, but whose legal consequences and results are the same),74 or destruction by fire, flood or other external cause. But there will be no frustration if the supplier has simply decided to supply another person who has offered a higher price, in which case the event will have been self-induced. Contracts to purchase generic goods by description cannot normally be frustrated merely because the supply is exhausted. However, where the contract identifies a particular source—or through mercantile usage a particular description implies a specific source or goods—such as a crop in a particular field, the contract is frustrated if the crop fails. Frustration can also extend to method and, if the specified way of performing a contract cannot be adhered to because of changed circumstances for which neither party is responsible, both are excused from performing the contract thereafter. In Cornish v Kanematsu,75 the contract was for the shipment of goods to be made per P&O steamer sailing from Japan direct to Sydney on or around a particular date. However no such ship was despatched, so the contemplated mode of performance became impossible and the contract was frustrated. In Australia a contract will be frustrated if the manner in which the contract was to be performed becomes impossible. The contract which was the subject of Codelfa Construction Pty Ltd v State Rail Authority of NSW 76 was found to be frustrated because the method of its performance  was  rendered  impossible. The parties had entered a contract under which the appellant was to construct railway tunnels in Sydney. The appellant had tendered for the project on the basis that it would work three shifts per day for six days a week including Sundays, which method it adhered to, although no provision was made for this in the contract. After the commencement of construction, residents obtained injunctions to restrain Codelfa from committing a nuisance which limited them to working two shifts per day for six days a week, excluding Sundays. The change in the method must be radical or substantial. In Tsakiroglou & Co Ltd v Noblee Thorl GmbH 77 although Sudanese groundnuts were not delivered at Hamburg due to the closure of the Suez Canal, the contract was not frustrated because they could have been sent by other routes.

15.2.2  Personality: death or incapacity A contract will be frustrated when the promisor dies or is disabled from performing a contract which relies on the promisor specifically for its performance. Examples include employment contracts where the employee has died,78 or where an artist contracted to execute a design becomes incapacitated by blindness.79 73 See Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154, 163. 74 Consolidated Neon (Phillips System) Pty Ltd v Tooheys Ltd (1942) 42 SR (NSW) 152, 157. 75 (1913) 13 SR (NSW) 8. 76 (1982) 149 CLR 337. 77 [1962] AC 93. 78 Cutter v Powell (1795) 6 TR 320; Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358. 79 Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125, 145.

Chapter 15

The doctrine of frustration

Temporary incapacity may frustrate a contract depending on the nature of the contract, and the extent and duration of the incapacity: if it undermines the purpose of the contract, then temporary incapacity may amount to frustration.80 If, for example, a concert has to be cancelled because a performing artist is struck down by illness and is unable to perform, the contract is discharged without breach on the part of the artist.81 However, temporary incapacity is not likely to frustrate a contract which establishes an enduring relationship, rather one that relates to the performance of a single obligation. Contracts of employment, for example—which explicitly anticipate periods of sickness and even permanent disability—are not readily frustrated,82 but if a contract makes no such specific provision, it will be frustrated if the employee is unable to perform their duties for an extended period.

15.2.3  Increased burden of performance A contract may be frustrated if the obligations under it are able A contract may be to be performed, but only at a burden much greater and radically frustrated if the obligations different from that contemplated by the parties at the formation under it are able to be of the contract.83 In Codelfa Construction Pty Ltd v State Rail Authority performed, but only at a of NSW 84 the injunctions taken out by local residents created burden much greater and radically different from an additional burden on the promisor which made the contract that contemplated by the radically different from that agreed to by the parties and, in the parties at the formation of new circumstances under which construction was able to proceed, the contract. commercially imprudent. However, Codelfa is not authority for the proposition that unforeseen events making the performance of the contract more burdensome will necessarily frustrate the contract.85 For example, a charterparty voyage from Odessa to India was not frustrated when the contemplated passage through the Suez Canal had to replaced by a voyage around the Cape of Good Hope, taking 30 days longer.86

15.2.4  Frustration of purpose: the principle of Krell v Henry The non-occurrence of an event may frustrate a contract if that event was the reason for entering the contract. In Krell v Henry 87 the plaintiff hired a flat in London to view the coronation parade of Edward VII, which was cancelled when the King fell ill. There was no statement of this purpose in the agreement, which referred only to the lease of the room. The cancellation of the coronation parade did not upset the room hire; nevertheless, the Court held that the cancellation of the parade frustrated the contract—not merely because the circumstances of the performance had changed, but because both parties ‘regarded [the coronation procession] … as the foundation of the contract’.88 80 81 82 83 84 85 86 87 88

Whim Well Copper Mines Ltd v Pratt (1910) 12 WALR 166. Robinson v Davison (1871) LR 6 Ex 269. Finch v Sayers [1976] 2 NSWLR 540, 558. Scottish Halls Ltd v The Minister (1915) 15 SR (NSW) 81. (1982) 149 CLR 337. Scottish Halls Ltd v The Minister (1915) 15 SR (NSW) 81, 89–90. Ocean Tramp Tankers Corp v V/O Sovfracht (‘The Eugenia’) [1964] 2 QB 226. [1903] 2 KB 740 (CA). Ibid, 750.

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Note that it is certainly not the ratio of Krell v Henry that changed circumstances in and of themselves, or extraneous factors which deprive a party of an expected outcome, frustrate contracts.89

15.2.5  Uncontemplated events The preponderance of authority strongly indicates that the event said to frustrate the contract must be one not foreseen by the parties.90 Frustration refers to the parties’ purpose in entering the contract and what is missing when a contract is frustrated must be ‘an express condition or state of things going to the root of the contract, and essential to its performance’.91 As with the non-occurrence of a contemplated event, the occurrence of an uncontemplated event may frustrate a contract if the purpose of the contract cannot be realised. If something essential to the performance of the contract ceases to, or does not, exist the contract will be frustrated.92 In Herne Bay Steam Boat Co v Hutton93 the defendant hired a boat to view the naval review that was to accompany King Edward VII’s coronation and for a cruise around the fleet on the same day, but the King’s illness forced the cancellation of the review. The Court did not agree with the defendant’s argument that the cancellation frustrated the purpose of the contract, holding that the review was not the contract’s foundation and that, because the defendant could still use the boat to achieve at least one of its stated purposes (the cruise around the fleet), the hire contract had not been rendered hollow. Foreseeing the cause of the frustrating event will not defeat the frustration of the contract. Parties who foresee the cause of an event that could frustrate the contract may make provision for it, and avoid the frustrating event by taking alternative action. The doctrine of frustration is not thereby excluded because it cannot be said that foresight of the cause of the frustration of the alternative was foresight of the frustrating event itself.94 Further, the event that was foreseen must have been appreciated as a real and material possibility and not merely reasonably foreseeable. For example, a person may know they are unwell, but not foresee as a serious possibility that they will become disabled.95 In addition, if the 89 BAS Capital Funding Corp v Medfinco Ltd [2004] 1 Lloyd’s Rep 652, 677; [2003] EWHC 1789 (Ch), [182] per Lawrence Collins J; but compare Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525 (Full Court), where a superannuation fund did not eventuate as a result of surrounding events for which contracting parties were not responsible. 90 Krell v Henry ([1903] 2 KB 740, 751 per Vaughn Williams LJ (Sterling LJ agreeing); Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, 724 per Lord Reid; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 359 per Mason J (Stephen and Wilson JJ agreeing). By contrast, in Ocean Tramp Tankers Corp v V/O Sovfracht (‘The Eugenia’) [1964] 2 QB 226, 239, Denning MR proposed that ‘the only thing that is essential’ for the doctrine of frustration to apply ‘is that the parties should have made no provision for it in their contract. The only relevance of its being “unforeseen” is this: If the parties did not foresee anything of the kind happening, you can readily infer they have made no provision for it: whereas, if they did foresee it, you would expect them to make provision for it.’ 91 Krell v Henry ([1903] 2 KB 740, 748. 92 Ibid per Vaughn Williams LJ. 93 [1903] 2 KB 683. 94 Palmco Shipping Inc v Continental Ore Corp (‘The Captain George K’) [1970] 2 Lloyd’s Rep 21, 31; Nile Co for the Export of Agricultural Crops v H and J M Bennet (Commodities) Ltd [1986] 1 Lloyd’s Rep 555; contrast Denning MR in Ocean Tramp Tankers Corp v V/O Sovfracht (‘The Eugenia’) [1964] 2 QB 226, 239. 95 Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358 (Full Court).

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event was foreseen, but not the extent to which it interfered with the performance of the contract, the contract may still be discharged for frustration.96

15.2.6  Disappointed expectations Disappointed expectations do not frustrate contracts; the common occurrence of a failure to fully realise the expected benefits of a contract provides no basis for the frustration of its purpose.97 As Reid LJ observed in Davis Contractors Ltd v Fareham Urban District Council,98 the task of the court is to determine:

The common occurrence of a failure to fully realise the expected benefits of a contract provides no basis for the frustration of its purpose.

o n the true construction of the terms which are in the contract read in the light of the nature of the contract and of the relevant surrounding circumstances … whether the contract which they did make … is wide enough to apply to the new situation: if it is not, then it is at an end.99

In Scanlan’s New Neon Ltd v Tooheys Ltd,100 government orders of indefinite duration during World War II prevented hired neon signs being illuminated. A contract for the hire of such signs did not guarantee the right of illumination, so the government orders did not interfere with the performance of the contract. The illegality only made the contract less beneficial, because although illumination of the signs was illegal, their daytime display was unaffected and performance was accordingly not impossible. The illegality did not radically alter the nature of the contract so as to frustrate it.101

15.2.7 Illegality Contracts may be void or unenforceable if at the time of their The discharge of a formation they were illegal for some reason, such as their purpose. contract for reasons of They may also be discharged by reason of illegality after they have illegality is a matter of been entered into. However, note that the discharge of a contract public policy and a rule of common law rather than for reasons of illegality is a matter of public policy and a rule of a principle of contractual common law rather than a principle of contractual frustration. frustration. This means that contracts frustrated by reasons of illegality are in fact discharged on a broader basis than frustration.102 Where a contract becomes illegal after its formation and during the course of its performance, or where its performance involves the commission of illegal acts, it is frustrated unless it has provided for alternative modes of performance, or one of the parties has agreed to bear the risks associated with the acts constituting the illegality. An example of supervening illegality amounting to 96 W J Tatem Ltd v Gamboa [1939] 1 KB 132; Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC 119. 97 Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696, 715. 98 Ibid. 99 Ibid, 721–722. Mason J endorsed these views in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 357. 100 (1943) 67 CLR 169. 101 See Metropolitan Water Board v Dick Kerr and Co Ltd [1918] AC 119. 102 G H Trietel, The Law of Contract, 11th ed., Thomson Sweet & Maxwell, (2003), p. 887.

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frustration may be a contract for the sale of goods between parties in different countries, where the sale or importation of those goods into the purchaser’s country is illegal. Contracts involving trading with the enemy during times of war are considered illegal and frustrated as a matter of public policy. Where, for example, an English company agreed to sell  equipment to a Polish company and deliver it to a Polish port in German-occupied Poland  in  World War II, the performance of the contract was regarded as frustrated.103 However, if the contract, when literally interpreted, provides for the exclusion of the doctrine of frustration, the doctrine will not apply to the event relied upon, or otherwise the contract will not be enforced to the extent that it conflicts with public policy. Where a contract for the supply of sulphur provided for the prevention of performance resulting from war (among other things), trade became illegal when war was declared and the illegality frustrated the contract, despite the specific terms.104 A contract will also be frustrated if illegality causes the foundation of the contract to disappear. The agreement which was the subject of the case of Denny Mott & Dickson Ltd v James B Fraser & Co Ltd 105 provided for the purchase of pine wood, which was subsequently made the subject of an order under UK defence regulations prohibiting both sale and importation of the material. The contract was frustrated because the trade in timber was the subject of the principle purpose of the contract. In Gamerco SA v ICM/Fair Warning (Agency) Ltd 106 the permit for a stadium obtained by the plaintiffs to stage the defendant’s show was revoked when the stadium was found to be unsafe, and unsuccessful attempts to secure an alternative venue caused the cancellation of the concert. The revocation frustrated the contract.

15.2.8 War As mentioned above, war may supervene to frustrate a contract when the contract involves trading with the enemy; however the mere fact of war does not constitute frustration even if it directly impacts on the performance of the contract.107 War may frustrate contracts; for example, frustration of a contract for the sale of goods was found to have occurred when German forces occupied the delivery port, making the contract illegal while the goods were in transit;108 and even where the parties to a charterparty foresaw the possibility of the requisitioning of a vessel, which eventuated, but was for an indefinite duration.109 The indefiniteness of detention was frustrating in a commercial context where certainty is paramount and in the context of law which entitles the parties to act as soon as they learn of the delay.110 In Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (‘The Evia’ (No 2)),111 the outbreak of war between Iran and Iraq trapped vessels under a charterparty in the Shatt-al-Arab (‘Stream of the Arabs’) River, which frustrated the charterparty contracts. Frustration of the contracts was not caused by the fact of war, but because war made it too dangerous to leave the waters. 103 104 105 106 107 108 109 110 111

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32. Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260. [1944] AC 265. [1995] 1 WLR 1226. Finelvet AG v Vinava Shipping Co Ltd [1983] 1 WLR 1469. Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada (‘The Julia’) [1949] AC 293. Bank Line Ltd v Arthur Capel & Co [1919] AC 435. Ibid, 454 per Lord Sumner. [1983] 1 AC 736.

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It may be difficult to establish that contracts entered into after the outbreak of hostilities have been frustrated, because the parties may be held to have assumed the risk of the hostilities affecting their contract. Goods may be delayed as a result of fighting,112 and material that was once readily commercially available may be the subject of government orders making them scarce or unavailable,113 affecting—if not completely undermining—the performance of the contract, but without frustrating it.

15.2.9 Delay Delay will only frustrate a contract if it results in a radical change in the contract’s performance. Whether a delay will frustrate the contract is a question to be answered by a consideration of the facts of the case and in the circumstances.114 For example, the delay in delivering iron rails caused by a vessel running aground and requiring repairs frustrated the contract in Jackson v Union Marine Insurance Co Ltd 115 by making it unreasonable to expect the charterers to deliver the supplies. In trade, discharge may occur prospectively or as soon as the party has knowledge of a delay, regardless of whether the delay has frustrated the common purpose of the agreement.116 Knowledge of a delay activates an entitlement to discharge the contract immediately117 because the duration of the delay is normally unknown, rendering it difficult to satisfy the test for frustration. Action on commercial probabilities often means that threats are readily perceived. The test is whether a reasonable person in the party’s position would infer that the event relied upon as causing the delay would delay the performance of the contract with sufficient likelihood to frustrate the commercial purpose of the contract.118 It may sometimes be necessary to wait before assessing whether a delay will radically affect the contract. Courts have, for example, held that parties should wait to assess the nature and impact of industrial action.119 Parties may also treat themselves as discharged prior to the occurrence of a delay; that is, when it is entirely prospective. In Embiricos v Sydney Reid & Co120 the Greek-flagged vessel chartered by the plaintiffs was subject to seizure by the Turkish authorities if it entered the Dardenelles, which it needed to do en route to its destination due to the imminent formal declaration of war between Turkey and Greece. Subsequently, the Turkish Government permitted passage to laden vessels, but by that time it was too late to load the cargo and continue its voyage, so the defendants elected to decline to proceed with the charterparty. The contract contained an exclusion clause which rendered it null and void in case of blockade due to war. The defendants’ cancellation made it impossible for them to take advantage of an unexpected extension of the period which would have enabled the completion of the voyage on time.

112 Ringstad v Gollin & Co Pty Ltd (1924) 35 CLR 303. 113 British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166, where the UK defence regulations reduced the availability of raw film stock. 114 Dahl v Nelson (1881) 6 App Cas 38, 48; Universal Cargo Carriers Corp v Citati [1957] 2 QB 401, 435 per Devlin J. 115 (1874) LR 10 CP 125. 116 Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125. 117 See Scrutton J in Embiricos v Sydney Reid & Co [1914] 3 KB 45, 54, approved in Watts Watts & Co Ltd v Mitsui & Co Ltd [1917] AC 227, 246; National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675. 118 Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125. 119 Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724, 752. 120 [1914] 3 KB 45.

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The Court upheld the defendants’ action. It reasoned that at the time the defendants exercised their election, the peril which was the subject of the exclusion clause had arisen, and there was no breach of the contract despite the later extension by the Turkish Government. The cancellation was a reasonable commercial decision, regardless of the fact that no actual delay occurred. Scrutton J stated: Commercial men must not be asked to wait until the end of a long delay to find out from what in fact happens whether they are bound by a contract or not; they must be entitled to act on reasonable commercial probabilities at the time when they are called upon to make up their minds.121

The doctrine of frustration could still be applied despite the fact that the initial delay would not have frustrated the contract. Where a contract is discharged for frustration, only unperformed obligations are discharged. The whole contract is discharged only when it stands as entirely executory at the time of frustration. The fact that the contract is partially performed does not prevent frustration discharging the remainder. Embiricos v Sydney Reid & Co122 is the source of the doctrine that partly performed contracts can be discharged for frustration in relation to the unperformed part of the contract.

• 15.3 Absolute contracts The excuse of frustration of contract can be made when the obligation to perform the contract is conditional or dependent. However, if a party has taken the risk, or given the absolute promise, of performing the contract even in the eventuality of being deprived of the benefit of its performance, or the performance of the contract being rendered impossible, the doctrine of frustration cannot be used to excuse performance. An absolute promise must be performed or else the party will risk having to pay damages for breach of contract.123 The determination of whether an obligation is absolute depends on the construction of the contract. Also crucial is the question as to whether a term drafted in absolute terms must be literally  construed. The seventeenth-century case of Paradine v Jane124 holds that it must, and this authority has been followed in many twentieth-century cases.125 However, it is currently generally accepted that absolute terms need not be literally construed,126 and that indeed such a construction would be inconsistent with the law of frustration of contracts as currently understood.

• 15.4 Land Although previously reluctant to extend the principle of frustration to agreements involving land, on the premise of respecting the difference in law between contract and property, the

121 122 123 124 125

Ibid, 54. Ibid, 53–54 per Scrutton J. Taylor v Caldwell (1863) 3 B & S 826, 833. (1647) Aleyn 26, 27. See for example Bruce v Tyley (1916) 21 CLR 277; Matthey v Curling [1922] 2 AC 180; Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169). 126 See Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154, 184.

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The doctrine of frustration

courts will now in appropriate circumstances subject contracts for the sale, an option to buy or lease,127 or an agreement to lease land (but generally not an executed lease) to the doctrine of frustration.128 There will probably be few cases of contracts involving the sale of land to which the doctrine of frustration will apply. For example, the demolition of buildings pursuant to a government order was held not to frustrate a contract of sale,129 because at common law, the risk associated with a property that is subject to a contract of sale is the purchaser’s from the time of entering into the contract.130 In Fletcher v Manton,131 the parties entered a contract of sale dated 21 March 1940 for land and the housing built on it. On 8 March 1940, the Victorian Housing Commission declared the housing unfit for human habitation, and on 3 April 1940 the vendor received a notice pursuant to the declaration to demolish the housing. The purchasers were informed of the receipt of the notice on 8 May 1940. They subsequently refused to accept the title, and on 21 June 1940 demanded rescission of the contract and the return of their deposit monies. The High Court held that the burden of the declaration by the Housing Commission and the direction for demolition fell on the purchasers as the equitable owners of the houses at the material time. The Court reasoned that the direction to demolish the house became effective when it was received by the vendor on 3 April, and by that time the purchasers were the equitable owners of the land. Thus the purchaser in that case was obliged to complete the contract notwithstanding that a notice to demolish the improvements erected on the property was served during the contract period. Fletcher v Manton (1940) 64 CLR 37 Dixon J at 48–49: The real question appears to me to be whether the declaration of 8th March ought or ought not be considered as then presently affecting the ownership of the land or, in other words, subject to the owner’s right of appeal, as being definitive of the owner’s duty to demolish, service amounting to no more than a condition precedent to legal enforcement. Upon consideration I have come to the conclusion that the making of the declaration ought not to be so regarded. The Housing Commission are an administrative body authorised to take a course adverse to the owner of land. They are not pronouncing a judicial sentence or decree but giving a direction or addressing a command to a person occupying the character of owner. What the Commission do before issuing the direction or command to the person concerned, that is, before service of the declaration, is inchoate and affects only themselves and their officers. They are authorised to deal with the owner and ownership, that is to say, the owner of land as such. The statute means that the blow

127 Denny Mott & Dickson Ltd v James B Fraser Co Ltd [1944] AC 265. 128 The application of the doctrine to contracts involving land is a relatively recent development, courts formerly preserving a rigid distinction between property and contract and noting that contracts involving land created proprietary interests: see National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675; Progressive Mailing House Pty Ltd v Taball Pty Ltd (1985) 157 CLR 17; Legione v Hately (1983) 152 CLR 406. 129 Fletcher v Manton (1940) 64 CLR 37; Carpenter v McGrath (1996) 40 NSWLR 39. 130 Fletcher v Manton (1940) 64 CLR 37, 45, 48, 51 per Starke, Dixon and McTiernan JJ. 131 Ibid.

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shall fall on the owner for the time being, and it specifies the means or occasion by which it shall take effect. Whoever is the owner at that moment must suffer the consequence. It is at this point that the equitable rule is invoked. The rule determines that for such purposes ‘ownership’ shall be regarded as passing from vendor to purchaser at the date of the contract. It must be remembered that the parties were bargaining for the transfer from one to the other of slum property liable under a general Act of Parliament to be affected at any moment of time by service of a demolition order. Once it is seen that ownership with all its risks is in equity transferred from the moment of the contract, then no anomaly can be felt in imposing on the purchasers the burden arising from the promulgation afterwards of an order of the Housing Commission, though before the date of the contract proceedings within the commission had, without the knowledge of either party, advanced up to the final point before notification.

Contracts for the sale of land rarely, if ever, give rise to claims of frustration. This is because the purchaser assumes the risk of the destruction of buildings on the land absent any specific  provision in the contract of sale covering such an event, and nevertheless acquires land to develop.132 Contracts have been held not to have been frustrated where buildings were destroyed by government order;133 where land was requisitioned after exchange but prior to settlement;134 and because of threatened compulsory acquisition.135 However, executory contracts conferring equitable interest on the purchaser may be frustrated. A landslip which set a construction deadline back by 30 months after the agreed completion date was held to be a frustrating event.136 Purchasers are said to assume the risk of being unable to use the land as contemplated, so events preventing such use are not frustrating.137 But frustration was held to have occurred in Austin v Sheldon,138 when six of seven acres were resumed despite the purchaser being entitled to compensation in case of resumption. Austin v Sheldon [1974] 2 NSWLR 661 Mahoney J at 667: In my opinion, whatever be the formulation of the principle applicable in respect of frustration or supervening impossibility of performance … the resumption of the land sold puts an end to the contract. In such an event, the vendor obviously cannot perform the central obligation undertaken by him, namely, to convey the land to the purchaser.

132 This principle may be subject to statute such as (NSW) Conveyancing Act 1919, s 66K (postponement of passing of risk to purchaser). Cf Insurance Contracts Act 1984 (Cth), s 50 (sale of insured property). 133 Fletcher v Manton (1940) 64 CLR 37. 134 Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169, 229. 135 E Johnson & Co (Barbados) Ltd v NSR Ltd [1997] AC 400; [1996] 3 WLR 583, PC. 136 Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 Build LR 81. 137 See Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671. 138 [1974] 2 NSWLR 661.

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Similarly, in a normal contract for sale of land, payment of the purchase money is dependent upon completion by conveyance … and, therefore, the purchaser would not be required to perform his basic obligation of payment. … The question of the appropriate implication to be drawn from, or effect to be given to, the resumption in this regard is sometimes complicated by the fact that the resumption is made under a statute which provides adequate compensation, and, therefore, the purchaser, if the price be paid, may receive by way of compensation, an appropriate return from the contract. However, in my opinion, if the applicability of the doctrine of frustration is to be tested, it is to be tested, not by reference to what may be, from time to time, the compensation statute in force, or under what particular governmental power the resumption is effected, but by considering the effect of the resumption upon the contractual rights and obligations of the parties. So tested, the result of holding that the contractual obligations did not determine would to be substitute for a contract to convey land for the payment of a price, with the ancillary obligations in relation to the showing and making of title and the like, contractual obligations of a different type. Considered, therefore, as a matter of principle, the resumption of the land contracted to be sold, in my opinion, brings the contract to an end.

Agreements to execute a lease of land may be subject to frustration,139 but not leases recorded in absolute contracts.140 Whether an executed lease can be frustrated in Australia appears open to question, but it unlikely that they can be segregated from the operations of the principles of contract law.141 Halloran v Firth142 held that it did not—the contractual doctrines of frustration and termination for fundamental breach (or for repudiation)143 were not seen as applicable to an executed demise  under which an interest or estate in land had actually passed to the tenant.144 The  reasoning behind the decision seemed to rely on viewing leaseholds in terms of feudal tenures, or chattels real, which were seen as increasingly inappropriate for commercial leases.145 139 The English cases are clear authority: see for example Northern Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675. There is no Australian authority directly on the point, but the proposition can be reconstructed from cases involving the sale of land and the repudiation of agreements to execute a lease: see for example Dimond v Moore (1931) 45 CLR 159. 140 Paradine v Jane (1647) Aleyn 26, 27; Re De Garis and Rowe’s Lease [1924] VLR 38; or, in exceptional cases of a completely unconditional demise for a long term with no rent reserved, compare Knight’s Case (1588) 5 Co Rep 54b. 141 See for example National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675; Highway Properties Ltd v Kelly, Douglas & Co Ltd (1971) 17 DLR (3d) 710; A L Corbin, Corbin on Contracts, West (1962), Vol. 6, s 1356; see also the cases cited in R Brooking and A Chernov, Tenancy Law and Practice in Victoria, 2nd ed., Butterworths (1980), para. 211; D M McRae, ‘Repudiation of Contracts in Canadian Law’ Canadian Bar Review, Vol. 56 (1978), 233; J T Robertson, ‘Frustrated Leases: “No to Never—But Rarely if Ever”’ Canadian Bar Review, Vol. 60 (1982), 619. 142 (1926) 26 SR (NSW) 183, approved on appeal: Firth v Halloran (1926) 38 CLR 261. 143 The New South Wales Court of Appeal has favoured the view that the doctrine of repudiation applies to a lease: Leitz Leeholme Stud Pty Ltd v Robinson [1977] 2 NSWLR 544. 144 Halloran v Firth (1926) 26 SR (NSW) 183, 187, and on appeal: Firth v Halloran (1926) 38 CLR 261, 268, but compare 269. 145 See Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 57 ALR 609, 635.

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The High Court upheld the decision and the reasons given by the Full Court of the Supreme Court of New South Wales.146 However, the leases in Shiell v Symons147 and Robertson v Wilson148 were treated as having been frustrated despite the existing authority, and in both Minister of State for the Army v Dalziel149 and Thearle v Keeley150 Williams J (at 302–303) relied on English and not Australian authority, stating that the House of Lords in Matthey v Curling151 had decided that the doctrine did not apply to leases, when the House of Lords had held in National Carriers Ltd v Panalpina (Northern) Ltd152 that it does. Whether and under what conditions a leasehold will be subject to the doctrine of frustration will depend on: (i) the nature of the event, which will ordinarily have to be catastrophic before a lease of land will be frustrated;153 (ii) the effect of the event on the purpose of the lease, for example where buildings on the land are destroyed by a legitimate occupying party; (iii) the duration of the lease: normally, longer leases will have to be affected by more severe events; for example, a standard commercial lease is more likely to be frustrated than a 99-year building lease, but a short-term residential lease is most likely to be frustrated. Once it has been determined that a contract has been frustrated under the common law, the parties are automatically discharged from their obligations to perform their contractual obligations, and to remain ready and willing to perform them.

• 15.5 Effects of frustration 15.5.1  Automatic discharge of obligation Once it has been determined that a contract has been frustrated under the common law, the parties are automatically discharged from their obligations to perform their contractual obligations, and to remain ready and willing to perform them; and as a result neither party can make claims against the other.154 Unlike discharge based on breach or repudiation, no election is required.155

146 Firth v Halloran (1926) 38 CLR 261: Two justices of the High Court (Knox CJ and Gavan Duffy J) endorsed without qualification the decision of the Full Court that the doctrine of frustration does not apply to a demise by which an estate in land is created and passed to the lessee. Isaacs J agreed with the majority, but rejected the proposition that the doctrine can never be applied to leases; Isaacs J was of the view that the fact that a lease creates more than a contractual obligation does not necessarily mean that the doctrine of frustration is excluded. Higgins J disposed of the appeal without finding it necessary to consider the question. The fifth member of the court, Rich J, merely agreed that the appeal should be dismissed, that being the opinion of all the other justices. 147 [1951] SASR 82, 88 per Ligertwood J. 148 (1958) 75 WN (NSW) 503 per McClemens J. 149 (1944) 68 CLR 261, 276. 150 (1958) 76 WN (NSW) 48. 151 [1922] 2 AC 180. 152 [1981] AC 675. 153 See Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd. 154 Hirju Mulji v Cheong Yue SS Co Ltd [1926] AC 497, 509; Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169, 203; Lauritzenas v Wijsmuller (‘The Super Servant Two’) [1990] 1 Lloyd’s Rep 1, 8; Re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194, 201. 155 See Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265.

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The doctrine of frustration

In general, the finding that the frustrating event has caused a radical change in the nature of the contract will discharge the entire contract156 subject to the following exceptions:157 (i) In a partially executed contract that has been frustrated, the parties are only discharged from performing the unexecuted part of the contract.158 (ii) Where the subject matter of a contract is destroyed or the source of the subject matter fails, the promisor is discharged from performing their obligations under the contract to the extent that the subject matter has perished or the source has failed.159 (iii) A temporary or permanent excuse to not perform a contract does not amount to a frustration,160 and while other excuses—such as the contract becoming illegal—may relieve the promisor from performing their obligations under the contract, this does not fall under the doctrine of frustration. (iv) If a part of the contract which is so distinct from the remainder of the contract as to form a separate agreement is subject to a radical event that has so altered the circumstances that it cannot be performed, then only that part of the contract has been frustrated, and the parties are not discharged from performing the rest of the contract.161 (v) Frustration may refer and be restricted to the application of the contract to a given set of facts.162 (vi) Where the parties have expressly provided for a partial discharge163 or for a particular event to excuse partial non-performance.164 Once frustrated a contract cannot be unilaterally reinstated, although the parties may enter a new contract. Neither can there be an estoppel of the discharge. However, there is some authority for the proposition that frustration cannot be relied upon if the contract is recognised by unequivocal acts. Mustill J in Black Clawson International Ltd v Papierwerke Waldhof-Aschaffenberg AG 165 was of this view. A contract will not be frustrated if it can be performed in a substantially or sufficiently similar way—‘if it can be carried out in a way that is not fundamentally different from that assumed’.166 As opposed to, for example, where in a construction contract there is no acceptable material to realise the construction, and any other materials would make the final construction ‘fundamentally different’. A contractual term may discharge the parties despite there being no frustration under the common law, excusing performance without frustrating the agreement. In addition, the doctrine 156 Aurel Foras Pty Ltd v Graham Karp Develpments Pty Ltd [1975] VR 202. 157 Refer J W Carter and D J Harland, Contract Law in Australia (4th ed.), Butterworths (2002), pp. 684–5. 158 Hirsch v The Zinc Corp Ltd (1917) 24 CLR 34. 159 Goldsborough Mort & Co Ltd v Carter (1914) 19 CLR 429. 160 See Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221, 244, where a lessee’s obligation to build under a lease was prohibited by government order and the lessee relied on the order to excuse them from building, but remained liable for the rent under the lease. 161 Bremer Vulkan Schiffbrau und Maschinenfabrick v South India Shipping Corp Ltd [1981] AC 909, 980. 162 Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724. 163 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegen PVBA [1978] 2 Lloyd’s Rep 109 (HL). 164 See Sharp v Batt (1930) 25 Tas LR 33b (a force majeure clause). 165 [1981] 2 Lloyd’s Rep 446, 457. 166 D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 1310; see also Tsakiroglou v Noblee Thori [1962] AC 93.

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of frustration may be called upon to discharge the other party where an express term only provides for the discharge of one party.167 Note that force majeure does not form part of the doctrinal schema of the common law. However, force majeure clauses are a common feature of modern contracts which excuse parties from performing obligations in certain circumstances that have a substantial effect on a contract, but which might not provide sufficient grounds for frustration. The contract term must specify the events to which force majeure applies—and not simply refer to force majeure as a basis for excusing either or both parties—to ensure it is not void for uncertainty, since it is not doctrinally operative under the common law. The courts will not automatically recognise force majeure clauses, but will construct the contract objectively, focusing on the actual words that appear in the term. The courts will construct the scope and effect of such a clause to ensure that applications for extensions of time or excuses to suspend or discharge the performance of a contract are justified.168 Note that a force majeure clause may not operate because of invalidity if it seeks to excuse a breach of contract. The courts will also require parties seeking to rely on the clause to prove the event fell within the scope and effect of the clause, and to produce evidence of the impact of the event, including evidence of attempts to either avoid the event or carry out the contract.169

15.5.2 Discharge in futuro Greig and Davis say of the application of the doctrine of frustration that: [it] is, in essence, a dispensation by the court, to relieve the parties of their bargain, in the light of what is just and reasonable in the altered circumstances which have arisen. It follows that a decision whether or not a contract has been frustrated must depend upon the judicial appreciation of the facts of the particular case or, in the words of Lord Wright in Denny Mott and Denny, Mott & Dickson Ltd v James B Fraser and Co Ltd [1944] AC 265 at 276, on ‘the view taken of the event and of its relation to the express contract by “informed and experienced minds”’. As Stephen J said in Brisbane CC v Group Projects Pty Ltd (1979) 145 CLR 143 at 163; 26 ALR 525, the cases ‘provide little more than single instances of solutions’ to the question of Frustration discharges whether a change of circumstances has been such as to frustrate the parties’ obligations in futuro—it does not the contract.170 rescind the contract ab initio. The contract is therefore not void; it remains alive as a measure of the rights and liabilities of the parties.

Frustration discharges the parties’ obligations in futuro—it does not rescind the contract ab initio.171 The contract is therefore not void; it remains alive as a measure of the rights and liabilities of the parties.172 Terms that identify rights and liabilities that have accrued prior to frustration continue to operate.

167 See Jackson v Union Marine Insurance Co Ltd (1874) LR 109 CP 125. 168 Tennants (Lancashire) Ltd v C S Wilson & Co Ltd [1917] AC 495 (force majeure clause for suspension of delivery of goods pending any contingencies beyond the control of the parties, such as war causing short supply of labour, etc.); Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (‘The Marine Star’) [1996] 2 Lloyd’s Rep 383 (CA); European Bank Ltd v Citibank Ltd (2004) 60 NSWLR 153; [2004] NSWCA 76 (force majeure clause providing for suspension of obligations under banking arrangements). 169 See B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419 (CA). 170 D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 1304. 171 See Re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194, 201. 172 Ibid; see also J W Carter and D J Harland, Contract Law in Australia (4th ed.), Butterworths (2002), p. 685.

Chapter 15

The doctrine of frustration

The various state Frustrated Contracts Acts may adjust the rights and liabilities of the parties under the contract.173 In Victoria, for example, s 3 of the Frustrated Contracts Act 1959 provides: 3. Adjustment of rights and liabilities of parties to frustrated contracts (1) Where a contract becomes impossible of performance or is otherwise frustrated or where a contract is avoided by the operation of section twelve of the Goods Act 1958 and the parties thereto are for that reason discharged from the further performance of the contract, the following provisions in this section shall, subject to the provisions of section four of this Act, have effect in relation thereto. (2) All sums paid or payable to any party in pursuance of the contract before the time of discharge shall, in the case of sums so paid, be recoverable and in the case of sums so payable cease to be so payable: Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in or for the purpose of the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or (as the case may be) recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred. (3) Where any party to the contract has by reason of anything done by any other party thereto in or for the purpose of the performance of the contract obtained a valuable benefit (other than a payment of money to which subsection (2) of this section applies) before the time of discharge, there shall be recoverable from him by the said other party such sum (if any) not exceeding the value of the said benefit to the party obtaining it as the court considers just having regard to all the circumstances of the case and in particular— (a) the amount of any expenses incurred before the time of discharge by the benefited party in or for the purpose of the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under subsection (2) of this section; and (b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration or avoidance of the contract. (4) In estimating for the purposes of the foregoing provisions of this section the amount of any expenses incurred by any party to the contract the court may, without prejudice to the generality of the said provisions, include such sum as appears to be reasonable in respect of overhead expenses and in respect of any work or services performed personally by the said party. (5) In considering whether any sum ought to be retained or recovered under the foregoing provisions of this section by any party to the contract the court shall not take into account any sums which have by reason of the circumstances giving rise to the frustration or avoidance of the contract become payable to that party under any contract of insurance unless there was an obligation to insure imposed by an express term of the frustrated or avoided contract or by or under any enactment. (6) Where any party has assumed obligations under the contract in consideration of the conferring of a benefit by any other party to the contract upon any other person whether a party to the contract or not, the court may if in all the circumstances of the case it considers it just to do so treat for the purposes of subsection (3) of this section any benefit so conferred as a benefit obtained by the party who has assumed the obligations as aforesaid. 173 Frustrated Contracts Act 1959 (Vic), s 3; Frustrated Contracts Act 1978 (NSW), s 12; compare Frustrated Contracts Act 1988 (SA), s 7.

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If prior to discharge the party has incurred expenses in the performance of the contract, the court may order money to be retained or money to be paid to meet that expense.174 A party who has obtained a benefit prior to a liability to pay having arisen when the contract was discharged may be ordered to pay the value of the benefit.175 Damages that have accrued prior to the discharge by frustration may be recovered; but the accrual of the right may be prevented by the frustration of the contract. If a contract is repudiated but the promisee does not elect to discharge it the promisee will not be able to claim damages.176 A debt due for payment at the time of the contract’s discharge for frustration is enforceable, even if was due after the frustrating event or contingent upon a future event outside the performance of the contract, provided that event has occurred.177 However, the basis for recovery is that the accrual of the owed sum has been proved.178 The frustrated contract and its terms cease to operate and cannot be enforced. However, it is a question of construction whether parties intended for certain terms—such as terms activated in the event of the contract being frustrated—to operate after frustration.179 By implication, enforceable rights continue to be governed by the contract’s arbitration clauses, choice of law and choice of jurisdiction clauses, and exclusion clauses, unless the parties have expressed a contrary intention. Where the contract lacks express terms dealing with the liability to pay, the test that is applied is whether the purchaser may rely on the total failure of consideration as a defence to the claim if the obligation to pay were to be enforced.180

Ke y p o ints for re v ision The applicability of the doctrine of frustration depends on the facts of the case. Usually frustration involves an event which is the fault of neither party causing the destruction or unavailability of something essential to the performance of the contract; or it requires that the situation is now so different from that in which the contract was made that the performance of the contract has become something fundamentally different to what was first contemplated. Contracts which can be performed substantially, if not completely, and in a similar manner, will not be frustrated. If a party assumes the risk of the destruction of goods, the contract will not be frustrated. If the thing essential to the performance of a contract is nevertheless available for some part of the period of the contract, the contract may not be frustrated. Deliberate acts or omissions by one or both parties will not frustrate a contract. The effect of frustration is to discharge both parties from their obligations under the contract.

174 Frustrated Contracts Act 1959 (Vic), s 3. 175 Ibid, s 3(3); see also BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925; [1979] 1 WLR 783 (QB). 176 See Avery v Bowden (1856) 6 E & B 953, approved in Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235. 177 See Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361, 379–380. 178 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32. Earlier cases had held that sums payable prior to frustration are always recoverable. This case, however, overturned that line of authority. 179 BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783, 829. 180 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, 53.

Chapter 15

The doctrine of frustration

A change in working methods may frustrate a contract if it radically alters the way in which the contract was to be performed. A contract which depends on the occurrence of another event may be frustrated where the dependent event is cancelled or does not occur, but not if that event is not the foundation of the contract. The frustrating event cannot have been foreseen by the parties. A delay that causes a radical change in the contract’s performance will frustrate the contract. Contracts may be prospectively frustrated. Contracts for the sale of land may in certain specific circumstances be frustrated. Whether leases may be frustrated is the subject of conflicting authority in law. Frustrated contracts discharge both parties of their obligations in futuro but not ab initio, such that the contract remains as a measure of the parties’ rights and liabilities adjustable in accordance with the various state Frustrated Contracts Acts.

problem-solving practice Alexander owned three parcels of land (Parcels 1, 2 and 3). He intended to sell two (Parcels 1 and 2), and develop the third (Parcel 3) himself. Of the two he put up for sale, the second (Parcel 2) held a ‘general’ local area authority for the construction of a resort hotel. Brenda was interested in purchasing Parcels 1 and 2, and constructing a hotel on Parcel 2. Alexander entered a contract with Brenda for the sale of Parcels 1 and 2, leaving Parcel 3 under Alexander’s ownership. Alexander was aware that Parcel 3 would be rezoned for business purposes and that its value would increase once Parcel 2 was developed into a hotel by Brenda. Alexander and Brenda entered a separate agreement for the construction of the hotel on Parcel 2. Meanwhile, Alexander commenced construction of business premises on Parcel 3. However, the hotel failed to be built. As a result, Alexander’s business premises were not as valuable as they would have been had the hotel been constructed. One clause of the construction deed provided: 11. Brenda will complete the construction of the hotel on or before 1 December 2011, provided that if Brenda has entered into a construction contract with a third party in time to ensure the completion of the hotel by 1 December 2011, but construction is delayed for reasons beyond the control of Brenda, and through no fault of Brenda then the time for completion of the hotel will be extended by a period equal to the aggregate periods of delay but not exceeding 6 calendar months. Another provided: 12. The parties agree that if the hotel is not constructed on Parcel 2, Alexander will suffer damages as a result of the diminution in value of Parcel 3, and the parties have agreed that the amount of such damages is the sum of $2.8m. In the event of the failure of Brenda to comply with her obligation under clause 11, Brenda will forthwith pay to Alexander and Alexander will accept in full satisfaction and discharge of all claims he may have against Brenda the sum of $2.8m. Alexander alleges that Brenda has breached the deed by failing to construct the hotel, and is therefore liable for $2.8m. One ground of Brenda’s defence is that the contract has been discharged for frustration because, in order for the hotel to be built, it was necessary to obtain a development approval from the local council,

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and this had not materialised prior to 1 December 2011 making the deed incapable of being performed and therefore frustratingly discharged. Has the contract been discharged for frustration?

ANSWER If Brenda’s undertaking was absolute and not conditional upon obtaining the permission, then the risk was assumed by her to construct the hotel regardless of supervening circumstances. This argument is available on the basis of the contractual terms and the assumed fact which was common knowledge between the parties that the permit may be withheld. Clause 12 may be evidence of such an absolute undertaking since it adverts to the possibility of the construction not being completed on time. Further evidence that Brenda had contracted to construct absolutely was her knowledge of the need to obtain appropriate permission. As Brenda had contracted to assume liability in the prevailing circumstances, it is unlikely that frustration may be raised in her defence. An awareness of the need to obtain building approval involves an awareness of the risk, foresight of the possibility that the approval might not materialise, or might be delayed, excluding the operation of the doctrine of frustration. If, however, rather than Brenda having agreed to bear the liability if she had failed to comply with her obligations, she had agreed to bear liability for not constructing the hotel lawfully in the time agreed except in the case of a supervening event, Brenda would be able to raise the defence of frustration. Brenda would have to show that the latter was the basis on which the agreement was premised, and was also the assumption upon which the parties proceeded. Rather than an argument based on the deed and the assumed facts, Brenda would argue that more consideration should be given to the circumstantial matrix of the case and the extent to which it supported a common assumption—that the failure to obtain a permit invalidated the common assumption as to the performance of the contract. The construction of a hotel without appropriate permits, or without those permits becoming available on time, was a radically different situation from that which the parties had contemplated when they contracted, and required a radically different performance. Such a radically different performance requirement would be something that the parties assumed would not occur.

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16

Misrepresentation

Chapt e r o v e rv i e w 16.0

Introduction  304

16.1

The general rule   305 16.1.1 The elements of an actionable misrepresentation   305

16.2

Positive misrepresentation  305 16.2.1 Mere puffery  306 16.2.2 Statements of opinion   309 16.2.3 Statements of intention   311 16.2.4 Statements of law   312

16.3

Silence  315 16.3.1 Where the silence distorts some positive representation  316 16.3.2 Where the statement becomes untrue   319 16.3.3 Where the parties are in a fiduciary relationship   319

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16.4

Culpable misrepresentation  320 16.4.1 Fraudulent misrepresentation  320 16.4.2 Negligent misrepresentation  320

16.5

Innocent misrepresentation  322

16.6

Who may sue for misrepresentation?   322 16.6.1 Limitations on actions for misrepresentation   323 Where the statement is non-inducing   323 Where the plaintiff is unaware of the representation   324 Where the plaintiff knows that the representation is false   324 Where the plaintiff does not act on the representation   324 Where the misrepresentation is not material   325

16.7

Rescission  325

• 16.0 Introduction Misrepresentation occurs where a false or misleading statement is made by one party to another in the course of negotiating a contract and induces the recipient to contract with the party that made the representation. The types of pre-contractual conduct that might constitute misrepresentation are governed by both the common law and statutory law. For the most part, the emergence of Fair Trading legislation and the new Consumer and Competition Act 2010 (Cth) (which replaced the Trade Practices Act 1974 (Cth)) has redrawn the boundaries of common law misrepresentation. Much of what was once the common law’s sole domain—the pre-contractual issues that gave rise to cases of misrepresentation—has been displaced by the statutory schemes which offer more effective remedies. The task of negotiating a contract is now harder given the statutory schemes that might apply if the wrong thing is said in the course of negotiations. Indeed, it is not always a simple matter to decide where the line should be drawn separating mere puffery from misleading and deceptive conduct or other unfair practices. There is also an overlap between conduct that may give rise to claims of misrepresentation and that which would support a claim in promissory estoppel. A pre-contractual statement may misrepresent the true state of affairs to the party to whom it is made, thereby giving rise to a claim under the common law of misrepresentation; and that same pre-contractual statement can form the basis for a claim in promissory estoppel. The key similarities between misrepresentation and estoppel are the elements of representation and reliance. Both must be present if either claim is to be made out. This chapter deals with common law misrepresentation, while Chapter 17 addresses the statutory form of misrepresentation law known as misleading and deceptive conduct.

Chapter 16

Misrepresentation

• 16.1 The general rule The general rule that applies to misrepresentation is that the As a general statement in question must refer to an existing or past fact.1 proposition, the courts However, this rule is under some pressure before the courts of are unwilling to tolerate common law. It had previously been thought that mere puffery, deception in the course of contracting and statements of opinion and statements of law could not give rise will likely endeavour to claims of misrepresentation; but it has become clear that under to find an actionable certain circumstances they may in fact give rise to successful misrepresentation where the defendant has acted claims of misrepresentation.2 As a general proposition, the courts fraudulently. are unwilling to tolerate deception in the course of contracting and will likely endeavour to find an actionable misrepresentation where the defendant has acted fraudulently.3 The primary remedy for a misrepresentation is rescission. The remedy of rescission places both of the parties in the position that they were in prior to the formation of the contract.4 For the remedy to be employed, the party who has been misled must decide whether they wish to pursue the contract or not. If they decide to abandon the contract, and if they can claim an actionable misrepresentation, the contract is then voidable.5 There are some limitations that apply to the remedy of rescission and these are discussed below.6

16.1.1  The elements of an actionable misrepresentation There are four elements of an actionable misrepresentation: (i) (ii) (iii) (iv)

A false statement must have been made to the party who is claiming to have been misled. The statement in question must be one of fact. The statement must be communicated to the party who claims to have been misled. The maker of the statement must have intended that the statement would induce a contract.

• 16.2 Positive misrepresentation The elements listed above must generally be present in order for a positive misrepresentation to occur. In the following categories of positive misrepresentation the cases discussed will involve these elements where a misrepresentation is found to exist. However, with respect to the requirement that the misrepresentation must be one of fact, this requirement is limited in the context of statements of law. Under certain circumstances, a misleading statement of law may support a claim for misrepresentation. 1 Given v Pryor (1979) 39 FLR 437. 2 See Eveready Australia Pty Ltd v Gillette Australia Pty Ltd (No 4) [2000] ATPR ¶41-751; see also National Australia Bank v Nobile (1988) 100 ALR 227. 3 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 505. 4 Alati v Kruger (1955) 94 CLR 216. 5 Sargent v ASL Developments Ltd (1974) 131 CLR 634. 6 See below, section 16.6.1.

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16.2.1  Mere puffery Exaggerated and exultant language that is used to impress potential customers, and which is clearly not meant to be taken literally, is not regarded as forming the basis of a claim under the law of misrepresentation.7 Purchasers expect that sales people will make exaggerated claims about the qualities of the products that they are selling. To attach legal consequences to this type of conduct would be disproportionate to any mischief that might be at play.8 But where the statement goes beyond puffery and suggests instead that it is based upon a truth, then a successful claim in misrepresentation may be made.9 For example, in Smith v Land & House Property Corp10 a vendor of property told a purchaser that ‘the whole property is let to Mr Frederick Fleck (a most desirable tenant)’. The vendor knew that this statement was untrue and that Mr Fleck was indeed a rather undesirable tenant. As the statement was made in such a way as to suggest that it was a fact, an actionable misrepresentation had occurred. In the case of Mitchell v Valherie11 the South Australian Supreme Court considered the question of whether the statements ‘Cosy—Immaculate Style’ and ‘Nothing to Spend—Perfect Presentation’ constituted an actionable misrepresentation. White J found that the phrase ‘Nothing to Spend’ had to be read together with the obvious puff statement of ‘Perfect Presentation’. This coloured the view of White J that there was no statement of fact. In contrast, Layton J considered the phrase ‘Nothing to Spend’ to be susceptible of characterisation as a fact, but interpreted the statement to mean nothing more than that the house was presentable. Layton J did not interpret the phrase as referring to whether the house was structurally sound or not. The extract below is from the decision of White J and provides an insight into how judges grapple with the task of interpretation in the context of the law of misrepresentation. (The decision of Layton J is not extracted here but suffice to say his Honour faced the same challenge as White J, though he drew a different inference from the facts presented in this case.) Where a statement goes beyond puffery and suggests instead that it is based upon a truth, then a successful claim in misrepresentation may be made.

Mitchell v Valherie (2005) 93 SASR 76 White J at 90: It is clear enough that it is not every statement made in contractual negotiations, or as a prelude to contractual negotiations, which will be regarded as conveying a representation. To constitute a representation, the statement must be a representation of fact. ‘The essence of misrepresentation is that it led the representee into error. This must be tested objectively—would a reasonable person in the position of the representee had been led into error by the statement?12

7 8 9 10 11 12

Dimmock v Hallett (1866) 2 Ch App 21; see also R v Weaver (1931) 45 CLR 321. Magennis v Fallon (1828) 2 LR Ir 167. Smith v Land & House Property Corp (1884) 28 Ch D 7. (1884) 28 Ch D 7. (2005) 93 SASR 76. N Seddon and MP Ellinghaus, Cheshire and Fifoot’s Law of Contract, 8th ed., LexisNexis (2002), [11.11].

Chapter 16

Misrepresentation

Statements that are so vague as to be incapable of being given any reasonably precise meaning or because they are exaggerated commendatory opinion rather than a statement of any factual matter do not give rise to an actionable misrepresentation. There are some introductory comments made at the start of negotiations for the purpose of attracting the interest of possible purchasers which are not reasonably to be understood as conveying a representation of fact. The more specific the words used, the less likely it is that they will be regarded as mere puffery. The defendants placed particular reliance on the decision of Young J in Eighth SRJ Pty Ltd v Merity. In that case, the purchasers of a home relied, amongst other things, on a verbal statement by the vendor’s agent about the home, ‘You will enjoy it here. You will have nothing to spend’. Before settlement, the purchasers ascertained that the property had in the past been the subject of termite infestation which a pest control firm had found difficult to eradicate. It was possible, but not certain, that some infestation remained. The purchasers purported to rescind the contract. Young J held that the statement ‘You will have nothing to spend’ could not reasonably be construed as a representation that there was no termite infestation, or that there was no other latent defect which would cause the purchasers to spend money. In the context of the parties’ negotiations, the tenor of the representation was to convey the impression that there was little to do to keep the house ‘spick and span’ week by week rather than being concerned with structural issues. However, as Young J noted, in each case the statements have to be considered in their own context so as to determine what both the speaker and hearer would have understood them to mean. In Merity, that context included the fact that both the vendor and purchaser were solicitors, negotiating the sale and purchase of a home for a consideration of $675 000 over a period of one week. Further, the words were spoken in a context relating to the week by week maintenance which may be required. That is a different context from the present case. The plaintiff did not have experience in the purchase of real estate in Australia. For the period of approximately 14 years prior to 1999, the plaintiff had been resident in Paris. Given the price of the home, it is reasonable to suppose that many first time (and therefore inexperienced) home buyers would have been included in the class of prospective purchasers of the property. It is apparent that the plaintiff’s decision to buy the property was made during her first visit to the home. As noted by Gleeson CJ, Hayne and Heydon J J in Butcher v Lachlan Elder Realty Pty Ltd, a more impressionistic analysis, concentrating on the immediate impact of the representor’s conduct may be appropriate where the document containing the representation is looked at only briefly before the decision to purchase is made. Another relevant matter of context is that the circumstances in which the brochure was issued indicate that most readers of it would, almost immediately, enter the house and make their own observations of it. There are some difficulties in identifying a representation of fact in the statement ‘Nothing to Spend’. Clearly enough, the statement could not reasonably be understood as meaning literally that no expenditure at all would be required by a prospective purchaser. Some expenditure on maintenance or upkeep is an inevitable incident of home ownership. The words used could hardly be understood as indicating a contrary view. Further, it is common for purchasers of homes to make at least some minor adaptations

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of a home shortly after taking occupation so as to have the house better suit their needs or tastes. Again, the words could hardly be understood as indicating that the condition of the house and its improvements were such that no alteration of any kind would be necessary to meet individual tastes. On the other hand, the brochure was of the kind used to convey information to prospective purchasers. It did include factual matters, e.g., the number of rooms, improvements, and some approximate measurements and areas. It could also be said that its purpose went beyond the attracting of the attention of a prospective purchaser. The newspaper advertisement had served that purpose in the plaintiff’s case, having piqued her interest and enticed her attendance at the open inspection. Those considerations may suggest that the brochure was intended to convey representations of fact. As already noted, the defendants submitted that if any representation of fact was made, it was no more than a representation about the ability of the home to be lived in immediately after purchase without further expenditure. Put slightly differently, the defendants’ submission was that the words, considered at their highest, were a representation about the habitability of the home at a particular time, viz, the time of purchase. I do not consider that submission to be persuasive. I think it underestimates the impression sought to be conveyed by the use of the words. I consider that the agent was intending to convey more than that the house was ‘reasonably liveable’ at the particular time. The words are more apt to suggest that, leaving aside expenditure arising from the ordinary wear and tear in the occupation of a home, expenditure would not be required of the purchaser on the home, at least for a reasonable period. This is similar to the impression which the plaintiff received. In her evidence she said that the brochure ‘was saying there was nothing to spend and it did indeed, from what I could see there was nothing that the house needed. It was just perfect the way it was. You could just move in.’ The question remains, however, whether the words are no more than commendatory opinion. Not without some reservations, I am satisfied that the words cannot reasonably be understood as conveying a representation of fact. A number of considerations lead me to that conclusion. The first is that the words of which the plaintiff complains are really in the nature of a pithy promotion of the property. They are in the form of catchwords, appearing immediately above a statement of some fairly basic facts about the property. This does not mean that of themselves they may not contain a representation of fact but, in context, I consider that they are more like a headline, which is designed to attract the eye of the reader. It is relevant that they do not appear in a sentence describing the qualities of the property. The second consideration is that the words ‘Nothing to Spend—Perfect Presentation’ have to be read as a whole. The words ‘Perfect Presentation’ are clearly enough words of promotional puffery. A reasonable prospective purchaser of real estate would not understand those words as conveying a representation of fact. The words ‘Nothing to Spend’, which immediately proceed them take their colour, to some extent, from those words. The third consideration is that the words were used in a context in which some hyperbole  is commonplace. Exaggerated descriptions of houses is a common, even

Chapter 16

Misrepresentation

expected, feature of real estate advertising. Reasonable persons would not, in my opinion, understand words of this kind to be conveying a representation about the structural integrity of the property. The final consideration is the difficulty to which I have already referred in identifying the precise content of the representation if it is to be construed as a representation of fact. In particular it is difficult to construe the statement as a representation about the structural integrity of the home, or the solidity of its foundations. In Mitchell v Valherie two of the judges clearly disagreed on the characterisation of the statements in question. While the overall outcome did not favour the plaintiff, it is clear that the same facts may give rise to differing conclusions of law. It does seem clear that where a statement is sufficiently specific, it might be regarded as a representation rather than puffery.13 It might be suggested that as the purpose of misrepresentation is to protect contracting parties from actionable deceptions that the statements must be considered within their context and with regard to the effect upon the recipient. Where the recipient might reasonably have regarded the statement as pertaining to some pertinent fact, which later became the subject matter of loss or potential loss, then the statement made is less likely to be puffery and more likely to be a statement of fact. But as the opinion of White J makes plain, the effect of the statement must be considered in the context of the time in which it was made, rather than in retrospect after some loss has occurred or a potential loss has been discovered.

16.2.2  Statements of opinion A statement of opinion does not ordinarily support a claim of A statement of misrepresentation.14 For example, in Bissett v Wilkinson15 a statement opinion does not ordinarily that a landholding could support 2000 sheep, when the maker of support a claim of the statement knew that the land had never actually held sheep, misrepresentation. was found to be a mere statement of opinion. However, in that case, the party claiming to be misled also knew that the land had never held sheep. When they sued claiming misrepresentation, the Court held that it should have been clear to the purchaser that the statement was merely one of opinion. Bissett v Wilkinson [1927] AC 177 Merrivale LJ at 183–185: In the present case, as in those cited, the material facts of the transaction, the knowledge of the parties respectively, and their relative positions, the words of representation used, and the actual condition of the subject-matter spoken of, are relevant to the two inquiries necessary to be made. What was the meaning of the representation? Was it true?

13 Eveready Australia Pty Ltd v Gillette Australia Pty Ltd (No 4) [2000] ATPR ¶41-751. 14 Esso Petroleum Co Ltd v Mardon [1976] 1 QB 801; see also Bissett v Wilkinson [1927] AC 177. 15 [1927] AC 177.

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In ascertaining what meaning was conveyed to the minds of the purchasers by the vendor’s statement as to the 2000 sheep, the most material fact to be remembered is that, as both parties were aware, the vendor had not and, so far as appears, no other person had, at any time carried on sheep-farming upon the unit of land in question. That land as a distinct holding had never constituted a sheep-farm. The two blocks comprised in it differed substantially in character. Hogan’s block was described by one of the purchasers’ witnesses as ‘better land.’ ‘It might carry,’ he said, ‘one sheep, or perhaps two, or even three sheep to the acre.’ He estimated the carrying capacity of the land generally as little more than half a sheep to the acre. And Hogan’s land had been allowed to deteriorate during several years before the purchasers purchased. As was said by Sim, J: In ordinary circumstances, any statement made by an owner who has been occupying his own farm as to its carrying capacity would be regarded as a statement of fact … This, however, is not such a case. The purchasers knew all about Hogan’s block and knew also what sheep the farm was carrying when they inspected it. In these circumstances … the purchasers were not justified in regarding anything said by the vendor as to the carrying capacity as being anything more than an expression of his opinion on the subject.

In this view of the matter their Lordships concur. Whether the vendor honestly and in fact held the opinion which he stated remained to be considered. This involved examination of the history and condition of the property. If a reasonable man with the vendor’s knowledge could not have come to the conclusion he stated, the description of that conclusion as an opinion would not necessarily protect him against rescission for misrepresentation, but what was actually the capacity in competent hands of the land the purchasers purchased had never been, and never was, practically ascertained. The purchasers, after two years’ trial of sheep-farming, under difficulties caused in part by their inexperience, found themselves confronted by a fall in the values of sheep and wool which would have left them losers if they could have carried 3000 sheep. A statement of opinion can also be regarded as a statement of fact. Where an opinion is not honestly held it is likely to be regarded as an attempt to misrepresent a fact.16 The most obvious example of this is the dishonest representation made in Smith v Land & House Property Corp17 regarding the desirability of Mr Fleck as a tenant. By stating an opinion, the person who makes it is also representing that they honestly hold that opinion. So where they in fact do not hold that opinion, but dishonestly pretend that they do so as to induce a contract, then this must give rise to an action for misrepresentation.18 If it can be shown that the maker of the statement could not have honestly held that opinion, then an action for misrepresentation will also arise.19

16 17 18 19

Smith v Land & House Property Corp (1884) 28 Ch D 7. Ibid; discussed above, section 16.2.1. Fitzpatrick v Michel (1928) 28 SR (NSW) 285; see also Brown v Raphael [1958] 2 All ER 79. Brown v Raphael [1958] 2 All ER 79; Oudaille v Lawson [1922] NZLR 259.

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16.2.3  Statements of intention Unless a party to a contract deliberately lies, it is not possible for a statement of intention to be either true or false.20 It is only where a fraudulent statement is made that a statement of intention can give rise to a claim in misrepresentation.21 In Balfour v Hollandia Ravensthorpe NL22 a salesman for a building society told a purchaser that after a period of time had passed, the building society would allow the purchaser to Unless a party to a contract deliberately lies, borrow 90 per cent of the value of the property. The salesman it is not possible for a knew that this would not happen. The Court held that this was statement of intention to actually a misrepresentation of an existing fact, as the building be either true or false. society’s own policy documents indicated that the statement was untrue. In Edgington v Fitzmaurice  23 the directors of a company stated that monies it was to borrow would be put towards alterations of the company’s building. Instead, the directors meant to use the money to pay off existing liabilities. As Cotton LJ stated: It was argued that this was only the statement of an intention, and that the mere fact that an intention was not carried into effect could not make the defendants liable to the plaintiff. I agree that it was a statement of intention, but it is nevertheless a statement of fact; and if it could not be fairly said that the objects of the issue of the debentures were those which were stated in the prospectus, the defendants were stating a fact which was not true, and if they knew that it was not true, or made it recklessly not caring whether it was true or not, they would be liable.24

Similarly, Bowen LJ stated: There must be a misstatement of an existing fact: but the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else. A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact.25

These principles were followed in Fitzwood v Unique Goal.26 As Finklestein J stated: A person whose assent to a contract has been produced by misrepresentation, whether fraudulent or not, is entitled to escape the bargain by rescission: Redgrave v Hurd (1881) 20  Ch  D  1. Here, although the implicit statement or representation that induced the making  of the sale of units agreements was a statement or representation as to a future event (that the management fee would be paid), such a statement or representation implies a statement of the promisor’s present intention which, if untrue, can be treated as a misrepresentation.27

20 Beattie v Lord Ebury (1872) 7 LR Ch App 777. 21 Balfour v Hollandia Ravensthorpe NL (1978) SASR 240; see also Beach Petroleum NL v Johnson (1993) 115 ALR 411; Al Khudairi v Abbey Brokers Ltd [2010] EWHC 1486 (Ch). 22 (1978) 18 SASR 240. 23 (1885) 29 Ch D 459. 24 Ibid, 479–480. 25 Ibid, 483. 26 (2002) 188 ALR 566. 27 Ibid, 593.

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16.2.4  Statements of law Statements of law have not traditionally supported actions for misrepresentation. However, it stands to reason that where legal advice is proffered with the intention that it should be acted upon, there should be some legal consequences if the advice is misleading.28 There have been cases where an incorrect statement of the law has been regarded by the courts as being an actionable misrepresentation.29 It is clear that a fraudulent misrepresentation of the law will give rise to an actionable claim.30 This principle accords with the other categories of statements that might give rise to a claim in misrepresentation. Where there is a false statement a claim will invariably arise. The distinction between fact and law is tenuous at best.31 After all, the existence and meaning of the law is a fact which can be objectively ascertained through the courts, even though many legal minds may differ in their view prior to an actual decision by a court. The extract below from the decision of Kaye J in Public Trustee v Taylor 32 demonstrates the circumstances under which a misstatement of the law can give rise to a finding of misrepresentation. In Taylor, the Public Trustee was the administrator of a deceased estate and sought to sell part of that estate to the defendant. The land in question was subject to zoning laws which stipulated that it was: ‘Zoned: special use 10. Subject to road widening.’ However, an officer of the Public Trustee was aware that the entirety of the land was to be used for the road. The defendant sought to avoid the contract. Statements of law have not traditionally supported actions for misrepresentation. However, where legal advice is proffered with the intention that it should be acted upon, there should be some legal consequences if the advice is misleading.

Public Trustee v Taylor [1978] VR 289 Kaye J at 296–299: To decide whether the property was zoned as represented, it would have been necessary to consider provisions of Pt II of the Town and Country Planning Act 1961, the Melbourne and Metropolitan Planning Scheme Ordinance and its map No. 39. The decision, therefore, would have been reached by applying the law, as found in the legislation, ordinance and map, to knowledge of the location of the property. The result achieved in this way was a conclusion of law, and the statement of it to another person was a representation of law. Delivering the judgment of the Court of Appeal in Territorial and Auxiliary Forces Association of the County of London v Nichols [1949] 1 KB 35, at p. 50, Scott LJ held that a statement that premises

28 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 506. 29 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. In the context of misrepresentation, see West London Commercial Bank v Kitson (1884) 13 QBD 360; MacKenzie v Royal Bank of Canada [1934] AC 468. 30 Public Trustee v Taylor [1978] VR 289; see also Pankhania v London Borough of Hackney [2002] EWHC 2441 Ch, [58]; Brennan v Bolt Burdon [2004] EWCA Civ 1017, [10]. 31 See David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; see also Lord Denning MR in Andre et Cie SA v Ets Michel Blanc et Fils [1979] 2 Lloyd’s Rep 427, 430–431. 32 [1978] VR 289.

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were controlled premises within the meaning of the Rent Restriction Acts constituted a representation of law. His Lordship said: That is not a representation of fact; it is a statement of the result obtained by applying the provisions of the Act to the circumstances of the particular case.

The decision in Nichols’ case was applied by the Privy Council in Kai Nam v Ma Kam Chan [1956] AC 358 in relation to a representation concerning whether certain premises were ‘an entirely new building’ as described in the Hong Kong Landlord and Tenant Ordinance. Similarly, it has been stated by the High Court, without deciding the matter, that there is a good deal to be said for the view that a representation made by a local government authority that certain land was within an area planned as a rural zone of a green belt of a proposed town planning scheme is a representation of law: Vitosh v Brisbane City Council (1960) 5 LGRA 342, at p. 345. It does not appear from the report of the case whether Nichols’ case and Kai Nam v Ma Kam Chan, were cited to the High Court, although the view expressed by it is consistent with the Privy Council and Court of Appeal judgments. My opinion, therefore, is that the representation by which the defendant was induced to enter into the contract was one of law. Relying upon a passage appearing in Cheshire and Fifoot Law of Contract, 3rd Aust. ed. (1974), p. 284, Mr Berkeley [counsel for the Public Trustee] submitted that a  misrepresentation of law is not actionable. To the extent that a misrepresentation of law cannot found an estoppel, his submission is supported by authority; Nichols’ case and Kai Nam v Ma Kam Chan: see also Spencer, Bower & Turner, Estoppel by Representation, 2nd ed. (1966), pp. 39, 40. I am unable, however, to find support in Vitosh v Brisbane City Council for a proposition that a misstatement of law made fraudulently will not support an action for deceit. In that case, the High Court dismissed the plaintiff’s appeal on the ground that, being an action for damages for fraudulent misrepresentation, the misrepresentations were neither as alleged in his statement of claim, nor false. The Court did not suggest that, had the representations been made fraudulently, the action would have failed on the ground that they were statements of law. There are, on the other hand, a number of cases where relief was granted to a party who had been induced to enter into an agreement by a misrepresentation of law made fraudulently and there are cases where the right to relief in such circumstances has been recognized; British Workman’s & General Insurance Co Ltd v Cunliffe (1902) 18 TLR 502; Kettlewell v Refuge Assurance Co [1908] 1 KB 545; Tofts v Pearl Life Assurance Co Ltd [1915] 1  KB 189 and Oudaille v Lawson [1922] NZLR 259, at p. 261. In Cunliffe’s case a policy holder sought to recover a premium paid by him under an assurance policy on the life of another person. He was induced to enter into the policy by a representation made by the company’s agent that he had an insurable interest. The Court of Appeal affirmed the divisional court’s decision that he was entitled to recover the amount of premium paid although in the divisional court it had been found that the representation was made innocently. Significantly Romer LJ described the conduct of the agent as improper. Subsequently in Harse v Pearl Life Insurance Co [1904] 1 KB 558, at p. 563, Collins MR explained that in Cunliffe’s case the statement of law on which the assured acted was made fraudulently. It  was similarly explained in Phillips v Royal London Insurance Co Ltd (1911)

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105 LT 136, at p. 137 and in Hughes v Liverpool Legal Society [1916] 2 KB 482, at pp. 486, 487. The learned authors of Spencer Bower & Turner, Actionable Misrepresentation, 3rd ed. (1974), p. 61, par. 42, after stating that it has been held or recognized in several authorities that if the law is fraudulently misstated, the representor would be held liable for misrepresentation, offer as an explanation for this principle that a statement of law implies a representation that the person professing to expound it believes it to be as stated by him. For my part, I agree with the explanation offered by the learned authors. It is therefore necessary to consider the consequences which flowed from the misrepresentation of law made fraudulently by the plaintiff’s agent. It was conceded by Mr Berkeley that if the defendant had been induced to enter into the contract by misrepresentation of fact made either innocently or fraudulently by the agent, he had validly disaffirmed and a declaration of rescission should be made. Counsel’s concession was confined to a misrepresentation of fact. It was consonant with the principle that a party who has been induced by a material fraudulent representation of fact to enter into a contract has a right to rescind: Hart v Swaine (1877) 7 ChD 42 and Nicholas v Thompson [1924] VLR 554. Similarly, the procurement of a contract by fraudulently making a misrepresentation of fact will, generally speaking, bar its enforcement by specific performance; Halsbury, 3rd ed., vol. 36, p. 303, par. 435. The basis for denying specific performance in those circumstances would appear to be that it is unconscionable to allow a party to enforce a contract obtained by his own misstatement which he knows to be false: Redgrave v Hurd (1881) 20 ChD 1, at pp. 12, 13, per Jessell MR. Under the heading ‘Essential features of misrepresentation’ in Halsbury, ibid, p. 306, par. 436 it is said: The statement must, it seems, be one of fact and not of law; but should the representation be matter of mixed fact and law, as is often the case in regard to matters of title, the defence prevails.

A similar statement is to be found in Fry on Specific Performance of Contract, 6th ed. (1921), p. 323, par. 682. It is there said: Whether a misrepresentation not of fact, but of law, would afford a defence to an action for specific performance has not, it is believed, been decided. But for the purposes of holding a defendant liable to make good a representation, or of rescinding a contract, it is certain that it must be a statement not of law, but of fact. No one is at liberty to say that he does not know the law.

Since the passage cited was last published, it would seem that there has not been any reported authoritative decision on the efficacy of such a defence. The learned author, however, did not refer to Coulson v Allison (1860) 2 De GF & J 521; 45 ER 723, a decision of Lord Campbell LC, affirming a declaration of Scott VC setting aside a deed of purported postnuptial settlement which had been procured by a misstatement of law. The parties to the deed were a widower and his deceased wife’s sister, who had contracted a form of marriage. Subsequently, before signing the deed, the woman was advised by the widower’s solicitors that there was doubt whether the marriage was valid. In the then existing state of the law, the marriage was null and void. The Vice Chancellor set aside the deed on the ground of total failure of consideration (1860) 2 Gif 279; 66 ER 117. The significance

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of this authority for present purposes is that, in affirming the Vice Chancellor’s decision, the Lord Chancellor’s judgment proceeded on the basis that the law pertaining to her marriage had been misrepresented by the solicitors to the woman. Thus, it might properly be described as a case where a deed was rescinded because it had been procured by a misrepresentation of law. Again, while ignorance of the law is not a defence to a criminal charge, it can hardly be said that it is a reality of life that all persons know the law. In my view, the same rights and consequences should flow from the making of fraudulent misrepresentation of law by which a party was induced to enter into a contract and from the making of a fraudulent misrepresentation of fact. If a party might claim damages arising out of a fraudulent misrepresentation of law, a fortiori he should be entitled both to rescind a contract which was procured in the same way as well as to resist the enforcement of it by specific performance. Some support for this conclusion is to be found in the judgment of Bowen LJ in West  London Commercial Bank v Kitson (1884) 13 QBD 360, at pp. 362, 363. There his Lordship declared: I am not prepared to say—and I doubt whether, if a man who wilfully misrep­ resented the law—would be allowed in equity to retain any benefit he got by such misrepresentation.

His Lordship’s statement was made, as I have already observed, in a case relating to a misrepresentation of fact. In Spencer Bower on Actionable Misrepresentation, 2nd ed. (1927), p. 57 in a footnote, this passage in his Lordship’s judgment is described as follows: a proposition worded with needless caution, for it cannot be supposed that, if a statement of law is a representation to the extent indicated for one purpose, it is not so for all, or that the application of the rule is confined to equity, or to proceedings for rescission.

See also 3rd ed. (1974), of the same work, Spencer Bower & Turner, at p. 61. Thus, I conclude it would be unconscionable to permit the plaintiff to gain from a fraudulent misrepresentation of law whether made by himself or by his agent.

• 16.3 Silence In the categories considered above, there has usually been a positive action in the form of a statement which gave rise to a misrepresentation. The general rule is that silence does not amount to a misrepresentation.33 But there are circumstances in which a failure to communicate a pertinent fact will give rise to a misrepresentation.34 Note that there is an overlap here between the common law principles and the jurisprudence on misleading 33 W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572; Smith v Hughes (1871) LR 6 QB 597. 34 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31.

The general rule is that silence does not amount to a misrepresentation. But there are circumstances in which a failure to communicate a pertinent fact will give rise to a misrepresentation.

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and deceptive conduct that was developed under s 52 of the now repealed Trade Practices Act 1974 (Cth).35 There are three main circumstances under which silence can constitute a misrepresentation: (i) where the silence distorts some positive representation; (ii) where the statement becomes untrue; (iii) where the parties are in a fiduciary relationship.

16.3.1  Where the silence distorts some positive representation Where a party makes a representation, they are bound to tell the truth. Telling only half the story—in relation to a matter that the person making the representation knows will be taken into account by the other party in entering the contract—is a misrepresentation.36 By remaining silent on some pertinent fact and by selectively revealing a few facts, the person making the representations is likely to mislead the other party.37 In Krakowski v Eurolynx Properties Ltd 38 Eurolynx had arranged a tenant. Swaeder, for its premises at a rent of $156 000 per annum. However, Eurolynx failed to disclose to Krakowski— the purchase of the premises—that there was a collateral agreement with the tenant providing him with three months’ rent-free and $156 000 for stocking and fitting out the premises. After Krakowski bought the premises from Eurolynx, Swaeder defaulted and left. The High Court held that Eurolynx’s conduct was fraudulent and misleading.

Krakowski v Eurolynx Properties Pty Ltd (1995) 183 CLR 563 Brennan, Deane, Gaudron, McHugh JJ at 574–577: There seems to have been no misunderstanding about the gist of the alleged misrepresentation, namely, that the annexing of the instrument of lease to the s 32 statement and the inclusion of those documents in the proffered contract of sale misrepresented the true contractual arrangement between Eurolynx and Swaeder. The purchasers’ case was that Eurolynx knew that they were interested in acquiring a property let to a strong tenant paying a rent that would return 10% on the sum invested and that it was fraudulent to advance the instrument of lease as the document relevant to the purchasers’ return on their investment without disclosing the existence and terms of the separate agreement. Counsel for Eurolynx have submitted at all stages of this action that the only relevant representation pleaded was that the instrument of lease contained a covenant for the payment of a rental of $156 000 for each of the initial two years of the term. That is the allegation made in par. 4(b) of the amended statement of claim if it is construed

35 See Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; Krakowski v Eurolynx Properties Pty Ltd (1995) 183 CLR 563. The Trade Practices Act has been replaced by the Competition and Consumer Act 2010 (Cth). Misleading and deceptive conduct is discussed in Chapter 17. 36 Curwen v Yan Yean Land Co Ltd (1891) 17 VLR 745. 37 Jennings v Zihali-Kiss (1972) 2 SASR 493; Awaroa Holdings Ltd v Commercial Securities and Finance Ltd [1976] 1 NZLR 19. 38 (1995) 183 CLR 563.

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literally and in isolation. Of course, the instrument of lease does contain a covenant in those terms. But reading that paragraph in the context of the amended statement of claim as a whole, it is clear that was not the representation on which the purchasers founded their cause of action in deceit. It is regrettable that the pleading was not more precisely framed, for the courts below in rejecting the submission of Eurolynx have had to formulate the terms of the representation pleaded and each of the formulations is open to challenge. In his reasons for judgment, the learned trial judge treated the essence of the purchasers’ allegation as misrepresentation by Mallesons [acting for the vendor] ‘in concealing the “collateral agreement”.’ His Honour decided the case on the footing that ‘(i)f there was fraud by the solicitor the defendant as principal would be responsible for the fraud of its agent’. However, he acquitted Eurolynx and Mallesons of fraud because he held that there was no duty to disclose the inducement given to Swaeder. The cause of action based on deceit failed at first instance. In the Full Court, however, their Honours saw the case differently. They treated the case not as one of concealment of a fact that Eurolynx or Mallesons were under a duty to disclose, but as a case of positive misrepresentation. Their Honours cited what Higginbotham CJ said in Curwen v Yan Yean Land Co Limited: concealment of a fact may cause the true representation of another fact to be misleading, and may thus become a substantive misrepresentation … A true representation, coupled with concealment, thus became a positive misrepresentation calculated to deceive.

Referring to the provisions of cl. 9.8 of the lease [cl. 9.8 was an entire understanding and whole of agreement clause; it attempted to confine the parties’ agreement and understanding to that contract and to exclude any pre-contractual representations], their Honours said: That term, when taken with the surrounding circumstances, including the manner in which the property was offered to the plaintiffs by the defendant’s estate agent, amounted in our judgment to a positive representation that no collateral agreement had been made between the defendant and the tenant. Such a representation inevitably deterred the plaintiffs—and Mermelstein on their behalf—from making their own enquiries into the questions whether the rent reserved by the lease was a market rent and whether, accordingly, a purchase price of $1.56 million was a fair reflex of it … The materiality of the collateral agreement to the question which concerned the plaintiffs—whether $1.56 million was a fair reflex of the rent reserved by the lease—is evident.

This was not a case in which a defendant had simply not disclosed a fact; it was a case in which negotiations for sale of unit 12 had taken place on the footing that a lessee for the property on offer had been found who was willing to pay a rent of $156 000 for a lease of that property. By its s. 32 statement and by the proffered contract of sale, Eurolynx had disclosed that the lease affected unit 12 and the question was whether that statement carried the representation that the terms of the instrument of lease contained the contractual arrangement between lessor and lessee or, putting the representation in

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another but identical way, whether the terms of the instrument of lease were unaffected by any other agreement between the lessor and lessee. In Tapp v Lee, Chambre J said: Fraud may consist as well in the suppression of what is true, as in the representation of what is false. If a man, professing to answer a question, select those facts only which are likely to give a credit to the person of whom he speaks, and keep back the rest, he is a more artful knave than he who tells a direct falsehood.

In the Full Court, their Honours said: the question was whether what had been communicated was untrue or was rendered untrue because of what was not communicated. But the question remains whether, even approaching the case upon that altered footing, the judge was correct in concluding that the plaintiffs did not make out their case.

The conclusion of the Full Court as to the effect of the evidence adduced at the trial within the scope of the pleadings was that— the plaintiffs were induced to enter into the contract of sale by a material representation of fact that was false. The representation was that the lease contained the whole of the agreement between the defendant and the tenant. In all the particular circumstances, that amounted to a representation to the effect that the rent reserved by the lease annexed to the contract of sale was a market rent. (Emphasis added.)

This conclusion as to the nature of the representation did not draw on the answers to requisitions. Those answers were not included among the particulars given by the purchasers of the representations founding the claim in deceit. The trial judge was in error in perceiving the purchasers’ allegation to be merely one of non-disclosure of the separate agreement rather than an allegation that the disclosed instrument of lease was not the exhaustive contractual arrangement between Eurolynx and Swaeder. The Full Court perceived the true gist of the allegation but added the rider, perhaps unnecessarily, that the representation on which the purchasers relied amounted to a representation that the rent reserved was the market rent. The representation pleaded and contended for in the case was correctly stated by the Full Court in the sentence emphasized above. The significance of that representation was that the rent of $156 000 reserved by the lease was represented to be the true rent, that is to say, the actual and genuine quid pro quo for the lease uninfluenced by any side agreement. When fraud is alleged against a defendant, it is not enough to prove that the representation as pleaded was false. The words or conduct by which a representation is made may be understood in different senses. The words or conduct may be understood by a reasonable person in the position of the representee in one sense, by the representee in a second sense and by the representor in a third sense. Or the representee may understand the words or conduct in a sense which the representor knew the representee might understand them, albeit not in the sense in which a reasonable bystander would understand them. The differing senses in which words or conduct are understood must be borne in mind in determining whether the several elements of deceit are proved. The sense in which a representation would be understood by a reasonable person in the position of the representee is prima facie the sense relevant to the question whether

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the representation is false. The sense in which a representation is understood by the representee is relevant to the question whether the representation induced the representee to act upon it. And the sense in which the representor intended the representation to be understood is relevant to the question whether the representation was made fraudulently.

16.3.2  Where the statement becomes untrue There may be circumstances where a positive representation has been made which is true, but which later comes to be a half-truth as a result of subsequent events. Moreover, where a party makes a statement which they subsequently find to be false, they are under an obligation to inform the other party.39 Also, where the circumstances have changed and a representation has become untrue, there is an obligation to disclose this to the other party.40 In the case of Lockhart v Osman41 the defendant’s agent advertised cattle as being ‘in excellent condition’ and ‘well suited for breeding purposes’. The agent later became aware that the cattle had been exposed to a highly contagious disease. The Court held that the agent’s failure to warn the other party was an actionable misrepresentation.

16.3.3  Where the parties are in a fiduciary relationship A party in a fiduciary relationship is bound to reveal all the material Where a contract is facts to the other party. A fiduciary relationship is one of the utmost contemplated between 42 trust and confidence. Where a contract is contemplated between parties who are fiduciaries parties who are fiduciaries to each other, there is a corresponding to each other, there is a corresponding obligation obligation to reveal all material facts. No derogation from this to reveal all material 43 44 obligation can be tolerated. In Hill v Rose  the defendant asked facts. No derogation from the plaintiff to buy a stake in his business, but did not disclose this obligation can be tolerated. that the business was nearly insolvent. As the parties were partners and in a fiduciary relationship, the defendant was under a duty to disclose. The Court held that the defendant had breached this duty. Similarly, in Conlon v Simms45 a prospective partner in a law firm failed to disclose his past misconduct. The partner was struck off the roll of solicitors when the misconduct was revealed. The Court held that this was a fraudulent misrepresentation. In addition to fiduciary relationships there are other contracts that are of the utmost good faith. These are referred to as contracts uberrimae fidei. An example of such contracts are 39 Lockhart v Osman [1981] VR 57; Boscaini Investments Pty Ltd v Petrides (1982) ASC 52-222; Robertson and Moffatt v Belson [1905] VLR 555. 40 Jones v Dumbrell [1981] VR 199; With v O’Flanagan [1936] 1 Ch 575; Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1. 41 [1981] VR 57. 42 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. 43 Maguire v Makaronis (1996) 188 CLR 449. 44 [1990] VR 129. 45 [2006] 2 All ER 1024.

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insurance contracts. Under these contracts, parties are bound to contract in good faith and must reveal all material facts that are known to them.46 Every contract of insurance is a contract uberrimae fidei. review questions 1 What are the different circumstances under which a positive misrepresentation can arise? 2 Why was a misrepresentation found to exist in the cases of Bissett v Wilkinson and Public Trustee v Taylor?

• 16.4 Culpable misrepresentation 16.4.1  Fraudulent misrepresentation The telling of an intentional untruth will be fraudulent misrepresentation.47 In Derry v Peek 48 the directors of a company were held not to be liable for misrepresentations that they had made because they honestly believed them to be true. Provided that the defendant honestly believes that they are telling the truth, even though the belief that they hold is unreasonable, they will not be said to be acting fraudulently.49 The state of mind of the defendant is essential on this issue.50 The defendant must know that their statement is untrue for it to be said that they are fraudulent.51

16.4.2  Negligent misrepresentation A defendant may be negligent in making statements to the plaintiff.52 This is a separate category of misrepresentation from fraudulent or innocent misrepresentation. The fundamental rule here was stated in Hedley Byrne v Heller:53 where a duty of care is owed by the maker of the representation to the recipient, liability arises where that duty has been breached and loss or damage has been suffered.54 This principle covers situations where there is no fraud, but where a duty is owed to the recipient and is breached by the making of a misleading statement. In essence, if the maker of the representation ought reasonably to know that the recipient is relying upon them to take due care to provide information which may induce the recipient to contract, then liability will attach where due care has not been taken.55 Where a duty of care is owed by the maker of the representation to the recipient, liability arises where that duty has been breached and loss or damage has been suffered.

46 Mackener v Feldia AG [1967] 2 QB 590. 47 Derry v Peek (1889) 14 App Cas 337. 48 Ibid. 49 Akerhielm v De Mare [1959] AC 789. 50 John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656. 51 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563. 52 Hedley Byrne Ltd v Heller & Partners [1964] AC 465. 53 Ibid. 54 See also Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241. 55 Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241; see also Mutual Life & Citizen’s Assurance Co v Evatt (1970) 122 CLR 628.

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The facts of Esso Petroleum Co Ltd v Mardon56 illustrate this concept. An oil company provided a person, who later became a tenant of a service station, with a forecast of petrol consumption for that service station. There were deficiencies in the production of the forecast and Esso was found to be liable for negligent misrepresentation. There is a fundamental limitation that applies in this area of the law; that is, though it is plain that negligent advice may cause some foreseeable loss to those who rely upon it, there is the danger—particularly where the advice is widely circulated—that application of liability to such harm might give rise to a multitude of claims and damages far beyond that which the law can support. Accordingly, some limiting principle must be imposed and, as such, the party providing the advice must know that the party receiving the advice will act upon it. This is illustrated below in the discussion of Gibbs CJ in L Shaddock & Associates v Council of the City of Parramatta.57 In that case, a council failed in its duty of care to inform the solicitor of a company that wished to purchase land that there were plans for widening a road that would affect the land. The company sued for misrepresentation. L Shaddock & Associates v Council of the City of Parramatta (1981) 150 CLR 225 Gibbs CJ at 230–231: The question then is whether there was a duty to answer carefully the questions put to the Council orally and in writing. It is now settled by the decisions in Hedley Byrne & Co Ltd v Heller & Partners Ltd and Mutual Life & Citizens’ Assurance Co Ltd v Evatt (High Court) and [in the Judicial Committee] that a person can be liable for financial loss resulting from a negligent mis-statement of fact or opinion, although the mis-statement was honestly made, and there was no fiduciary or contractual relationship between the parties. The question that is not settled by those authorities is what is the principle by which the courts are to determine whether a duty of care exists. The courts in those cases rejected the view that the principle stated by Lord Atkin in Donoghue v Stevenson, which is usually the starting point in any inquiry as to whether a duty of care exists (see Anns v Merton London Borough Council), provides the basis of liability in the case of negligent mis-statements. There are obvious differences between negligent words and negligent acts. In the first place, negligent words by themselves can cause no loss or damage—they cause loss or damage only because persons act in reliance on them. Secondly, people speaking on social or informal occasions may not uncommonly make statements or express opinions with much less care than if they were giving advice or information professionally or for business purposes. Thirdly, words may receive—and foreseeably receive—so wide a circulation that the application of the principle in Donoghue v Stevenson might open the door to a multiplicity of claims for very large amounts of damages. Even if the third of these considerations were dismissed as irrelevant, the others would remain compelling. It would appear to accord with general principle that a person should be under no duty to take reasonable care that advice or information which he gives to another is correct, unless he knows, or ought to know, that

56 [1976] QB 801. 57 (1981) 150 CLR 225.

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the other relies on him to take such reasonable care and may act in reliance on the advice or information which he is given, and unless it would be reasonable for that other person so to rely and act. It would not be reasonable to act in reliance on advice or information given casually on some social or informal occasion or, generally speaking, unless the advice or information concerned ‘a business or professional transaction whose nature makes clear the gravity of the inquiry and the importance and influence attached to the answer’, to use the words of Lord Pearce in Hedley Byrne. Equally it would not be reasonable to rely upon advice or information given by another unless the person giving it either had some special skill which he undertook to apply for the assistance of another or was so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry. Further a person should not be liable for advice or information if he had effectually disclaimed any responsibility for it. These general principles—they are not hard and fast rules—were accepted by the majority of their Lordships in Hedley Byrne, although Lord Devlin expressed a rather different point of view. The same general principles are supported by the judgments of the members of this Court in Mutual Life & Citizens’ Assurance Co Ltd. v Evatt.

• 16.5 Innocent misrepresentation Where the maker of a statement neither intends to deceive, nor is careless in making a statement, then there may be an innocent misrepresentation.58 Generally, an innocent misrepresentation will not support an action for rescission. However, the innocence of the misrepresentation might not preclude liability where the representation goes to the heart of the contract and where there is a complete difference between the substance of the representation and the reality of the situation.59 The law here is unclear and there is some doubt as to whether a statement might be regarded as being an inducement where there was no intention to deceive, but where the statement clearly played a part in procuring the contract.

• 16.6 Who may sue for misrepresentation? Only the party who has received the misleading communication may sue for misrepresentation.60 It is the intended recipient who is that party that has been wronged; and it follows that the wronged party, and not any other related party, may sue for redress. However, that is not to suggest that the misleading statement must always be made directly to the plaintiff.61 The statement may be made to a class of persons to whom the plaintiff belongs.62 Provided that the plaintiff is contemplated in some manner—either as a direct recipient 58 59 60 61 62

Gould v Vaggelas (1984) 157 CLR 215. Brownlie v Campbell (1880) 5 App Cas 925, 937; Wilcher v Steain (1961) 79 WN (NSW) 141. Peek v Gurney (1873) LR 6 HL 377. Commercial Banking Company of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337. Leslie Leithead Pty Ltd v Barbar (1965) 65 SR (NSW) 172; Mount Gambier Co-Operative Milling Society Ltd v Williams [1921] SASR 185.

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or as a member of a particular class—and the representation is acted upon, then a claim of misrepresentation will arise. In Peek v Gurney63 the directors of a company issued a prospectus containing false and misleading  information. The misrepresentation in the prospectus was directed at the general public and was intended to induce them to buy shares in the company. The plaintiff did not buy shares when the prospectus was released; he bought shares some months later, and when the company was wound up he lost £100 000. The plaintiff sued for misrepresentation. The House of Lords rejected the plaintiff’s claim as the plaintiff had bought his shares on the open market and not as a member of the class of persons who had received the prospectus. Similarly, in Commercial Banking Co of Sydney Ltd v R H Brown & Co64 the plaintiff’s bank requested information from another bank as to the financial status of a dealer with whom the plaintiff wished to conduct business. The defendant provided information to the plaintiff’s bank even though it knew that the information was false. The dealer was allowed to take wool on credit. When he defaulted, the plaintiff sued the defendant. The High Court upheld the trial judge’s decision on the basis that the defendant knew and intended, despite its disclaimers, that the information was likely to be acted upon. Notably, in Commercial Banking Co, the report was not made directly to the plaintiff; but the plaintiff was clearly contemplated as an eventual recipient of the information by the defendant.

16.6.1  Limitations on actions for misrepresentation Where the statement is non-inducing If the misrepresentation does not induce the contract, then it cannot form the basis of an action for misrepresentation.65 A mere falsehood does not create a legal right to redress unless it works in the plaintiff’s mind so as to lead them into error.66 The plaintiff need not have suffered loss at the point at which they seek to rescind, but they must have been tricked in some way. In Gould v Vaggelas67 Wilson J, citing Cheshire and Fifoot on the Law of Contract, made the following statements about misrepresentation: 1 Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case. 2 If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation. 3 The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation. 4 The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.

63 64 65 66 67

(1873) LR 6 HL 377. (1972) 126 CLR 337. Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. Gould v Vaggelas (1984) 157 CLR 215. (1984) 157 CLR 215, 236.

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Where the plaintiff is unaware of the representation There can be no misrepresentation where the plaintiff is unaware of the representation. Put simply, if the plaintiff has not heard the statement, then they cannot be said to be induced by it.68 In Re Northumberland and Durham District Banking Co; Ex parte Bigge69 the plaintiff Bigge, a shareholder in a company, sought to rescind his contract on the basis that the company had published false reports on its financial state. However, Bigge’s action failed as he was unable to show that he was aware of the reports when he bought his shares or that they induced his purchase.

Where the plaintiff knows that the representation is false A plaintiff cannot be misled by a representation that they know is false. The level of knowledge required by the courts is actual knowledge.70 There is a crucial difference here between having the opportunity to discover the truth, but failing to do so, and actually knowing the truth.71 In  Redgrave  v Hurd,72 Hurd was induced to buy Redgrave’s business after Redgrave inflated its earnings. Hurd would have discovered the falsehood if he had properly inspected Redgrave’s accounts, but he failed to do so. Nonetheless, Hurd succeeded against Redgrave, on the basis that he had relied solely on the latter’s misrepresentations. There is a limitation on the general principle stated above in that where a representee has some knowledge of a falsity, but is not aware of the full extent of the falsehood, they may still claim for misrepresentation.73 In Gipps v Gipps,74 a husband misrepresented the value of shares and takings from a business to his wife. The husband and wife were divorcing and were seeking a settlement. The wife was aware that the husband was not telling the exact truth, but she was unaware of the full extent of his falsehoods. The wife succeeded in her action for fraud because she lacked full knowledge of the falsity. The contract must be induced by the misrepresentation. Accordingly, in situations where the plaintiff has relied solely on their own judgment or the advice of others to the exclusion of the misrepresentation, it cannot be said that there has been a successful deception.

Where the plaintiff does not act on the representation A representation that is not acted upon cannot be regarded as being a successful inducement.75 The plaintiff may rely on their own assessment, rather than on the representation of the defendant.76 Alternatively, the party that initially makes the misrepresentation may correct it prior to the contract being completed.77 The contract must be induced by the misrepresentation. Accordingly, in situations where the plaintiff has relied solely on

68 Re Northumberland and Durham District Banking Co; Ex parte Bigge (1858) 28 LJ (Ch) 50. 69 Ibid. 70 Redgrave v Hurd (1881) 20 Ch D 1; Holmes v Jones (1907) 4 CLR 1692. 71 Ibid. 72 (1881) 20 Ch D 1. 73 Gipps v Gipps [1978] 1 NSWLR 454. 74 Ibid. 75 Holmes v Jones (1907) 4 CLR 1692; Wilcher v Steain [1962] NSWR 1136. 76 Attwood v Small (1838) 7 ER 684. 77 Holmes v Jones (1907) 4 CLR 1692.

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their own judgment or the advice of others to the exclusion of the misrepresentation, it cannot be said that there has been a successful deception. Similarly, effectively correcting a misleading statement negates the earlier misrepresentation.

Where the misrepresentation is not material To give rise to a successful claim, the misrepresentation must be material in cases of culpable misrepresentation. With regard to innocent misrepresentation, a strict test was advanced by Blackburn J in Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd 78 to the effect that an innocent misrepresentation does not give rise to a right to rescind unless there is a ‘complete difference’ between what was suggested and what was received.79 However, the emergence of Sale of Goods legislation in all Australian jurisdictions probably overrides this principle. It will be sufficient that the misrepresentation is one of the reasons why the plaintiff entered the contract.80 Moreover, the misrepresentation may not even be the main factor that led the plaintiff into the contract.81 Provided that the misrepresentation has some bearing on the decision to enter into the contract, then the plaintiff will have a claim.82 The term ‘material’ does not have a settled meaning within the law of misrepresentation. In Nicholas v Thompson,83 for example, it was held to be sufficient that the misrepresentations had contributed in some way to the forming of the contract. In Nicholas the defendants made a false statement about having received fantastic offers for his property in the past. The plaintiff successfully avoided the contract.

• 16.7 Rescission It is useful to conclude our study of misrepresentation by considering the primary remedy that may be sought by an aggrieved party in this area of the law. The party who has suffered the misrepresentation will most likely wish to walk away from the contract. At this point, the contract is voidable rather than void. The party who has been misled must decide whether to persevere with the contract or whether to abandon it entirely. From a commercial perspective, it may make little sense to continue a business relationship with a party that you clearly cannot trust. In effect, rescission Accordingly, the remedy of rescission places the parties back creates a legal fiction, where, to the extent in the positions that they were in prior to the formation of the possible, it is made to contract. Rescission applies where a contract is voidable. Until appear as if the contract such time as the contract is voided, it continues to be in force never existed. between the parties, but once the contract has been rescinded the

78 79 80 81 82 83

(1867) LR 2 QB 580. Ibid, 587. Gould v Vaggelas (1984) 157 CLR 215; Edgington v Fitzmaurice (1885) 29 Ch D 459. Field v Shoalhaven Transport Pty Ltd [1970] 3 NSWR 96; Barton v Armstrong [1976] AC 104. Australian Steel and Mining Corp Pty Ltd v Corben [1974] 2 NSWLR 202. [1924] VLR 554.

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parties are returned to their original positions.84 In effect, rescission creates a legal fiction, where, to the extent possible, it is made to appear as if the contract never existed.85 However, for rescission to be available, it must be possible to put the parties back in the positions that they were in prior to the contract formation.86 While the party that has been misled will be likely to seek rescission, a court must superintend this course of action to ensure that it is actually possible.87 As rescission is an equitable remedy, a court will use its discretion in determining whether the remedy is appropriate. In order to effectively rescind a contract, the misled party must give clear notice to the other party. Once the misled party elects to seek rescission, this choice is binding.88 The communication of the rescission must be clear and unequivocal.89 Once the election to rescind is made then the act of rescission is complete. If the other party challenges the rescission, then—providing that the case is one of clear misrepresentation—the rescission is likely to be confirmed by the court. If the misled party delays choosing to rescind, they may lose the ability to do so.90 In such a situation the court may instead opt to provide them with equitable damages.

Ke y p o in ts for re v ision An actionable misrepresentation may be founded upon: • a pre-contractual representation that may be characterised as a specific representation rather than mere puffery; • a statement of opinion where there is either no basis for the opinion or it is not honestly held; • a statement of intention where no such intention exists; or • a statement of law that is misleading. Silence will not ordinarily constitute a misrepresentation; however, a half-truth can be a misrepresentation. Similarly, where a statement later becomes untrue, there is a duty to inform the recipient if the maker of the representation is aware that the former is acting in reliance of the statement. Where a fiduciary duty exists or where the contract is one of the utmost good faith, the parties are bound to reveal all material facts. There are two types of culpable misrepresentation: fraudulent and negligent misrepresentation. Negligent misrepresentation will found an action in negligence only where a duty of care is owed to the recipient of the representation. Only the party who has been misled may sue for misrepresentation. The misrepresentation must be material, and the plaintiff must have been aware of it and acted in reliance of it while not knowing that it was false. Rescission is the primary remedy for misrepresentation.

84 85 86 87 88 89 90

Alati v Kruger (1955) 94 CLR 216. FAI General Insurance Co Ltd v Ocean Marine Mutual Protection and Indemnity Association (1997) 41 NSWLR 559. Maguire v Makaronis (1996) 188 CLR 449. Alati v Kruger (1955) 94 CLR 216 Clough v London and North Western Railway Co (1871) LR 7 Exch 26. Coastal Estates v Melevende [1965] VR 433. Long v Lloyd [1958] 1 WLR 753.

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problem-solving practice Sally and Sunil are a married couple who have recently purchased a house. They purchased their house from David. Due to their business commitments, Sally and Sunil were only able to inspect the house once prior to purchase and so they relied on David’s representations. David said that the neighbours were very quiet and peaceful. David also said that the house had absolutely no structural defects. However, when Sally and Sunil moved in they discovered that there was a termite infestation in the house and that their neighbours played loud music at all hours of the night. Sally and Sunil have since discovered that David had made a series of complaints to the police about his neighbours when he was living in the house and that he had a pest inspector advise him on the termite problem. Advise Sally and Sunil.

ANSWER Sally and Sunil will most likely seek to rescind their contract with David. There are two representations in this matter which might give rise to an action for misrepresentation. The first is that the house is structurally sound, while the second is that the neighbours are peaceful. In both instances David is aware that his representations are untrue. The type of misrepresentation that has occurred here is fraudulent misrepresentation. David has attempted to deceive Sally and Sunil. This case is analogous to that of Smith v Land & House Property Corp because, like the defendant in that case, David knows the truth of the matter and has consciously lied. Further, unlike in Mitchell v Valherie, the representation about the structure of the house is quite specific. David represented that the house was structurally sound, whereas in Mitchell no such direct representation was made—in Mitchell the representation was to the effect that ‘You will have nothing to spend’. Neither White nor Layton JJ in Mitchell construed that phrase as referring to the structure of the house. However, in the present matter David made a direct reference to the structure when he knew  that there were termites. David cannot argue that his representations were mere opinions as he knew that they were not true. The representations were clearly material to Sally and Sunil’s decision to contract with David. Moreover, at the time that the representations were made, Sally and Sunil were unaware that they were false. Sally and Sunil will likely succeed in an action for misrepresentation.

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chapter

17

Misleading or deceptive conduct

Chapt e r o v e rv i e w 17.0

Introduction  329

17.1

The objective of s 18   329

17.2

Conduct in trade or commerce   330

17.3

Establishing misleading or deceptive conduct   334 17.3.1 The Taco Bell steps  334 17.3.2 The ordinary and reasonable person   336

17.4

Examples of misleading or deceptive cases   339 17.4.1 Comparative advertising  339 17.4.2 Silence where disclosure is expected   339 17.4.3 Puffery  340 17.4.4 Promises  340 17.4.5 Character merchandising  340

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Misleading or deceptive conduct

• 17.0 Introduction Section 52 of the now repealed Trade Practices Act 1974 (Cth) (TPA) provided that a ‘corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’. The TPA has now been replaced by the Australian Consumer Law (ACL), which is contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth), and the equivalent of s 52 of the TPA equivalent is s 18 of the ACL. Section 18 provides that a ‘person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’ (emphasis added). As the only difference between s 52 of the TPA and s 18 of the ACL is that the latter applies to persons, which includes corporations and individuals, the vast body of jurisprudence that has developed under the former is now applicable to s 18. There are two substantive parts to s 18. The first concerns the determination of whether the conduct is in trade or commerce. The second concerns whether the conduct is misleading or deceptive or likely to mislead or deceive.

• 17.1 The objective of s 18 Section 18 of the ACL sets out to proscribe a particular type of conduct. In effect, s 18 sets a standard for commercial behaviour.1 In Brown v Jam Factory Pty Ltd,2 the Federal Court stated that ‘Section 52 does not purport to create liability at all; rather it establishes a norm of conduct.’3 In many respects, s 18 is the statutory form of the common law doctrine of misrepresentation.4 As discussed in Chapter 16, misrepresentation is concerned with representations made by one party to another that are apt to mislead or deceive. However, the conduct that is prohibited under s 18 is not limited to representations.5 In Henjo Investments Pty Limited v Collins Marrickville Pty Limited (No 1),6 Lockhart J stated: Misleading or deceptive conduct generally consists of representations, whether express or by silence; but it is erroneous to approach section 52 on the assumption that its application is confined exclusively to circumstances which constitute some form of representation.7

Similarly, in State Government Insurance Corporation v Government Insurance Office of NSW,8 French J stated: The requirement that some representation be demonstrated as an element of the conduct has no doubt been appropriate in many applications of s 52 of the Trade Practices Act or its equivalent, s 10 of the Fair Trading Act, to cases analogous to passing off. It is not, however, a universal requirement. In my opinion, it is not logically a necessary condition for the characterisation of conduct as misleading or deceptive or likely to mislead or deceive that it convey some representation. To so require is to impose a gloss on the words of the statute.9 1 Brown v Jam Factory Pty Ltd (1981) 53 FLR 340, 348. 2 Ibid. 3 Ibid, 348. The remedies that are available under s 18 are set out elsewhere in the ACL. 4 See Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) ATPR 40-303, 43,751. 5 Butcher v Lachlan Elder Realty Pty Ltd (2002) 55 NSWLR 558. 6 (1988) 79 ALR 83. 7 Ibid, 93. 8 (1991) ATPR 41-110. 9 Ibid, 52,711.

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The fundamental concern of s 18 is whether the conduct of the person or corporation, whether by representation or otherwise, has ‘the tendency to lead members of the public into error’.

The fundamental concern of s 18 is whether the conduct of the person or corporation, whether by representation or otherwise, has ‘the tendency to lead members of the public into error’.10 In short, if the conduct is such that it causes members of the public to reach erroneous conclusions, which then influence or may influence their conduct, then the person or corporation responsible will have fallen foul of s 18.

• 17.2 Conduct in trade or commerce Leaving aside the question of whether the conduct complained of is in fact misleading or deceptive, or likely to be so, the threshold question that must first be addressed is whether the conduct took place in trade or commerce. The trade or commerce must take place in Australia, or be between an entity in Australia and entities outside Australia.11 The Explanatory Memorandum to the ACL states: Section 18 of the ACL applies to conduct ‘in trade or commerce’. ‘Trade or commerce’ is defined as meaning ‘trade or commerce within Australia, or between Australia and places outside Australia, and includes any business or professional activity (whether or not carried on for profit)’. The ACL applies to conduct engaged in outside of Australia, provided that at least some aspect of the trading relationship between two or more parties has taken place in Australia.12

This definition suggests that the ACL takes a very expansive view of the phrase in ‘trade or commerce’, but that the conduct must have a trading character. This is important as not all the functions of a corporation can be defined as being trading in nature. In Bevanere Pty Ltd v Lubidineuse,13 it was held that the one-off sale of a company’s principal asset took place in trade or commerce. The Court based its decision on the fact that the sale of the asset took place as a part of the overall process of trade or commerce. The leading case on point is Concrete Constructions (NSW) Pty Ltd v Nelson.14 This case established the limitations on whether conduct was in trade or commerce under s 52 of the TPA, and these limitations will most likely continue to apply to s 18 of the ACL. In Concrete Constructions, a construction worker, Nelson, was working on metal grates that covered air-conditioning shafts when one of the grates gave way. He fell and sustained serious injuries. Nelson had been advised by the foreman, an employee of Concrete Constructions, that the grates were secured. As it turned out, they were not secured and caused his accident. Nelson argued that this conduct was misleading and deceptive. In the Federal Court, Einfeld J held that the matter could be decided under s 52. On appeal to the High Court, however, a majority held that the conduct did not occur within trade or commerce under s 52. The majority noted that there were arguments in favour of a wide or narrow interpretation of the phrase ‘in trade or commerce’, but decided in favour of a 10 11 12 13 14

Ibid, 52,711. ACL, s 2. Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth), para. 3.12. (1985) 59 ALR 334. (1990) 169 CLR 594.

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narrow  interpretation. It has been noted that if the wider interpretation had been followed, s 52 would have been utilised in a manner that went far beyond commercial dealings and into personal injury cases.15 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 Mason CJ, Deane, Dawson and Gaudron JJ at 600–605: There have been numerous cases in which consideration has been given to the scope of s 52 of the Act. They include decisions of this Court …, decisions of the Federal Court and some decisions of State Supreme Courts. Reference to many of them was made by Lee J of the Federal Court in the course of a helpful discussion of authority in Merman Pty Ltd v Cockburn Cement Ltd (1988) 10 ATPR 40-915, at pp. 49,833-49,838; 84 ALR 521, at pp. 525–531. To the cases there mentioned, we would add a reference to the decision of the New South Wales Court of Appeal in Wright v TNT Management Pty Ltd (1989) 15 NSWLR 679. The actual decision in none of those cases is, however, either directly applicable to the circumstances of the present case or decisive of the question whether s 52’s prohibition of misleading or deceptive conduct by a corporation in trade or commerce extends to the internal affairs of the corporation or to purely internal communications between employees of a corporation in the course of their employment. That being so, it is unnecessary that we refer to the decided cases in any detail. It suffices, for present purposes, to say that we regard it as settled by earlier decisions that an action to restrain a contravention of s 52 can, in appropriate circumstances, be maintained by a person who is not a consumer … and that we consider that, while the cases make plain that consumer protection lies at the heart of the legislative purpose to be discerned in s 52, the precise boundaries of the territory within which that section operates remain undetermined … The general heading ‘Consumer Protection’ at the commencement of Pt V is part of the Act (Acts Interpretation Act 1901 (Cth), s 13). It constitutes part of the context within which the substantive provisions of Pt V must be construed and should be taken into consideration in determining the meaning of those provisions in case of ambiguity. The heading does not, however, control the permissible scope of the substantive provisions of Pt V and cannot properly be used to impose an unnaturally constricted meaning upon the words of those substantive provisions (see Hornsby Building Information Centre Pty Ltd, at p. 225; Parkdale, at p. 202). As a matter of language, s 52 prohibits a corporation from engaging in misleading or deceptive conduct ‘in trade or commerce’ regardless of whether the conduct is misleading to, or deceptive of, a person in the capacity of a consumer. In these circumstances, it is not permissible to give to the heading of Pt V the effect of confining the general words of s 52 to cases involving the protection of consumers alone. So to constrict the provisions of s 52 would be to convert a general prohibition of misleading or deceptive conduct by a corporation, be it consumer or supplier, in trade or commerce, into a discriminatory requirement that a corporate supplier of goods or services should observe standards in its dealings with a corporate consumer which the consumer itself was left free to disregard. That being so, the general words of s 52 must be 15 Barto v GPR Management Services Pty Ltd (1992) ATPR 41-162, 40,210.

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construed as applying even-handedly to corporations involved in a transaction or dealing with one another ‘in trade or commerce’. So to say is not, however, to deny the significance of the heading ‘Consumer Protection’ for the purposes of the present case. In particular, as will appear, that heading is of importance in determining the effect of the words ‘in trade or commerce’ in s 52 (see Hornsby Building Information Centre Pty Ltd, at p. 224). It is well established that the words ‘trade’ and ‘commerce’, when used in the context of s 51(i) of the Constitution, are not terms of art but are terms of common knowledge of the widest import. The same may be said of those words as used in s 52(1) of the Act. Indeed, in the light of the provisions of s 6(2) of the Act which give an extended operation to s 52 and which clearly use the words ‘trade’ and ‘commerce’ in the sense which the words bear in s 51(i) of the Constitution, it would be difficult to maintain that those words were used in s 52 with some different meaning. The real problem involved in the construction of s 52 of the Act does not, however, spring from the use of the words ‘trade or commerce’. It arises from the requirement that the conduct to which the section refers be ‘in’ trade or commerce. Plainly enough, what is encompassed in the plenary grant of legislative power ‘with respect to … Trade and commerce’ in s 51(i) of the Constitution is not of assistance on the question of the effect of the word ‘in’ as part of the requirement that the conduct proscribed by s 52(1) of the Act be ‘in trade or commerce’. The phrase ‘in trade or commerce’ in s 52 has a restrictive operation. It qualifies the prohibition against engaging in conduct of the specified kind. As a matter of language, a prohibition against engaging in conduct ‘in trade or commerce’ can be construed as encompassing conduct in the course of the myriad of activities which are not, of their nature, of a trading or commercial character but which are undertaken in the course of, or as incidental to, the carrying on of an overall trading or commercial business. If the words ‘in trade or commerce’ in s 52 are construed in that sense, the provisions of the section would extend, for example, to a case where the misleading or deceptive conduct was a failure by a driver to give the correct handsignal when driving a truck in the course of a corporation’s haulage business. It would also extend to a case, such as the present, where the alleged misleading or deceptive conduct consisted of the giving of inaccurate information by one employee to another in the course of carrying on the building activities of a commercial builder. Alternatively, the reference to conduct ‘in trade or commerce’ in s 52 can be construed as referring only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character. So construed, to borrow and adapt words used by Dixon J in a different context in Bank of NSW v The Commonwealth [1948] HCA 7; (1948) 76 CLR 1, at p. 381, the words ‘in trade or commerce’ refer to ‘the central conception’ of trade or commerce and not to the ‘immense field of activities’ in which corporations may engage in the course of, or for the purposes of, carrying on some overall trading or commercial business. As a matter of mere language, the arguments favouring and militating against these alternative constructions of s 52 are fairly evenly balanced. The scope of the prohibition imposed by s 52 is, however, governed not only by ‘the terms in which it is created’ but by ‘the context in which it is found’ … In that regard, it is of particular significance that the words ‘trade’ and ‘commerce’ have ‘about them a chameleon-like hue, readily adapting themselves to their surroundings’ … Section 52(2) precludes limiting the scope of s 52(1)

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Misleading or deceptive conduct

by implication drawn from the contents of other provisions of Pt V. Nonetheless, when the section is read in the context provided by other features of the Act, which is ‘An Act relating to certain Trade Practices’, the narrower (i.e. the second) of the alternative constructions of the requirement ‘in trade or commerce’ is the preferable one. Indeed, in the context of Pt V of the Act with its heading ‘Consumer Protection’, it is plain that s 52 was not intended to extend to all conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purposes of, its overall trading or commercial business. Put differently, the section was not intended to impose, by a side-wind, an overlay of Commonwealth law upon every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities. What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character. Such conduct includes, of course, promotional activities in relation to, or for the purposes of, the supply of goods or services to actual or potential consumers, be they identified persons or merely an unidentifiable section of the public. In some areas, the dividing line between what is and what is not conduct ‘in trade or commerce’ may be less clear and may require the identification of what imports a trading or commercial character to an activity which is not, without more, of that character. The point can be illustrated by reference to the examples mentioned above. The driving of a truck for the delivery of goods to a consumer and the construction of a building for another pursuant to a building contract are, no doubt, trade or commerce in so far as the relationship between supplier and actual or potential customer or between builder and building owner is concerned. That being so, to drive a truck with a competitor’s name upon it in order to mislead the customer or to conceal a defect in a building for the purpose of deceiving the building owner may well constitute misleading or deceptive conduct ‘in trade or commerce’ for the purposes of s 52. On the other hand, the mere driving of a truck or construction of a building is not, without more, trade or commerce and to engage in conduct in the course of those activities which is divorced from any relevant actual or potential trading or commercial relationship or dealing will not, of itself, constitute conduct ‘in trade or commerce’ for the purposes of that section. That being so, the giving of a misleading handsignal by the driver of one of its trucks is not, in the relevant sense, conduct by a corporation ‘in trade or commerce’. Nor, without more, is a misleading statement by one of a building company’s own employees to another employee in the course of their ordinary activities. The position might well be different if the misleading statement was made in the course of, or for the purposes of, some trading or commercial dealing between the corporation and the particular employee. The alleged misleading or deceptive conduct of the Company’s foreman in the present case consisted of an internal communication by one employee to another employee in the course of their ordinary activities in and about the construction of a building. It follows from what has been said above that that conduct was not, for relevant purposes, conduct ‘in trade or commerce’ and would not, if established, constitute a contravention of s 52 of the Act. That being so, the appeal must be allowed and the preliminary question which was answered by the learned primary judge in the affirmative must be answered in the negative.

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• 17.3 Establishing misleading or deceptive conduct There are a variety of situations which may legitimately give rise to claims of misleading or deceptive conduct. For example, misleading or deceptive conduct cases may arise in situations where comparative advertising is used, where silence gives rise to a misrepresentation, where a product erroneously appears to be affiliated with a famous person, and in a number of other situations.16 Where these claims do arise, it is essential that a basic process of evaluation is followed to assess these claims.

17.3.1  The Taco Bell steps The leading case on point is the Federal Court’s decision in Taco Co of Australia Inc v Taco Bell Pty Ltd,17 which set up the ‘Taco Bell steps’ that have frequently been employed by subsequent courts to evaluate s 52 matters. Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 Deane and Fitzgerald JJ at 201–203: Conduct which produces or contributes to confusion or uncertainty may or may not be misleading or deceptive for the purposes of s 52. In some circumstances, conduct could conceivably be properly categorized as misleading or deceptive for the very reason that it represents that confusion or uncertainty exists where, in truth, there is no proper room for either. Ordinarily, however, a tendency to cause confusion or uncertainty will not suffice to establish that conduct is of the type described in s 52. The question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description contained in s 52. As has already been noted, the High Court in Hornsby Building Information Centre v Sydney Building Information Centre (supra) held that the respondent’s use of a name similar to the name of the applicant did not, in the particular circumstances of that case, offend s 52(1). The names there were descriptive and thus not distinctive of any particular business. However, the possibility of confusion was recognized and the conclusion was arrived at notwithstanding evidence that persons had been led, by the similarity of names, to believe that the Hornsby Centre was a branch of, or otherwise associated with, the Sydney Centre. At p. 230, Stephen J. said: Evidence of confusion in the minds of members of the public is not evidence that the use of the Hornsby Centre’s name is itself misleading or deceptive but rather that its intrusion into the field originally occupied exclusively by the Sydney Centre has, naturally enough, caused a degree of confusion in the public mind. This is not, however, anything at which s 52(1) is directed.

The case of Hornsby Building Information Centre v Sydney Building Information Centre (supra) provides guidance as to the general approach to be adopted in s 52 cases involving the

16 See below, section 17.4. 17 (1982) 42 ALR 177.

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use of similar names. As Stephen J said (ibid at p. 228), it is ‘of particular importance to identify the respect in which there is said to be any misleading or deception’ and ‘to determine whether there has been any contravention of s 52(1) it is necessary to inquire why … misconception has arisen’. In World Series Cricket v Parish (supra, at p. 201), Brennan J correctly commented that ‘a statement which conveys no meaning but the truth cannot mislead or deceive or falsely represent; although a statement which is literally true may nevertheless convey another meaning which is untrue, and be proscribed accordingly’ (see, to the same effect, per Stephen J, Hornsby Building Information Centre v Sydney Building Information Centre, supra, at pp. 227–228). Irrespective of whether conduct produces or is likely to produce confusion or misconception, it cannot, for the purposes of s 52, be categorized as misleading or deceptive unless it contains or conveys, in all the circumstances of the case, a misrepresentation. The difficulty which will commonly arise in a s 52 case is in determining whether the conduct contains or conveys, in all the circumstances, a misrepresentation and in assessing the significance to that question of evidence that one or more persons were in fact led into error. In extreme, but not necessarily infrequent, cases, it may be correct to hold that, as a matter of law, conduct said to contravene s 52 is incapable of conveying the untrue meaning alleged or any other false meaning. Such cases aside, whether or not conduct amounts to a misrepresentation is a question of fact to be decided by considering what is said and done against the background of all surrounding circumstances. In some cases, such as an express untrue representation made only to identified individuals, the process of deciding that question of fact may be direct and uncomplicated. In other cases, the process will be more complicated and call for the assistance of certain guidelines upon the path to decision. In a case, such as the present, where the suggested misrepresentation has not been expressly made and it is alleged that the relevant deception or misleading is, or is likely to be, of the public, the following propositions appear to be established as affording guidance. First, it is necessary to identify the relevant section (or sections) of the public (which may be the public at large) by reference to whom the question of whether conduct is, or is likely to be, misleading or deceptive falls to be tested … Second, once the relevant section of the public is established, the matter is to be considered by reference to all who come within it, ‘including the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, men and women of various ages pursuing a variety of vocations’ … Thirdly, evidence that some person has in fact formed an erroneous conclusion is admissible and may be persuasive but is not essential. Such evidence does not itself conclusively establish that conduct is misleading or deceptive or likely to mislead or deceive. The Court must determine that question for itself. The test is objective … Finally, it is necessary to inquire why proven misconception has arisen … The fundamental importance of this principle is that it is only by this investigation that the evidence of those who are shown to have been led into error can be evaluated and it can be determined whether they are confused because of misleading or deceptive conduct on the part of the respondent.

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Some basic principles have emerged from Taco Bell and subsequent cases and these will continue to be relevant under s 18 of the ACL: (i) The test for misleading or deceptive conduct is an objective question of fact and must be determined by the court having regard to all the relevant circumstances. (ii) Where a claim of misleading or deceptive conduct is made, there is no requirement that anyone has actually been misled or deceived. (iii) Rather, what must be demonstrated is that there is a very real possibility that people may be misled or deceived. (iv) Evidence that someone has been misled or deceived will be persuasive. (v) There must be some conduct on the part of the person or corporation that invites the consumer or other party into error.

17.3.2  The ordinary and reasonable person It is imperative that a class of consumers is identified who may have been misled or deceived or who are susceptible to being misled or deceived. The relevant person within this class is the ordinary and reasonable person. The identity of the ordinary and reasonable person will vary depending upon the context in which the conduct was made and the class of persons at whom it was aimed. In Campomar Sociedad Limitada v Nike International Limited,18 Campomar sold a fragrance known as ‘Nike Sports Fragrance’. Nike alleged that this conduct was misleading and deceptive. The High Court held that in the context of representations that are made to the public at large, the central issue is how the ordinary and reasonable members of that class would be affected. Some limitations do apply, as these members are expected to take basic precautions to protect their own interests.19 However, in Campomar, the fact that consumers did not see that the small print on the packaging disavowed any actual connection to Nike did not amount to a failure to take care. It is imperative that a class of consumers is identified who may have been misled or deceived or who are susceptible to being misled or deceived. The relevant person within this class is the ordinary and reasonable person.

Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 The Court at 85–88: It is in these cases of representations to the public … that there enter the ‘ordinary’ or ‘reasonable’ members of the class of prospective purchasers. Although a class of consumers may be expected to include a wide range of persons, in isolating the ‘ordinary’ or ‘reasonable’ members of that class, there is an objective attribution of certain characteristics. Thus, in Puxu, Gibbs CJ determined that the legislation did not impose burdens which operated for the benefit of persons ‘who fail[ed] to take reasonable care of their own interests’. In the same case, Mason J concluded that, whilst it was unlikely that an ordinary purchaser would notice the very slight differences in the appearance of the two items of furniture

18 (2000) 202 CLR 45. 19 See Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191.

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in question, nevertheless such a prospective purchaser reasonably could be expected to attempt to ascertain the brand name of the particular type of furniture on offer. Where the persons in question are not identified individuals to whom a particular misrepresentation has been made or from whom a relevant fact, circumstance or proposal was withheld, but are members of a class to which the conduct in question was directed in a general sense, it is necessary to isolate by some criterion a representative member of that class. The inquiry thus is to be made with respect to this hypothetical individual why the misconception complained has arisen or is likely to arise if no injunctive relief be granted. In formulating this inquiry, the courts have had regard to what appears to be the outer limits of the purpose and scope of the statutory norm of conduct fixed by s 52. Thus, in Puxu, Gibbs CJ observed that conduct not intended to mislead or deceive and which was engaged in ‘honestly and reasonably’ might nevertheless contravene s 52. Having regard to these ‘heavy burdens’ which the statute created, his Honour concluded that, where the effect of conduct on a class of persons, such as consumers, was in issue, the section must be ‘regarded as contemplating the effect of the conduct on reasonable members of the class’. It is here that there arises a critical question on the case put for the appellants. It concerns the so-called ‘doctrine’ of ‘erroneous assumption’ said to be derived from, in particular, decisions of the Full Court of the Federal Court in McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd, Taco Company of Australia Inc v Taco Bell Pty Ltd and Lego Australia Pty Ltd v Paul’s (Merchants) Pty Ltd. In their joint judgment in Taco Bell, Deane and Fitzgerald JJ emphasised that ‘no conduct can mislead or deceive unless the representee labours under some erroneous assumption’. Their Honours went on to observe: Such an assumption can range from the obvious, such as a simple assumption that an express representation is worthy of credence, through the predictable, such as the common assumption in a passing-off case that goods marketed under a trade name which corresponds to the well-known trade name of goods of the same type have their origins in the manufacturer of the well-known goods, to the fanciful, such as an assumption that the mere fact that a person sells goods means that he is the manufacturer of them.

Their Honours added that, in determining the question whether conduct properly should be categorised as misleading or deceptive or as likely to mislead or deceive, the nature of the erroneous assumption which must be made before conduct could have that character ‘will be a relevant, and sometimes decisive, factor’. Their Honours rejected: [any] general proposition of law to the effect that intervention of an erroneous assumption between conduct and any misconception destroys a necessary chain of causation with the consequence that the conduct itself cannot properly be described as misleading or deceptive or as being likely to mislead or deceive.

Nevertheless, in an assessment of the reactions or likely reactions of the ‘ordinary’ or ‘reasonable’ members of the class of prospective purchasers of a mass-marketed product for general use, such as athletic sportswear or perfumery products, the court may well decline to regard as controlling the application of s 52 those assumptions by persons whose reactions are extreme or fanciful. For example, the evidence of one witness in the present case, a pharmacist, was that he assumed that ‘Australian brand name laws would

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have restricted anybody else from putting the NIKE name on a product other than that endorsed by the [Nike sportswear company]’. Further, the assumption made by this witness extended to the marketing of pet food and toilet cleaner. Such assumptions were not only erroneous but extreme and fanciful. They would not be attributed to the ‘ordinary’ or ‘reasonable’ members of the classes of prospective purchasers of pet food and toilet cleaners. The initial question which must be determined is whether the misconceptions, or deceptions, alleged to arise or to be likely to arise are properly to be attributed to the ordinary or reasonable members of the classes of prospective purchasers. In Lego Australia Pty Ltd v Paul’s (Merchants) Pty Ltd, a decision delivered on the same day as that in Taco Bell, the Full Court undertook this task. Involved in this was the question whether the misconception complained of would be suffered by that hypothetical individual who would have been a member of that ordinary or reasonable class of purchasers of the respondent. The Full Court ‘viewed objectively’ evidence suggesting that in Australia the name ‘Lego’ was so well known as being applicable to the applicant’s Lego toys and was so little known as being applicable to any other products that members of the public would assume any product at all to which the name was applied was manufactured by the manufacturer of the toys. As Deane and Fitzgerald JJ emphasised: The fact that companies may and sometimes do expand the range of products which they produce cannot of itself warrant a conclusion that a particular company has done so.

Their Honours, however, were concerned that a ‘line ought to be drawn’ lest there be no products in respect of which ‘Lego’ could be used without fear of contravention of s 52 because, in all such cases, some members of the public would be under the misconception that those goods were manufactured by the maker of the ‘Lego’ toys. Their Honours thus decided in Taco Bell that the ‘question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description contained in s 52’. This reasoning should be accepted. In the present case, evidence was given of the marketing of the ‘NIKE SPORT FRAGRANCE’ products in pharmacies. Sheppard J said: Some of the evidence establishes that this product was found displayed in pharmacies beside or underneath other sports fragrances, including a sports fragrance marketed under the name ‘Adidas’. Evidence establishes that the well known sporting organisation Adidas does either itself, or through other companies which it authorises, market a sports fragrance bearing its name.

Further, an examination of the affidavit and oral evidence of the witnesses shows that in the assumption they made as to the extension of ‘NIKE’ sportswear business into a sports fragrance, they were aware of and influenced by the activities of the Adidas company in introducing a range of Adidas fragrance products. In those circumstances, looking at the matter objectively, there was nothing capricious or unreasonable or unpredictable in Sheppard J’s conclusion that the placing of the ‘NIKE SPORT FRAGRANCE’ product in the same area of pharmacies with other sports fragrances was likely to mislead or deceive members of the public into thinking that the ‘NIKE SPORT FRAGRANCE’ product was in some way promoted or distributed by Nike International itself or with its consent and approval.

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Misleading or deceptive conduct

review questions 1 What is the purpose of the prohibition on misleading and deceptive conduct? 2 What are the elements of s 18 of the ACL and how have they been applied in the leading cases?

• 17.4 Examples of misleading or deceptive cases As noted above, there are a number of different circumstances under which s 52 claims can arise. In particular, misleading or deceptive conduct claims can arise in the context of comparative advertising, silence where a reasonable expectation of disclosure exists, puffery, promises and character merchandising.

17.4.1  Comparative advertising Comparative advertising occurs where a manufacturer or service provider directly compares their product or services with that of a competitor in an advertisement. From the standpoint of consumer welfare, comparative advertising may be quite useful in terms of providing information to consumers. Nonetheless, every claim made in a comparative advertisement must be verifiable lest the advertisement misleads the public. In Gillette Australia Pty Ltd v Energizer Australia Pty Ltd,20 a claim of misleading and deceptive conduct arose out of an advertisement that compared Energizer and Duracell batteries. The two batteries were different in nature—the Duracell batteries were alkaline and the Energizer batteries were carbon zinc. Alkaline batteries last longer than carbon zinc batteries. Energizer’s claim was that as Duracell was not comparing like with like nor mentioning the higher cost of alkaline batteries, the advertisement was misleading. The Full Court of the Federal Court held that such advertisements were not misleading or deceptive, as favourably comparing one aspect of a manufacturer’s product with the same aspect of a competitor’s product did not entail any untrue statements or misleading half-truths.

17.4.2  Silence where disclosure is expected Generally, there is no duty in trade or commerce to disclose every matter known to a business, particularly in the context of a commercial negotiation. However, circumstances may arise where there is a reasonable expectation of disclosure. The ‘reasonable expectation’ test is now well established. The test is ‘whether in the light of all the circumstances constituted by acts, omissions, statements or silence, there has been conduct which is misleading or deceptive’.21 The test emphasises the effect upon the party that is disadvantaged by the silence.

20 (2002) 193 ALR 629. 21 Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608, 618.

The ‘reasonable expectation’ test is ‘whether in the light of all the circumstances constituted by acts, omissions, statements or silence, there has been conduct which is misleading or deceptive’.

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In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd 22 a statement that a restaurant could seat 128 people, coupled with the non-disclosure that the local authority only permitted the restaurant to seat 84 people, was held to amount to misleading and deceptive conduct. Further, in Nagy v Masters Dairy Ltd,23 the non-disclosure by Masters Dairy that it had entered a distribution relationship with another business was held to constitute misleading and deceptive conduct in the context of negotiations between itself and Nagy that were undertaken with a view to the two companies entering a distribution relationship.

17.4.3  Puffery Puffery will generally not sustain a claim of misleading or deceptive conduct. The courts tend to take the view that the public is well accustomed to puffs and are able to distinguish them from statements of fact.24 That said, if a claim is capable of misleading or deceiving consumers, it will move from the category of general puffery into that of actionable misrepresentations. Where, however, a statement is clearly false in light of its context, it will not be mere puffery. For example, a claim of ‘bigger and better’ in relation to an action movie is not likely to be misleading or deceptive, but such a claim could be misleading or deceptive in the context of apartments, where size is a very relevant and pertinent concern.25

17.4.4  Promises Promises of a contractual nature may give rise to claims of misleading or deceptive conduct if they are not fulfilled. Section 18 might be utilised in this context, where the party who is disadvantaged is a third party who would otherwise be excluded from contractual remedies by the doctrine of privity. Promises about future conduct may also support claims for misleading or deceptive conduct. In Futuretronics Pty Ltd v Gadzhis,26 the defendant successfully bid on the plaintiff’s property at a sale auction. However, the defendant then refused to sign a contract for the sale of the property. Ormiston J ruled that such conduct, which amounted to a promise as to future conduct, could be misleading or deceptive unless the representor had reasonable grounds for acting as they did at the relevant time. In Futuretronics, the defendant did not have reasonable grounds for his actions. However, there was no loss as there was no other bidder at the auction.

17.4.5  Character merchandising A business will often seek to bolster the status of its product in the market by claiming a relationship to a famous person or even a famous fictitious character. Character merchandising can be extremely effective and there is very often no logical reason for associating a particular person or character with a product. Moreover, while Australian law does not recognise the intellectual property right of rights in personality, which is well developed in the United States, the manner 22 (1988) 79 ALR 83. 23 (1996) 150 ALR 273. 24 Byers v Dorotea Pty Ltd (1986) 69 ALR 715. 25 Ibid. 26 [1992] 2 VR 209.

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in which these cases have developed under s 52 of the TPA basically provides for a similar level of protection, albeit in a non-intellectual property context. In Pacific Dunlop Ltd v Paul Hogan,27 Burchett J stated: Character merchandising through television advertisements should not be seen as setting off a logical train of thought in the minds of television viewers. Its appeal is nothing like the insistence of a logical argument on behalf of a product, which may persuade … An association of some desirable character with the product proceeds more subtly to foster favourable inclination towards it, a good feeling about it, an emotional attachment to it …28

In that case, an advertisement for shoes involved a scene that was extremely similar to one from the film ‘Crocodile’ Dundee, which starred the actor Paul Hogan. In particular, the distinctive clothing of Hogan’s character was mirrored in the advertisement. Hogan sued under s 52 of the TPA on the basis that the advertisement suggested an association between the manufacturer and himself. A misrepresentation was found to exist.

Ke y p o in ts for re v ision Misleading or deceptive conduct cases will be determined objectively in light of all the circumstances of a particular case. The question is whether the representations or other conduct were likely to lead the affected party in to error. In addressing the question above, the courts will have regard to the ordinary and reasonable member of the class of persons affected by the conduct. There are various categories under which misleading or deceptive conduct might occur and these categories are not closed. Section 52 of the TPA established a very substantial body of law. These cases are now directly applicable under s 18 of the ACL.

problem-solving practice ‘Smith’s Traditional English Restaurant’ in Sydney is run by Peter Williams. In March of this year Peter distributed a number of flyers which suggested that his restaurant served ‘the best and most amazing’ English cuisine and that a nearby competitor restaurant had once been investigated for unsafe food preparation practices. The latter claim was actually true, but it had occurred after Peter had dined at the restaurant and had made a false claim to the authorities about the hygiene of the food and its preparation. The affected restaurant is run by Bruce Miller. Bruce wishes to sue under s 18 of the ACL.

ANSWER The question that arises in the present context is whether anyone has been misled or deceived or is likely to be so affected by the flyer. There are two claims in the flyer that may be actionable. The first is

27 (1989) 87 ALR 14. 28 Ibid, 45.

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the claim about the ‘best and most amazing’ English cuisine. The second is the claim about unsafe food preparation practices. With regard to the first claim it is well established that puffery is not likely to be misleading or deceptive conduct (see Byers v Dorotea Pty Ltd). In this context, the crucial question is whether the nature of the transaction is such that the puff might actually constitute a misrepresentation. This seems quite unlikely as the public at large is very likely to be well acquainted with claims by restaurants that their food is the best. However, the second issue, that of unsafe food practices, is likely to be more controversial. The affected class of persons is the public at large. This may be reduced down to those persons who have actually received the flyer. The relevant question will be whether the ordinary and reasonable members of this class are likely to know the full context of the unsafe food preparation claim. In this regard, there is a pertinent non-disclosure in Peter’s representations (see Demagogue v Ramensky) in that he has failed to disclose his part in the false claim. The conduct is likely to be misleading and deceptive.

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chapter

18

Unconscionable conduct

Chapt e r o v e rv i e w 18.0

Introduction  344

18.1

The elements of unconscionability   344 18.1.1 Special disadvantage  346 Constitutional or situational disadvantage   347 Limitations to the concept of special disadvantage   348 18.1.2 Knowledge of special disadvantage   350 18.1.3 Taking unconscionable advantage   350 ACCC v CG Berbatis Holdings Pty Ltd  350 Bridgewater v Leahy  353 Louth v Diprose   358

18.2

Defences  364

18.3

Remedies  364

18.4

Statutory unconscionability  364

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• 18.0 Introduction This chapter examines the law relating to unconscionable conduct. It will examine the principles surrounding the elements of unconscionability and the case law on the doctrine. Equity will intervene where one party to the contract has taken an unconscientious advantage of the special disadvantage or disability of another party.1 Unconscionability is a major part of the common law of contracts and it is also enshrined in Australia’s consumer protection legislation.2 In this area of the law it is crucial that the party who claims to have been taken advantage of is in fact suffering from a special disadvantage. (The parameters of ‘special disadvantage’ will be discussed below.)3 Provided that such a special disadvantage exists, the onus will then be on the other contracting party to prove that the bargain was fair. Unconscionability does not exist simply because a bargain between two competent parties turns out to be rather harsh on one of the parties. Unconscionability can only exist where there has been some moral turpitude in taking advantage of the peculiar disadvantage of one of the parties. The main remedy for unconscionability is rescission. The legislation that covers unconscionability provides more comprehensive remedies than rescission; however, the focus of this chapter will be on the common law of unconscionability. Unconscionability is related to the doctrines of undue influence, duress, mistake, misrepresentation and estoppel. In each of these there is an element of wrongdoing on the part of one party that gives rise to an actionable claim. The key difference is that unconscionability is a claim in its own right with Unconscionability its own elements. In particular, the focus of unconscionability focuses on the actions is upon a specific transaction rather than an ongoing relationship. of the stronger party in procuring the bargain, As Deane  J noted in Commercial Bank of Australia v Amadio,4 rather than upon the unconscionability focuses on the actions of the stronger party in quality of consent of the procuring the bargain, rather than upon the quality of consent of weaker party. the weaker party.

• 18.1 The elements of unconscionability There are three main elements of unconscionability. First, one party must be at a special disadvantage.5 Second, the other party must know that the special disadvantage exists.6 Third, the other party must have taken an unconscientious advantage of the party with the special disadvantage.7 The defence to a claim of unconscionability is to show that the transaction was fair, just and reasonable.8

1 Blomley v Ryan (1956) 99 CLR 362. 2 See ss 20, 21 and 22 of the Competition and Consumer Protection Act 2010 (Cth). 3 See below, section 18.1.1. 4 (1983) 151 CLR 447. 5 See Commercial Bank of Australia v Amadio (1983) 151 CLR 447; Louth v Diprose (1992) 175 CLR 621. 6 See Garcia v National Australia Bank Ltd (1998) 194 CLR 395. 7 Commercial Bank of Australia v Amadio (1983) 151 CLR 447; Louth v Diprose (1992) 175 CLR 621; Bridgewater v Leahy (1998) 194 CLR 457. 8 Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 474.

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Unconscionable conduct

Commercial Bank of Australia v Amadio9 is the leading decision on unconscionability and aptly illustrates the application of the three elements of the doctrine. Vincenzo Amadio was a builder and developer whose company had encountered serious financial difficulties. Vincenzo had a close relationship with his banker, Mr Virgo. It was often the case that Mr Virgo would prop up the business by increasing the overdraft and by advising Vincenzo to selectively dishonour cheques. To all intents and purposes Vincenzo’s business had the appearance of prosperity, but in reality this was a sham. Vincenzo’s company overdraft had been selectively increased from $80 000 in October 1976 to $125 000 in January 1977 and by March 1977 he owed $193 000. The office property that Vincenzo had provided as security was not correctly valued—he had valued it at $200 000, but the bank valued it at $153 000 in the event of a forced sale. By April 1979, it was valued at $120 000. With his company overdraft in a perilous position, Vincenzo spoke to his parents to see whether they would provide security for $50 000 for up to six months. Vincenzo’s parents were elderly and had a poor grasp of English. Vincenzo told the bank that his parents would provide a guarantee and mortgage over an investment property. This property was the only asset of Mr and Mrs Amadio apart from their home. Mr Virgo visited the Amadios, believing that Vincenzo had explained the true nature of the guarantee and the mortgage. Mr and Mrs Amadio signed the prepared documents without properly reading them. During the meeting, Mr Amadio commented that the guarantee was only for six months. Mr Virgo corrected him but the Amadios did not react. Vincenzo’s business deteriorated and went into liquidation and the bank sought to enforce the guarantee. In the High Court, a majority of justices found that Mr and Mrs Amadio were not bound by the mortgage and the guarantee. Deane J stated: The jurisdiction of courts of equity to relieve against unconscionable dealing developed from the jurisdiction which the Court of Chancery assumed, at a very early period, to set aside transactions in which expectant heirs had dealt with their expectations without being adequately protected against the pressure put upon them by their poverty (see O’Rorke v Bolingbroke (1877) 2 App Cas 814, at p. 822). The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or ‘unconscientious’ that he procure, or accept, the weaker party’s assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: ‘the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain the benefit of the contract’ (see per Lord Hatherley, O’Rorke v Bolingbroke (1877) 2 App Cas, at p. 823 …)10

In Amadio all of the relevant elements of unconscionability were present. The Amadios had a  special disadvantage on account of their poor English, advanced age, lack of business experience and high level of dependence on their son. The bank officer, Mr Virgo, was aware of their situation, and fully aware of Vincenzo’s predicament, yet he still went ahead with

9 Ibid. 10 Ibid, 474.

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the transaction. Further, there was no defence of reasonableness that the bank could make out under these circumstances. Deane J’s comments also make it clear that the focus is on the conduct of the stronger party. The concern is not so much that the bargain itself is manifestly disadvantageous—though in cases such as Amadio and Louth v Diprose11 such disadvantage did in fact exist—but rather on the question of taking advantage.

18.1.1  Special disadvantage The types of disadvantage that may be considered as being a special disadvantage are by no means settled. In Blomley v Ryan,12 Fullagar J listed a series of disadvantages that he considered may qualify: The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other.13

In the present day it cannot be suggested that sex would qualify as a special disadvantage. However, as Fullagar J stipulates, the common theme among the rest of this list is that the relevant factor can create a situation of serious disadvantage. In the same case, Kitto J stated obiter: This is a well-known head of equity. It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.14 The essence of special disadvantage is a serious impairment which effectively nullifies the ability of the weaker party to conserve their interests.

The remarks of Kitto J identify the essence of special disadvantage: namely, a serious impairment which effectively nullifies the ability of the weaker party to conserve their interests. How that disadvantage comes about is not material. The weaker party may put themselves in a position of weakness through their own folly. However, equity will intervene if the circumstances warrant that the bargain be set aside.

Kitto J continued: The essence of the ground we have to consider is unconscientiousness on the part of the party seeking to enforce the contract; and unconscientiousness is not made out in this case unless it appears, first, that at the time of entering into the contract the defendant was in such a debilitated condition that there was not what Sir John Stuart called ‘… a reasonable degree of equality between the contracting parties’ … The fact that the defendant’s condition was the result of his own self-indulgence could make no difference, for, as is shown by Cooke v Clayworth [1811] EngR 189; [1811] EngR 189; (1811) 18 Ves Jun 12 (34 ER 222), 11 12 13 14

(1992) 175 CLR 621. (1956) 99 CLR 362. Ibid, 405. Ibid, 415.

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the principle applied is not one which extends sympathetic benevolence to a victim of undeserved misfortune; it is one which denies to those who act unconscientiously the fruits of their wrongdoing.15

In Blomley the issue was whether the sale of property between two parties was procured under circumstances that were unconscionable. The defendant in the matter, Ryan, owned land in rural New South Wales. After a long drinking session he concluded an agreement with the plaintiff, Blomley, for the sale of one of his properties. At the time that the agreement was made Ryan did not appear drunk. But it was known to Blomley that the defendant engaged in protracted bouts of drinking; in fact, the agreement was signed during a lull in such a bout. Sometime after the agreement was made Ryan, chastened by remarks from friends and acquaintances that he had sold the property at an undervalue, refused to complete the transaction. Blomley sued seeking specific performance. The trial judge, Taylor J, found in favour of Ryan. Taylor J pointed out that Blomley was well aware of Ryan’s bouts of drinking, and the effect that this was likely to have on him, and that he was also aware of the considerable undervalue at which Ryan offered the property. In the High Court on appeal, the majority—comprising McTiernan and Fullagar JJ—found the contract to be unconscionable and upheld the findings of Taylor J. However, Kitto J found in favour of Blomley on the basis that Ryan had in fact acted shrewdly and in his own interests in seeking to disavow a bargain that he had rashly made.16 The view that Kitto J took was that Ryan’s resistance to the contract stemmed more from his embarrassment at the public knowledge within his rural community of the poor bargain that he had made, rather than from any serious disadvantage.17

Constitutional or situational disadvantage There is a difference between situational and constitutional disadvantage, and the cases of ACCC v CG Berbatis Holdings Pty Ltd18 and Louth v Diprose19 illustrate this difference. Situational disadvantage can be described as a situation that has occurred within the relationship of the two parties, where one party has become considerably vulnerable to the other. Constitutional disadvantage refers instead to a specific quality of the weaker party that makes them particularly vulnerable. The constitutional disadvantage is pre-existing and is not directly caused or maintained by the relationship between the contracting The existence parties. For example, in Commercial Bank of Australia v Amadio,20 the of a situational poor literacy of the parents was a constitutional disadvantage. In disadvantage does not contrast, in Louth v Diprose the fact that Diprose was infatuated with guarantee a finding of unconscionability. The Louth lead to a situation in which the latter took advantage of degree of disadvantage the former. Note that the existence of a situational disadvantage and its peculiarities are does not guarantee a finding of unconscionability. The degree of still crucial consideration disadvantage and its peculiarities are still crucial consideration for for a court. a court.

15 16 17 18 19 20

Ibid, 415. Ibid, 425–427. Ibid, 425–427. (2003) 214 CLR 51. (1992) 175 CLR 621. (1983) 151 CLR 447.

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In ACCC v CG Berbatis Holdings Pty Ltd at first instance, French J stated: The Roberts [lessees of a property], in particular, had little bargaining power when it came to dealing with the owners. There was a marked inequality of bargaining power between them. The Roberts suffered what might be called a ‘situational’ as distinct from a ‘constitutional’ disadvantage. That is to say it did not stem from any inherent infirmity or weakness or deficiency. It arose out of the intersection of the legal and commercial circumstances in which they found themselves. That disadvantage, not being constitutional in character, was not able to be mitigated by the fact of legal representation which they had available to them at all material times.21

The High Court overruled French J on the question of whether the Roberts’ situational disadvantage amounted to a special disadvantage.22 Had the view of French J in the Federal Court been followed by the High Court, then the concept of special disadvantage might have become incredibly broad. However, the High Court in Berbatis agreed with French J on the distinction between situational and constitutional disadvantage.

Limitations to the concept of special disadvantage If the concept of special disadvantage were to be construed too broadly by the courts, then any transaction in which a stronger party procured some advantage from a weaker party would be susceptible to a claim of unconscionability. Given the reality of commercial life it is too naïve to assume that the parties to a contract will always be of equal standing. However, it is not in the interests of society at large, where the promotion of commercial affairs are concerned, to have transactions set aside too easily. Given the potentially wide breadth of the concept of special disadvantage, Mason J was at pains to note in Commercial Bank of Australia v Amadio23 that the concept of disadvantage was qualified by the adjective ‘special’;24 while in ACCC v CG Berbatis Holdings Pty Ltd 25 Gleeson  CJ addressed both the issue of constitutional and situational disadvantage and the limits of the concept of special disadvantage. Though Berbatis was a case decided under s 51AA of the Trade Practices Act 1974 (Cth), it is relevant to unconscionability under equity by virtue of the fact that the  provision incorporated the common law of unconscionability into the now repealed statute. ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 Gleeson CJ at 63–64: In Blomley v Ryan, Fullagar J, after pointing out that the circumstances of disability or disadvantage that can be involved in unconscionable conduct are of great variety and are difficult to classify, gave, as examples, ‘poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary.’ The common characteristic of such circumstances is that they place one party at a serious disadvantage in dealing with the other.

21 22 23 24 25

[2000] FCA 1376, [128]. (2003) 214 CLR 51. (1983) 151 CLR 447. Ibid, 462. (2003) 214 CLR 51.

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In the present case, French J said that the lessees suffered from a ‘situational’ as distinct from a ‘constitutional’ disadvantage, in that it did not stem from any inherent infirmity or weakness or deficiency. That idea was developed somewhat in a joint judgment, to which French J was a party, in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd, where it was said that, under the rubric of unconscionable conduct, equity will set aside a contract or disposition resulting from the knowing exploitation by one party of the special disadvantage of another, and then it was said: The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education: Commercial Bank of Australia Ltd v Amadio. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other: Louth v Diprose; Bridgewater v Leahy.

While, with respect to those who think otherwise, I would not assign the facts of Bridgewater v Leahy to such a category, the reference to emotional dependence of the kind illustrated by Louth v Diprose as a form of special disadvantage described as ‘situational’ rather than ‘constitutional’ is understandable and acceptable, provided that such descriptions do not take on a life of their own, in substitution for the language of the statute, and the content of the law to which it refers. There is a risk that categories, adopted as a convenient method of exposition of an underlying principle, might be misunderstood, and come to supplant the principle. The stream of judicial exposition of principle cannot rise above the source; and there is nothing to suggest that French J intended that it should. A problem is that the words ‘situation’ and ‘disadvantage’ have ordinary meanings which, in combination, extend far beyond the bounds of the law referred to in s 51AA; and, it may be added, far beyond the bounds of what was explained to Parliament as the purpose of the section. One thing is clear, and is illustrated by the decision in Samton Holdings itself. A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests. In Amadio, Mason J said that the point of using the qualifying word ‘special’ before ‘disadvantage’ in this context is ‘to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests’. It was the inability of a party to judge his or her own best interests that was said by McTiernan J in Blomley v Ryan, and again by Deane J in Amadio, to be the essence of the relevant weakness. The adjective ‘special’ was also used by Kitto J in Blomley v Ryan when he referred to the ‘well-known head of equity’ invoked in that case. He said: It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.

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18.1.2  Knowledge of special disadvantage The special disadvantage must be obvious in some way to the stronger party.26 Where the stronger party does not know of the weaker party’s disadvantage, and consequently has no intention of acting unconscientiously, a court will not find unconscionability.27

18.1.3  Taking unconscionable advantage The cases of Commercial Bank of Australia v Amadio28 and Louth v Diprose 29 make it reasonably clear that where a special disadvantage exists, then unconscionability is likely to be found. These cases may be characterised as cases where a special vulnerability clearly existed and was exploited. It is crucial that where the special disadvantage is less obvious, the stronger party has constructive knowledge of the disadvantage and that they use that knowledge to take unconscientious advantage of the latter.30

ACCC v CG Berbatis Holdings Pty Ltd The High Court in ACCC v CG Berbatis Holdings Pty Ltd 31 drew a line under unconscionability, finding that harsh dealings by a landlord with respect to small tenants in a shopping mall did not amount to unconscionability. Note that Berbatis was decided under s 51AA of the Trade Practices Act 1974 (Cth) (now s 20 of the Competition and Consumer Protection Act 2010 (Cth)); however, the wording of s 51AA makes it plain that there is little difference between common law and statutory unconscionability. In Berbatis, the Roberts family ran a fish and chip shop in a shopping centre. Their landlord was the owner of the shopping centre. Along with some other tenants, the Roberts family had sought to sue their landlord over some charges levied under the terms of their respective leases. In essence, the Roberts were suing their landlord for $50 000 worth of overpayments. The Roberts family encountered some difficulties and became keen to sell their business. The daughter of the Roberts family was very sick and this placed a strain on the family. With their lease expiring, the Roberts found a potential purchaser, who told them that he would buy the business provided  that they had a lease in place. The Roberts family communicated this to their  landlord,  who suggested that they would be agreeable on the basis that the Roberts sign a new lease with a clause (clause 14) which stipulated that any claim in relation to the overpayments be dropped. The Australian Competition and Consumer Commission (ACCC) agreed to act on behalf of the Roberts family and to sue CG Berbatis Holdings in the Federal Court. The first case, before French J in the Federal Court, was decided in favour of the ACCC. On appeal, the Full Court of the Federal Court found in favour of Berbatis. This was affirmed on appeal to the High Court.

26 27 28 29 30 31

Garcia v National Australia Bank Ltd (1998) 194 CLR 395. Melverton v Commonwealth Development Bank of Australia (1989) ASC 55-921. (1983) 151 CLR 447. (1992) 175 CLR 621. Louth v Diprose (1992) 175 CLR 621. (2003) 214 CLR 51.

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ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 Gummow and Hayne JJ at 76–79: In Commercial Bank of Australia Ltd v Amadio, Mason J referred to passages in the judgments of Fullagar J and Kitto J in Blomley v Ryan. Mason J said: It is made plain enough, especially by Fullagar J, that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition [or] circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.

His Honour went on to emphasise the need for the plaintiff seeking relief to establish the taking of unconscientious advantage of the plaintiff’s disabling condition or circumstance. It will be apparent that the special disadvantage of which Mason J spoke in this passage was one seriously affecting the ability of the innocent party to make a judgment as to that party’s own best interests. In the present case, the respondents emphasise that point and stress that a person in a greatly inferior bargaining position nevertheless may not lack capacity to make a  judgment about that person’s own best interests. The respondents submit that the facts  in the present case show that Mr and Mrs Roberts were under no disabling condition which affected their ability to make a judgment as to their own best interests in agreeing to the stipulation imposed by the owners for the renewal of the lease, so as to facilitate the sale by Mr and Mrs Roberts of their business. Those submissions should be accepted. In dealing with the owners for a new lease, the Roberts were in a difficult bargaining position because they had no legal right to a renewal, there having been no option bargained for and included in the subsisting lease. Nor was their situation like that of the hotel lessee considered by Waddell CJ in Eq in Bond Brewing (NSW) Pty Ltd v Reffell Party Ice Supplies Pty Ltd. In the circumstances of that case, the lessor was estopped from terminating the defendant’s lease without making a payment for the goodwill built up by the tenant and an order for possession was made in favour of the lessor only upon the lessor giving security for an amount of compensation for goodwill to be determined thereafter by the Court. However, the situation in which the Roberts were placed did not necessarily support the conclusion that they lacked the capacity to make a judgment about their best interests by agreeing to cl 14 as the price of obtaining the renewal which then would support the sale of the business to Mr Holland. The second requirement to which Mason J pointed in Amadio is the taking advantage of the alleged disadvantage. The present case was conducted on the footing that it was the imposition by the owners of cl 14 which constituted the unconscionable conduct.

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Much of the argument for the ACCC falls away after an understanding of what is required to constitute the necessary special disadvantage and of the conduct impugned as that requiring the inclusion of cl 14. A little more should be said respecting the situations in which the owners and the Roberts were placed when the negotiations for the renewal of the lease reached their final stage. The lease held by the Roberts was not the only lease of premises at the Centre whose term was set to expire in February 1997. There was a significant number of leases which would expire at that time. Moreover, there were seven or eight vacant shops. Mr Sullivan [counsel  for the ACCC] had regarded these matters as weakening the bargaining position of the owners. The Roberts valued their rights of recovery of overpayments at $50 000. That was a significantly over-optimistic estimate. The best indication that this was so is provided by the estimated entitlement to a sum of less than $3000 had the Roberts participated in the later settlement. On the other hand, the renewal of the lease was essential for the consummation of the sale of the business to Mr Holland for some $65 500. There were three apparent resolutions to the impasse between the parties. First, the lease might be renewed without the inclusion of cl 14. This was unacceptable to the owners; they were not obliged to grant any renewal at all and so were at liberty to prevent that outcome and thereby deprive the Roberts of their sale proceeds. The second and third possibilities were both acceptable to the owners but, given the evidence of Mr Sullivan referred to above, the second probably was preferable. The second was renewal of the lease and inclusion of cl 14; the third was no renewal and no release of the owners by cl 14. To the Roberts, the renewal of the lease (albeit giving up the other claim later shown to be worth apparently only some $3000) was vital to the sale of the business, making the second outcome preferable to the third. Against that background, it may not be surprising that the bargain struck reflected the second outcome. It was never the case of the ACCC that the owners were obliged to deal with the Roberts by producing the first outcome, so that the owners, consistently with s 51AA, might deal with the Roberts only to the disadvantage of the owners. To conclude that the owners ‘extract[ed]’ the agreement by the Roberts to include cl 14, as did the primary judge, mistakes the significance of the available outcomes. The owners would not agree to renew the lease without cl 14 and were at liberty to achieve that result, as his Honour accepted. To stigmatise the second (and actual) outcome appears to favour as the preferable result the third outcome whereby the owners would have had no further dealing with the Roberts, the lease would have expired and the sale lost, but the Roberts would have later received some $3000 at the settlement.

review questions 1 What is unconscionable conduct? 2 What are the elements of unconscionable conduct? 3 Describe the key differences between Commercial Bank of Australia v Amadio and ACCC v CG Berbatis Holdings Pty Ltd within the context of unconscionability.

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Bridgewater v Leahy It is interesting to contrast the High Court’s decision in Berbatis with its earlier decision of Bridgewater v Leahy.32 As some commentators have noted, Bridgewater is a rather puzzling decision.33 On the one hand Bridgewater would appear to represent a high-water mark for the concept of unconscionability; but on the other hand the facts in Bridgewater do not conform to the usual facts surrounding unconscionability. In Bridgewater, the family of the late Bill York challenged a transaction that he had entered into with his nephew, Neil York. For a time, Bill York had carried on a partnership with Neil York’s father, Sam York. Bill York held his nephew in high regard and worked with him as part of a grazing business for a considerable period of time. At his nephew’s suggestion, Bill York effectively sold a parcel of property to his nephew at a price of $150 000. The property was valued at over $696 000 so the nephew benefited from a $546 000 reduction in the price. Part of the transaction included a forgiveness of debt, to the amount of $546 000 under a deed. To facilitate this transaction, Bill York had suggested that the nephew sell one of his own properties in order to have money available for the purchase. Neil York complied with this request. At the time of the 1988 transaction, Bill York was of sound mind and condition. His mental acuity did waiver slightly, given his advanced age, but there was no evidence that he was senile or impaired in any way. Bill York did not seek independent legal advice. Instead, he consulted with a local solicitor who regularly advised both Bill and Neil York. In November 1988, one of Bill York’s daughters, Mrs Leahy, came to be aware of the transaction. She was displeased with the generosity that her father displayed towards Neil York, though her father defended the transaction. Bill York died in April 1989 at the age of 85. Mrs Leahy and her sisters then challenged the validity of the deed that forgave the $546 000 debt and other parts of Bill York’s will. The trial judge, De Jersey J in the Queensland Supreme Court, found for Neil York. Both De Jersey J and the Queensland Supreme Court of Appeal found that Bill York was not suffering from any special disadvantage. Further, both De Jersey J and the Court of Appeal found that unconscionability did not exist in Bridgewater. However, by a narrow 3:2 majority, the High Court found that unconscionability existed. In their dissent, Gleeson CJ and Callinan J found that the absence of a special disadvantage was fatal to the claim for unconscionability. Bridgewater v Leahy (1998) 194 CLR 457 Gleeson CJ and Callinan J at 469–472: The appellants claim equitable relief in relation to the 1988 transaction, (or part of it), contending in their Statement of Claim that at the time of the death of Bill York he had a right to such relief. That Neil and Beryl York acquired property from Bill York at a substantial undervalue is not in doubt. Both Bill York and Neil York were well aware of that. As part of the same transaction, Neil York acquired property from Sam York for no consideration.

32 (1998) 194 CLR 457. 33 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 752.

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The essence of the appellants’ claim is that, in 1988, Neil York took unfair advantage of Bill York. His conduct, it is said, involved an unconscientious use of power arising out of the circumstances and condition of the parties to the transaction, of the kind considered in Blomley v Ryan. On this approach, Bill York was a ‘victimised party’. It would not be to the point had Bill York entered into a transaction which was unfair to his wife and daughters, if there were nothing more to it. The appellants based their  argument upon what they said was a special disability on the part of Bill York, and  an unconscientious taking advantage of such disability by Neil. That is the way their case was put, and it was to that proposition that the judgments in the courts below responded. What was the special disability? The trial judge, and the majority in the Court of Appeal, found there was none. They found that Bill York knew and understood what he was doing in 1988, and that the transaction into which he entered gave effect to his long standing and firmly held wishes. They also pointed out that it is impossible to separate the 1988 transaction from the 1985 will, and that any characterisation of the dealings between Bill and Neil York in 1988 must take account of their common understanding of what was to take place on the death of Bill in relation to the subject lands. There is no evidence, and no finding in the courts below, that the 1988 transaction resulted from any apprehension on the part of Neil York, either that his uncle would alter his will to Neil’s disadvantage, or that a successful challenge to the will might be made after Bill York’s death. As was noted above, almost a year elapsed between the time when the 1988 transaction was first proposed and the time when it was completed; and this was when Bill York was aged about 84. The transaction can scarcely be regarded as some kind of pre-emptive strike. … The nature of the relevant disadvantage concerns the ability of the weaker, or victimised, party, to make an informed judgment as to his or her interests. This is made clear in Commercial Bank of Australia Ltd v Amadio … In the same case Deane J, identifying the weakness which attracts the jurisdiction, referred to the statement of McTiernan J in Blomley v Ryan that the ‘essence of such weakness is that the party is unable to judge for himself ’. Absence of independent legal advice, like age, or infirmity, or some other condition or circumstance of the kind referred to may, in a given case, be of factual importance in determining whether special disability or weakness, of the relevant kind, exists, but it is important to bear in mind the essence of the supposed disability or weakness. Here there are concurrent findings of fact in the courts below, based upon ample evidence, to the effect that Bill York was not under any special disability, in the sense  in  which that expression was explained in Amadio. It may be acknowledged that the requisite capacity  for judgment goes beyond an understanding of the salient features of the transaction. However, it is relevant to observe that it cannot properly be concluded that Bill York was unaware of any of those features; much less that they were concealed from him. It was argued for the appellants that Bill York may not have appreciated the value of the land in question. This is most unlikely. That was a

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subject of close and abiding interest to him, and the argument has no foundation in the evidence. Nor is there any reason to doubt that he appreciated the significance of the transaction, both for himself and for his family. His justification of his conduct, when he was challenged by his daughter in November 1988, indicates both independence of mind and determination. In Louth v Diprose Deane J explained the significance of concurrent findings of fact when this Court is invited to address an issue such as that presently in question. This Court ‘should not, in the absence of special reasons such as plain injustice or clear error, disturb such concurrent findings’. It is irrelevant that there has been a dissentient in the first appellate court. The present is not a case in which the trial judge had the benefit of assessing the person now said to have had an equity to set the 1988 transaction aside. However, the judge had evidence as to how that person, not long before he died, set out to explain and justify his apparent generosity to Neil York. In the context of a charge of unconscientious conduct, the trial judge had an opportunity to assess Neil York, and Mr Pack [who assisted with the transfer], and others involved in the matter. The appellants have not demonstrated plain injustice or clear error of the kind referred to by Deane J. Rather, the findings of fact made in the courts below appear to be correct. It is of interest to note the findings of fact at first instance in some of the leading cases on this topic. In Wilton v Farnworth a person who was ‘markedly dull-witted and stupid’ was persuaded to sign over to another his interest in his wife’s estate without having any idea of what he was doing. In Blomley v Ryan the defendant took advantage of the plaintiff’s alcoholism to induce him to enter a transaction when his judgment was seriously affected by drink. In Amadio the special disability of the guarantors included a limited understanding of English, pressure to enter in haste into a transaction they did not understand, and reliance upon their son. In Louth v Diprose the primary judge found that the donee, with whom the donor was ‘utterly infatuated’, had threatened suicide, manufactured a false atmosphere of personal crisis, and engaged in a process of manipulation to which the donor was vulnerable. The judge found that the donee’s conduct ‘smacked of fraud’. Of course, it is the principles enunciated in those cases, and not their particular facts, which are of importance. The facts, however, illustrate the practical content of the principles; and they are a long way removed from the facts of the present case. As to the principles expounded in the cases, the findings in the court below establish Bill York’s independence of mind and capacity for judgment when he entered into the 1988 transaction; a transaction which can only be understood in a wider context, including the provisions of the 1985 will, and Bill York’s long and firmly held intention that Neil York should succeed to his pastoral interests. The findings deny the existence of any special disability in Bill York, and they acquit Neil York of unconscientious conduct. It is not a sufficient answer to these concurrent findings of fact to suggest that the members of the courts below failed to address the correct issues. The issues were squarely before them and, in particular, the principles in Amadio were considered.

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We do not accept that de Jersey J failed to give separate and independent consideration to the claim which is presently in issue, and treated its failure as a necessary consequence of the failure of the challenges to the will. Rather, his Honour treated the will as an important part of the factual background to the 1988 transaction. In that he was correct. The reasoning of the majority in the Court of Appeal reflected an accurate appreciation and application of the relevant principles. The claim based on unconscionability should fail.

However, the majority of Kirby, Gummow and Gaudron JJ found that a special disadvantage in the form of emotional dependence did exist. It would appear that their Honours based this conclusion on the peculiarities of Bill York’s personality and the rigid traditionalism of his views. Bridgewater v Leahy (1998) 194 CLR 457 Kirby, Gummow and Gaudron JJ at 478–493: Unconscionable conduct, as the term suggests, focuses more on the unconscientious conduct of the defendant. As a ground of relief in England unconscionable conduct has been confined largely to ‘catching bargains’ with expectant heirs and others in particular categories of disadvantage e.g. those who are illiterate … In Australia, it has been recognized that unconscionable conduct is a ground of relief which will be available ‘whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is taken of the opportunity thereby created’. Unconscionable conduct is also recognized in New Zealand as a ground of relief in these circumstances.’ In Commercial Bank of Australia Ltd v Amadio, Deane J spoke of unconscionable conduct as occurring where, in the circumstances, it is unconscientious to ‘procure, or accept, the weaker party’s assent to the impugned transaction’. It also should be noted that in Hart v O’Connor, an appeal from New Zealand, the Privy Council described unconscionable conduct which provided a basis for equitable relief as ‘victimisation, which can consist either of the active extortion of a benefit or the passive acceptance of a benefit in unconscionable circumstances’. In so giving the judgment of the Privy Council, Lord Brightman was reflecting a general proposition put by James LJ in Torrance v Bolton. This was that it was the ‘ordinary jurisdiction’ of the Court of Chancery to deal with instruments and transactions ‘in which the Court is of opinion that it is unconscientious for a person to avail himself of the legal advantage which he has obtained’. In any event, it will become apparent from the facts of this case that more was involved than passive acceptance by Neil of Bill’s bounty and that, at a crucial juncture, the initiative came from Neil. … Bill had been born in Wallumbilla and lived there all his life. We have referred to the evidence which showed the amassing by him of considerable land and interests. He was

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a quiet, reserved man of limited education. He travelled only infrequently away from his home. The primary judge found: He had a reasonable relationship with his daughters, although he really excluded both them, and Stella his wife, from his business affairs, and rather stolidly considered their true place to be ‘in the home’. Bill’s life revolved substantially about his interest in cattle, and the recreations of shooting and football. … Bill provided only very basic accommodation for his wife and daughters. He was remarkable [sic] frugal. He did not even give birthday presents. His treatment of his wife and daughters in this will was therefore consistent with that general approach … … Bill felt that the place for Stella and his daughters was in the home, not on the land or engaged in business affairs.

On the other hand, he had an ‘enormous affection’ for Neil, ‘fully trusted him’ and, for his part, Neil appreciated the high regard his uncle felt for him. … The relationship between Bill and Neil meant that, when Neil raised the question of using the proceeds of sale of the Injune Land, they were meeting on unequal terms. Neil took advantage of this position to obtain a benefit through a grossly improvident transaction on the part of his uncle. In some cases, the equity that arises by reason of an unconscientious or unconscionable dealing of the nature with which this appeal is concerned may be satisfied only by setting aside that dealing in its entirety. The dealing may be embodied in the one instrument which contains several provisions or in several instruments. In other circumstances, of which this case is an example, the equity may be satisfied by orders setting aside some but not all of these instruments or some but not all of the provisions thereof. It is unconscionable for Neil and his wife to retain the benefit of the improvident transaction by asserting the forgiveness of the whole of the debt which would otherwise be owing to Bill’s estate. On the findings of fact made by and available to him, the primary judge should have held that the Deed should not be allowed to stand and be given its full effect; the Court of Appeal also should have intervened. A similar conclusion would have followed with respect to the Transfers but for the complexities that would arise in the disentanglement of the transactions involved, including the absence of Sam [Neil York’s father] and the mortgagee as parties to this litigation. In the circumstances of this case and consistently with the framing of relief which, in Lord Blackburn’s phrase, is ‘practically just’, the appellants, as representatives of Bill’s estate, properly may elect that only the Deed itself be set aside. However, in seeking equity, the estate must be prepared to do equity. In particular, weight has to be given to the testator’s wish significantly to benefit his nephew which was expressed in cl. 4 of the Will.

It seems clear from the extracts of the majority decision that the improvident nature of the transaction and the gross undervalue were important factors in finding unconscionability. It would  also appear that Bill York’s attitude towards his wife and daughters coloured their

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Honours’ views upon the question of unconscionability. Whether these are relevant considerations in the law of unconscionability is less certain. The majority’s decision is on safer ground where  it states that the relation between Bill and Neil York created a situation of inequality between them. Bill York was more likely to be favourably disposed to suggestions from his nephew. But this conclusion itself is troubling. Bill York did not lack mental acuity. He was an experienced grazier. Furthermore, just like any other person with a family, he might have been somewhat more disposed to particular members of that family than to others. However, the doctrine of unconscionability is not in place with the sole purpose of judging the correctness of family relationships. It is in place to protect weaker parties from the unconscientious acts of stronger party. The case of Bridgewater is somewhat more ambiguous than the earlier decision of the High Court in Louth v Diprose.34 It is unclear whether Bridgewater represents a change in direction on the part of the High Court on common law unconscionability or whether the decision is an anomaly. Given, the Court’s decision in ACCC v CG Berbatis Holdings Pty Ltd, it seems likely that the latter option will prevail. The doctrine of unconscionability is not in place with the sole purpose of judging the correctness of family relationships. It is in place to protect weaker parties from the unconscientious acts of stronger party.

Louth v Diprose In the case of Louth v Diprose 35 the High Court held that a man who was infatuated with a woman was unconscionably taken advantage of after she manufactured a false atmosphere of crisis. Louis Diprose was a man of modest means living in Launceston. In 1981 Diprose met Carol Louth. The pair formed a friendship where Diprose was more attached to Louth then she was to him. When Louth divorced she moved to Adelaide and stayed in a house at Tranmere. The Tranmere house was owned by her brother-in-law and she paid a reduced rent for the use of the premises. Diprose had attempted to convince Louth to stay in Launceston and had proposed marriage to her. They had a very brief sexual relationship. In early 1983 Diprose moved to Adelaide to be nearer to Louth. In July 1983 Louth told Diprose that she was depressed and contemplating suicide. Diprose continued to press his affections upon Louth. However, she rejected his advances. Despite this, Diprose paid several of Louth’s household bills and gave gifts to her. After Louth’s sister separated from her husband, Louth was told by her brother-in-law that she would have to pay a higher rent. Louth told Diprose that she would commit suicide if she was forced to vacate the house. Consequently, Diprose bought the Tranmere house for $58 000 and transferred it entirely into Louth’s name. For the next three years Diprose continued to pay Louth’s bills, including her children’s school fees, and provided her with food from time to time. After the parties fell out in mid-1988 Diprose told Louth that he wanted the house transferred to him and that she should pay some rent for her occupation. Louth rejected this request and litigation ensued in the Supreme Court of South Australia. King CJ agreed with Diprose’s claim that it would be unconscionable for Louth to retain the Tranmere house. This was upheld on appeal by the Full Court of the Supreme Court. Louth appealed to the High Court where a majority ruled in favour of Diprose. 34 (1992) 175 CLR 621. 35 Ibid.

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Louth v Diprose (1992) 175 CLR 621 Brennan J at 626–633: The jurisdiction of equity to set aside gifts procured by unconscionable conduct ordinarily arises from the concatenation of three factors: a relationship between the parties which, to the knowledge of the donee, places the donor at a special disadvantage vis-à-vis the donee; the donee’s unconscientious exploitation of the donor’s disadvantage; and the consequent overbearing of the will of the donor whereby the donor is unable to make a worthwhile judgment as to what is in his or her best interest. A similar jurisdiction exists to set aside gifts procured by undue influence. … The ground for setting aside a gift obtained by unconscientious exploitation of a donor’s special disadvantage, as explained in Amadio, can be compared with the ground for setting aside a gift obtained by undue influence, as explained by Dixon J in Johnson v. Buttress [(1936) 56 CLR 113, 134]: The basis of the equitable jurisdiction to set aside an alienation of property on the ground of undue influence is the prevention of an unconscientious use of any special capacity or opportunity that may exist or arise of affecting the alienor’s will or freedom of judgment in reference to such a matter. The source of power to practise such a domination may be found in no antecedent relation but in a particular situation, or in the deliberate contrivance of the party. If this be so, facts must be proved showing that the transaction was the outcome of such an actual influence over the mind of the alienor that it cannot be considered his free act. But the parties may antecedently stand in a relation that gives to one an authority or influence over the other from the abuse of which it is proper that he should be protected. (Emphasis added.)

The similarity between the two jurisdictions gives to cases arising in the exercise of one jurisdiction an analogous character in considering cases involving the same points in the other jurisdiction. The relationship There are some categories of confidential relationships from which a presumption of undue influence arises when a substantial gift is made by one party to the relationship to the other—relationships such as solicitor and client, physician and patient, parent and child, guardian and ward, superior and member of a religious community. Public policy creates a presumption of undue influence in cases where the relationship falls into one of the recognized categories. Those categories do not exhaust the cases in which it may be held that it is contrary to conscience for a donee to retain a gift. In cases where the relationship is not one of confidentiality, a gift may be impeached where the evidence shows that in fact it was procured by unconscionable conduct. Where a gift is impeached on the ground that it was obtained by unconscionable conduct consisting in an unconscionable exploitation of an antecedent relationship, the relationship is one in which one party stands in a position of special disadvantage vis-à-vis the other. Such relationships are infinitely various, the common feature being that the donor is, to the knowledge of the donee, in a position of special disadvantage vis-à-vis the donee: that is to say, in matters in which their interests

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do not coincide, the donor’s capacity to make a decision as to his or her own best interest is peculiarly susceptible to control or influence by the donee. … The relevant relationship may exist because of some weakness in the donor. Thus Fullagar J in Blomley v Ryan [ (1956) 99 CLR 362 405] took as instances of weakness ‘poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary’. And McTiernan J said that ‘(t)he essence of such weakness is that the party is unable to judge for himself ’ [(15) ibid, 392]. It is unnecessary to show that the donee contributed to that weakness. In the present case, King CJ [Diprose v Louth (No 1) (1990) 54 SASR 438, 447–448] found— a relationship existed between the plaintiff and the defendant which placed the plaintiff in a position of emotional dependence upon the defendant and gave her a position of great influence on his actions and decisions. From the time they first met he was utterly infatuated by her. He had had unhappy domestic experiences and was anxious to lavish love and devotion upon a woman. He fell completely in love with the defendant … The defendant, as her evidence confirms, was well aware that the plaintiff had a deep emotional attachment to her and desired only to have her love and to marry her. He knew that he had what she accepted in evidence to be ‘an enormous weakness’ for her. His willingness to devote himself to her and to lavish her with gifts, notwithstanding that she did not return his love, is quite pathetic. The degree of his emotional dependence upon her and his susceptibility to her wishes is obvious on the evidence and was obvious to her.

Given those findings, the relationship between the plaintiff (respondent) and the defendant (appellant) was so different in degree as to be different in kind from the ordinary relationship of a man courting a woman. It was found that the personal relationship between them was such that the plaintiff was extremely susceptible to influence by the defendant, as the defendant knew. That finding makes the relationship in the present case analogous to the relationship which Lord Langdale MR thought to be subsisting between an engaged couple in Page v Horne [ [1848] 50 ER 804, 807]. There his Lordship set aside a gift by a woman to her fiance, observing that ‘no one can say what may be the extent of the influence of a man over a woman, whose consent to marriage he has obtained’. It may no longer be right to presume that a substantial gift made by a woman to her fiance has been procured by undue influence but the cases in which such a presumption has been made demonstrate that the relationship which places a donor at a special disadvantage may have its origin in an emotional attachment of a donor to a donee. Exploitation of the donor’s disadvantage Equity intervenes ‘whenever one party to a transaction is at a special disadvantage in dealing with the other party … and the other party unconscientiously takes advantage of the opportunity thus placed in his hands’ [Blomley v Ryan (1956) 99 CLR 362, 415 per Kitto J]. Citing this passage in Amadio [(1983) 151 CLR 447, 489], Dawson J said: What is necessary for the application of the principle is exploitation by one party of another’s position of disadvantage in such a manner that the former could not in good conscience retain the benefit of the bargain.

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What his Honour said of a bargain can be said equally of a gift. In the present case, King CJ made explicit findings of an unconscientious exploitation by the defendant of the plaintiff’s weakness [(1990) 54 SASR 438, 448]: I am satisfied that she deliberately manufactured the atmosphere of crisis in order to influence the plaintiff to provide the money for the house. I am satisfied, moreover, that she played upon his love and concern for her by the suicide threats in relation to the house. She then refused offers of assistance short of full ownership of the house knowing that his emotional dependence upon her was such as to lead inexorably to the gratification of her unexpressed wish to have him buy the house for her. I am satisfied that it was a process of manipulation to which he was utterly vulnerable by reason of his infatuation.

The donor’s will and judgment When a donor who stands in a relationship of special disadvantage vis-à-vis a donee makes a substantial gift to the donee, slight evidence may be sufficient to show that the gift has been procured by unconscionable conduct. Whether that finding should be made depends on the circumstances. In Watkins v Combes [(1922) 30 CLR 180, 193], Isaacs J said: It is not the law, as I understand it, that the mere fact that one party to a transaction who is of full age and apparent competency reposed confidence in, or was subject to the influence of, the other party is sufficient to cast upon the latter the onus of demonstrating the validity of the transaction. Observations which go to that extent are too broad.

But where it is proved that a donor stood in a specially disadvantageous relationship with a donee, that the donee exploited the disadvantage and that the donor thereafter made a substantial gift to the donee, an inference may, and often should, be drawn that the exploitation was the effective cause of the gift. The drawing of that inference, however, depends on the whole of the circumstances. In this case, the defendant contends that, whatever view is taken of her conduct, the proper conclusion to be reached on the evidence is that the plaintiff made the gift to her simply because he wished to do so, imprudent though the gift may have been. If that be the right conclusion, so that the gift was not the result of unconscionable conduct on the part of the defendant, the plaintiff cannot recover the gift. As Lindley LJ pointed out in Allcard v Skinner [(1887) 36 Ch D 145, 182–183]: Courts of Equity have never set aside gifts on the ground of the folly, imprudence, or want of foresight on the part of donors. The Courts have always repudiated any such jurisdiction … It would obviously be to encourage folly, recklessness, extravagance and vice if persons could get back property which they foolishly made away with, whether by giving it to charitable institutions or by bestowing it on less worthy objects.

Salmond J in Brusewitz v Brown [ (1923) NZLR 1106, 1109] spoke to the same effect: The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his own property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognized invalidating circumstances, such as fraud or undue influence.

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His Honour then goes on to distinguish cases of undue influence: This general principle, however, is subject to an important exception. Where there is not merely an absence or inadequacy of consideration for the transfer of property, but there also exists between the grantor and the grantee some special relation of confidence, control, domination, influence, or other form of superiority, such as to render reasonable a presumption that the transaction was procured by the grantee through some unconscientious use of his power over the grantor, the law will make that presumption, and will place on the grantee the burden of supporting the transaction by which he so benefits, and of rebutting the presumption of its invalidity. In such cases it is necessary for the grantee to prove that the suspected transaction has not its source in any improper influence over the mind or will of the grantee, or in any fraud, misrepresentation, mistake, or concealment of material facts which ought to have been disclosed by the grantee to the grantor in view of the relation between them. Unless the grantee can prove this the transaction will be set aside at the suit of the grantor or his representatives.

The same approach leads to a similar conclusion when the evidence shows unconscionable conduct on the part of a donee. Once it is proved that substantial property has been given by a donor to a donee after the donee has exploited the donor’s known position of special disadvantage, an inference may be drawn that the gift is the product of the exploitation. Such an inference must arise, however, from the facts of the case; it is not a presumption which arises by operation of law. The inference may be drawn unless the donee can rely on countervailing evidence to show that the donee’s exploitative conduct was not a cause of the gift. At the end of the day, however, it is for the party impeaching the gift to show that it is the product of the donee’s exploitative conduct. This is the final and necessary link in the chain of proof of unconscionable conduct leading to a decree setting aside the gift. The plaintiff discharged that onus in the present case. That is implicit in the conclusion of King CJ [(1990) 54 SASR 438, 448]: By reason of the plaintiff’s infatuation and the defendant’s manipulation of it he was ‘unable to make a worthwhile judgment as to what is in his best interest’: Commercial Bank of Australia v Amadio [(1983) 151 CLR 447, 461 per Mason J]. The defendant was well aware of that and her manufacture of an atmosphere of crisis where no crisis existed was dishonest and smacked of fraud. To my mind the defendant’s unconscientious use of her power over the plaintiff resulting from his infatuation, renders it unconscionable for her to retain the benefit of such a large gift out of the plaintiff’s limited resources.

His Honour inferred that the gift was the product of the defendant’s ‘manipulation’ of the plaintiff. ‘The findings of fact made by King CJ were attacked both in the Full Court and before this Court. The attack failed in the Full Court and, for the reasons given by Deane J, the attack should fail here.’ Deane J at 636–638: The appellant set out on a planned course of conduct aimed at persuading the respondent to provide the money necessary to enable her to purchase the house from her brother-inlaw. She ‘deliberately manufactured’ a false ‘atmosphere of crisis in order to influence the

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(respondent) to provide the money (to purchase) the house’. She falsely told the respondent that she was required to leave the house. She said that, if forced to vacate the house, she would commit suicide. The respondent, who was aware that the appellant had cut her wrists on a previous occasion, believed her. By ‘a process of manipulation to which (the respondent) was utterly vulnerable by reason of his infatuation’, the appellant obtained from the respondent a gift of $59 206.55, being the purchase price of the house and associated conveyancing fees. The process of manipulation included refusal of ‘offers of assistance (by the respondent) short of full ownership of the house knowing that (the respondent’s) emotional dependence upon her was such as to lead inextricably to the gratification of her unexpressed wish to have him buy the house for her’. On the basis of his findings about the appellant’s purpose and conduct, the learned trial judge not surprisingly expressed the view that her conduct ‘smacked of fraud’. It has long been established that the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party to the transaction with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that special disability was sufficiently evident to the other party to make it prima facie unfair or ‘unconscionable’ that that other party procure, accept or retain the benefit of, the disadvantaged party’s assent to the impugned transaction in the circumstances in which he or she procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: ‘the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain’ or retain the benefit of it [O’Rorke v Bolingbroke (1877) 2 App Cas 814, 823 per Lord Hatherley]. The adverse circumstances which may constitute a special disability for the purposes of the principle relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible of being comprehensively catalogued. In Blomley v Ryan [(1956) 99 CLR 362, 405], Fullagar J listed some examples of such special disability: ‘poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary’. As Fullagar J remarked [at 405], the common characteristic of such adverse circumstances ‘seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other’. On the findings of the learned trial judge in the present case, the relationship between the respondent and the appellant at the time of the impugned gift was plainly such that the respondent was under a special disability in dealing with the appellant. That special disability arose not merely from the respondent’s infatuation. It extended to the extraordinary vulnerability of the respondent in the false ‘atmosphere of crisis’ in which he believed that the woman with whom he was ‘completely in love’ and upon whom he was emotionally dependent was facing eviction from her home and suicide unless he provided the money for the purchase of the house. The appellant was aware of that special disability. Indeed, to a significant extent, she had deliberately created it. She manipulated it to her advantage to influence the respondent to make the gift of the money to purchase the house. When asked for restitution she refused. From the respondent’s point of view, the whole transaction was plainly a most improvident one.

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review questions 1 What were the facts in Louth v Diprose? 2 Why did the High Court find that the appellant’s conduct had been unconscionable? 3 Do you think the High Court made the right decision? Explain your answer.

• 18.2 Defences The key defence to unconscionability is for the party whose conduct is impugned to demonstrate that the transaction is in fact fair, just and reasonable.36 As such, the burden of proof regarding the defence falls upon the stronger party. The considerations that come into play under this defence are: The key defence to unconscionability is for the party whose conduct is impugned to demonstrate that the transaction is in fact fair, just and reasonable.

(i) the amount of money paid by the stronger party to the weaker party; (ii) the existence of independent advice; (iii)  the ability of the weaker party to fully comprehend the transaction or that the stronger party had no knowledge of the weaker party’s weaknesses.37

• 18.3 Remedies The primary remedy in the case of an unconscionable dealing is that the transaction be set aside.38 A court may also require that any profits stemming from the unconscionable transaction be accounted for to the plaintiff.39 Equitable damages may also be available in some instances.40 Under some circumstances the right to have the contract set aside may be lost, such as where there is delay, but equitable damages may still be available.41

• 18.4 Statutory unconscionability The Trade Practices Act 1974 (Cth) (TPA) dealt with statutory unconscionability under ss 51AA, 51AB and 51AC. The TPA has now been repealed and it was fully replaced as of 1 January 2011 by the Australian Consumer Law (ACL), which is contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth). In reality the ACL is a re-naming and re-badging of the TPA, as many of the schemes under the former Act will remain in place. Statutory unconscionability will remain under ss 20, 21 and 22 of the ACL, which are virtually identical to ss 51AA, 51AB and 51AC of the TPA. 36 Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 474. 37 Louth v Diprose (1992) 175 CLR 621. 38 Ibid; Asia Pacific International Pty Ltd v Dalrymple [2000] 2 Qd R 229. 39 O’Brien v ANZ Bank Ltd (1971) 5 SASR 347. 40 Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810. 41 Dowsett v Reid (1912) 15 CLR 695.

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The primary advantage of suing under the statute is that the courts may have recourse to a wider range of remedies under the ACL than are available under the common law. Section 20 of the ACL provides that a person must not, in trade or commerce within Australia, engage in unconscionable dealing within the meaning of the common law.42 Section 20 does not apply to conduct that is regulated under ss 21 and 22.43 Section 21 provides that a person may not engage in unconscionable dealing towards consumers; and s 22 provides that a person may not engage in unconscionable dealing towards businesses. In effect, the existence of ss 21 and 22 decreases the utility of s 20. Both ss 21 and 22 also appear to create a broader concept of statutory unconscionability than that which exists under the common law, in that they apply to most of the circumstances in which unconscionability might arise and they expand the scope of the doctrine. This is because both provisions contain a long list of factors that need to be taken into account in determining unconscionability. Notably, in both provisions a court must have regard to ‘the relative strengths of the bargaining positions’ of both parties. This appears to reintroduce the inequality of bargaining power as a major consideration in determining unconscionability.44 This was a concept that was rejected as insufficient on its own to constitute special disadvantage under s 51AA by the High Court in ACCC v CG Berbatis Holdings Pty Ltd.45 To sustain a claim for unconscionability under the ACL, the person must know that the customer or supplier with which it is dealing is at a special disadvantage. In ACCC v Radio Rentals46 Finn J in the Federal Court held that, where the person was a corporation, it was not possible to aggregate the knowledge of various company employees to manufacture the requisite level of knowledge in circumstances where no individual employee knew that the customer was at a special disadvantage and where there had not been any discussion of the matter among employees.47 The Federal Court has noted in some decisions that unconscionability under both ss 51AB and 51 AC of the TPA (now ss 21 and 22 of the ACL) is likely broader than under s 51AA.48 Given the broad terms of ss 21 and 22 there is probably some overlap with the Unfair Contract Terms scheme in the ACL49 and the express term of good faith where it is used in contracts.

Ke y p o in ts for re v ision Unconscionability is concerned with the fairness of a particular transaction. Unconscionability prevents a stronger party from taking an unconscientious advantage of a weaker party.

42 ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 is useful for the interpretation of s 20. 43 ACL, s 20(2). 44 In Lloyds Bank Ltd v Bundy [1975] 1 QB 326, 339, Lord Denning MR espoused a broader principle of unconscionability based primarily on inequality of bargaining power. This was rejected by the House of Lords in National Westminster Bank Plc v Morgan [1985] 1 AC 686. 45 (2003) 214 CLR 51. 46 [2005] FCA 1133. 47 Ibid, [179]. 48 See ASIC v National Exchange Pty Ltd (2005) 148 FCR 132; ACCC v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253. 49 ACL, ss 23–28.

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There are three elements to unconscionability: (i) special disadvantage; (ii) knowledge of the disadvantage; (iii) an unconscientious taking of advantage. The defence to a claim of unconscionability is to demonstrate that the transaction is fair, just and reasonable. The disadvantage at question in the dispute must be quite significant to reach the level of special disadvantage. Mere disadvantage through a weaker bargaining position will not suffice to support a finding of unconscionability.

problem-solving practice Emily Norton is a twenty-one-year-old university student and part-time sales assistant at a clothing store in Melbourne. Emily’s next door neighbour is an elderly widower named Ahmed Hassan. Emily knows that Ahmed is very lonely and that he speaks very little English. Ahmed is very fond of Emily and they often have long chats, though Emily struggles to understand Ahmed’s broken English. One day, Emily tells Ahmed that she has been fired from her job at the clothing store. Emily tells Ahmed that unless she can come up with $5000 she will lose her apartment and her place at university. Ahmed immediately gives Emily $15 000 from his own savings. He tells her that the $15 000 is a gift. Emily deposits the money into her bank account. Ahmed has since discovered that Emily still has her job at the clothing store and that her place at university is fully funded by the Commonwealth. Can Ahmed have the gift of $15 000 set aside under the law?

ANSWER In answering this question, consider the following issues: (i)

What is the transaction that can be said to be an unconscionable dealing?

(ii) What has Emily done that is unconscionable? (iii) Does Ahmed have a special disadvantage? (iv) Was Emily aware of Ahmed’s special disadvantage? Emily is aware that Ahmed is lonely and vulnerable. She has fabricated a story in order to obtain a financial advantage from him. Other areas of law may apply to this conduct, but we will confine our analysis to the law of unconscionability. There are three main elements of unconscionability: (i) special disadvantage; (ii) knowledge by the other party of that special disadvantage; and (iii) the unconscientious taking of advantage. In this instance Ahmed is elderly, a widower, lonely and speaks little English. It would be pertinent to consider how these characteristics compare to the list of factors enunciated by Fullagar J in Blomley v Ryan. Whether these characteristics combine to form a special disadvantage is debatable. In Amadio the fact that the parents were elderly and with a limited grasp of English supported a finding of special disadvantage. If these characteristics do amount to a special disadvantage, then the next question that arises is whether Emily was aware of the disadvantage. It seems implicit from the facts that Emily had the requisite degree of knowledge. In her face-to-face dealings with Ahmed it would have been difficult for her to not have been aware of his vulnerability. A parallel may be drawn here with the conduct of the bank officer in Amadio. If a single meeting between the bank officer and the parents in Amadio was

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sufficient to establish knowledge, then by extension Emily’s repeated interactions with Ahmed should also support a positive finding of the second element of unconscionability. The next question that arises is whether Emily has unconscionably taken advantage of Ahmed. On the facts that have been given, the existence of deception should be sufficient to support a finding of unconscionability. In Louth v Diprose manipulative conduct, short of outright deception, was sufficient to constitute the unconscientious taking of advantage. The quantum of money involved in the present matter differs greatly from that in Louth v Diprose, but the amount of money is not a determinative factor and the existence of a calculated deception should be sufficient to outweigh any discrepancy between the facts of Diprose and the present matter.

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chapter

19

Undue influence

Chapt e r o v e rv i e w 19.0

Introduction  369

19.1

Categories of undue influence   370 19.1.1 Actual undue influence   370 19.1.2 Presumed undue influence   372

19.2

Specific relationships of influence   378 19.2.1 Parent and child   378 19.2.2 Guardian and ward   378 19.2.3 Religious adviser and disciple   380

19.3

Rebutting the presumption   387 19.3.1 Independent advice  387 19.3.2 Free will  388

19.4

The principle in Yerkey v Jones  388

19.5

Remedies  392

Chapter 19

Undue influence

• 19.0 Introduction This Chapter will examine the different categories of undue influence and the types of relationships where undue influence is presumed. It will also explore the relationship between the doctrine of undue influence and the principle in Yerkey v Jones.1 All contractual negotiations invariably involve the exercise of some degree of influence from one party to another. However, the doctrine of undue influence polices the boundaries of that influence, and in certain circumstances the courts will intervene to set aside a contract where one party is thought to have benefited unconscionably due to the nature of the relationship between the parties or because of the existence of actual undue influence.2 The degree of influence exerted by one party over the other must be found to be ‘undue’ before the courts will deign to intervene.3 In certain instances this is presumed by the antecedent relationship between the parties which gives a clear ascendancy to one over the other.4 Nonetheless, the presumption of undue influence can be rebutted by evidence of independent advice and free decision making by the ‘affected’ party. The doctrine of undue influence is derived from equity. As both the common law and equity are fused pursuant to the Judicature Acts, the doctrine now forms a part of the common law. The doctrine applies to a variety of transactions including contracts and gifts. As a part of the overall body of contract law, undue influence is a form of unconscionable conduct. In effect, undue influence is a species of unconsionability that applies to situations where it would be unconscionable for a person with a specific and special degree of influence over another party to retain the benefit of a transaction that has been procured by that influence.5 The case of Allcard v Skinner 6 illustrates this principle. Allcard v Skinner involved an application to set aside a gift made by a member of a religious organisation to the order of nuns that she had joined. The plaintiff joined the sisterhood in 1871 and made a vow of poverty, chastity and obedience. As part of her vow the plaintiff was required to surrender all individual property. The plaintiff then made a gift of £7000 to the Lady Superior of the sisterhood to hold on trust for it. Over time, the sisterhood spent all but £1671 of the gift and, sometime after leaving the sisterhood, the applicant sought the return of the money that was left. The Court of Appeal found that the gift had been made under circumstances of undue influence. Crucially, the Court was of the view that no unfair advantage had been taken of the plaintiff, but that the only explanation for the gift was that the position of the plaintiff vis-à-vis the defendant, being one of a disciple and a spiritual order, was one under which the plaintiff faced an irresistible pressure. The Allcard case demonstrates: (i) the importance of the relationship between the affected party and the party seeking the gift or contract; (ii) that undue influence can be found regardless of whether unfair pressure has been exerted or not, as taking advantage is sufficient in of itself;7 and 1 (1939) 63 CLR 649. 2 National Westminster Bank v Morgan [1985] 1 AC 686; Johnson v Buttress (1936) 56 CLR 113; Royal Bank of Scotland Plc v Etridge (No 2) [2002] AC 773. 3 Johnson v Buttress (1936) 56 CLR 113, 135. 4 See below, section 19.1.1. 5 Allcard v Skinner (1887) 36 Ch D 145; Goldsworthy v Brickell [1987] 1 All ER 853. 6 Ibid. 7 Coercion is not a requirement.

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(iii) that the party seeking to procure the contract or gift does not necessarily need to be seeking a personal benefit.

• 19.1 Categories of undue influence The concept of undue influence is difficult to adequately define. It may apply in a number of situations and to a wide variety of relationships. In Johnson v Buttress 8 Dixon J described the basis and nature of undue influence: The basis of the equitable jurisdiction to set aside an alienation of property on the ground of undue influence is the prevention of an unconscientious use of any special capacity or opportunity that may exist or arise of affecting the alienor’s will or freedom of judgment in reference to such a matter.9

In Allcard v Skinner,10 Lindley LJ described the purpose of undue influence as follows: to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud.11

There are two basic categories of undue influence. The first pertains to situations in which there is no special relationship between the parties to the contract or gift, but where the plaintiff proves that influence was exerted.12 These are referred to as cases of actual undue influence. In the jurisprudence and literature pertaining to undue influence, cases of actual undue influence are often described as ‘Class 1’ cases.13 The second category pertains to situations where the relationship between the parties is such that a presumption of undue influence arises where a contract or gift is made. These cases are often referred to in the jurisprudence as ‘Class 2’ cases. In the second category, the existence of the relationship itself raises the presumption. Within Class 2 there are in fact two different subcategories, which are relationships that automatically raise the presumption of undue influence (Class 2A) and relationships of influence (Class 2B). Where relationships of influence are concerned, once the plaintiff has established that the relationship exists then the presumption arises.

19.1.1  Actual undue influence In cases of alleged actual undue influence, the evidentiary onus lies with the affected party to prove that the other party has unfairly taken advantage.14 In such cases, the plaintiff must demonstrate that the antecedent relationship has been characterised by a high degree of trust

8 (1936) 56 CLR 113. 9 Ibid, 135. 10 (1887) 36 Ch D 145. 11 Ibid, 183. 12 See Farmers’ Co-Op Executors & Trustees v Perks (1989) 52 SASR 399; In re Craig [1971] Ch 95. 13 See Barclays Bank plc v O’Brien [1994] 1 AC 180. For a discussion of the categories of undue influence, see Rick Bigwood, ‘Undue Influence in the House of Lords: Principles and Proof ’ (2002) 65 Modern Law Review 435. 14 Johnson v Buttress (1936) 56 CLR 113; Calvo v Sweeney [2009] NSWSC 719.

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Undue influence

and confidence between the parties.15 Once the plaintiff has In cases of alleged established that the relationship was one of a high degree of trust actual undue influence, and confidence, the evidentiary onus will then shift to the other the evidentiary onus lies party.16 with the affected party to prove that the other In Farmers’ Co-Op Executors & Trustees v Perks17 a transfer of party has unfairly taken property from a wife to a husband was found to be procured advantage. The plaintiff through actual undue influence. The relationship between the must demonstrate that the antecedent husband and wife was marked by a long history of violence from relationship has been the husband to the wife. The husband eventually murdered the characterised by a high wife. Duggan J found that a relationship of influence existed and, degree of trust and confidence between as finding of the exercise of actual undue influence could not be the parties. rebutted, the transfer was set aside.18 One of the key characteristics of cases of actual undue influence is that where the relationship between the parties does not give rise to a presumption of undue influence, the specific facts of the matter will determine whether undue influence exists or not. For example, in Louth v Diprose19 a gift of a house from an infatuated man to the woman who was the object of his affection was found to be both unconscionable and the result of undue influence; while in Adenan v Buise 20 the gift of money and the provision of an interest-free loan from an alcoholic was found to be the result of undue influence. In other cases of actual undue influence, a threat has been present. In Williams v Bayley,21 the use of a veiled threat was found to be actual undue influence. In that case, a son had given some bankers a series of promissory notes upon which he had forged his father’s signature. When the bankers discovered the fraud, they contacted the father and suggested that unless some other arrangement was made they would have to alert the authorities. The father then agreed to give the bank an equitable mortgage over his property. The father subsequently succeeded in having that transaction set aside for undue influence. Note that such conduct would be actionable today under the Competition and Consumer Act 2010 (Cth) or a state or territory Fair Trading Act. It is notable that in certain cases of actual undue influence, such as Perks and Williams, some degree of coercion has been present. There is clearly a potential overlap between actual undue influence and other categories of equitable fraud, such as duress and unconscionable conduct. However, coercion cannot be said to be essential to actual undue influence; rather, what must be shown is the exertion of improper influence. There is then a very real overlap between actual undue influence and presumed undue influence. This lack of conceptual clarity is aptly demonstrated in the case of Johnson v Buttress 22 where Starke J characterised the matter as one

15 16 17 18 19 20 21 22

Johnson v Buttress (1936) 56 CLR 113; Farmers’ Co-Op Executors & Trustees v Perks (1989) 52 SASR 399. In re Craig [1971] Ch 95. (1989) 52 SASR 399. Ibid, 405–406, 416–417. (1992) 175 CLR 621. [1984] WAR 61. (1866) LR 1 HL 200. (1936) 56 CLR 113, discussed below.

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of actual undue influence, while Dixon J viewed the case as a relationship of influence which triggered the presumption.23

19.1.2  Presumed undue influence As mentioned above, presumed undue influence refers to those categories of relationships that automatically raise the presumption of undue influence.24 There are two types of presumed undue influence: the first relates to categories of relationship where the presumption automatically arises (Class 2A); while the second concerns relationships of influence (Class 2B). Where this is a relationship of influence, once the plaintiff has established that the relationship exists, then the presumption arises. The types of relationships that automatically give rise to the presumption (Class 2A) are: (i) parent and child;25 (ii) guardian There are two types and ward;26 (iii) doctor and patient;27 (iv) solicitor and client;28 of presumed undue (v)  trustee and beneficiary;29 and (vi) religious adviser and influence: the first relates to categories of disciple.30 The categories of relationships that might give rise to relationship where the the presumption are not closed. Though the courts have over time presumption automatically identified the types of relationships listed above as giving rise to arises (Class 2A); while the second concerns the presumption, it is possible that new relationships might also relationships of influence attract the operation of the presumption of undue influence. (Class 2B). The leading case on relationships of influence and undue influence is Johnson v Buttress.31 John Buttress was elderly, illiterate and had recently been widowed at the time that he came to highly depend upon Mary Johnson. Buttress was quite temperamental and fell out with several members of his own family. He came to be very reliant on Johnson and her family for social support and other assistance. On 24 April 1931, Buttress transferred the disputed property to Johnson as a gift. After his father’s death Buttress’s son sought to have the transfer set aside on the grounds of undue influence. The son succeeded with his claim in the New South Wales Supreme Court. Johnson then appealed to the High Court. The appeal failed as the High Court found that Johnson had indeed exercised undue influence over Buttress. In the extracts below, Latham CJ and Dixon J set out the requirements that must be demonstrated  before undue influence can be found to exist. It is clear from the judgment of Dixon J that the vulnerability of Buttress and the growing degree of influence that Johnson had over him set up the situation of undue influence.

23 Ibid, 126 per Starke J, 138 per Dixon J. 24 Jenyns v Public Curator (Qld) (1953) 90 CLR 113; Goldsworthy v Brickell (1987) Ch 378; see also Tate v Williamson (1866) LR 2 Ch 55. 25 This category includes people acting in a loco parentis role: see Bank of New South Wales v Rogers (1941) 65 CLR 42; see also London and Westminster Loan and Discount Co Ltd v Bilton (1911) 27 TLR 184. 26 Powell v Powell [1900] 1 Ch 243. 27 Williams v Johnson [1937] 4 All ER 34. 28 Westmelton (Vic) Pty Ltd v Archer and Schulman [1982] VR 305. 29 Jenyns v Public Curator (Qld) (1953) 90 CLR 113; Whereat v Duff [1972] 2 NSWLR 147. 30 Allcard v Skinner (1887) 36 Ch D 145. 31 (1936) 56 CLR 113. Johnson v Buttress may be defined as a Class 2B case.

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Johnson v Buttress (1936) 56 CLR 113 Latham CJ at 119–123: The jurisdiction of a court of equity to set aside gifts inter vivos which have been procured by undue influence is exercised where undue influence is proved as a fact, or where, undue influence being presumed from the relations existing between the parties, the presumption has not been rebutted. Where certain special relations exist undue influence is presumed in the case of such gifts. These relations include those of parent and child, guardian and ward, trustee and cestui que trust, solicitor and client, physician and patient and cases of religious influence. The relations mentioned, however, do not constitute an exhaustive list of the cases in which undue influence will be presumed from personal relations. Wherever the relation between donor and donee is such that the latter is in a position to exercise dominion over the former by reason of the trust and confidence reposed in the latter, the presumption of undue influence is raised (Dent v Bennett; see also Smith v Kay). Where such a relation of what may be called, from one point of view, dominion, and from another point of view, dependence, exists, the age and condition of the donor are irrelevant so far as raising the presumption of undue influence is concerned. It must be affirmatively shown by the donee that the gift was (to use the words of Eldon LC in the leading case of Huguenin v Baseley) ‘the pure, voluntary, well-understood act of the mind’ of the donor. It may not be necessary in all cases to show that the donor received competent independent advice … But evidence that such advice has been given is one means, and the most obvious means, of helping to establish that the gift was the result of the free exercise of independent will; and the absence of such advice, even if not sufficient in itself to invalidate the transaction, would plainly be a most important factor in determining whether the gift was in fact the result of a free and genuine exercise of the will of the donor. In the case of an illiterate or weak-minded person it will be more difficult for the donee to discharge the prescribed onus of proof than in other cases. The burden will be still heavier upon the donee where the donor has given him all or practically all of his property (Price v Price; Inche Noriah v Shaik Allie Bin Omar). … The learned judge found that a relation of trust and confidence obtained between the deceased and the defendant of such a character that he relied upon her for advice on any matter of business. His Honour did not believe that the original suggestion of a transfer came from the defendant but that it was suggested (obviously by the defendant) in order to make ‘the gift previously made by the will irrevocable.’ This inference was, in my opinion, fairly open on the evidence. This being so, I agree with the learned judge that, in order to maintain the transaction, it was necessary for the defendant to show affirmatively that the deceased knew what he was doing when he made the transfer, in the sense that he understood its effect and significance in relation to himself, and further to show that the transfer was the result of his own will. I apply to this case the words of Sir John Leach VC in Griffiths v Robins, quoted by the Chief Justice Sir Samuel Griffith in Spong v Spong, altering only the pronouns to make the words more plainly applicable to the present case and

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omitting the words referring to independent advice which later authorities (already mentioned) have shown to be unnecessary as part of the rule of law:—‘He (the donor) had entire trust and confidence in her (the person who induced him to execute the deed of gift); and it may be stated that she was the person upon whose kindness and assistance he depended. She stood, therefore, in a relation to him which so much exposed him to her influence that she can maintain no deed of gift from him unless she can establish that it was the result of his own free will.’ Thus, in my opinion, the findings of the learned judge, supported as they are by admissible evidence, show that though it has not been affirmatively proved against the defendant that she exercised undue influence, yet she has not displaced the presumption of undue influence which arises in the circumstances of this case. Thus the transaction cannot stand by reason of the general policy of the law directed to preventing the possible abuse of relations of trust and confidence. In my opinion, the appeal should be dismissed. Dixon J at 134–138: The basis of the equitable jurisdiction to set aside an alienation of property on the ground of undue influence is the prevention of an unconscientious use of any special capacity or opportunity that may exist or arise of affecting the alienor’s will or freedom of judgment in reference to such a matter. The source of power to practise such a domination may be found in no antecedent relation but in a particular situation, or in the deliberate contrivance of the party. If this be so, facts must be proved showing that the transaction was the outcome of such an actual influence over the mind of the alienor that it cannot be considered his free act. But the parties may antecedently stand in a relation that gives to one an authority or influence over the other from the abuse of which it is proper that he should be protected. When they stand in such a relation, the party in the position of influence cannot maintain his beneficial title to property of substantial value made over to him by the other as a gift, unless he satisfies the court that he took no advantage of the donor, but that the gift was the independent and well-understood act of a man in a position to exercise a free judgment based on information as full as that of the donee. This burden is imposed upon one of the parties to certain well-known relations as soon as it appears that the relation existed and that he has obtained a substantial benefit from the other. A solicitor must thus justify the receipt of such a benefit from his client, a physician from his patient, a parent from his child, a guardian from his ward, and a man from the woman he has engaged to marry. The facts which must be proved in order to satisfy the court that the donor was freed from influence are, perhaps, not always the same in these different relationships, for the influence which grows out of them varies in kind and degree. But while in these and perhaps one or two other relationships their very nature imports influence, the doctrine which throws upon the recipient the burden of justifying the transaction is confined to no fixed category. It rests upon a principle. It applies whenever one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part. One occupying such a position falls under a duty in which fiduciary characteristics

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may be seen. It is his duty to use his position of influence in the interest of no one but the man who is governed by his judgment, gives him his dependence and entrusts him with his welfare. When he takes from that man a substantial gift of property, it is incumbent upon him to show that it cannot be ascribed to the inequality between them which must arise from his special position. He may be taken to possess a peculiar knowledge not only of the disposition itself but of the circumstances which should affect its validity; he has chosen to accept a benefit which may well proceed from an abuse of the authority conceded to him, or the confidence reposed in him; and the relations between him and the donor are so close as to make it difficult to disentangle the inducements which led to the transaction. These considerations combine with reasons of policy to supply a firm foundation for the presumption against a voluntary disposition in his favour. But, except in the well-recognized relations of influence, the circumstances relied upon to establish an antecedent relation between the parties of such a nature as to necessitate a justification of the transaction will be almost certain to cast upon it at least some measure of suspicion that active circumvention has been practised. This often will be so even when the case falls within the list of established relations of influence. Because of the presence of circumstances which might be regarded as presumptive proof of express influence, cases outside the list but nevertheless importing a special relationship of influence sometimes are treated as if they were not governed by the presumption but depended on an inference of fact. Scrutton LJ has remarked on the inclination of common law judges ‘to rely more on individual proof than on general presumption, while considering the nature of the relationship and the presence of independent advice as important, though not essential, matters to be considered on the question whether the transaction in question can be supported’ (Lancashire Loans, Ltd v Black). Further, when the transaction is not one of gift but of purchase or other contract, the matters affecting its validity are necessarily somewhat different. Adequacy of consideration becomes a material question. Instead of inquiring how the subordinate party came to confer a benefit, the court examines the propriety of what wears the appearance of a business dealing. These differences form an additional cause why cases which really illustrate the effect of a special relation of influence in raising a presumption of invalidity are often taken to decide that express influence which is undue should be inferred from the circumstances. The decision of the present appeal depends, I think, altogether on the question whether, before the transfer, Mrs Johnson, or possibly the Johnson family collectively, stood in a special relation of influence to Buttress. The suggested relation has not its exact counterpart in any decided case. But this is of little weight. The rule must not be narrowed; the risk must not be run of fettering the exercise of the jurisdiction by an enumeration of persons against whom it should be exercised; the relief stands upon a general principle applying to all the variety of relations in which dominion may be exercised by one person over another (per Lord Cottenham LC in Dent v Bennett, including a citation from the argument of Sir Samuel Romilly in Huguenin v Baseley). ‘It is sufficient for the application of the principle, if the parties meet under such circumstances as, in the particular transaction, to give the stronger party dominion over the weaker’ (per Lord Selborne LC, Earl of Aylesford v Morris). Moreover, not very distant analogies to the relationship suggested in the present

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case are to be found in Griffiths v Robins, Harvey v Mount, Longmate v Ledger, Clark v Malpas and Baker v Monk. The first and most important consideration affecting the question is the standard of intelligence, the equipment and character of Buttress. No doubt, once it is established that a relation of influence exists, the presumption arises independently of these matters. It has been said that it is an error to treat the subjects of capacity and of influence as if they were separate elements (Cf, per Christian LJ, Armstrong v Armstrong). But, in any case, in this peculiar case it is the man’s illiteracy, his ignorance of affairs, and his strangeness in disposition and manner that provide the foundation for the suggested relation. For many years he had leant upon his wife, and it is evident that, after her death, he was at a loss for guidance and support. He turned first to one and then to another for a prop. His affairs of business were in reality few and simple. But to him they seem to have loomed large. A claim that his deceased wife owed money for some cash orders threw him into a state of great excitement. The question whether he could obtain an old-age pension troubled him. The failure of the arrangement that his son and daughter-in-law should share his home was succeeded by negotiations with his stepson. In some of these matters he quoted the advice of Mrs Johnson. In making a will in favour of his stepson’s child, and then a second will in favour of Mrs Job [Buttress’s other sister], he showed how unstable his attachments were. It is possible that he regarded will-making as a means of securing that help and support which he so much needed. After his return from Melbourne, he began to place increasing reliance upon Mrs Johnson and the members of her family. Then the difficulties with his tenants developed. Whether Mrs Johnson’s advice on her visit to the premises or his own temperament was the cause of the trouble, it is clear that the attempt to get his tenants out became the source of great concern and difficulty to him. It was a matter with which he could not cope. He relied on the Johnsons to manage it for him. From the beginning of March his connection with them must have steadily grown. His will in favour of Mrs Johnson marks its progress. From 13th April 1931, although he did not live at Rose Bay, he must have spent the greater part of his time there. Little doubt can be felt that ultimately he came so to depend upon Mrs Johnson that a full relation of influence over him subsisted. It would be a mistake to lay much stress on the statements made in crossexamination by Mrs Johnson, her husband and her daughter as to the degree and kind of confidence the old man placed in Mrs Johnson. They are general statements expressed in terms dangerous in their ambiguity. But they do draw a picture of an ignorant labouring man depending in many essential matters upon one whom he regarded as having all the advantages of education and position and in whom he confided. This picture is borne out by the description of his manner of life and the accounts of what he said from time to time. But the question remains whether, at the time of the transfer, she stood in that or any less relation of influence. It is not, I think, illogical to consider as an additional piece of evidence bearing upon this question the significance of the transfer itself. Whether its purpose was to prevent an application under the Testator’s Family Maintenance and Guardianship of Infants Act, or simply to confer an immediate benefit upon Mrs Johnson in the confident expectation that she would look after him for the rest of his life, the fact that Buttress was prepared to make over to her his sole property shows how far his trust in her had

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advanced. Faith in her future beneficence towards him must not be confused with present dependence and subjection. But the condition in which his ignorance and illiteracy placed Buttress must be kept in view. That condition coupled with his temperament, his odd behaviour and his inferior mental faculties made the habitual guidance and support of some one almost essential to him. That person would be called upon either to tolerate or to manage him. At a later date, Mrs Johnson occupied this position. At an earlier date, Buttress was instinctively seeking someone who would undertake it. The evidence of the course of events in the short intervening period which includes the will and the transfer is meagre. But it shows beyond doubt that such matters of business as he had occasion to transact were managed by, or under the supervision of, Mrs Johnson. It shows that he was constantly in her company and that he relied upon her advice and depended on her kindness. I think that when the circumstances of the case are considered with the character and capacity of Buttress they lead to the conclusion that an antecedent relation of influence existed which throws upon Mrs Johnson the burden of justifying the transfer by showing that it was the result of the free exercise of the donor’s independent will. This, in my opinion, she has quite failed to do. Her appeal should, therefore, be dismissed.

The key facts in Johnson v Buttress that led to a finding of undue influence were: (i) the degree of inequality between the donor and the recipient of the gift; and (ii) the failure of Johnson to persuade Buttress to seek independent advice. The inequality in the relationship can be said to have been derived from Buttress’s illiteracy, his inferior economic position relative to Johnson, and  his idiosyncratic personality. At the time that the gift was made,  the evidence suggests that Buttress himself proposed The key facts in making it in favour of Johnson. But this alone did not prove that Johnson v Buttress that led to a finding the gift was made as a free exercise of Buttress’s will. In order to of undue influence prove a free exercise of will, the donee would need to show that were: (i) the degree of the  donor had sought independent advice. This would be inequality between the particularly important where the gift in question was quite donor and the recipient of the gift; and (ii) the valuable. Johnson did not advise Buttress to seek independent failure of Johnson to advice. Accordingly, once the relationship of trust and confidence persuade Buttress to seek between the parties was established by the plaintiff, she was unable independent advice. to rebut the presumption of undue influence. review questions 1 What is undue influence? 2 What are the different types of undue influence? How do they differ from each other? 3 Why was undue influence found to exist in Johnson v Buttress?

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• 19.2 Specific relationships of influence

32

19.2.1  Parent and child Where a child or even a young adult has made a gift in favour of their parents, the courts will look closely to see whether any undue influence has been exercised. The basis for the presumption in this context is that the parent enjoys a high degree of influence over the child. The parent must thus show that the child received independent advice and freely entered into the transaction. In Lancashire Loans Ltd v Black 33 a daughter married at 18 and lived thereafter with her husband. Her mother came under financial strain due to her extravagant lifestyle and the daughter signed a joint promissory note for £775 at 85 per cent interest. The daughter also provided other funds for the mother’s purposes. The daughter signed documents at her mother’s request but did not fully understand what she was signing. The daughter received advice from a solicitor who was acting for both her mother and the moneylenders. The Court held that the transaction must be set aside. In the view of the Court, though the daughter had married, she was still effectively not emancipated—that is to say, she was not fully independent of parental influence—for the purposes of equity. The legal advice that the daughter received from the solicitor did not amount to independent advice, given the conflict of interest that existed with regard to his role as adviser to both the mother and the moneylenders.

19.2.2  Guardian and ward In Powell v Powell 34 the plaintiff succeeded in having set aside a gift that she had made to her step-mother, the defendant, under the influence of both her step-mother and her solicitor. When the plaintiff turned twenty-one, the defendant produced a document in which the plaintiff ’s late father had expressed a desire that the plaintiff should share her property equally with the defendant’s two children. The plaintiff then executed a settlement giving a two-third interest of the relevant income to the defendant’s children. The Court of Chancery held that even though there was independent advice, this was insufficient as the solicitor had acted for both parties and the plaintiff was not fully emancipated.

Powell v Powell [1900] 1 Ch 243 Lord Farwell at 245–248: It has been for many years well settled that no one standing in a fiduciary relation to another can retain a gift made to him by that other, if the latter impeaches the gift within a reasonable time, unless the donee can prove that the donor had independent advice, or that the fiduciary relation had ceased for so long that the donor was under no control or

32 Note that the other recognised relationships of influence—doctor and patient, solicitor and client, and trustee and beneficiary—are are regulated by specific statutory schemes. 33 [1934] 1 KB 380. 34 [1900] 1 Ch 243.

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influence whatever. The donee must shew (and the onus is on him) that the donor either was emancipated, or was placed, by the possession of independent advice, in a position equivalent to emancipation. A man of mature age and experience can make a gift to his father or mother because he stands free of all overriding influence except such as may spring from what I may call filial piety; but a young person (male or female) just of age requires the intervention of an independent mind and will, acting on his or her behalf and interest solely, in order to put him or her on an equality with the maturer donor who is capable of taking care of himself. It is sufficient to refer to Archer v Hudson, Wright v Vanderplank, and the cases collected in the notes to Huguenin v Baseley. On the authorities it appears to me not to be a question of actual pressure, or deception, or undue advantage, or want of knowledge of the effect of the deed. The mere existence of the fiduciary relation raises the presumption, and must be rebutted by the donee in the way that I have just stated. Further, it is not sufficient that the donor should have an independent adviser unless he acts on his advice. If this were not so, the same influence that produced the desire to make the settlement would produce disregard of the advice to refrain from executing it, and so defeat the rule; but the stronger the influence the greater the need of protection. The real meaning of the rule is that the youth, being in the eye of the Court unfit to deal irrevocably with his parent or guardian in the matter of a gift of this kind, must appoint some independent adviser to act for him. It is the action resulting from the advice, not action against the advice, that binds the donor. Further, in my judgment, the donee does not discharge this burden by shewing that his own solicitor acted for both parties. A solicitor who accepts such a post puts himself in a false position; if he acts for both, he owes a duty to both, to do the best that he can for both. But the Court requires that the donor should be placed in as good a position as if he were in fact emancipated. The solicitor, therefore, must be independent of the donee in fact, and not merely in name, and this he cannot be if he is solicitor for both. Again, his duty is to protect the donor against himself, and not merely against the personal influence of the donee, in the particular transaction. The necessity for the protection arises in great measure from the natural bent of mind and will resulting from the relation (e.g.) of parent and child during the impressionable period of youth, and the solicitor does not discharge his duty by satisfying himself simply that the donor understands and wishes to carry out the particular transaction. He must also satisfy himself that the gift is one that it is right and proper for the donor to make under all the circumstances; and if he is not so satisfied, his duty is to advise his client not to go on with the transaction, and to refuse to act further for him if he persists. He certainly ought not to go on if he disapproves, simply because, as was suggested in this case, he thinks that some one else will do the work if he does not. The plea that offences must needs come does not exonerate the man by whom the offence cometh. The more foolish and wilful the conduct of the youthful donor appears to the solicitor, the less should he lend the sanction of his countenance to the gift. If it is said that this would prevent some persons who are of age from doing what they choose with their own property, the answer is that they can deal with it, but not irrevocably. It is not the policy of the law to allow the parent to take advantage of his position without giving the child an opportunity of changing his mind within a reasonable time when he has acquired

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experience and wisdom. The donor is benefited, not injured by this; and the donee cannot be heard to say that it is an unjust rule, because, ex hypothesi, he does not come into court with clean hands, and has no equity. I adopt Bowen LJ’s words in Allcard v Skinner, which express better than I can the views I wish to adopt: ‘This is not a limitation placed on the action of the donor; it is a fetter placed upon the conscience of the recipient of the gift, and one which arises out of public policy and fair play.’ Further, the revelation to the child of the memorandum by her dead father was in itself an exercise of moral pressure of the strongest kind. The father signed the document six years before his death, when he was apparently annoyed with his daughter, and it may not have represented his last wishes. But I feel bound to say that in my judgment such a memorandum is an improper attempt to exercise posthumous pressure, and is most obnoxious to the rule of the Court. It is an appeal of a nature most difficult for a young person just twenty-one to resist, especially if the child is told at the same time (as in the present case) that she is bound in honour to obey, and will be regarded as a social pariah if she does not. It seems clear from a reading of the decision in Powell v Powell, particularly with respect of the final paragraph, that Lord Farwell was influenced in his reasoning by the bad faith conduct of the defendant; that is, this was not simply a matter of taking advantage of a superior position— the defendant exerted moral pressure that appeared calculated to push the plaintiff towards making an improvident decision.

19.2.3  Religious adviser and disciple The courts have consistently recognised that a spiritual or faux spiritual relationship can result in a situation where the religious leader or order is able to place significant pressure upon the follower. There are several older cases that reflect this view, such as Allcard v Skinner,35 Nottidge v Prince,36 Lyon v Home37 and Morley v Loughnan.38 More recent examples of courts finding undue influence in matters pertaining to religious orders and spiritual advisers include Quek v Beggs,39 Hartigan v International Society for Krishna Consciousness Inc,40 Khan v Khan41 and McCulloch v Fern.42 In Hartigan a woman became a devotee of the Krishna movement and made several gifts of property and money to the movement. After she ceased to be a devotee of the movement, she sought return of some of the money. Despite a finding by Bryson J that ‘there was nothing in the nature of a deliberate attempt by the defendant or by The courts have consistently recognised that a spiritual or faux spiritual relationship can result in a situation where the religious leader or order is able to place significant pressure upon the follower.

35 36 37 38 39 40 41 42

(1887) 36 Ch D 145. (1860) 66 ER 103. (1868) LR 6 Eq 655. [1893] 1 Ch 736. (1990) 5 BPR 11,761. [2002] NSWSC 810. (2004) 62 NSWLR 229. [2001] NSWSC 406.

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anyone in the Krishna Consciousness Movement to get the better of the plaintiff’,43 a finding of undue influence was still made. Hartigan v International Society for Krishna Consciousness Incorporated [2002] NSWSC 810 Bryson J at [27]–[37]: There is no possible view of the plaintiff’s case, or of the facts, in which she made the gift with anything less than a full and complete understanding that she was giving away the Rosebery Creek Farm and parting with complete ownership of it, or that at the time of executing the document she fully wished and intended that an effective gift would take place. That is the common characteristic of claims to set aside gifts on the ground of undue influence; if there had been a lack of understanding of the nature of the transaction, or if the transaction could be attacked or set aside on the ground that the donor had not understood the true nature of the transaction, or had been misled or defrauded, there would be no need or ground for this form of equitable relief. It is an essential part of a claim to set aside a gift on the ground of under influence that there should have been a fully effectual and intended gift; in an allusion to the words of Lord Eldon LC in Huguenin v Baseley (1807) 14 Vesey Junior 273 at 300 [1807] EngR 397; 33 ER 526 at 536, the question is not whether the intention existed, but how it was produced. In the application of this basic principle to gifts to religious institutions or religious advisers, the court does not act only for the restraint of deceptions and of intended exploitation of religious enthusiasms or beliefs; if there has been behaviour of those kinds the court will set aside gifts which the behaviour has produced, but the grounds of the court’s intervention extend well beyond such behaviour. The court’s approach, in cases of gifts influenced by religious advisers or religious beliefs, is more exacting than ordinary community standards and goes well beyond overcoming deliberate exploitation. It may be unconscionable to accept and rely on a gift which was fully intended and understood by the donor and originated in the donor’s own mind, where the intention to make the gift was produced by religious belief. Characteristically persons claiming this relief have made gross errors of judgment, obvious to any objective outsider. Finally, an owner of property is entitled to dispose of it, even to dispose of it in a very improvident way, but the court requires to be satisfied that the transaction is not unconscionable after examining the events and circumstances closely. … Many undue influence cases have involved, in greater or less degree, some religious influence on the decision of the donor, usually involvement of a clergyman or spiritual adviser as donee or otherwise in the events leading to the donation to a religious institution or other person connected to the spiritual adviser. In Huguenin v Baseley the donor actually had an active adviser; he was a clergyman although that fact was not given great prominence by Lord Eldon and the donations were made to him and persons connected to him but not to religious institutions. A closer consideration of the interaction of religious teaching and

43 [2002] NSWSC 810, [37].

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undue influence was given in Allcard v Skinner (1887) 36 ChD 145. In Quek v Beggs (1990) 5 BPR 11761 McLelland J reviewed the legal principles which were applied at 11764 to 11766, in a passage which has often been referred to in this Division. … In my respectful view the operation of the principles and the basis of the equitable jurisdiction are clearly shown in Johnson v Buttress [1936] HCA 41; (1936) 56 CLR 113 in the judgment of Dixon J at 134–136. The passage at 134–135 shows that there is no need for the relationship to fall into any highly defined category. Dixon J said ‘[The doctrine] applies whenever one party occupies or assumes towards another a position naturally involving an ascendency or influence over that other, or a dependence or trust on his part. One occupying such a position falls under a duty in which fiduciary characteristics may be seen. It is his duty to use his position of influence in the interest of no-one but the man who is governed by his judgment, gives him his dependence, and entrusts him with his welfare. When he takes from that man a substantial gift of property, it is incumbent upon him to show that it cannot be ascribed to the inequality between them which must arise from his special position.’ Although Dixon J spoke in terms of duty, the reference was not in my understanding to a duty imposed by law but to what must be done if it is to be established that the transaction is to be treated as effectual. The matter was put in this way in Allcard v Skinner by Cotton LJ at 171. Speaking of cases where a presumption of undue influence has been raised his Lordship said ‘the Court interferes, not on the ground that any wrongful act has in fact been committed by the donee, but on the ground of public policy, and to prevent the relations which existed between the parties and the influence arising therefrom being abused.’ This passage was quoted with approval by Williams J in Bank of NSW v Rogers [1941] HCA 9; (1941) 65 CLR 42 at 85. To a similar effect is a passage in the judgment of Bowen LJ in Allcard at 190: ‘This is not a limitation placed upon the action of the donor; it is a fetter placed upon the conscience of the recipient of the gift, and one which arises out of public policy and fair play.’ The focus of attention on public policy and prevention of abuse is important for understanding why the law is as exacting as it is, which is not well understood by focussing on the position of the donor, who in the nature of things has behaved foolishly and has brought about a transaction against his own interests. In the same judgment at 183 Bowen LJ said ‘The undue influence which Courts of Equity endeavour to defeat is the undue influence of one person over another; not the influence of enthusiasm on the enthusiast who is carried away by it, unless indeed such enthusiasm is itself the result of external undue influence. But the influence of one mind over another is very subtle, and of all the influences religious influence is the most dangerous and the most powerful, and to counteract it Courts of Equity have gone very far. They have not shrunk from setting aside gifts made to persons in a position to exercise undue influence over the donors, although there has been no proof of the actual exercise of such influence; and the courts have done this on the avowed ground of the necessity of going this length in order to protect persons on the exercise of such influence under circumstances which render proof of it impossible. The Courts have required proof of its non-exercise, and, failing that proof, have set aside gifts otherwise unimpeachable.’

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This passage has been repeatedly referred to with approval; see Quek v Beggs at 11,765 and (in a very different context) Ryan v The Queen [2001] HCA 21; (2001) 75 ALJR 815 at 827 (Gummow J). … It is not possible to state in an exhaustive or even in an altogether clear way what the court will require as indications sufficient for validity, because the court’s conclusion is adduced from a detailed examination of the facts of each case. On the need for precise examination of the particular facts see Jenyns v The Public Curator (Queensland) [1953] HCA 2; (1953) 90 CLR 113 at 118–119. Although it should not be said that independent advice is essential for validity, it would not often happen that an improvident donation for religious purposes would be upheld unless some person who was altogether independent of the donee and who had a full understanding of the donor’s circumstances had actually succeeded in bringing the donor’s mind to bear on the implications of the gift for the donor’s own economic position and welfare. It is an enormity when a person with the means to solve such a basic problem in life as the need for housing for herself and her children gives those means away to the religious institution of a religion in which she has received instruction, and leaves herself and her children unprovided for. That is an entire departure from ordinary behaviour and from acts of benevolence usually encountered, and the enormity calls for close examination before it is accepted that the gift is effective. The enormity of the gift is particularly great in the plaintiff ’s circumstances where she had small children whose housing she was giving up, and she had no other resources which were significant in the context of providing for her housing need, or any other long-term need, and she received no formally expressed or binding commitment, from the defendant or anyone else, to make any countervailing provision for her or for her children. It does not often happen, to my observation, in the case law to which I was referred that a woman gives up all her capital assets and receives no countervailing commitment; the plaintiffs in Huguenin v Baseley and in Allcard v Skinner had other capital resources to rely on, and in the plaintiff ’s circumstances the donation which she now challenges was a far greater enormity. On views I have formed about the facts, there was nothing in the nature of a deliberate attempt by the defendant or by anyone in the Krishna Consciousness Movement to get the better of the plaintiff, to overbear her or deceive her, or to deprive her of the opportunity of making up her own mind. Nobody was insidiously working to make the plaintiff behave contrary to her own interests. At the same time however it should be observed, as a dominating fact in all considerations, that the extreme improvidence of the gift would have been obvious to any reasonable observer who knew anything of her circumstances and was, I am quite satisfied, obvious to the officers of the movement who conducted the defendant’s side of the transaction. When she signed the document the plaintiff did not have any other significant capital resource; nor did her husband. They had two small children, the elder aged three, and their third child was born later that month on 24 December 1988. They may have had some relatively small amount of money in a bank account, but they had no other significant capital resource which could meet the needs of a young family for housing, or contribute significantly towards doing so, even to the extent of a deposit. They owned a car. They owned some farm animals, and

[ 383 ]

[ 384 ]

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some household effects; but when she gave up ownership of the Rosebery Creek Farm she lost her opportunity to care for the farm animals. She had no other significant financial resources. The plaintiff and her husband had lived on the Rosebery Creek Farm for less than six months and did not have any productive farming activity in hand, and neither had any employment. I see no reason to suppose that the resources of them both in savings, earnings, proceeds of sale of properties in California or in Queensland, or from any other source, produced any large balance not explained by the acquisition of the Rosebery Creek property, bearing in mind their journeys, their many moves and the absence of any sign of productive employment of Mr Hartigan since he says he lost his employment and opportunity to earn commissions as a strategic metals trader after the Stock Market Crash of October 1987. The idea that the plaintiff was in 1989 or ever was a wealthy woman is quite wrong. She had not received any significant inheritance, and later received one small sum of about A$1000 from an uncle and A$1000 from an aunt. In practical terms the plaintiff was completely impoverished by the gift and placed in a situation where she was completely dependent on whatever arrangements could be made within the Krishna Consciousness Movement for housing herself, her husband and her children. The gift could not be explained by ordinary human motivations of generosity, charity or religious feeling, and was so extraordinarily improvident as itself to call for consideration of the circumstances and state of mind which led the plaintiff to decide to make it. In Hartigan, despite the fact that the plaintiff fully understood the effect of the transaction and its ramifications for herself and her family, the transaction was still set aside. In particular, Bryson  J seems to focus on the fact that the extremely improvident nature of the transaction would have been obvious to an objective bystander. Further, though he does not use this exact language, Bryson J appears to allocate a duty of care to the leaders of the religious movement to prevent a transaction that they knew would be extremely improvident. The case of Khan v Khan,44 which involves the influence of a religious leader over an adherent, also demonstrates the proposition that undue influence can be procured by a third party who derives no direct benefit from the impugned transaction. In Khan, a mother (Mrs Sadiq) and her son sought to sell their house to a married couple (Shikandar and Farisha). All the parties were of the Muslim faith and shared the surname, Khan, despite not being related. Shikandar and Farisha moved into the house before the sale and the relations between the couple and Mrs Sadiq  eventually soured to the point where the The case of Khan v latter refused to sell the house to the former. Eventually, after much Khan demonstrates the dispute over the price, a meeting was held at Mrs Sadiq’s house. proposition that undue Shikandar and Farisha brought along a Mufti (Mufti Naeim), a influence can be procured by a third party who religious adviser, to assist with the negotiations. The Mufti advised derives no direct benefit Mrs Sadiq that if she sold her house to Shikandar and Farisha for from the impugned $495 000 (which was significantly less than the house was worth) transaction. she would be blessed. Mrs Sadiq’s sons also advised her to sell.

44 [2004] 62 NSWLR 229.

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At this meeting Mrs Sadiq signed the contract of sale. She later recanted and when Shikandar and Farisha sued for specific performance, she counter-claimed for undue influence on the basis that the Mufti’s presence and advice were designed to pressure her into selling, given his status in the Muslim faith. Khan v Khan (2004) 62 NSWLR 229 Barrett J at 234–242: It seems clear enough that the equitable principles concerning relief against undue influence upon which Mrs Sadiq relies are those stated as follows at paragraph 15–150 of the fourth edition (2002) of Meagher, Gummow and Lehane’s ‘Equity Doctrines and Remedies’ (by Meagher, Heydon and Leeming), under the heading ‘Third parties’: The equitable doctrine extends to cases where the party exerting the undue influence was not the direct recipient of the disponor’s property. It extends to set aside transactions involving third parties in the following capacities: (a) where Y under the influence of X disposes of his property to Z; it does not appear necessary that the third party Z act in concert with X provided, presumably, he is not a purchaser from Y without notice of X’s influence …

19. This poses, in the present case, the question whether Mrs Sadiq (Y) was relevantly under the influence of Mufti Naiem (X) when she agreed, by the memorandum [the contract of sale] of 30 September 2003, to sell to Shikandar and Farisha (Z). The relevant influence is not confined to one involving selfishness or any desire for personal advantage on the part of the person exerting it: see, for example, Bullock v Lloyds Bank Ltd [1995] 1 Ch 327 at p. 323. I record at once my very clear finding that Mufti Naiem, in participating as he did, was not in any way whatsoever actuated by considerations of self-interest. His sole concern, as the Imam of the mosque, was the proper and legitimate one of providing spiritual guidance and counsel to all present at the meeting. 20. A conventional ‘undue influence’ case was described by Mahoney JA in Stivactas v Michaeletos (No 2) [1994] ANZ Conv R 242 as follows: In such a case, the evidence is ordinarily directed to establishing three things: that the defendant had influence over the plaintiff; that he exercised that influence so that what was done was, to the relevant extent, the result of that influence rather than the will of the plaintiff; and that his position or otherwise the circumstances were such that the influence, and the exercise of it, were ‘undue’ to the extent that equity should intervene.

His Honour referred to Watkins v Coombes [1922] HCA 3; (1922) 30 CLR 180 at pp.193–4 and Johnson v Buttress [1936] HCA 41; (1936) 56 CLR 113 at p. 119 and pp.134–6 in this connection. 21. In the kind of ‘third party’ case referred to in the extract I have quoted from the fourth edition of Meagher, Gummow and Lehane, the ingredients are somewhat different. The evidence must, in a case of that kind, show that the party designated X had influence over the party designated Y; that X exercised that influence so that what Y did was the result of the influence rather than Y’s will; and that the party designated

[ 385 ]

[ 386 ]

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Z unconscientiously derived a benefit from the conduct of Y knowing that that conduct was a result of the influence of X rather than Y’s will. If the position of Z is characterised by analogy with liability, it involves the kind of secondary liability based on knowing participation discussed in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] UKPC 4; [1995] 2 AC 378. The third party recipient of benefit (Z), who knowingly takes with notice of the undue influence exerted upon the disponor (Y) by the person having ascendancy (X), takes unfair or unconscientious advantage of a situation in which a force against which equity will grant relief is known by him or her to be at work. … The thing that makes the influence of spiritual advisers ‘undue’ and attracts equitable intervention was described by Lindley LJ in Allcard v Skinner (1887) LR 36 ChD 145 at p. 183: But the influence of one mind over another is very subtle, and of all influences religious influence is the most dangerous and the most powerful, and to counteract it Courts of Equity have gone very far. They have not shrunk from setting aside gifts made to persons in a position to exercise undue influence over the donors, although that had been no proof of the actual exercise of such influence, and the Courts have done this on the avowed ground of the necessity of going this length in order to protect persons from the exercise of such influence under circumstances which render proof of it impossible.

31. The relationship of spiritual adviser and follower is, of course, one of those in which undue influence is presumed. But in the present case there is no reliance on any presumption. The case was argued on the basis that actual undue influence had been brought to bear and it is that proposition that I must explore. … As I have said, Mufti Naiem was in no sense a beneficiary of the undoubted influence he brought to bear upon Mrs Sadiq’s will. He was doing no more than advise all present on matters of religious duty. Shikandar and Farisha no doubt approved Mufti Naiem’s rulings. But they went further. It was Shikandar who was not content with Mrs Sadiq’s merely signing the form of contract. He realised that that document would have to go back to the solicitor so that an exchange of contracts and associated formalities could take place. It was for that reason that Shikandar asked that the memorandum be prepared and signed on the spot. He wanted to be sure that Mrs Sadiq, having succumbed to Mufti Naiem’s influence, did not escape from what he regarded as a concluded bargain. 41. This conduct of Shikandar (which I think should be imputed also to Farisha) is sufficient, to my mind, to make reliance by the plaintiffs upon the written memorandum unconscientious in a way that equity will not countenance. The case is one in which Mrs  Sadiq, under the religious influence of Mufti Naiem, contracted to dispose of property to Shikandar and Farisha who had notice of that influence and the effect of it upon Mrs Sadiq’s will. They were present when Mufti Naiem told Mrs Sadiq where her religious duty lay. They have not attempted to show that they did not take advantage of Mrs Sadiq’s obedience to Mufti Naiem. Nor, on the evidence, could they do so. The bargain under which they received a benefit from Mrs Sadiq is therefore one which equity regards as unconscionable and will not allow to be enforced against Mrs Sadiq.

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The immediacy with which Shikandar took advantage of the influence that Mufti Naiem had over Mrs Sadiq appears to have swayed Barrett J towards a finding of undue influence. By all accounts, Mrs Sadiq was a strong-minded woman and an examination of the facts will evince that she was quite effective in negotiating the price of the house up from $480 000 to $495 000, despite the fact that there were minor defects associated with the house owing to poor workmanship. In fact, Mrs Sadiq appears to have succeeded in having Shikandar agree to bear the cost of repairs after he initially sought a reduction in the sale price of $15 000 at a time when the agreed price was $480 000. Though Khan was litigated as a case of actual undue influence, and thus no overt reliance was placed on the issue of presumed undue influence, the decision does demonstrate the caution that the courts display when religious leaders are associated with contracts or gifts. In this particular case, no ill-motive was imputed towards Mufti Naeim or even suggested by the parties, but his presence and advice, though perhaps intended to be conciliatory, raised concerns on the part of the Court. That said, it may well have been the case that if Shikandar had delayed upon the contract until the next day or some days afterwards, at a point when the Mufti’s influence was not so immediate, then no finding of undue influence would have been made.

• 19.3 Rebutting the presumption 19.3.1  Independent advice The procurement of independent advice is important in rebutting The procurement of the presumption of undue influence. The stronger party bears the independent advice is burden of proof to demonstrate to the court that the affected important in rebutting the party has in fact made an independent and fully informed presumption of undue influence. The stronger decision.45 This is a positive burden of proof, and the mere party bears the burden of absence of proof as to undue influence does not discharge the proof to demonstrate to burden. Where the presumption of undue influence has arisen, it the court that the affected party has in fact made is clear that the existence of independent advice is fundamental to an independent and fully rebutting it. There is some disagreement, though, as to whether informed decision. that independent advice actually has to be followed. While independent advice is clearly helpful with regard to rebutting the presumption, it is not strictly required under the law. Isaacs J in Haskew v Equity Trustees, Executors and Agency Co Ltd 46 pointed out that ‘there is no rule of law absolutely requiring independent advice’. Similarly, Latham CJ in Johnson v Buttress47 stated that it ‘may not be necessary in all cases to show that the donor received competent independent advice’; and the Privy Council in Inche Noriah v Shaik Allie Bin Omar48 made a similar observation. In Inche Noriah an elderly Malay widow made a gift of property to her nephew. The gift comprised almost all of her property. The relationship between the nephew and his aunt was one that gave rise to

45 Union Fidelity Trustee Co of Australia v Gibson [1971] VR 573; Westmelton (Vic) Pty Ltd v Archer and Schulman [1982] VR 305. 46 (1919) 27 CLR 231, 234–235. 47 (1936) 56 CLR 113, 119. 48 [1929] AC 127, 135.

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the presumption of undue influence. The aunt received advice from a solicitor, but the solicitor was unaware that the gift amounted to almost all of her property. The Privy Council held that as the advice was not fully informed, the presumption was not rebutted and the gift was set aside. It does appear to be possible that where the advice is fully informed, and where it has been received by the plaintiff but not acted upon, that the impugned transaction might still stand. This proposition is consistent with that put forward by the court in Kali Bakhsh Singh v Ram Gopal Singh49 that a transaction might stand where it can be shown that independent advice would have been disregarded.

19.3.2  Free will If the circumstances show that the transaction was the product of free will and not of the exertion of any undue pressure, then the claim of undue influence will be rejected. In R v Attorney-General for England and Wales50 a soldier, ‘R’, who served in the British SAS claimed that a confidentiality document that he had signed, pertaining to his service in the Gulf War, was the product of the undue influence that his superior officers exerted over him. The military had sought confidentiality agreements after the publication of books by former SAS members had caused disquiet among past and serving SAS soldiers. R had signed the confidentiality agreement after being told by his commanding officer that if he did not sign, he would be returned to his former regiment and would receive less pay. R signed the confidentiality agreement in order to remain in the SAS. The High Court of New Zealand found in R’s favour; however both the Court of Appeal and the Privy Council ruled against him. If the circumstances show that the transaction was the product of free will and not of the exertion of any undue pressure, then the claim of undue influence will be rejected.

• 19.4 The principle in Yerkey v Jones In the past, the courts have held that where security is provided for a loan by a third party who is emotionally dependent upon the borrower, the transaction is liable to be set aside for undue influence.51 The basic principle in Yerkey v Jones52 is that where the borrower has engaged in undue influence upon the third party, the lender is also tainted by association. The consequence of this decision is to effectively place a duty upon the lender to ensure that the third party’s participation in the transaction is fully free and fully informed. It is less clear whether the lender’s efforts to secure free and informed consent will in fact vitiate any undue pressure that the borrower has placed upon the third party. In Yerkey v Jones, a husband secured his wife’s signature as security for a loan. The wife later sought to have that transaction set aside. Dixon J noted that while the relationship of husband The consequence of the decision in Yerkey v Jones is to effectively place a duty upon the lender to ensure that the third party’s participation in the transaction is fully free and fully informed.

49 50 51 52

(1913) 30 TLR 138. [2004] 2 NZLR 577. Bank of Victoria Ltd v Mueller [1925] VLR 642; Yerkey v Jones (1939) 63 CLR 649. (1939) 63 CLR 649.

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and wife did not in and of itself raise a presumption of undue influence, it ‘has never been divested completely of what may be called equitable presumptions of an invalidating tendency’.53 Such a statement would surely be outrageously controversial were it to be made today by a justice of the High Court. The precedent value of Dixon J’s judgment in Yerkey v Jones was questioned by the New South Wales Supreme Court of Appeal in Garcia v National Australia Bank, 54 but the High Court followed Dixon J’s approach.55 In Garcia a married couple executed a mortgage over their home with the National Australia Bank. The nature of the mortgage was such that it covered not only those monies that were owed under the mortgage itself, but any future guarantees. The husband sought further guarantees for loans from the bank in order to support his business. The wife signed four guarantees. The bank did not explain the nature of the loans or the guarantees to the wife. After the couple divorced, the wife sought to have the mortgage set aside. A majority of the High Court56 followed the approach of Dixon J in Yerkey v Jones and found that there had been no actual undue influence by the husband over the wife. Nonetheless, the High Court set aside the guarantees provided by the wife to the bank on the basis that it was unconscionable for the bank to retain the benefit of the transactions in circumstances where the transactions had not been explained to the wife and where she did not stand to benefit.57 The decision in Garcia excited some public controversy and academic commentary.58 The majority of the High Court was certainly sensitive to the matters of public policy raised by Garcia insofar as they related to the equality of women, but was at pains to point out that the principle espoused by Dixon J, and applied by the majority, related to the failure of the creditor to seek the informed consent of the wife. In the extract below, the majority sets out its analysis of the principle in Yerkey v Jones and its application in Garcia. Garcia v National Australia Bank (1998) 194 CLR 395 Gaudron, McHugh, Gummow and Hayne JJ at 403–407: The Court of Appeal held that it was not bound to follow Yerkey v Jones. Sheller JA concluded that what had been said to be the principle in Yerkey v Jones is ‘a principle to which one judge only adhered’, namely Dixon J, and ‘at its heart … is based upon general assumptions about the capacity of married women rather than upon evidence of the circumstances of the particular case’. He identified in some recent cases an expression of ‘doubts about a principle founded on the assumption that a married woman is ipso facto under a special disadvantage in any transaction involving her husband and that the husband is in this context the stronger party.’ Accordingly, Sheller JA concluded that ‘the so-called principle in Yerkey v Jones should no longer be applied in New South Wales.’

53 Ibid, 675. 54 (1996) 139 NSWLR 577, 598. 55 Garcia v National Australia Bank Ltd (1998) 194 CLR 395. 56 Ibid. 57 Garcia is primarily a case of unconscionability; however, it is extracted in this chapter in relation to the Court’s discussion of undue influence. 58 See A Lyons, ‘Garcia v NAB: Who is Within its Scope and What Must They be Told?’ (2004) 78 ALJ 379.

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We consider the better view to be that the reasons for decision of Dixon J in Yerkey v Jones were not significantly different from the reasons of the other members of the Court. It should be emphasised that it is for this Court alone to determine whether one of its previous decisions is to be departed from or overruled. However, we do not base our decision upon some confined analysis of the case intended to identify its ratio decidendi. Rather, we consider that the principles spoken of by Dixon J in Yerkey v Jones are simply particular applications of accepted equitable principles which have as much application today as they did then. Yerkey v Jones was said, in argument, to reflect outdated views of society generally and the role of women in society in particular. It was submitted that changes in Australian society since 1939, when Yerkey v Jones was decided, require that equitable rules move on to meet these changed circumstances. That Australian society, and particularly the role of women in that society, has changed in the last six decades is undoubted. But some things are unchanged. There is still a significant number of women in Australia in relationships which are, for many and varied reasons, marked by disparities of economic and other power between the parties. However, the rationale of Yerkey v Jones is not to be found in notions based on the subservience or inferior economic position of women. Nor is it based on their vulnerability to exploitation because of their emotional involvement, save to the extent that the case was concerned with actual undue influence. So far as Yerkey v Jones proceeded on the basis of the earlier decision of Cussen J in The Bank of Victoria Ltd v Mueller, it is based on trust and confidence, in the ordinary sense of those words, between marriage partners. The marriage relationship is such that one, often the woman, may well leave many, perhaps all, business judgments to the other spouse. In that kind of relationship, business decisions may be made with little consultation between the parties and with only the most abbreviated explanation of their purport or effect. Sometimes, with not the slightest hint of bad faith, the explanation of a particular transaction given by one to the other will be imperfect and incomplete, if not simply wrong. That that is so is not always attributable to intended deception, to any imbalance of power between the parties, or, even, the vulnerability of one to exploitation because of emotional involvement. It is, at its core, often a reflection of no more or less than the trust and confidence each has in the other. It may be that the principles applied in Yerkey v Jones will find application to other relationships more common now than was the case in 1939—to long term and publicly declared relationships short of marriage between members of the same or of opposite sex—but that is not a question that falls for decision in this case. It may be that those principles will find application where the husband acts as surety for the wife but again that is not a problem that falls for decision here. This case concerns a husband and wife and it is to that relationship that the present decision relates, just as it is concerned only with the circumstance of the wife acting as surety for her husband. The resolution of questions arising in the context of other relationships may well require consideration of other issues. Thus to take one example, if cohabitation is taken as a criterion, what should a lender

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Undue influence

know or seek to find out about the nature of the relationship between the parties? But those issues did not arise and were not debated on the hearing of this appeal. In his reasons for decision in Yerkey v Jones, Dixon J dealt with at least two kinds of circumstances: the first in which there is actual undue influence by a husband over a wife and the second, that dealt with in Mueller, in which there is no undue influence but there is a failure to explain adequately and accurately the suretyship transaction which the husband seeks to have the wife enter for the immediate economic benefit not of the wife but of the husband, or the circumstances in which her liability may arise. The former kind of case is one concerning what today is seen as an imbalance of power. In point of legal principle, however, it is actual undue influence in that the wife, lacking economic or other power, is overborne by her husband and goes surety for her husband’s debts when she does not bring a free mind and will to that decision. The latter case is not so much concerned with imbalances of power as with lack of proper information about the purport and effect of the transaction. The present appeal concerns circumstances of the latter kind rather than the former. In Yerkey v Jones Dixon J said: But it is clearly necessary to distinguish between, on the one hand, cases in which a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband’s surety by the exertion by him upon her of undue influence, affirmatively established, and on the other hand, cases where she does not understand the effect of the document or the nature of the transaction of suretyship. In the former case the fact that the creditor, on the occasion, for example, of the actual execution of the instrument, deals directly with the wife and explains the effect of the document to her will not protect him. Nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice. If the creditor has left it to the husband to obtain his wife’s consent to become surety and no more is done independently of the husband than to ascertain that she understands what she is doing, then, if it turns out that she is in fact acting under the undue influence of her husband, it seems that the transaction will be voidable at her instance as against the creditor.

Of the second of the two cases that we have referred to earlier, Dixon J said: In the second case, that where the wife agrees to become surety at the instance of her husband though she does not understand the effect of the document or the nature of the transaction, her failure to do so may be the result of the husband’s actually misleading her, but in any case it could hardly occur without some impropriety on his part even if that impropriety consisted only in his neglect to inform her of the exact nature of that to which she is willing blindly, ignorantly or mistakenly to assent. But, where the substantial or only ground for impeaching the instrument is misunderstanding or want of understanding of its contents or effect, the amount of reliance placed by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance. If the creditor takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp

[ 391 ]

[ 392 ]

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some material part of the document, or, indeed, the significance of what she is doing, cannot, I think, in itself give her an equity to set it aside, notwithstanding that at an earlier stage the creditor relied upon her husband to obtain her consent to enter into the obligation of surety. The creditor may have done enough by superintending himself the execution of the document and by attempting to assure himself by means of questions or explanation that she knows to what she is committing herself. The sufficiency of this must depend on circumstances, as, for example, the ramifications and complexities of the transaction, the amount of deception practised by the husband upon his wife and the intelligence and business understanding of the woman. But, if the wife has been in receipt of the advice of a stranger whom the creditor believes on reasonable grounds to be competent, independent and disinterested, then the circumstances would need to be very exceptional before the creditor could be held bound by any equity which otherwise might arise from the husband’s conduct and his wife’s actual failure to understand the transaction: Cf per Cussen J. If undue influence in the full sense is not made out but the elements of pressure, surprise, misrepresentation or some or one of them combine with or cause a misunderstanding or failure to understand the document or transaction, the final question must be whether the grounds upon which the creditor believed that the document was fairly obtained and executed by a woman sufficiently understanding its purport and effect were such that it would be inequitable to fix the creditor with the consequences of the husband’s improper or unfair dealing with his wife.

Thus, Dixon J was dealing with two kinds of case. In the former, the case of actual undue influence, as Dixon J says, explaining the effect of the document to the surety will not protect the creditor and ‘[n]othing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice’. In the latter, ‘[i]f the creditor takes adequate steps to inform [the wife] and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing’ cannot give her an equity to set the instrument aside.

• 19.5 Remedies The primary remedy for undue influence is rescission. The party that has been subjected to undue influence will invariably seek the return of any gift or monies that it has given or freedom from any contractual obligation. Recission is discussed in detail in Chapter 22.

Ke y p o ints for re v ision Undue influence concerns situations where one party benefits unconscionably from the influence that they exert over another. There are two types of undue influence: actual undue influence and presumed undue influence. In cases of actual undue influence, the plaintiff will need to prove that influence was exerted.

Chapter 19

Undue influence

In cases of presumed undue influence, the relationship between the parties will be such that a presumption of undue influence will arise when a gift or contract is made. Where the presumption of undue influence arises, the presumption may very well be rebutted if the ‘influenced’ party has received independent legal advice. The courts have tended to find undue influence in cases where religious orders have received gifts from their devotees.

probelem-solving practice Nitin and Meera Chopra are an elderly couple living in Melbourne. They migrated to Australia from India in 1982, when they were both in their thirties. They have been quite successful in their lives in Australia and have two valuable properties in Melbourne, one worth $1m and another worth $2m. They have three children, Arun, Harsha and Sasha. All three children are now young adults. Arun is a doctor, Harsha is an engineer and Sasha is a lawyer. In their old age, Nitin and Meera have become homesick for India. They have visited India five times in the past three years, though they do not wish to move back as their children are living in Melbourne. In order to connect with the local Indian community in Melbourne, both Nitin and Meera have begun visiting the Shri Ganesha Temple in Footscray. They have become quite close with Dr Haresh Sharma, a Hindu priest at the Shri Ganesha Temple. Recently, Nitin and Meera have been thinking about how they will bequeath their assets in their will. Sasha, their 25-year old daughter, has been repeatedly telling her parents that as the only female child in the family she is highly ‘vulnerable’ in Australia. Sasha has told her parents that her two brothers can fend for themselves and that they are well established in their careers, while she is just a recently graduated lawyer. Last week, Sasha has arranged for Dr Sharma to meet with her parents at their home. Sasha knew that Dr Sharma was very conservative in his views. She told him prior to the meeting that she was very ‘vulnerable’ in Australia without the economic security of home ownership. Sasha was present at the meeting and again raised the issue of her vulnerability. Dr Sharma told Nitin and Meera that ‘female children must always be protected. No true Indian father would leave his daughter vulnerable.’ Nitin and Meera were highly affected by the discussion and gifted the home worth $2m to Sasha. Arun and Harsha later found out about what had transpired at the meeting. They are disappointed that a longstanding family understanding that the assets of the parents are to be shared evenly among the children has not been honoured. They have pointed out that they have contributed financially to their sister’s education and have given her strong moral support over several years; and that Sasha is highly educated and in secure employment. Nitin and Meera are now having second thoughts about the gift to Sasha. It appears that Sasha wants to sell the house so that she can go off and lead a life of leisure overseas. This horrifies Meera who says ‘the whole point of passing on assets in this way is to secure the long-term welfare of the family group’. Can Nitin and Meera have the gift set aside for undue influence?

ANSWER The starting point in any analysis of the present matter must be the relationship between the recipient of the gift and the donors of the gift. Sasha is the daughter of Nitin and Meera. The relationship of parent and child can give rise to a presumption of undue influence where the parent is a recipient of a gift

[ 393 ]

[ 394 ]

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from the child (see Powell v Powell). However, it is less clear as to whether a presumption of undue influence can be made where the child is the recipient of a gift from the parents. It does seem quite unlikely that a court would hold that a presumption would apply where the child receives a gift from her parents unless there was something to induce the presumption. In the present matter, Sasha has benefited from the advice given to her parents by Dr Sharma. In fact, Sasha arranged for Dr Sharma to advise her parents knowing full well what he was going to say. Sasha has also emphasised her ‘vulnerability’ while downplaying her strengths and abilities. In Johnson v Buttress, Dixon J made reference to the ‘unconscientious use of any special capacity or opportunity that may exist or arise affecting the alienor’s will or freedom of judgment’. In the present matter, Sasha has created a special opportunity by playing off her parent’s sentiments and their relationship with Dr Sharma. Even though Dr Sharma did not stand to gain any personal benefit, his presence and influence was central to Sasha’s ability to influence her parents into providing the gift. The situation here is similar to that of Khan v Khan. The presence of a spiritual mentor has provided ‘guidance’ to the donors that would not otherwise have been part of their decision-making process. The relationship of religious adviser and disciple is a recognised category of relationship that gives rise to a presumption of undue influence (see Allcard v Skinner; Quek v Beggs and Hartigan v International Society for Krishna Consciousness Inc). The question must then be to what degree was the influence of Dr Sharma decisive in the decision of the Chopras to gift a $2m house to Sasha? On the facts, it does appear to have played a crucial role. The Chopras had not previously made the gift, though no doubt Sasha had raised the issue before the meeting with Dr Sharma. In Khan, even though Mrs Sadiq was an intelligent woman in her own right, the advice of Mufti Naeim was found to have influenced her decision. In Khan, undue influence was found to exist despite the fact that the Mufti received no personal benefit from his influence. If undue influence is presumed or found to exist in this matter, then Sasha will have to rebut the presumption. In the present case, the Chopras have not received any independent legal advice. Though it is not decisive, it is important that the donor receive independent legal advice (see R v Attorney-General for England and Wales). Nonetheless, the proximity of Dr Sharma’s influence to the decision of the Chopra’s to gift the house to Sasha and the absence of independent advice make it rather likely that undue influence will be found to exist.

[ 395 ]

chapter

20

Duress

Chapt e r o v e rv i e w 20.0

Introduction  396

20.1

The elements of duress   396

20.2

The legal boundaries of duress   397 20.2.1 Duress, undue influence and unconscionability   397 20.2.2 Duress and consideration   398

20.3

Contracts made under duress are voidable   398

20.4

Categories of duress   399 20.4.1 Duress to the person   399 Threats of violence   399 Other threats  400 20.4.2 Duress of goods   401 20.4.3 Economic duress  401

[ 396 ]

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20.5

The overborne will and the nature of the threat   408 20.5.1 The overborne will   409 20.5.2 The nature of the threat   409

20.6

Causation  413

20.7

Remedies  414

• 20.0 Introduction The topic of duress is concerned with the voidability of contracts that have been procured by the application of unacceptable pressure by one party onto another.1 It can be said that all contractual negotiations involve the use of some form of pressure. However, the type of pressure contemplated by the law of duress crosses the line from acceptable pressure and enters the realm of either unlawful conduct or some other form of unacceptable behaviour which the law of contract cannot sanction.2 There are a number of duress cases where threats of criminal violence have been employed.3 These cases fall easily within the parameters of duress. Those cases that are more controversial are ones where no criminality is involved but the threat can still be said to be unconscionable in some way. These include the cases of economic duress, where a clear dividing line between acceptable commercial pressure and unacceptable pressure is harder to discern.4 In a modern context, economic duress appears to be the more likely form of duress to be contested before the courts.

• 20.1 The elements of duress In Universe Tankships Inc of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’)5 Lord Scarman held that there were two elements of duress: pressure and the illegitimacy of pressure. In contrast, in Pharmacy Care Systems Ltd v Attorney-General 6 the New Zealand Court of Appeal held that there were seven elements of duress.7 However, Lord Scarman’s approach has generally been followed, though it may be interpreted to encompass three elements. The legal elements of duress are, therefore as follows: (i) illegitimate pressure—physical, psychological or economic—was used to bring about a transaction; 1 Barton v Armstrong [1976] AC 104. 2 There is a debate within the law of duress as to whether the doctrine is confined to unlawful conduct or whether it applies, under certain circumstances, to lawful conduct: see Australia and New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149. 3 See Barton v Armstrong [1976] AC 104; Cumming v Ince (1847) 116 ER 418; Friedeberg-Seeley v Klass (1957) 101 Sol Jo 275. 4 See for example Occidental Worldwide Investment Corporation v Skibs A/S Avanti (‘The Siboen’ and ‘The Sibotre’) [1976] 1  Lloyd’s Rep 293; Universe Tankships Inc v International Transport Workers Federation (‘The Universe Sentinel’) [1983] 1 AC 366. 5 [1983] 1 AC 366. 6 (2004) 2 NZCCLR 187, [98] (CA). 7 As Professor Bigwood has noted, this seems to be too many elements: see Rick Bigwood, ‘When Exegesis Becomes Excess: The Newborn Problematics of Contractual Duress Law in New Zealand’ (2005) 21 Journal of Contract Law 208.

Chapter 20

Duress

(ii) the pressure procured the transaction (causation); and (iii) there were no reasonable alternatives available to the plaintiff.8 In a typical case of duress, the defendant resorts to illegitimate pressure in order to bring about the contract. The plaintiff succumbs at the time that the pressure is exerted, but once they have recovered they then sue and seek to have the transaction set aside. Initially, the burden of proof rests with the plaintiff. However, the defendant can make out certain ‘quasi’ defences by proving that the pressure did not cause the contract or that the plaintiff had reasonable alternatives. The type of scenarios in which duress might arise can vary. For example, in a traditional duress scenario, the parties might have had little prior relationship with each other before the alleged coercion took place. However, in other situations, duress might arise where the parties have had several dealings with each other and where one party wishes to seize upon an opportunity to exploit the other party’s vulnerability in an unacceptable manner.

• 20.2 The legal boundaries of duress 20.2.1  Duress, undue influence and unconscionability The legal boundaries of duress are not sacrosanct. Duress as a As with undue doctrine is related to both undue influence and unconscionability. influence and As with the latter two doctrines, duress has its roots within unconscionability, equity and is concerned with whether a bargain, procured under duress has its roots within equity and is circumstances which the law deems to be questionable, can in fact concerned with whether a be allowed to stand. bargain, procured under The fundamental difference between duress and undue circumstances which the law deems to be influence is that when duress arises, the contract has been procured questionable, can in fact by pressure such that the free will of one of the contracting parties be allowed to stand. has been compromised. Contracts procured by duress lack the requisite degree of consent that the law normally expects of a contracting party. However, in cases of undue influence, consent is freely given to the contract but the influence that one party has over the other is such that the bargain is liable to be set aside. While the boundaries between duress and undue influence seem somewhat clear the dividing line between duress and unconscionability, and in particular statutory unconscionability, are far from clear. The key point is that statutory unconscionability, as it stands presently housed within the Australian Consumer Law,9 is an expansive rule. There are a number of statutory factors that might give rise to unconscionability under the provisions of the Australian Consumer Law, and these factors appear to overlap with the elements of duress. Statutory unconscionability also overlaps with undue influence. Nonetheless, the overlap between the common law doctrine of duress and statutory unconscionability is unlikely to give rise to any great legal difficulty. As the three doctrines share a common legal heritage in the courts of equity, their part amalgamation through legislative design simply gives effect to their shared purpose: to allow the courts to intervene where a contract has been brought about under circumstances that  the law deems unacceptable, and where the effect of that contract would be oppressive to the affected party. 8 See Universe Tankships Inc v International Transport Workers Federation (‘The Universe Sentinel’) [1983] 1 AC 366. 9 Sections 20, 21 and 22.

[ 397 ]

[ 398 ]

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20.2.2  Duress and consideration A greater degree of difficulty emerges where the dividing line between duress and consideration is concerned. This matter is of most importance where two parties have commenced work under a contract but where one party, due to some hardship, seeks a further benefit from the other party in order to continue performing under the contract.10 Duress might exist in such a situation on the basis that after the contract has commenced operation, the affected party is rendered vulnerable to the other party’s willingness to fulfil their obligations. For example, in the case of Williams v Roffey Bros & Nicholls (Contractors) Ltd,11 where duress was alleged, the parties had already entered into a contract before pressure was exerted by one party to extract further concessions from the allegedly affected party. In Williams the existence of a practical benefit to the other party and the absence of circumstances which pointed to duress allowed for the contract to be enforceable.12 In their analysis of this issue, Seddon and Ellinghaus have noted that the question of duress was resolved by an ‘innovative’ use of the existing duty rule.13 The learned authors have also suggested that ‘a shrewd contractor should be attentive to how he or she makes the suggestion that more money is needed to finish the job’. Though this is undoubtedly correct it seems almost too arbitrary to leave the dividing line between such fundamentally opposing doctrines such as duress and consideration to the cleverness of a contracting party.14 It must instead be the case that the distinction between duress and consideration must be determined objectively, with a court having regard, as Greig and Davis suggest, to ‘whether there has been a “benefit” or a “detriment”’.15

• 20.3 Contracts made under duress are voidable Where duress is made out, the contract will not be void ab initio;16 it will instead be voidable.17 The application of the doctrine of consideration in this context would generally suggest that a contract made under duress—wherein the application of deeply illegitimate pressure and threats would mean that there would be no real consent or consideration—should be void.18 10 For a discussion of duress and consideration, see Roger Halson, ‘Opportunism, Economic Duress and Contractual Modifications’ (1991) 107 Law Quarterly Review 649; see also J W Carter, ‘The Renegotiation of Contracts’ (1998) 13 Journal of Contract Law 185. 11 [1991] 1 QB 1. 12 Ibid, 13–16. 13 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 711. 14 Of course, it should not be suggested that Seddon and Ellinghaus intended that the distinction between duress and consideration depended solely or even greatly upon whether the contractor had been shrewd or otherwise in phrasing their demand for extra payment. 15 D W Greig and J L R Davis, The Law of Contract, Law Book Co (1987), p. 950. 16 Barton v Armstrong [1976] AC 104. 17 Ibid; Lynch v DPP for Northern Ireland [1975] AC 653; Barton v Armstrong [1973] 2 NSWLR 598. 18 This is the compulsion of the will test expounded in Pao On v Lau Yiu Long [1980] AC 614, 635–636, where the Court held that a ‘coercion of the will so as to vitiate consent’ would support this proposition. Similarly, in Occidental Worldwide Investment Corporation v Skibs A/S Avanti (‘The Siboen’ and ‘The Sibotre’) [1976] 1 Lloyd’s Rep 293, the holding that the victim’s will must be overborne also suggests no true consent and by extension that the contract must be void ab initio. However, the courts in both the UK and Australia have moved away from this notion: see Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40, 45–46 per McHugh JA; Dimskal Shipping Co SA v International Transport Workers Federation (‘The Evia Luck’ (No 2)) [1992] AC 152 per Lord Goff.

Chapter 20

Duress

However, the courts have consistently held, mainly on grounds of Where duress is policy, that the affected party should have the right to decide made out, the contract 19 whether or not they wish to remain in the contract. As duress will not be void ab initio; it now covers economic pressure, in the form of the doctrine of will instead be voidable. economic duress, in addition to the more traditional modes of duress such as duress to the person and duress to goods, it makes conceptual sense that the contract is voidable rather than void. Particularly where no imminent violence is threatened towards a contracting party, the decision to enter into a contract is a voluntary act, albeit one induced by illegitimate pressure in economic duress cases. In Universe Tankships Inc of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’)20 Lord Diplock stated: It is not that the party seeking to avoid the contract which he has entered into with another party, or to recover money that he has paid to another party in response to a demand, did not know the nature or the precise terms of the contract at the time when he entered into it or did not understand the purpose for which payment was demanded. The rationale is that his apparent consent was induced by pressure exercised upon him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind. It is a rationale similar to that which underlies the avoidability of contract entered into and the recovery of money exacted under colour of office, or under undue influence or in consequence of threats of physical duress.21

• 20.4 Categories of duress 20.4.1  Duress to the person Threats of violence Threats of physical harm or actual assaults will constitute duress to the person. The threat or assault can be made either to the contracting party or to somebody to whom the party is related or to whom they are close. The threat can be made either by the coercing party or by their agent.22 In Barton v Armstrong,23 Barton, who was the managing director of a company, made a deed under which the company agreed to pay $140 000 to Armstrong (the chairman of the board) and to buy Armstrong’s shares for $180 000. The trial judge found that several threats of violence had been made to Barton by Armstrong prior to the execution of the deed. Barton also alleged that threats of violence against him and his family had been made by others on behalf of Armstrong. One question that arose in Barton was whether the party that made the threats was in

19 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] 3 WLR 419; Universe Tankships of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’) [1983] 1 AC 366. 20 [1983] 1 AC 366. 21 Ibid, 400. 22 Barton v Armstrong [1976] AC 104 (PC). 23 Ibid.

[ 399 ]

[ 400 ]

Contract Law: Text and Cases

fact connected to the party who was alleged to have engaged in duress. In the New South Wales Court of Appeal Jacobs JA (in dissent) held that threats could be made by a third party and that these would lead to a finding of duress if (i) the other party was aware that the threats were being made or had some connection to the threats; or (ii) the person making the threats was an agent for the other party.24 However, the Court of Appeal also found that even though Barton had grounds to fear Armstrong’s threats, he had still entered into the deed with Armstrong for sound business reasons. Accordingly, a majority of the Court of Appeal found against Barton on the question of duress. Barton appealed to the Privy Council. The basis of Barton’s appeal was the proposition that where a contract has been procured under duress, the affected party retains a right of rescission notwithstanding that there were other grounds for entering into the agreement. A majority of the Privy Council allowed Barton’s appeal. The Privy Council held that even though there may have been grounds upon which Barton could have signed the deed, other than the threats made against him, as the threats had played a part in Barton’s decision to enter the agreement it was voidable at his request.25

Other threats While it is very clear that actual violence will amount to duress to the person, violence is not a necessary element of this form of duress. A threat of false imprisonment can constitute duress to the person, though this can also be construed as a form of violence.26 As demonstrated by the case of Public Service Credit Union v Campion27 the threat to prosecute a relative can also constitute duress to the person. Similarly, a threat to disclose embarrassing information, or an attempt at blackmail, will fall within this category of duress.28 In Campion, the defendant’s son fraudulently procured funds from the plaintiff. The Public Service Credit Union told Campion that unless he signed a guarantee they would inform the police. The guarantee was signed, but when the Public Service Credit Union sued Campion the guarantee was set aside on the grounds of undue influence, though duress was also argued before the Court. The decision in Campion illustrates that duress to the person need not be of direct harm to the contracting party, but may be of harm to a relative, and that the harm in question need not be confined to violence. In Mutual Finance Ltd v John Wetton and Sons Ltd 29 duress arose where a father and a son, both of who were directors in a family company, were pressured into a contract by the implied threat of prosecution of another son. The latter son had forged the signatures of the father and the former son on a guarantee which had been given to Mutual Finance. The local manager of Mutual Finance made it clear, though he did not use any express words to this effect, that he would prosecute the son who had committed forgery unless he received a new guarantee. The son who had not committed the forgery gave the guarantee out of concern for his brother’s liberty and his father’s failing health. The guarantee was set aside on the grounds of duress.

24 Barton v Armstrong [1973] 2 NSWLR 598 (CA). 25 Barton v Armstrong [1976] AC 104, 120. 26 McLarnon v McLarnon (1968) 112 Sol Jo 419. 27 (1984) 75 FLR 131. 28 See Robertson v Robertson (1930) QWN 41; Mutual Finance Ltd v John Whetton [1937] 2 KB 389. 29 [1937] 2 KB 389.

Chapter 20

Duress

20.4.2  Duress of goods Duress of goods occurs in situations where one contracting party attempts to unlawfully seize, detain, destroy or damage the goods of the other party.30 Note that the nature of this category of duress resembles economic duress in the sense that the harm that results to the affected party will most likely be economic in nature. The traditional position on duress precluded duress to goods31 and economic duress, confining it instead to harm and threats of harm to the person, but this position has now been reversed.32 In Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd 33 the respondent hired the appellant to paint its helicopter. The respondent was unsatisfied with the performance of the appellant and twice sent the helicopter back in order for the work to be done properly. When the helicopter was to be collected for the third time, the appellant sought to have the respondent sign a document that would absolve the appellant of any further responsibility and which would ensure payment of $4300 which was claimed to be owing to the appellant. The appellant was aware that the respondent urgently needed the helicopter. The only way in which the helicopter would be released on that day was if the document was signed. The respondent signed, but then refused to pay the $4300 on the grounds of duress. The New South Wales Supreme Court held that the appellant’s conduct amounted to duress. There was an implied threat that without the promise of payment for the $4300, the helicopter would not have been released. The respondent was found to have only signed the agreement due to its desperation to receive the helicopter on that day. review question What is duress? Under what circumstances will claims of duress arise?

20.4.3  Economic duress Economic duress has been well recognised at law.34 However, the rationale underlying economic duress and the precise boundaries of the doctrine remain unclear.35 In particular, one cannot say with any certainty what type of factual paradigms will trigger the operation of the rules of economic duress. What seems to be clear is that economic duress will normally entail a demand for payment which has no basis in the existing contractual relations between the parties and for

30 Maskell v Horner [1915] 3 KB 106; see also Occidental Worldwide Investment Corp v Skibs A/V Avanti (‘The Siboen’ and ‘The Sibotre’) [1976] 1 Lloyd’s Rep 293, 336 per Kerr J; J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539. 31 Skeate v Beale (1841) 113 ER 688. 32 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298. 33 Ibid. 34 Universe Tankships of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’) [1983] 1 AC 366; Pao On v Lau Yiu Long [1980] AC 614; T A Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1955) 56 SR (NSW) 151; Smith v William Charlick Ltd (1924) 34 CLR 38; White Rose Flour Milling Co Pty Ltd v Australian Wheat Board (1988) 18 ALJR 324. 35 See Andrew Phang, ‘Economic Duress—Uncertainty Confirmed’ (1992) Journal of Contract Law 147.

[ 401 ]

[ 402 ]

Contract Law: Text and Cases

which no new consideration is given.36 Yet, even though this basic type of scenario might be discerned from the case law, other situations are not precluded from coming within the boundaries of economic duress; for example, threats to exclude a party from a commercial activity unless they enter a contract or to withdraw future business have been argued as duress.37 Both the Australian and UK courts were actively involved in developing the doctrine of economic duress. The Australian courts in T A Sundell & Sons Pty v Emm Yannoulatos (Overseas) Pty Ltd,38 Smith v William Charlick Ltd 39 and White Rose Flour Milling Co Pty Ltd v Australian Wheat Board 40 effectively developed the concept of economic duress; and the UK courts in North Ocean Shipping Company Ltd v Hyundai Construction Economic duress will Company Ltd 41 and Universe Tankships Inc v International Transport Workers normally entail a demand for payment which has Federation (‘The Universe Sentinel’)42 also recognised the existence of no basis in the existing the doctrine. In more recent cases, however, the Australian courts contractual relations have been reluctant to find economic duress as this doctrine might between the parties and for which no new encroach upon legitimate yet unsavoury commercial practices; consideration is given. and it is clear that large businesses in particular may struggle to successfully make out a claim of economic duress.43 The cases of William Charlick 44 and T A Sundell 45 illustrate the basic fact paradigm of economic duress cases. In William Charlick the plaintiff purchased wheat from the Wheat Harvest Board of South Australia. The Board was the only supplier that the plaintiff had available. The Board sought an additional payment from the plaintiff, without attempting to justify the demand on any legal or contractual ground other than ‘moral’ entitlement. The Board made it clear that if the plaintiff did not acquiesce, that his future supply of wheat would be placed in jeopardy. The plaintiff paid and then sought to sue under duress. The action failed on the basis that the plaintiff had full knowledge of the material facts. Starke J stated: the buyers chose to pay a further sum for wheat already sold to them rather than to be shut out from further trade with the mandatary of the owners of wheat. The money was, no doubt, paid unwillingly, and the payment was dictated by the trade interests of the petitioner. But it was, nevertheless, paid voluntarily, in the legal sense, and with full knowledge of the facts and without any unlawful compulsion, extortion, undue influence, or the abuse of any duty which the Wheat Board owed to the petitioner.46

It is noticeable that in his judgment, Starke J makes reference to ‘unlawful compulsion’. Similar language can be gleaned from the judgments of Knox CJ and Isaacs J, and it appears that their Honours were heavily influenced by traditional notions of duress, where clear threats of harm and force were present. 36 North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd [1979] QB 705. 37 News Limited v Australian Rugby League Football Ltd (1996) 139 ALR 193; Deemcope Pty Ltd v Cantown Pty Ltd [1995] 2 VR 44. 38 (1955) 56 SR (NSW) 323. 39 (1924) 34 CLR 38. 40 (1988) 18 ALJR 324. 41 [1979] QB 705. 42 [1983] 1 AC 366. 43 CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714; Ford Motor Co of Australia Ltd v Arrowcrest Group Pty Ltd (2003) 134 FCR 522. 44 Smith v William Charlick Ltd (1924) 34 CLR 38. 45 T A Sundell & Sons Pty v Emm Yannoulatos (Overseas) Pty Ltd (1955) 56 SR (NSW) 323. 46 Smith v William Charlick Ltd (1924) 34 CLR 38, 70.

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The case of William Charlick is an early case in the development of the doctrine of economic duress. It is doubtful that a court would find for the defendant again if the same circumstances were to arise in some future dispute. As Carter et al. have noted, the importance of William Charlick is that it recognises that a plaintiff may be entitled to recovery in cases where a payment has been made under compulsion.47 In T A Sundell the plaintiff bought steel from the defendant under a contract. The price of the steel was £109.15.0 per ton under the contract. However, the seller later sought to increase the price to £140 per ton, as the price of iron had increased. The plaintiff agreed to the increase in price but later sought to recover the amount that had been paid. The New South Wales Supreme Court found in favour of the plaintiff. William Charlick and T A Sundell both illustrate situations in which a seller seeks an additional payment from a buyer without offering any new consideration. That these cases might give rise to economic duress, notwithstanding the actual outcome in William Charlick, seems clear though they should not be confined to sales contracts and can obviously cover other commercial situations. In North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd 48 the plaintiff, North Ocean, contracted with Hyundai for the construction of a ship. Under the contract Hyundai was to build the ship and North Ocean was to pay $US30 950 000 in instalments. After the first instalment was paid, the US dollar was devalued by 10 per cent. Hyundai sought additional payments in the order of a 10 per cent increase, despite the fact that the contract did not support the request for payment. North Ocean was in the midst of negotiating a lucrative charterparty and so acceded to Hyundai’s demand. North Ocean did not seek to recover the additional payment until nine months after it had received the ship. It was held by Mocatta J that the agreement would have been set aside for economic duress, but because North Ocean had failed to act until nine months after the ship had been completed, it thereby impliedly consented to the variation of the contract. In Universe Tankship of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’)49 an international federation of trade unions put pressure on shipowners to increase the rates of pay and other terms of employment of their workers by threatening to engage in a ‘blacking’ of the shipowners’ vessel. The practice of ‘blacking’ constituted refusing to assist the vessel in docking in or leaving a port. The shipowners succumbed to the threats of the union and then sought to recover their money. A majority of the House of Lords found that there had been duress. Universe Tankship of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’) [1983] 1 AC 366 Lord Scarman at 400–401: It is, I think, already established law that economic pressure can in law amount to duress; and that duress, if proved, not only renders voidable a transaction into which a person has entered under its compulsion but is actionable as a tort, if it causes damage or loss: Barton v Armstrong [1976] AC 104 and Pao On v Lau Yiu Long [1980] AC 614. The authorities upon 47 J W Carter, E Peden, G J Tolhurst, Contract Law in Australia, LexisNexis (2008), p. 489. 48 [1979] 1 QB 705. 49 [1983] 1 AC 366.

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which these two cases were based reveal two elements in the wrong of duress: (1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted. There must be pressure, the practical effect of which is compulsion or the absence of choice. Compulsion is variously described in the authorities as coercion or the vitiation of consent. The classic case of duress is, however, not the lack of will to submit but the victim’s intentional submission arising from the realisation that there is no other practical choice open to him. This is the thread of principle which links the early law of duress (threat to life or limb) with later developments when the law came also to recognise as duress first the threat to property and now the threat to a man’s business or trade. The development is well traced in Goff and Jones, The Law of Restitution, 2nd ed. (1978), chapter 9. The absence of choice can be proved in various ways, e.g. by protest, by the absence of independent advice, or by a declaration of intention to go to law to recover the money paid or the property transferred: see Maskell v Horner [1915] 3 KB 106. But none of these evidential matters goes to the essence of duress. The victim’s silence will not assist the bully, if the lack of any practicable choice but to submit is proved. The present case is an excellent illustration. There was no protest at the time, but only a determination to do whatever was needed as rapidly as possible to release the ship. Yet nobody challenges the judge’s finding that the owner acted under compulsion. He put it thus [1981] ICR 129, 143: It was a matter of the most urgent commercial necessity that the plaintiffs should regain the use of their vessel. They were advised that their prospects of obtaining an injunction were minimal, the vessel would not have been released unless the payment was made, and they sought recovery of the money with sufficient speed once the duress had terminated.

The real issue in the appeal is, therefore, as to the second element in the wrong duress: was the pressure applied by the ITF [International Transport Workers Federation] in the circumstances of this case one which the law recognises as legitimate? For, as Lord Wilberforce and Lord Simon of Glaisdale said in Barton v Armstrong [1976] AC 104, 121D: ‘the pressure must be one of a kind which the law does not regard as legitimate.’ As the two noble and learned Lords remarked at p. 121D, in life, including the life of commerce and finance, many acts are done ‘under pressure, sometimes overwhelming pressure’: but they are not necessarily done under duress. That depends on whether the circumstances are such that the law regards the pressure as legitimate. In determining what is legitimate two matters may have to be considered. The first is as to the nature of the pressure. In many cases this will be decisive, though not in every case. And so the second question may have to be considered, namely, the nature of the demand which the pressure is applied to support.

In the case of Crescendo Management Pty Ltd v Westpac Banking Corporation50 the defendant, Westpac, refused to release the proceeds of a sale of property to two of its clients unless they secured the debt of two companies, of which one of the clients was a director. Though the Court

50 (1988) 19 NSWLR 40.

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found the pressure to be illegitimate, the pressure was held not to have acted upon the mind of the couple when they executed the mortgage. The mortgage appeared on the facts of the case to have been executed before the illegitimate pressure was applied. The absence of causation prevented a finding of economic duress. In Australia and New Zealand Banking Group v Karam51 the New South Wales Supreme Court further elucidated upon the concept of economic duress. The Karams ran a footwear company in Sydney. The ANZ Bank provided the Karams with financial service from 1980 onwards, including an overdraft account and commercial bills. The Karams’ business went well up until 1992 when it began to experience financial troubles. In June 1993 the ANZ Bank sought various security documents in exchange for assisting the Karams with their business. These securities included an essentially unlimited security over Karam family properties. When the business continued to fail in 1995, the ANZ Bank refused to advance the Karams any further funds and sought satisfaction of their debts. The Karams sued under the Contracts Review Act 1980 (NSW ) and for unconscionability under the common law. One of the issues raised was economic duress. At trial, Santow J found in favour of the Karams. On appeal the New South Wales Court of Appeal unanimously reversed the findings of Santow J, holding that there had been no economic duress as the Karams understood what they were signing and had utilised independent legal advice. The Court was of the view that given the financial position of the Karams, the ANZ Bank was justified in seeking more extensive guarantees. Australia and New Zealand Banking Group v Karam (2005) 64 NSWLR 149 The Court at 162–165: In this context, care must be taken in using phraseology such as ‘economic duress’, which may have an ordinary meaning somewhat broader than its legal counterpart, and with an emotive connotation. The circumstances in which the Karams found themselves were, in one sense, quite similar to those which arose in Amadio, namely that they were providing guarantees to a company which was ‘in a perilous financial condition’. Nevertheless, the differences are important. In the case of the Karams, the Company was their own, in the sense that they were the shareholders and, in relation to the brothers, were the directors of the Company and in relation to their wives, had been the directors at all times up to 22 February 1993. It may be that they believed that the Company was ‘a flourishing and prosperous enterprise, though temporarily in need of funds’, but their knowledge of its financial circumstances was the same as that of the bank. They may have had greater expectations of its ability to trade out of its difficulties than did the relevant Bank officers, but they were not ignorant of its affairs, as were the Amadios in respect of their son’s business. It follows that the Karams were not in a position of special disadvantage vis-à-vis the Bank in the sense that the Bank knew the true circumstances, whereas they did not; the Bank could not be said to have relied on their ignorance to its own advantage. …

51 (2005) 64 NSWLR 149.

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49. At common law, the concept of physical duress rendered a contract void because the consent of the complaining party was not a true consent, but one given in circumstances where the will of that party was overborne. It would seem that the expansion of that concept in The Universe Sentinel, to include economic duress, was intended to be an expansion by analogy and thus limited to circumstances where, in the words of Lord Scarman, the pressure must be such that its practical effect is ‘compulsion or the absence of choice’: see generally, Mason and Carter, Restitution Law in Australia (1995) p. 161. 50. In discussing the rationale of the rule, Lord Diplock made three points clear. The first was that he was dealing with a development of the common law. Secondly, in a passage reflected by McHugh JA five years later in this Court, he rejected the following factors as part of the rationale of the development: It is not that the party seeking to avoid the contract which he has entered into with another party, or to recover money that he has paid to another party in response to a demand, did not know the nature or the precise terms of the contract at the time when he entered into it or did not understand the purpose for which the payment was demanded.

Rather, his Lordship indicated that the rationale was— similar to that which underlies the avoidability of contracts entered into and the recovery of money exacted under colour of office, or under undue influence or in consequence of physical duress.

51. Noting that the case involved the field of industrial relations, ‘to which very special considerations apply’, Lord Diplock eschewed any attempt to identify the limits of legitimate economic pressure. It is not, however, in my view, necessary, to enter into the general question of the kinds of circumstances, if any, in which commercial pressure, even though it amounts to a coercion of the will of a party in the weaker bargaining position, may be treated as legitimate and, accordingly, as not giving rise to any legal right of redress.

52. In Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, at 45–46 McHugh JA discussed the conceptual basis of the defence of economic duress, albeit in terms in which the other members of the Court (Samuels JA and Mahoney JA) did not join. His Honour suggested that the reference in The Universe Sentinel to ‘compulsion of the will of the victim’, was ‘unfortunate’. As his Honour noted, the concept of duress in the criminal law was discussed by Lord Simon of Glaisdale, in Director of Public Prosecutions (NI) v Lynch [1975] UKHL 5; [1975] AC 653 at 695 in a passage which expressly equated with contract law the proposition ‘that duress is not inconsistent with act and will, the will being deflected, not destroyed’. His Honour continued: Indeed, if the true basis of duress is that the will is overborne, a contract entered into under duress should be void. Yet the accepted doctrine is that the contract is merely voidable. In my opinion the overbearing of the will theory of duress52 should be rejected. A person who is the subject of duress usually knows only too well what he is doing.

52 Discussed below, section 20.5.

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But he chooses to submit to the demand or pressure rather than take an alternative course of action. The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate.

53. McHugh JA also echoed the description of Lord Diplock set out above in relation to the limits of legitimate pressure (at 46): Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress.

54. Two aspects of this passage were to cause difficulty. First, although the context was one in which his Honour was considering an extension of the common law doctrine of duress, the introduction of the criterion of ‘unconscionable conduct’ appeared to invoke equitable principles. As Lord Diplock had referred to ‘undue influence’ as enjoying a similar rationale, the reference to equity may have been deliberate. Secondly, the reference to ‘overwhelming pressure’, in a context in which his Honour had rejected the need for the will to be overborne, was also apt to create uncertainty. The term appears to have been a reflection of the passage in Lord Diplock’s speech in The Universe Sentinel. 55. In 1991, in Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 Clarke JA (Priestley JA to similar effect and Handley JA agreeing) noted the common law distinction between physical duress (or ‘duress to the person’), which rendered a contract void, and unlawful detention of a person’s goods (‘duress of goods’) which was sufficient to enable the complaining party to recover money paid in an action for ‘money had and received’ but not, if the distinction held, to avoid a contract entered into in those circumstances. Clarke JA noted at 306: This distinction, if correct, leads to the absurd result that if A paid money under duress of goods he could recover the money paid but if he entered into a contract to pay money under similar duress he could not avoid the contract and would be obliged to pay the moneys due thereunder.

His Court rejected that conclusion and the distinction on which it was based. However, the criterion upon which relief might be accorded was discussed only in terms of ‘unlawful detention’ of goods, or the threat thereof. 56. By this time, the concept of ‘economic duress’ had become accepted terminology. In Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152, Lord Goff of Chieveley (at pp. 165–166) referred to the English case law, including the decision of Pao On v Lau Yiu [1979] UKPC 2; [1980] AC 614, in the Privy Council, reaching the same conclusion as that which had been reached in this Court in Crescendo Management and Hawker Pacific. His Lordship noted at 165G: it is now accepted that economic pressure may be sufficient to amount to duress for this purpose, provided at least that the economic pressure may be characterised as illegitimate and has constituted a significance cause inducing the plaintiff to enter into the relevant contract.

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The most recent authority relied on by his Lordship for that view was the judgment of McHugh JA in Crescendo Management. His Lordship continued (at 166): It is sometimes suggested that the plaintiff’s will must have been coerced so as to vitiate his consent … I myself, like McHugh JA, doubt whether it is helpful in this context to speak of the plaintiff’s will having been coerced.

His Lordship went on to note that it was not necessary in the context of the case to determine ‘what constitutes illegitimate economic pressure’. 57. Two years after Dimskal and Hawker Pacific, the concept of economic duress came back before this Court in Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50. The majority (Clarke JA and Cripps JA) held that ‘the appellants had not established any illegitimate pressure of the kind to which McHugh JA referred in Crescendo Management’: at 151D. Kirby P (dissenting in the result) noted the vagueness of the doctrine (at p. 106E): What precisely the law is prepared to countenance as ‘legitimate’ begs the question which needs to be answered in characterising particular conduct as impermissible economic duress (on the one hand) or the permissible (even necessary) operation of the market economy (on the other).

His Honour further stated (at 107): The doctrine of economic duress may be better seen as an aspect of the doctrines of undue influence and unconscionability respectively. If relief, beyond statute, is appropriate, courts would be better able to provide such relief in a consistent and principled fashion under the rubric of undue influence and undue unconscionability rather than by pretending to economic expertise and judgment which they generally lack.

For reasons noted below, his Honour’s view that a principled approach should, in effect, abandon the term ‘economic duress’ and, presumably, questions of ‘illegitimate pressure’ should be accepted. 58. In Westpac Banking Corporation v Cockerill (1998) 152 ALR 267 at 289, Kiefel J (with whom Northrop J and Lindgren J substantially agreed), after reference to the passage in Crescendo Management set out above, stated: I do not think that his Honour was intending in this passage to refer to the equitable doctrine of unconscionable dealing which is recognised as affording an independent ground on which a court exercising equitable jurisdiction can relieve from a contract.

The point of distinction which is relevant for present purposes is that duress, like undue influence, focuses upon the effect of pressure, upon the quality of the consent or assent of the pressured party, rather than the quality of the conduct of the party against which relief is sought …

• 20.5 The overborne will and the nature of the threat There are two issues that arise for consideration in relation to threats made to contracting parties and the operation of the law of duress. The first is the degree to which the free will of the contracting party, who is subjected to a threat, must be compromised, or overborne. The second

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is the nature of the threat and whether it must be unlawful. The first issue clearly deals with the degree to which consent is affected. This touches upon the point, noted above,53 that contracts made under duress are void ab initio, rather than merely voidable.

20.5.1  The overborne will The notion that duress requires that the will of the affected party be ‘overborne’ was first expounded by Kerr J in Occidental Worldwide Investment Corp v Skibs A/V Avanti ‘The Siboen’ and ‘The Sibotre’.54 This theory drew much criticism, notably from Professor Atiyah, for effectively reducing the affected party to a state of ‘automatism’.55 The fundamental problem with the ‘overborne will’ approach to duress is that it implies a high degree of involuntariness into the making of the contract. However, the making of a contract, even under duress, is a voluntary act. This is why contracts made under duress are voidable rather than void ab initio. In Crescendo Management Pty Ltd v Westpac Banking Corporation56 HcHugh JA stated that the overbearing of the will approach to duress should be rejected: In my opinion the overbearing of the will theory of duress should be rejected. A person who is the subject of duress usually knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take an alternative course of action.57

It can be said that illegitimate pressure can cover a broad spectrum of conduct and situations. When the underlying purpose of the law of duress is considered, the concept of illegitimate pressure makes more sense as a factor to consider in determining duress than any notion of the will of the affected party being overborne. The approach of McHugh JA was followed by the New South The concept of Wales Supreme Court in Equiticorp Financial Services Ltd (NSW) v illegitimate pressure 58 Equiticorp Financial Services Ltd (NZ ) and by the Victorian Supreme makes more sense as Court in Deemcope Pty Ltd v Cantown Pty Ltd 59 and Belgravia Investments a factor to consider in determining duress than Pty Ltd v Evans.60 Similarly, in Dimskal Shipping v International Transport any notion of the will of 61 Workers Federation Lord Goff endorsed McHugh JA’s statement. the affected party being Accordingly, the true test for duress is ‘whether any applied overborne. pressure induced the victim to enter into the contract’.62

20.5.2  The nature of the threat A degree of controversy does exist in relation to the question of whether or not duress must be unlawful. Unlawful and illegal acts can clearly constitute duress. It is less clear as to whether 53 See above, section 20.3. 54 [1976] 1 Lloyd’s Rep 293. 55 See P S Atiyah, ‘Economic Duress and the Overborne Will’ (1982) 98 Law Quarterly Review 197; see also Andrew Phang, ‘Whither Economic Duress? Reflections on Two Recent Cases’ (1990) 53 Modern Law Review 107, 109. 56 (1988) 19 NSWLR 40. 57 Ibid, 45G. 58 (1992) 29 NSWLR 260. 59 [1995] 2 VR 44. 60 (Unreported, 13 March 1998). 61 [1992] 2 AC 152, 165–166. 62 Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 45G.

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lawful conduct can constitute duress.63 Moreover, in circumstances where lawful conduct might likely lead to a finding of duress—such as the threat of vexatious litigation—the boundary lines of duress are less clear. There have been cases of duress where the threat of lawful action has been accompanied by an unlawful demand. These are most obviously the cases where the party committing duress threatens to report some criminal conduct to the police or to expose some highly compromising information unless the victim enters into a particular contract.64 In Kaufman v Gerson65 the Court of Appeal held that a threat to prosecute a man unless his wife paid his debts was duress against the wife. In the case of Universe Tankship of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’)66 Lord Scarman discussed the issue of unlawfulness within the context of economic duress. Lord Scarman was in dissent in Universe Tankship, but his discussion on duress generally, and unlawfulness specifically, is illuminating with respect to duress. He stated: The origin of the doctrine of duress in threats to life or limb, or to property, suggests strongly that the law regards the threat of unlawful action as illegitimate, whatever the demand. Duress can, of course, exist even if the threat is one of lawful action: whether it does so depends upon the nature of the demand. Blackmail is often a demand supported by a threat to do what is lawful, e.g. to report criminal conduct to the police. In many cases, therefore, ‘What [one] has to justify is not the threat, but the demand …’: see per Lord Atkin in Thorne v Motor Trade Association [1937] AC 797, 806. The present is a case in which the nature of the demand determines whether the pressure  threatened or applied, i.e. the blacking [refusing to assist a vessel in docking in or leaving a port], was lawful or unlawful. If it was unlawful, it is conceded that the owner acted under duress and can recover. If it was lawful, it is conceded that there was no duress and the sum sought by the owner is irrecoverable. The lawfulness or otherwise of the demand depends upon whether it was an act done in contemplation or furtherance of a trade dispute. If it was, it would not be actionable in tort: section 13(1) of the Act [Trade Union and Labour Relations Act 1974 ]. Although no question of tortious liability arises in this case and section 13(1) is not, therefore, directly in point, it is not possible, in my view, to say of acts which are protected by statute from suit in tort that they nevertheless can amount to duress. Parliament having enacted that such acts are not actionable in tort, it would be inconsistent with legislative policy to say that, when the remedy sought is not damages for tort but recovery of money paid, they become unlawful.67

It is notable that Lord Scarman makes the strong point that where Parliament has specifically made an act lawful, it does not make sense for that same act to be rendered an act of duress. Universe Tankship was a case of economic duress, a doctrine whose borders are poorly defined, and the question of lawfulness or unlawfulness might have clarified the existence or otherwise of economic duress. An approach similar to this view was later espoused by the New South Wales Supreme Court in the case of Australia and New Zealand Banking Group v Karam,68 where the Court argued that economic duress should be confined to unlawful acts. The Court was of the view

63 See J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539. 64 See Public Service Credit Union v Campion (1984) 75 FLR 131; Kaufman v Gerson [1904] 1 KB 591. 65 [1904] 1 KB 591. 66 [1983] 1 AC 366. 67 Ibid, 401. 68 (2005) 64 NSWLR 149.

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that lawful act duress cases should be regarded as cases of unconscionable dealing or undue influence.69 The Supreme Court’s decision in Karam has attracted some academic criticism,70 and in Mitchell v Pacific Dawn Pty Ltd 71 the Queensland Court of Appeal was at pains to point out that duress and unconscionable conduct are different doctrines ‘with different bases and incidents’. In the extract below from Karam, the New South Wales Supreme Court considered the question of economic duress within the broader framework of unconscionability. In this extract, the Court’s discussion of Bridgewater v Leahy72 has been removed. Suffice to say, that case has been advanced as potentially broadening the scope of unconscionable conduct.73 If duress is seen as a species of unconscionability, which it unquestionably is, then this enlivens the question of whether lawful conduct can constitute duress, as lawful conduct can be unconscionable under circumstances where it is morally repugnant to either insist on one’s lawful rights or to retain the benefits of a bargain obtained under circumstances which offend the conscience of equity.74 Australia and New Zealand Banking Group v Karam (2005) 64 NSWLR 149 The Court at 166–168: How the doctrine of economic duress fits with the equitable doctrines is unclear. The reference to ‘unlawful’ conduct, read in context of the earlier authorities, was originally a reference to unlawful detention of goods. Concepts of ‘illegitimate pressure’ and ‘unconscionable conduct’, if they do not refer to equitable principles, lack clear meaning, outside, possibly, concepts of illegitimate pressure in the field of industrial relations. Mason and Carter in Restitution Law in Australia (1995 at [540]), referring to Professor Beatson, The Use and Abuse of Unjust Enrichment (1991, OUP) state: Professor Beatson has criticised the use of the blackmail analogy in the area of economic duress, and questioned the capacity of the courts to impose judicial control on threats of lawful termination of contract. The only three categories he would allow are threats made maliciously and without any interest whatsoever;

69 See N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 707. 70 See Rick Bigwood, ‘Throwing the Baby out with the Bathwater? Four Questions on the Demise of Lawful Act Duress in New South Wales’ (2008) 27(2) The University of Queensland Law Journal 41. 71 [2007] QCA 74, [7]. The Court of Appeal stated at that ‘Duress and unconscionable conduct are distinct doctrines with different bases and incidents: they are not different ways of describing the same doctrine. The expression “illegitimate pressure” is not a synonym for “unconscionable conduct”.’ 72 (1998) 194 CLR 457. 73 As discussed in Chapter 18, section 18.1.3, it is unclear whether Bridgewater v Leahy represents a change in direction for the High Court with respect to unconscionable conduct or whether it is an anomalous decision. If the New South Wales Supreme Court in Karam relied upon the arguably more expansive approach to unconscionability in Bridgewater to justify directing cases of alleged lawful act duress towards the doctrine of unconscionable conduct rather than duress, then this approach is arguably quite flawed. 74 While the author notes the comments of the Queensland Court of Appeal in Mitchell v Pacific Dawn Pty Ltd [2007] QCA 74, [7], it is clear that duress is a species of unconscionability. The doctrines of duress and unconscionable conduct might be distinct and have different focuses and rationales, but they share common roots in unconscionability. As such, it makes sense to maintain some semblance of harmony among those doctrines that, broadly speaking, belong to unconscionability—unconscionable conduct, duress and undue influence—so long as the doctrines remain coherent within themselves.

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threats in the context of a protected relationship, namely one of dependency or a fiduciary relationship; and threats made in a public law context where principles of fairness and rationality apply. There is much to be said for keeping to those better trodden and more carefully tended paths, rather than rushing down broader paths that beckon but which may in the end lead to a tangled wilderness of single instances.

The authors also express a doubt that ‘the notion of unconscionability will prove of much assistance’. 62. The question is whether the doctrine operates where the conduct in question is not in some sense unlawful. As Professor Beatson noted (supra at p. 131) The Universe Sentinel was not a case involving a threat of lawful action: At common law the conduct of the union was tortious. The question before the Court was whether Parliament had legitimated what was otherwise undoubtedly a tort. This meant that the House did not have to and did not fully analyse the position of threats to do lawful acts or address the difficult question of how to evaluate the propriety of lawful conduct.

Although this limitation on the doctrine was not accepted by Lord Goff in Dimskal [1992] 2 AC at 169B–C, the principled approach is to adopt equitable principles relating to unconscionability, as suggested by McHugh JA in Crescendo Management and by Kirby P in Equiticorp. That approach will allow the weaker party to invoke principles of undue influence, or rights to relief based on unconscionable conduct in circumstances where the weaker party suffers from a ‘special disadvantage’, in the sense identified in Amadio. In addition, relief may be granted where permitted by statute. … The vagueness inherent in the terms ‘economic duress’ and ‘illegitimate pressure’ can be avoided by treating the concept of ‘duress’ as limited to threatened or actual unlawful conduct. The threat or conduct in question need not be directed to the person or property of the victim, narrowly identified, but can be to the legitimate commercial and financial interests of the party. Secondly, if the conduct or threat is not unlawful, the resulting agreement may nevertheless be set aside where the weaker party establishes undue influence (actual or presumptive) or unconscionable conduct based on an unconscientious taking advantage of his or her special disability or special disadvantage, in the sense identified in Amadio. Thirdly, where the power to grant relief is engaged because of a contravention of a statutory provision such as s 51AA, s 51AB or s 51AC of the Trade Practices Act, the Court may be entitled to take into account a broader range of circumstances than those considered relevant under the general law. Pursuant to both Trade Practices Act provisions and the Contracts Review Act, the relative strengths of the bargaining positions of the parties, and their ability to negotiate terms, will be relevant. However, it does not follow that because, for the purposes of s 9(2)(a) of the Contracts Review Act, there was a material inequality of bargaining power, a contract between such parties will necessarily be set aside. Most ‘contracts of adhesion’ will fall into that category, but most will be valid.

Chapter 20

Duress

review questions 1 What is economic duress? 2 What are some of the controversies that surround the doctrine of economic duress? How might they be resolved?

• 20.6 Causation The illegitimate threat must have caused the execution of the The illegitimate threat contract in some manner; that is, the threat must have acted on must have caused the the mind of the victim. It follows then that one of the key issues execution of the contract in duress is determining whether the threat operated on the mind in some manner; that is, the threat must have of the victim. In most duress cases, this will be fairly obvious. The acted on the mind of the victim of the alleged duress will protest in some manner and make victim. their displeasure known in a tangible way. However, in North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd 75 the failure of the victim of duress to seek redress was held to be an undue delay and a bar to a remedy. In Crescendo Management Pty Ltd v Westpac Banking Corporation76 causation was not satisfied as the mortgage had been signed before the illegitimate pressure was brought to bear. In most cases of duress, however, the illegitimate pressure is proximate to the entry into or variation of a contract. Generally, in cases of duress to the person, causation has been self-evident. However, in Barton v Armstrong77 this arose as an issue. In that case, Lord Cross of Chelsea stated: It is hardly surprising that there is no direct authority on the point, for if A threatens B with death if he does not execute some document and B, who takes A’s threats seriously, executes the document it can be only in the most unusual circumstances that there can be any doubt whether the threats operated to induce him to execute the document. But this is a most unusual case and the findings of fact made below do undoubtedly raise the question whether it was necessary for Barton in order to obtain relief to establish that he would not have executed the deed in question but for the threats.78

In Barton v Armstrong causation was satisfied on the facts of the case. As Seddon and Ellinghaus have noted, in a case such as ‘Barton v Armstrong, involving a threat of murder, the Privy Council was fairly obviously not going to develop a test for causation favourable to the threatening party’.79 Seddon and Ellinghaus support a variant of the ‘but for’ test, which has received some judicial and academic support; while in Crescendo McHugh JA stated that the test for duress should be ‘whether any applied pressure induced the victim to enter into the contract’.80 This test, which is arguably more inclusive than a ‘but for’ test, might be preferable given the need to craft rules for duress that support three different species of the doctrine. 75 76 77 78 79 80

[1979] QB 705. (1988) 19 NSWLR 40. [1976] AC 104. Ibid, 118. N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 716. (1988) 19 NSWLR 40, 45G.

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• 20.7 Remedies The remedy that is of most fundamental importance in the area of duress is rescission;81 where duress has occurred, the affected party will have the right to rescind the contract. Rescission is an essential step towards recovering any monies that have been spent as a result of the economic duress.82 However, where rescission is not available—as for example in the facts of North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd  83 due to the delay of the plaintiff—then recovery of the money will not be possible. Where rescission has been granted, restitution might also be available to prevent the unjust enrichment of the defendant.84 Duress might be an actionable tort and, as such, damages might be payable in such cases. The notion of duress as a tort was considered by Lord Diplock in Universe Tankship of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’),85 though his Lordship declined to express a view either confirming or rejecting the proposition.

Ke y p o ints for re v ision Duress is concerned with providing redress where illegitimate pressure has been brought to bear upon a contracting party. A contract made under duress is voidable. There are three basic types of duress: duress to the person, duress of goods and economic duress. There are three fundamental elements to duress: (i) illegitimate pressure; (ii) causation; and (iii) the absence of reasonable alternatives. Economic duress is well-recognised at law, yet its parameters are uncertain. There is a general reluctance in Australia for courts to intervene in the affairs of sophisticated commercial parties and this bears down somewhat as a limitation upon the doctrine of economic duress. Drawing the line between sharp commercial practices, which are acceptable, and illegitimate commercial practices, which constitute economic duress, is a question of fact and degree.

problem-solving practice Albert is a shoemaker in Canberra. He has recently been carrying on an affair with his neighbour’s wife. Stefan, another shoemaker, comes to know of the affair and threatens to expose Albert’s secret unless Albert sells him his business at a heavily discounted price. Albert contracts to sell his business to Stefan. Last week Albert’s wife found out about the affair. Can Albert rescind his contract with Steven?

81 North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd [1979] QB 705. 82 Ibid. 83 Ibid. 84 Dimskal Shipping Co SA v International Transport Workers Federation (‘The Evia Luck’ (No 2)) [1992] AC 152. 85 [1983] 1 AC 366.

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Duress

ANSWER The question that arises in the present matter is whether Stefan’s threat to expose the affair unless Albert contracted with him constitutes duress to the person. Duress requires (i) illegitimate pressure; (ii) causation; and (iii) the absence of reasonable alternatives. Turning to the first element, the question to be addressed here is whether Stefan’s threat constitutes illegitimate pressure. In Public Service v Campion a threat to inform the police unless a guarantee was given was found to be duress. The facts of the present matter are broadly similar. The fact that the act in question is not unlawful does not save it from constituting illegitimate pressure. The combination of the threat and the contractual demand gives the pressure its illegitimate character. The next question is causation; this is in effect a factual question and depends upon whether Albert has acted as a consequence of the illegitimate pressure. This element is satisfied upon the facts of the present matter. The final question is whether Albert had any reasonable alternatives. Given the opprobrium that Albert’s conduct might attract, it seems that within this context he had few practical alternatives. Accordingly, a claim for duress is likely to be successful.

[ 415 ]

[ 416 ]

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21

Unfair contract terms

Chapt e r o v e rv i e w 21.0

Introduction  417

21.1

The Australian Consumer Law   417

21.2

The rationale behind the Unfair Contract Terms regime   418

21.3

Application and operation   420 21.3.1 A consumer contract   420 21.3.2 A standard form contract   421 21.3.3 An unfair term   422 The ACL’s examples of unfair terms   423

21.4

Remedies  424

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Unfair contract terms

• 21.0 Introduction The advent of the Australian Consumer Law (ACL) as a law having uniform application throughout Australia will have a significant impact upon some areas of contract law.1 Most notably, the ACL will impact upon statutory unconscionability, implied terms in the form of consumer guarantees, misleading or deceptive conduct (the statutory corollary to the common law doctrine of misrepresentation) and unfair contract terms. It is the last topic that is the focus of this chapter: the Unfair Contract Terms regime of the ACL. This scheme is provided for in ss 23–28 of the ACL and sets up a mechanism for whether terms in standard form consumer contracts are unfair.

• 21.1 The Australian Consumer Law The ACL is housed in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA). The purpose of the ACL is to provide uniform consumer protection law in Australia. Prior to the commencement of the ACL, consumers were protected under a patchwork of federal, state and territory laws, and at a federal level the Trade Practices Act 1974 (Cth) (TPA) regulated corporate conduct in relation to consumers. Most notably, the TPA had significant legislative provisions in relation to statutory unconscionability, misleading or deceptive conduct, and implied terms in goods contracts.2 At a state and territory level, Fair Trading Acts and Sale of Goods Acts provided other—and at times overlapping—protections for consumers. The idea behind the CCA and the ACL, therefore, is to have a single, unified consumer and competition law. The ACL is a combination of the TPA and state and territory legislations, with new provisions added to give additional protection to consumers. As the Commonwealth Constitution does not directly empower the Commonwealth to legislate for consumer protection, it has The idea behind been deemed necessary for the states and territories to apply the the CCA and the ACL is to have a single, ACL through their Fair Trading Acts. This process was conceived unified consumer and and agreed to through the Council of Australian Governments competition law. (COAG). As such, the ACL is very much the product of state, territory and federal government cooperation. To implement COAG’s plan, the ACL was deemed to be an application law. For example, in Victoria the ACL is applied through the Fair Trading Act 1999 (Vic), and similar arrangements exist in every other state and territory. The upshot of these legislative arrangements is that the ACL now has uniform application throughout Australia. While the ACL is designed to protect consumers, there are provisions that apply to corporations and those who are carrying on a business. For example, s 22 of the ACL provides protection against unconscionable conduct in relation to business transactions. Similarly, provided that the transaction in question is a consumer transaction, a business may seek the protection of the Consumer Guarantees regime in Division 1, which recognises that businesses may at times contract as consumers, but might at other times contract for business purposes. The misleading 1 For a more detailed study of the ACL, see Alex Bruce, Consumer Protection Law in Australia, LexisNexis, (2011). 2 For an overview of these schemes within the TPA, see S Fisher, P Ali and G Pearson, Commercial Law, Lawbook Co (2010).

[ 417 ]

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or deceptive conduct (Chapter 2, Part 2.1 of the ACL) and statutory unconscionability (Chapter 2, Part 2.2 of the ACL) provisions in particular set out a general understanding that while businesses are able to be self-interested and do not need to contract in the best interests of others, they must not engage in conduct that is unconscionable and dishonest.

• 21.2 The rationale behind the Unfair Contract Terms regime The maxim caveat emptor was well suited to the times when a buyer could inspect a vendor’s goods and decide whether they wished to purchase them. However, in the modern marketplace consumers are afforded less time to make decisions about products and are often confronted by pre-prepared contracts that have been put together by sophisticated businesses. The mismatch between unaware consumers and savvy businesses was evident even when the TPA was enacted. In the Explanatory Memorandum to the TPA, the then Senator Lionel Murphy stated: In consumer transactions, unfair practices are widespread. The existing law is still founded on the principle known as caveat emptor—meaning ‘let the buyer beware’. The principle may have been appropriate for transactions conducted in village markets. It has ceased to be appropriate as a general rule. Now the marketing of goods and services is conducted on an organised basis by trained executives. The untrained consumer is no match for the businessman who attempts to persuade the consumer to buy goods or services on terms suitable to the vendor.3

In the current marketplace, businesses are even more sophisticated, with significant resources devoted to strategy, marketing and legal matters. Accordingly, it makes sense that some basic protections should be in place to assist consumers whenever businesses seek to rely upon unfair terms in a standard form contract. Moreover, the circumstances under which such problems might arise have expanded. In the twenty-first century consumers will easily encounter standard form contracts when they engage in such activities as signing up for a gym membership, video store membership, a mobile phone contract, car rentals, the purchase of airline tickets, or the purchase of computer software through a click-wrap licence. The statutory schemes in the TPA provided no direct coverage of unfair terms in a contract. Similarly, though the common law of contracts does have something to say about unfair terms, it is not infallible in this area. Consider, for example, the situation of a man who drove into a private car park, which advertised free parking for two hours subject to ‘terms and conditions’, obtained a ticket with terms printed on the back, but then overstayed his allowed free parking time by a mere minute and was then given an infringement notice claiming $88 in damages.4 In this example, the owner of the car park is claiming to be entitled to $88 in damages under contract. Upon what grounds could the man contest the claim for $88 in circumstances where the likely imposition of such a claim had not been brought to his attention? Traditionally, contract law

3 Second Reading Speech, Trade Practices Bill 1974 (Cth), Hansard, 30 July 1974, pp. 540–541. 4 This example is actually based on a spate of claims for damages by the operators of several car parks against consumers. Over the past few years, a practice has emerged of certain car parks advertising ‘free parking for two hours’ and then attempting to claim either $66 or $88 in damages from customers if they either overstay or fail to display their tickets. The practice has drawn the attention of the Australian Competition and Consumer Commission, the Consumer Law Group and the Victorian Government. It has been stated that the commencement of the Australian Consumer Law will effectively end this practice.

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Unfair contract terms

might deal with such a situation through the use of the ‘red hand rule’,5 as applied in the cases of Thornton v Shoe Lane Parking 6 and Interfoto Picture Library v Stilleto Visual Programmes Ltd.7 There are rules concerning liquidated damages which might bar a claim for damages of $88 for overstaying in a car park by a mere minute. Alternately, in the case of Corporation of the City of Adelaide v Adelaide City Fines Pty Ltd  8 it was held that the infringement notices that Adelaide Fines was handing out to customers looked too much like official council fines. It was held that Adelaide Fines had engaged in misleading and deceptive conduct. However, if the term had been brought to the attention of the motorist then the ‘red hand rule’ would not apply; and if the claim for damages was printed in a way that did not resemble fine notices imposed by local councils, then a claim of misleading or deceptive conduct would not be available. There was some speculation when the former provisions of the TPA relating to statutory unconscionability in business and consumer dealings were enacted that their reach would extend beyond that of unconscionability in the common law and equity. However, in practice it has appeared that special disadvantage and substantive unfairness in the contract must be co-requisites in order for a finding of statutory unconscionability to be made. For example, in the leading consumer unconscionability cases of ACCC v Lux9 and ACCC v Keshow10 the consumers both suffered from special disadvantages. In Lux the consumer was an illiterate and mentally disabled woman. In Keshow the consumers were illiterate and disadvantaged Indigenous women. In both cases the businesses in question showed a lack of conscience, through their agents, in attempting to procure contracts and retain their benefit in circumstances where to do so would be manifestly unjust. To return to the example above it is clearly unfair for a business to seek to claim $88 in damages from a consumer for overstaying in a parking space for a minute. However, neither misleading or deceptive conduct nor statutory unconscionability offer a perfect solution. The common law rules of contract law are of some assistance, but these rules might also be displaced under certain circumstances. Moreover, litigating under either the common law or the ACL might prove costly and time-consuming. The Unfair Contract Terms regime would offer a seemingly perfect solution in that it offers relatively clear rules on unfairness in contracts. In this sense, the Unfair Contract Terms regime targets the regulatory gap in the former TPA and provides a mostly The Unfair Contract workable solution to attempts by businesses to impose unfair and Terms regime targets harsh terms on consumers. The need for the Unfair Contract the regulatory gap in the Terms regime is aptly demonstrated by the fact that between the former TPA and provides interim of the enactment of the Unfair Contract Terms regime a mostly workable solution to attempts by of the TPA and the commencement of the CCA and the ACL, businesses to impose both Victoria and New South Wales enacted their own Unfair unfair and harsh terms on Contract Terms legislation. The ACL now supersedes both the consumers. Fair Trading Amendment (Unfair Contract Terms) Act 2010 (Vic) and 5 6 7 8 9 10

The ‘red hand rule’ states that the more unreasonable a clause is, the greater the notice that must be given of it. (1971) 2 QB 163; see also Spurling v Bradshaw Ltd [1956] 1 WLR 461. (1988) 1 All ER 348. [2009] FCA 132 (20 February 2009). [2004] FCA 926 (2005) ATPT (Digest) 46–265.

[ 419 ]

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the Fair Trading Amendment (Unfair Contract Terms) Act 2010 (NSW).11 Furthermore, several states had Unfair Contract Terms rules in their Fair Trading Acts long before the commencement of the ACL.12 review question What is the rationale behind the Unfair Contract Terms regime?

• 21.3 Application and operation The Unfair Contract Terms regime is found in Chapter 2, Part 2.3 of the ACL. The scheme is provided for in ss 23–28. Section 23(1) provides that a term will be void if it is unfair and if the contract is a standard form contract. Either the consumer party to the contract or the ACCC may apply for a declaration from a court that the term is void. It is important to note that the larger contract itself is not considered to be void ab initio. However, if an essential term is found to be void, and where this raises serious issues of uncertainty or incompleteness, the prospect of the contract as a whole being void ab initio also arises. There are effectively three primary requirements that need to be satisfied under the Unfair Contract Terms regime: (i) the contract in question must be a consumer contract;13 (ii) the contract must be a standard form contract;14 and (iii) the term in question must be unfair.15 With regard to the above: (i) Section 23(3) deals with the requirement of a consumer contract. (ii) The term ‘standard form contract’ is not defined in the ACL; however, s 27(1) sets up a rebuttable presumption that a pre-prepared consumer contract is a standard form contract. (iii) There are four requirements that must be met before a contract term will be declared to be unfair, and these are discussed below.16 Section 25(1) sets out a series of examples in which a term might be considered to be unfair.

21.3.1  A consumer contract Section 3 of the ACL provides that a person is a consumer if they buy goods for less than $40 000; or where the goods are of a kind ordinarily acquired for personal, domestic or household use or 11 The Unfair Contract Terms regime is now fully within the CCA as part of the ACL. 12 For example, Victoria had a smaller unfair contract terms regime in Part 2B of the Fair Trading Act 1999 (Vic): see Director of Consumer Affairs Victoria v Craig Langley Pty and Matrix Pilates and Yoga Pty Ltd [2008] VCAT 1332; see also Director of Consumer Affairs Victoria v Trainstation Health Clubs Pty Ltd (Civil Claims) [2008] VCAT 2092. 13 See ACL, s 23(3). 14 See ACL, s 27. 15 See ACL, ss 24–25. 16 See below, section 21.3.3.

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Unfair contract terms

consumption; or where the goods consist of a vehicle or trailer acquired for use principally in the transport of goods on public roads. However, s 23(3) in Chapter 2, Part 2.3 of the ACL, offers an arguably narrower definition and it is important, in the context of the Unfair Contract Terms regime, to remember that the two definitions are conceptually and legally separate. The Unfair Contract Terms regime contained in Chapter 2, Part 2.3 has a narrower field of operation than the general term ‘consumer’ in the ACL. In effect, s 23(3) confines the Unfair Contract Terms regime to situations where the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption, and to dealings in land. It provides: (3) A consumer contract is a contract for: (a) a supply of goods or services; or (b) a sale or grant of an interest in land; to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

Note also that in the Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth), it was stated that the regime is restricted to ‘business to consumer transactions as the provisions apply only to a consumer contract in which at least one of the parties is an individual’.17

21.3.2  A standard form contract Under the Unfair Contract Terms regime, the contract in question must be a standard form contract. This allows for a relatively wide scope of coverage over pre-prepared contracts that businesses seek to employ in consumer transactions. The Australian Competition and Consumer Commission (ACCC) has stated in its Guide to the Unfair Contract Terms Law:18 in broad terms a standard form contract will typically be one that has been prepared by one party to the contract and is not subject to negotiation between the parties—that is, it is offered on a ‘take it or leave it’ basis.19

The ACCC notes in its Guide that such contracts are invariably found in the context of consumer transactions relating to telecommunications, gym memberships, finance, domestic building and motor vehicles. However, this list is not closed and a standard form consumer contract might be found to exist in any number of consumer transaction situations. The existence of the rebuttable presumption in s 27—that a pre-prepared consumer contract is a standard form contract—seeks to account for the power imbalance between the business, which has had time to prepare the contract, and the consumer who receives the contract on a ‘take it or leave it’ basis: 27 Standard form contracts (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.

17 Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth), [5.15]. 18 ACCC, A Guide to the Unfair Contract Terms Law, Commonwealth of Australia, Canberra ( July 2010). 19 Ibid, p. 4.

[ 421 ]

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Contract Law: Text and Cases

(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 … 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.

Section 27(2) lists a number of factors for the courts to take into consideration in determining whether a contract is a standard form contract. Crucially, paras (b) and (c) refer to whether a contract has been prepared before any discussion between the parties, and whether a party has been required to effectively either accept or reject the terms; while para (d) refers to whether a party has been able to negotiate the It seems highly likely terms of the contract. It seems highly likely that where a consumer that where a consumer has been able to has been able to negotiate the terms of a contract, it will not be negotiate the terms of found to be a standard form contract. In the Director of Consumer a contract, it will not be Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd found to be a standard (Civil Claims),20 decided under the then Victorian Unfair Contract form contract. Terms legislation, Judge Harbison stated: terms of a consumer contract which have been the subject of genuine negotiation should not be lightly declared unfair. This legislation is designed to protect consumers from unfair contracts, not to allow a party to a contract who has genuinely reflected on its terms and negotiated them, to be released from a contract term from which he or she later wishes to resile …21

21.3.3  An unfair term Whether a term in a standard form consumer contract will be held to be unfair will depend upon the application of s 24. In effect, there are four requirements under s 24 that must be satisfied before a term can be held to be unfair: (i) The court must take into account whether the term is transparent. (ii) The term must cause a significant imbalance in the parties’ rights under the contract. (iii) The term must not be reasonably necessary to protect the interests of the party that benefits from the term. (iv) The term must cause a detriment to the consumer. The requirement that a court must have regard to whether a contract term is transparent is contained in s 24(2), and in s 24(3) it is stipulated that a term is transparent if the term is 20 [2008] VCAT 1332. 21 Ibid, [66].

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Unfair contract terms

expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term. Whether a term causes a significant imbalance in the parties’ rights under a contract will depend upon the facts of the particular case. The ease with which the business might alter terms or evade obligations to a consumer will likely influence any finding in relation to this requirement. In the Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd (Civil Claims)22 it was held that clauses allowing a gym to avoid performance but not allowing the member to either sue the gym or cancel their membership were unfair. In the UK case of Director General of Fair Trading v First National Bank,23 with regard to legislation similar to that in s 24 of the ACL, Lord Bingham stated: The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty.24

Whether a term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term will also depend upon the facts of the matter. However, s 24(4) sets up a rebuttable presumption that the term is not reasonably necessary; in other words, the business must prove that the term is reasonably necessary. In its Guide to the Unfair Contract Terms Law 25 the ACCC states: Such evidence might include material relating to the business’s costs and business structure, the need for the mitigation of risks or particular industry practices to the extent that such material is relevant.26

The requirement of detriment will likely be quite easy to make out on the facts should a term in a standard form consumer contract be challenged. This is a question of fact and the consumer need only show that the term is unfavourable to them.

The ACL’s examples of unfair terms Section 25(1) of the ACL contains a list of examples of potential unfair terms. While s 25 does not stipulate that these terms will automatically be considered to be unfair, it appears highly likely that there will be a presumption, at least at an informal level, that the existence of such clause will lead to a finding that a term is unfair. Note that s 25(1) does not preclude other types of terms from being found to be unfair under s 24. Section 25(1) provides: 25 Examples of unfair terms (1) Without limiting section 24, the following are examples of the kinds of terms of a consumer contract that may be unfair: (a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;

22 23 24 25 26

[2008] VCAT 1332. [2002] 1 AC 481. Ibid, 499. ACCC, A Guide to the Unfair Contract Terms Law, Commonwealth of Australia, Canberra ( July 2010). Ibid, p. 11.

[ 423 ]

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(b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract; (c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; (d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; (e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; (f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; (g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract; (h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning; (i) a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents; (j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent; (k) a term that limits, or has the effect of limiting, one party’s right to sue another party; (l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; (m) a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; (n) a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

• 21.4 Remedies Section 23(1) stipulates that an unfair contract term will be void. Under s 250 of the ACL a party to a standard form consumer contract might also seek a declaration from a court that a term is void. An injunction might be sought under s 232(3), and damages and compensation orders are available under ss 236 and 237 respectively.

Ke y p o in ts for re v ision The purpose of the Unfair Contract Terms regime is to redress the imbalance between consumers and sophisticated businesses in situations where the consumer is presented with a pre-prepared contract on a ‘take it or leave it’ basis. There are three steps that need to be undertaken to determine whether a contract term is unfair within the meaning of the Unfair Contract Terms regime: (i) establishing that the contract is a consumer contract; (ii) establishing that the contract is a standard form contract; and (iii) considering whether the term is unfair. A contract is a consumer contract if it falls within the parameters of s 23(3) of the ACL. A contract is a standard form contract if it has been pre-prepared by a party and is presented to the consumer on a ‘take it or leave it’ basis.

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Unfair contract terms

Section 27 of the ACL establishes a rebuttable presumption that a contract is a standard form contract. Section 24(1) provides a three-part test as to whether a contract is unfair. Section 24 as a whole requires that in ascertaining whether the term is unfair, four factors must be considered: (i) whether the term is transparent; (ii) whether the term causes a significant imbalance in the parties’ rights under a contract; (iii) whether the term is reasonably necessary to protect the legitimate interests of the business; and (iv) whether the term would cause a detriment to the consumer. Whether the term is transparent or not will not on its own determine whether the term is unfair. However, an unclear term is likely to be unfair. Section 25(1) provides a list of terms of concern. This list is relevant to the determination of the application of s 24(1)(a) (whether the term causes a significant imbalance). There is a rebuttable presumption in s 24(4) that the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term. Detriment under s 24(1)(c) is a question of fact. The detriment need not have occurred. It merely needs to appear likely to occur if the term were ever to be employed by the party who would be advantaged by the term.

problem-solving practice Britta decides to join a gym owned and operated by Super Body Fitness Pty Ltd. When Britta arrives at the gym she is presented with a contract by a representative of Super Body Fitness. The contract contains a clause which stipulates that Super Body Fitness can cancel Britta’s membership at any time and for any reason. When Britta enquires about the term she is told that Super Body Fitness does not negotiate contract terms with individual customers. Is this term likely to be unfair under the Unfair Contract Terms regime?

ANSWER There are effectively three steps that need to be undertaken to determine whether a contract term is unfair within the meaning of the Unfair Contract Terms regime of the Australian Consumer Law. These are: (i) establishing that the contract is a consumer contract; (ii) establishing that the contract is a standard form contract; and (iii) considering whether the term is unfair. The third step—considering whether the term is unfair—has four parts. These are: (a) whether the term is transparent; (b) whether the term causes a significant imbalance in the parties rights under a contract; (c) whether the term is reasonably necessary to protect the legitimate interests of the business; and (d) whether the term would cause a detriment to the consumer. In the situation at hand, the first question would be whether the contract between Britta and Super Body Fitness is a consumer contract. Section 23(3) of the ACL would apply. It may be argued that Britta’s contract is for services for personal consumption and thereby falls within the plain meaning of s 23(3)(a). The second question is whether the contract that Britta receives is a standard form contract. Section 27 of the ACL establishes a rebuttable presumption that a contract is a standard form contract. It will be

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incumbent upon Super Body Fitness to prove otherwise. However, in the present matter, the contract has been pre-prepared and Britta has been told that Super Body Fitness does not negotiate terms with individual customers. Both of these facts are relevant factors for a court to consider under ss 27(2)(b) and (c) respectively in relation to whether the contract is a standard form contract. It appears evident upon the facts that the contract will be found to be a standard form contract. The third and most essential question is whether the impugned term in the contract is unfair. From the facts it does appear that the term is transparent within the meaning of s 24. Britta has been able to quite easily comprehend the term and it appears to have been clearly and readily presented to her. The term clearly causes an imbalance between the parties on its face. The term allows Super Body Fitness to terminate Britta’s contract without any cause. This appears to fall within the example of an unfair term provided for in s 25(1)(b) of the ACL. It will be incumbent upon Super Body Fitness to demonstrate that the term is reasonably necessary to protect its legitimate interests. Section 24(4) of the ACL makes it a rebuttable presumption that the term is not reasonably necessary. If the term were to be used by Super Body Fitness it would clearly cause a detriment to Britta. On the basis of the above reasoning it is likely that the term is unfair under the Unfair Contract Terms regime.

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chapter

22

Mistake

Chapt e r o v e rv i e w 22.0

Introduction  428

22.1

Unilateral mistake  430 22.1.1 Unilateral mistake as to identity   430 When the parties have contracted at a distance   431 When the parties have contracted face to face   432 22.1.2 The effect of an executed document   433 22.1.3 Unilateral mistake as to terms   433 22.1.4 ‘Snapping up’ an offer   434

22.2

Common and mutual mistake   435

22.3

The subject matter of the contract   436 22.3.1 Identifying the subject matter   436 22.3.2 Total failure of consideration   437 Absence of subject matter   437

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Partial absence of subject matter   439 Mistake as to quality of subject matter   439 22.4

Other categories of mistake   439

22.5

Remedies  440 22.5.1 Rescission  440 22.5.2 Unjust enrichment  444 22.5.3 Specific performance  444 22.5.4 Rectification  444 For common mistake   445 For unilateral mistake   446

• 22.0 Introduction The common law’s doctrine of mistake, and the application of that doctrine, are inseparable from the common law’s conception of the nature of contract itself. On the one hand, the will theory of contract1 maintains that contracts are formed by, and conform to, the subjective intention of the parties.2 The competing theory—the bargain theory—proposes that contracts are declaratory and that their formation (and the substance of the agreement they embody) are to be understood objectively.3 In practice, however, it has been argued that the common law does not espouse a pure allegiance to either, but fashions a compromise which is in fact more pragmatic than theoretical.4 In the tradition of civil law most closely associated with the will theory of contract formation, Grotius argued that one party’s mistake with respect to a matter fundamental to the contract, regardless of the other party’s knowledge, would negate consent and mean that no contract had been concluded.5 The common law’s application of the doctrine of mistake is consistent with a declaratory theory of contract.6 The difference in philosophy may be crucial to the remedy available to the parties. Take the example of the Roman error in nomine, where two parties, intending to enter a contract for the sale and purchase of product A, both use the word X to refer to product A, whereas in fact the meaning of word X is not A, but B. Perhaps they have used a word in a third language that is current in an essentially international industry. Under the will theory, a contract would exist for A. 1 See Chapter 2, section 2.1.1. 2 See J Gordley, The Philosophical Origins of Contract Law, Clarendon Press (1991). 3 See O W Holmes, The Common Law, Dover (1991), p. 309: ‘The law has nothing to do with the actual state of the parties’ minds.’ 4 See R Zimmerman, The Law of Obligations: Roman Foundations of the Civilian Tradition, Oxford University Press (1996), pp. 585–587, 619–620 (comparing civilian and common law traditions). 5 H Grotius, On the Rights of War and Peace, Clarendon Press (1925), p. 332; compare St Thomas Aquinas, the locus classicus of the will theory, for whom agreement was based on consent (or declaration): Summa Theologica, Benziger Bros (1947). 6 That theory is evident in the classic case of Raffles v Wichelhaus (1864) 2 H & C 906; see also Cundy v Lindsay (1878) 3 App Cas 459; Hartog v Colin & Shields [1939] 3 All ER 566.

Chapter 22

Mistake

However, under a declaratory theory the subject of the contract would be B, despite the fact that neither party intended to contract for it. The common law may find a contract for B but rectify to a contract for A. However, rectification is a remedy available when there has been a mistake in the recording and not the making of a contract, and only rectifies prior agreements.7 Because the common law tradition focuses elsewhere than on the parties’ consent or intention as the basis of contract formation, it tends not to have a well-worked-out position on the vitiation of consent or intention as compared to continental systems of law. Parties are rarely permitted to plead their subjective understanding as to the terms of the contract when the framework of contractual interpretation is overridingly and presumptively objective. The doctrine of mistake, therefore, which deals with defects in consent, does not align with the common law as well as it does with the civil law. Instead, both textbooks and authority deal with ‘mistake’ as to terms, or as to a party’s identity, as amounting to a mismatch of offer and acceptance, and therefore under the concept of ‘formation’. The classic policy position articulated in Bell v Lever Bros Ltd 8 was that it is of paramount importance that contracts should be observed, and … if parties honestly comply with the essentials of the formation of contracts—i.e. agree in the same terms on the same subject matter—they are bound, and must rely on the stipulations of the contract for protection from the effect of the facts unknown to them.9

The reassertion of Bell v Lever Bros as the classic policy position10 At present, the scope of the doctrine followed a historical interlude in which relief was more broadly of mistake is extremely available on the basis of the courts’ equitable jurisdiction, stemming narrow and operates from Denning LJ’s decision in Solle v Butcher.11 At present, however, only if both contracting parties, acting innocently, the scope of the doctrine of mistake is extremely narrow and have entered the contract operates only if both contracting parties, acting innocently, have on the basis of a shared entered the contract on the basis of a shared mistake assumption mistake assumption which, if removed, would which, if removed, would render performance of the contract render performance of the impossible. contract impossible. Contracts are often affected by mistakes of various kinds and to varying extents. Errors having legal effect as mistake in contract are those in which the mistake affects the validity and enforceability of the contract, or the rights and remedies available as a result. Mistakes may be distinguished on the basis of the effect of the mistake. Some mistakes make the contract ‘void’; others render it ‘voidable’. The taxonomy of mistake in UK law that will be dealt with in this chapter is unilateral, common and mutual mistake. This categorisation has been criticised as explaining little about the types of mistakes, their source and their effect, and therefore not offering guidance as to remedies and relief. Other classifications, in particular a functional classification, have been offered by scholars, but have not found judicial approbation.12 7 Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450 (CA); see also Prenn v Simmonds [1971] 1 WLR 1381(HL), 1383–1385 per Lord Wilberforce. 8 [1932] AC 161. 9 Ibid, 224 per Lord Atkin. 10 Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 All ER 902, where Steyn J applied Atkin LJ’s test in determining whether the contract had been rendered void for mistake. 11 [1950] 1 KB 671, discussed below, section 22.5.1. 12 See for example M A Eisenberg, ‘Mistake in Contract Law’, 91 California Law Review (2003) 1575.

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• 22.1 Unilateral mistake A mistake is unilateral when the mistake is that of a single party. When only one party is mistaken, the contract will not necessarily be void or voidable; the validity and enforceability of the contract will only be affected if the mistaken party proves that the other party knew or had reason to suspect that the mistake had been made, or had contributed to the other’s mistake. Therefore, absent knowledge of or contribution to the mistake, a unilateral mistake of construction entitles the party whose construction the court accepts as correct to the remedy of specific performance.

22.1.1  Unilateral mistake as to identity Mistake as to identity may arise in a restricted number of circumstances, for example in cases of fraudulent misrepresentation of agency.13 In such cases there is no contract absent the authority to contract. If a party enters a contract having fraudulently misrepresented their identity, the contract is not void but voidable, such that the mistaken party can elect to have it set aside subject to third parties having honestly acquired rights under it for good value.14 Also, no contract arises and specific performance cannot be ordered where the offeror deals with a person acting on behalf If a party enters a contract of another with whom the offeror does not wish to deal, such having fraudulently as where one person enlists another to purchase on their behalf misrepresented their property which the vendor would exclude them from purchasing.15 identity, the contract is However, specific performance will be ordered where there is no not void but voidable, such that the mistaken misrepresentation16 and the purchaser’s identity is not material party can elect to have it to the transaction qua transaction, notwithstanding that the set aside subject to third vendors would not have entered the contract had they known the parties having honestly acquired rights under it for purchaser’s identity.17 good value. Further, a third party cannot accept an offer made to another party so as to create a binding contract between the offeror and the third party. In Boulton v Jones18 goods were ordered from one Broecklehurst. The order arrived after Broecklehurst had sold his business, and the new owner substituted his name for Broecklehurst’s and filled the order. He then sued for payment of the price but failed because, as Pollock CB said, ‘It is a rule of law, that if a person intends to contract with A, B cannot give himself any right under it.’19 The decision appears to contradict an objective approach to contract formation, but is consistent with contract formation in which the personality of the contracting party is important.20 13 Higgons v Burton (1857) 26 LJ Ex 342; Luke v Simmons [1927] AC 487. 14 Lewis v Averay [1972] 1 QB 198, 207 per Lord Denning; see also Westpac Banking Corp v Dawson (1990) 19 NSWLR 614 (mistake as to the identity of a party to a mortgage did not void the mortgage). 15 See Said v Butt [1920] 3 KB 497 (a friend purchased a theatre ticket for a theatre critic who the theatre management did not wish to see the production); Archer v Stone (1898) 78 LT 34 (a vendor offered to sell property to the agent of a person with whom he did not wish to deal). 16 Dyster v Randall & Sons [1926] 1 Ch 932. 17 See Williams v Bulat [1992] 2 Qd R 566; see also Nash v Dix (1898) 78 LT 445 (the vendor would not sell property to Roman Catholics and the purchaser purchased with a view to reselling to Roman Catholics). 18 (1857) 2 H & N 564. 19 Ibid, 565. 20 Ibid, 566 per Bramwell B. The two approaches have different theoretical bases: one is concerned with the personality of the party, the other is concerned with the proper allocation of rights under a contract made by other parties.

Chapter 22

Mistake

When the parties have contracted at a distance A unilateral mistake is more likely to render a contract void when parties have contracted at a distance, or inter absentes. The facts of Cundy v Lindsay21 are that Blenkarn ordered goods from the Lindsays in writing, stating his identity on the order as ‘Blenkarn & Co, 37 Wood Street and 5 Little Love Lane, Cheapside’, but signed the order ‘Blenkiron & Co’—the name of a firm whose place of business was 123 Wood St, Cheapside. It appears that the Lindsays—who were very familiar with Blenkiron as a customer—did not turn their mind to the name ‘Blenkarn’, even though it appeared on the order. They believed they were dealing with Blenkiron and dispatched the goods to 37 Wood Street. Blenkarn then sold the goods to the third party, Cundy. The Lindsays alleged their contract with Blenkarn was void such that Cundy did not obtain ownership of the goods and brought a claim in conversion against Cundy. The issue was whether Cundy had the requisite title to sustain the action. The House of Lords held that there being no contract by which the title could pass to the impostor, Blenkarn, the claimants had retained the title in the goods. Cairns LJ stated that ‘as between [Blenkarn] and [the Lindsays] there was no consensus of mind which could lead to any agreement, or any contract whatever’.22 His Lordship explained: No, my Lords, stating the matter shortly in that way, I ask the question, how is it possible to imagine that in that state of things any contract could have arisen between [Lindsay] and Blenkarn, the dishonest man? Of him they knew nothing, and of him they never thought. With him they never intended to deal. Their minds never, even for an instant of time, rested upon him, and as between him and them there was no consensus of mind which could lead to any agreement or any contract whatever.23

Penzance LJ stated that the mere fact of the goods being sent to Blenkarn’s address at 37 Wood Street in the context of all the facts was not evidence of a willingness to deal with the business at that address, regardless of identity; while Hatherley LJ distinguished the facts of this case from other cases that had been decided on the basis of face-to-face dealings.24 Therefore their Lordships left open the question of whether a dealing inter praesentes would have yielded a different conclusion. In King’s Norton Metal Co Ltd v Edridge Merrett & Co Ltd 25 the plaintiffs were metal manufacturers. Wallis sent a letter to the plaintiffs seeking a quotation for the supply of metal. The letter represented that it had been sent from Hallam & Co. The metal was supplied but the price never paid. Wallis sold the metal to a third party. The plaintiffs sued the defendant third party, alleging the metal supplies remained their property. The Court of Appeal held that Cundy v Lindsay did not rule the instant case on the basis that the mistake in King’s Norton Metal related to the attributes (such as creditworthiness) and not the identity of the other party. The plaintiffs had intended to contract with the author of the letters with no regard as to their identity, with the result that the contract bound them to Wallis. The contract was voidable rather than void.

21 22 23 24

(1878) 3 App Cas 459. Ibid, 465. Ibid, 465. The outstanding issues in Cundy v Lindsay are that the Lindsays’ subjective impressions were made to bear too largely on the result; that the Court did not deal with whether they should have verified the information in the order, such as the address; and that the outcome deprived an innocent third party of their purchased rights under a contract. For criticism of the case, see Shogun Finance Ltd v Hudson [2004] 1 AC 919, 960 per Lord Millett. 25 (1897) 17 TLR 98.

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When the parties have contracted face to face In face-to-face dealings involving fraudulent misrepresentation, a contract may be void for a mistake relating to the identity of the person misrepresenting who they are, but not for mistakes which relate to their qualities and characteristics. The presumption in face-to-face transactions is that parties intend to deal with the person actually present. The presumption is rebuttable, but only on the grounds of clear evidence to the contrary.26 The leading authority is Lewis v Averay.27 The plaintiff, having advertised a car for sale in a newspaper, was approached by a person purporting to be the actor Richard Greene. The person purporting to be Greene made out a cheque for GBP £450 which he signed ‘R A Green’ and indicated that he wished to take the car then and there. Lewis asked for proof of identity and the person purporting to be Greene produced a Pinewood Studios pass made out to ‘Richard A Green’, which bore an address and his photograph. Lewis handed over the car, a log book, a certificate and a receipt made out to ‘Richard A Green’ for £450. The person purporting to be Greene sold the car shortly afterwards to Averay, who knew nothing of his previous conduct, and the cheque which Lewis tried to deposit bounced. Lewis sued Averay for conversion. The UK Court of Appeal held that a voidable contract between Lewis and the person purporting to be Greene had been concluded which had not been avoided prior to the car being sold to Averay, who therefore obtained good title to the car.28 In Lewis v Averay, Lord Denning MR criticised distinctions made in the case of Ingram v Little29 between mistakes as to identity and mistakes as to qualities and character, and between fraudulent misrepresentations which induce the making of the contract and those made after contract which induce the seller to part with possession. He said: The presumption in face-to-face transactions is that parties intend to deal with the person actually present.

As I listened to the argument in this case, I felt it wrong that an innocent purchaser (who knew nothing of what passed between the seller and the rogue) should have his title depend on such refinements. After all, he has acted with complete circumspection and in entire good faith; whereas it was the seller who let the rogue have the goods and thus enabled him to commit the fraud. I do not, therefore, accept the theory that a mistake as to identity renders the contract void. I think the true principle is that which underlies the decision of this court in King’s Norton Metal Co Ltd v Edridge Merrett & Co Ltd (1897) 14 TLR 98 and of Horridge J in Phillips v Brooks Ltd [1919] 2 KB 243 which has stood for these last 50 years. It is this: When two parties have come to a contract—or rather what appears on the face of it to be a contract—the fact that one party is mistaken as to the identity of the other does not mean that there is no contract, or that the contract is a nullity and void from the beginning. It only means that the contract is voidable, that is, liable to be set aside at the instance of the mistaken person, so long as he does so before third parties have in good faith acquired rights under it.30

26 Ingram v Little [1961] 1 QB 31 per Pearce and Sellers LJJ. 27 [1972] 1 QB 198. 28 Compare Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525. 29 [1961] 1 QB 21. 30 [1972] 1 QB 198, 207.

Chapter 22

Mistake

22.1.2  The effect of an executed document Does the existence of a written executed contract affect the approach to unilateral mistake? In Shogun Finance Ltd v Hudson31 the majority applied Cundy v Lindsay32 and held the original contract void and a nullity. A fraudster, pretending to be Mr Patel and producing Mr Patel’s driving licence, persuaded a finance company to let him buy a car on hire purchase. The same person then sold the vehicle to Mr Hudson, an innocent purchaser. Under s 27 of the Hire Purchase Act 1964 (UK), Mr Hudson would become the owner of the vehicle if the person pretending to be Mr Patel was a debtor under the hire purchase agreement. The majority concluded that the executed hire purchase agreement was void. It had purported to be with Mr Patel who had neither signed nor authorised anyone to sign it; so it did not bind anyone. The fraudster was therefore not a debtor, the legislation could not be applied and title did not pass to Mr Hudson. Walker LJ analysed the case in terms of the objective offer and acceptance theory and resolved the mistake under the doctrine of formation: The other general point is that (in agreement, I think, with all your Lordships) I regard the issue in this appeal as essentially a problem of offer and acceptance, and in determining whether or not a contract has been formed by offer and acceptance; the court adopts an objective approach, and does not enquire into what either party actually intended, but the effect, objectively assessed of what they said or wrote.33

However, Millett LJ (dissenting) provided some basis for believing that mistake may indeed operate in these circumstances, even if a minor way: In my opinion, once one accepts that there are two questions involved: (i) did a contract come into existence at all? And (ii) if so was the contract vitiated by fraud or mistake? There is only principled conclusion. Whatever the medium of communication, a contract comes into existence if, on an objective appraisal of the facts, there is sufficient correlation between offer and acceptance to make it possible to say that the impostor’s offer had been accepted by the person to whom it was addressed … provided that the offer is made to him, then whether his acceptance of the offer is obtained by deception or mistake, and whether his mistake is as to identity of the offeror or some material attribute of his, the transaction should result in a contract; albeit one which is voidable.34

22.1.3  Unilateral mistake as to terms A party cannot presume that in all cases a court will permit it (in relation to its own mistake) to void a contract ab initio, even where the mistake relates to a fundamental feature of the agreement and the other contracting party was aware of the mistake. In Smith v Hughes35 Blackburn J said: If, whatever a man’s real intentions may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other

31 [2002] QB 834. Shogun is now the leading case in the UK law of mistake based on identity. The House of Lords favours the view that when parties contract face to face there is a strong presumption that a contract arises between those parties. 32 (1878) 3 App Cas 459. 33 [2002] QB 834, 978. 34 Ibid, 953. 35 (1871) LR 6 QB 597.

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party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.36

Therefore, a party who appears objectively to be consenting to the terms proposed by the other party—so that the other party, on the basis of belief in that consent, is induced to enter the contract—is bound to the terms of the agreement. In Smith v Hughes the plaintiff was a farmer who sold oats to the defendant, a racehorse trainer. When the plaintiff made the offer, he provided a sample which the defendant took, and then offered to pay 34 shillings per quarter for the oats. When the oats were delivered, the defendant refused them on the grounds that they were new, green oats, not old oats (which are the only sort of oats that racehorses can eat). Note that the sample provided by the plaintiff had been of new oats. Cockburn CJ held that the defendant could not avoid the contract even if the plaintiff had known of the defendant’s mistake. Cockburn CJ suggested that: A party who appears objectively to be consenting to the terms proposed by the other party—so that the other party, on the basis of belief in that consent, is induced to enter the contract—is bound to the terms of the agreement.

If, indeed, the buyer, instead of acting on his own opinion, had asked the question whether the oats were old or new, or had said anything which intimated his understanding that the seller was selling the oats as old oats, the case would have been wholly different; or even if he had said anything which shewed that he was not acting on his own inspection and judgment, but assumed as the foundation of the contract that the oats were old, the silence of the seller, as a means of misleading him, might have amounted to a fraudulent concealment, such as would have entitled the buyer to avoid the contract. Here, however, nothing of the sort occurs. The buyer in no way refers to the seller, but acts entirely on his own judgment.37

Smith v Hughes distinguishes between unilateral mistake as to offer and acceptance and unilateral mistake as to collateral—even if fundamental—matters.

22.1.4  ‘Snapping up’ an offer When it is obvious that the offeror has made a mistake in the terms of an offer—even if those terms are clear and unambiguous—the offeree may not simply ‘snap up’ the offer and enforce the agreement. In Hartog v Colin & Shields38 the price of a contract to sell hare skins was mistakenly expressed ‘per pound’, rather than ‘per piece’, which was consistent with both pre-contractual negotiations and custom. The Court held that The offer was wrongly expressed, and the defendants [offeror] by their evidence, and by the correspondence, have satisfied me that the plaintiff [offeree] could not possibly have supposed that the offer contained the offeror’s real intention.39

The mistaken party must show that the other party knew or must have known of the mistake, but it is not necessary that they contributed to the mistake. 36 37 38 39

Ibid, 607. Ibid, 605. [1939] 3 All ER 566. Ibid, 568.

Chapter 22

Mistake

• 22.2 Common and mutual mistake A mistake made by both parties may be common40 or mutual. Common mistake is where both parties hold the same mistaken belief. A mistake is mutual when both parties to a contract are mistaken, although in different ways or about different things. Their mistake may therefore not be ‘common’ to both of them, although they will both be under a misapprehension; they are at cross purposes. Common and mutual mistake overlap, and are often difficult to distinguish. Instances of mutual mistake are relatively rare. However, in Raffles v Wichelhaus41 a contract was concluded for the sale and purchase of cotton expected ‘ex Peerless from Bombay’. There were in fact two different vessels named Peerless sailing from Bombay at different times, and neither party knew of the existence of the other vessel. The buyer refused to accept the cotton arriving by the Peerless which sailed in December, contending that they had understood the contract to refer to the Peerless sailing in October. The seller sued for damages, arguing that they had performed the contract and contending that a literal construction of the contract supported their argument for performance. The Court rejected the seller’s argument and found that there was no basis for determining that  either party’s interpretation was objectively preferable to the other. The contract was intractably ambiguous about the vessel being referred to. The ambiguity of the contract terms was assessed objectively42 in light of the evidence and the Court held that if a reasonable person in the buyer’s position would have construed the contract as referring to the Peerless which sailed in December, the buyer would have been bound by that interpretation of the contract regardless of their subjective understanding.43 However, this was not the case; therefore the buyer prevailed. In Scriven Bros & Co v Hindley & Co44 bags of hemp and tow were to be auctioned for the plaintiff. The auction catalogue described the goods, but did not identify or distinguish them by lot number. The defendants had inspected the hemp at the plaintiff ’s premises but not at the auction room where they were displayed. At the auction, when the tow went up for bidding, the defendants intended to bid for the hemp without realising they had put in a bid for the tow. The bid represented a very high price for tow, although a reasonable price for hemp, and the lot was knocked down to the defendants. The plaintiff sued for the price of the sale. Lawrence J, applying a subjective test, found that because the defendants had intended to bid for and buy hemp and not tow, and because the auctioneer believed the defendants had mistaken the value of the goods but not their identity, the parties were not ad idem and there could therefore be no contract.

40 Solle v Butcher [1950] 1 KB 671; McCrae v Commonwealth Disposals Commission (1951) 84 CLR 377. 41 (1864) 2 H & C 906; 159 ER 375. 42 The Court considered the subjective position of the parties, but found that this did not resolve the inherent ambiguity of the contract; therefore by necessity the Court had to turn to an objective or reasonable person analysis of the subject matter of the contract. 43 See also Smidt v Tiden (1874) LR 9 QB 446; Sharp v Thompson (1915) 20 CLR 137; but contrast NBTY Europe Ltd ( formerly Holland & Barrett Europe Ltd) v Nutricia International BV [2005] 2 Lloyd’s Rep 350. 44 [1913] 3 KB 564.

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• 22.3 The subject matter of the contract 22.3.1  Identifying the subject matter Whether or not the contract is determined void will depend on the identification of the subject matter of the contract. The subject matter can only be determined by construction of the express terms of the contract and through incontrovertible inferences. Also, both parties must implicitly or explicitly be in agreement as to the facts which they intend to operate and without which the contract would not arise.45 In Bell v Lever Bros Ltd 46 Lord Thankerton, referring to the judgment of Lord Westbury in Cooper v Phibbs, said: The phrase ‘underlying assumption by the parties’ as applied to the subject matter of a contract, may be too widely interpreted so as to include something which one of the parties had not necessarily in his mind at the time of the contract; in my opinion it can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral element of the subject matter.47

In the same case Lord Atkin formulated the test for the existence of common mistake in this way: ‘Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts?’48 The facts in Bell v Lever Bros Ltd were that Bell and Snelling were Chairman and ViceChairman of a Lever Bros subsidiary company. Although they resigned on a payout of £50 000 by the company, they had, in breach of the terms of their service, received secret commissions and thereby also breached their fiduciary duties to the company. Lever Bros sued on the basis of fraudulent misrepresentation and breach of contract. The Court of Appeal found the termination contract void for common mistake, so that the payment made under it could be recovered. However, the House of Lords found that the error in question—that the service contracts could only be terminated by consent—was not a fundamental feature of the contract and did not involve the subject matter of the contract. For Lord Thankerton, Lever Bros did not regard ‘the indefeasibility of the service agreements as an essential and integral element of the subject matter of the bargain’.49 Applying the test referred to above, Lord Atkin stated that the new facts did not destroy the identity of the subject matter and that it would be mistaken to conclude that ‘an agreement to terminate a definite specified contract is void if it turn out that the agreement had already been broken and could have been terminated otherwise’.50

Bell v Lever Bros Ltd [1931] 1 KB 557, 563 per Wright J. [1932] AC 161. Ibid, 235–236. Ibid, 227. Lord Warrington in dissent (at 208, Lord Hailsham agreeing), formulated a different test based on the facts: ‘whether the erroneous assumption … was of such a fundamental character as to constitute an underlying assumption without which the parties would not have made the contract they in fact made, or whether it was only a common error as to the material element, but one not going to the root of the matter and not affecting the substance of the consideration’. 49 Ibid, 236. 50 Ibid, 223–224. 45 46 47 48

Chapter 22

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The view in Australia is that Lord Atkin’s test states the law, but is rarely satisfied.51 The test however has been applied in a number of English cases.52

22.3.2  Total failure of consideration As applied by Lord Atkin in Bell v Lever Bros Ltd,53 discussed above, the test for voidness of contract at common law makes pivotal the construction of the contract and the identity of its subject matter; distinguishes between mistakes involving the existence of the subject matter and its quality, or the kind of thing that it is; and suggests that contracts will only be void of they combine mistake and total failure of consideration. Total failure of consideration will not necessarily render the contract void, and money may be recoverable on the basis of a common mistake between the parties. In Cox v Prentice54 the sale price of silver (the subject of the contract) was to be determined by the weight as assayed by a third party. The assayer overstated the weight of the silver and the buyer sued for the deficiency in the value of the silver. The buyer did not succeed in this action, but the Court held that he might have succeeded in an action for money had and received, given that neither party knew or was capable of knowing the facts of the weight of the silver, on the basis of common mistake. Payment for a consideration which fails totally may be recovered on the basis of unjust enrichment as in Strickland v Turner,55 where a life annuitant instructed his trustees to sell the annuity but died just before the sale without the trustees’ or the purchaser’s knowledge. The purchaser recovered on the basis that he had paid for a consideration which had totally failed.

Absence of subject matter Section 11 of the Goods Act 1958 (Vic) and its equivalent in the other states and territories56 provide that a contract will be void for common mistake where specific goods have perished at the time the contract was made.57 However, while perished goods may void a contract, goods that never existed do not. In Couturier v Hastie,58 the buyer and seller entered into a contract for the sale of corn that was, at the time the contract was made, in transit from Salonica to the UK. However, prior to the contract being made, the corn in question had been sold in Tunisia by the ship’s master because much of 51 See McRae v Commonwealth Disposals Commission (1951) 54 CLR 377. 52 See for example Nicholson and Venn v Smith Marriott (1947) 177 LT 189, where what was bought—Georgian napkins and tablecloths—was essentially different from what it was believed to be—the property of Charles I; see also Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255. 53 [1932] AC 161. 54 (1815) 3 M & S 344. 55 (1852) 7 Ex 208. 56 See also Sale of Goods Act 1954 (ACT), s 11; Sale of Goods Act 1923 (NSW), s 11; Sale of Goods Act 1972 (NT), s 10; Sale of Goods Act 1936 (Qld), s 9; Sale of Goods Act 1895 (SA), s 6; Sale of Goods Act 1896 (Tas), s 11; Sale of Goods Act 1895 (WA), s 6. 57 See Couturier v Hastie (1856) 5 HLC 673 (contract for the sale of corn repudiated by the purchaser where the corn was sold after being assessed as unfit for further carriage by sea); see also Barr v Gibson (1838) 3 M & W 390 (contract for the sale of a ship where the ship had run aground seven days prior to the execution of the contract without the knowledge of the buyer or seller). 58 (1856) 5 HLC 673.

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the cargo had already been destroyed by heat, and he wished to prevent further deterioration of the remaining cargo. The purchaser learned of this and repudiated the contract. The seller sued for the price of the contract. The Court held that the contract was void. The case is open to a number of possible interpretations. A mistake by both parties as to the existence of the subject matter of the contract may render the contract void. The case was not, however, decided on the basis that both parties had been mistaken as to the existence of the subject matter of the contract, as the only issue before the House of Lords was whether the buyer was obliged to pay the purchase price. Further, if the contract was void for common mistake because the subject matter of the contract did not exist at the time the contract was made, neither party would be able to sue on the contract (and this includes the impossibility of a buyer’s action for damages on the basis of the non-delivery of goods).59 The House of Lords expressly stated that the case turned on the construction of the contract. The reason for the judgment in favour of the buyer was that under the contract, the corn to be bought and sold had to exist, which—at the time of the sale—it did not. As Lord Cranworth LC stated: The whole question turns on the construction of the contract … Looking to the contract … alone, it appears to me clearly that what the parties contemplated, those that bought and those who sold, was thatthere was an existing something to be sold and bought, and if sold and bought, then the benefit of insurance should go with it.60

The decision may have been made on the basis of a total failure of consideration destroying the underlying basis of the contract. The contract in the case of McRae v Commonwealth Disposals Commission61 was for the purchase of an oil tanker described as lying ‘100 miles north of Samarai’, but the tanker could not be located at that nor any other location, despite the plaintiffs undertaking an extensive and costly salvage operation. The contract was held to be void for common mistake at trial, on the basis of the authority of Couturier v Hastie, but this decision was reversed by the High Court on appeal. The High Court analysed the contract in Courturier as being subject to an implied condition precedent that the goods in fact existed; and concluded that the decision established that the buyer was not liable to pay the price of the goods when a contract was one for the sale of specific goods and there had been a total failure of consideration. In McRae the Commonwealth argued that the contract was void for mistake on the basis that the goods in question either did not exist or had been destroyed. The Court examined Couturier v Hastie, considering whether it stood for the proposition that a contract for non-existent goods or goods that had perished was void for mistake. The Court reasoned that Couturier turned on interpretation of the contract, and concluded that in McRae, the Commonwealth was in breach of contract. Construction of the contract may reveal that both parties were basing their intention to create contractual relations on the correctness of their shared assumptions, the falseness of which founded a common mistake, as in Couturier. However, a contract for non-existent goods instead breaches a warranty made by the seller to the buyer, giving rise to damages. McRae was decided

59 G H Treitel, The Law of Contract, 9th ed., Sweet & Maxwell (1995), p. 272. 60 (1843–60) All ER 280, 284. 61 (1951) 84 CLR 377.

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on the basis of a breach of warranty by the defendant that the tanker would be in the place specified.

Partial absence of subject matter A valid contract is not void if the parties to it share a common mistake as to the scope of the contract. In Svanosio v McNamara62 it was found that a hotel—sold under contract together with the land it was on, its licence and goodwill—stood partly on private and partly on Crown land, but that this did not void either the contract or the conveyance. So in a contract for the sale of land, where both parties share a belief as to a state of affairs, and  the belief is not correct, the contract is not void even if the purchaser would not have bought the land had they known the true facts,63 and the vendor is not liable in damages for the purchaser’s loss.64

Mistake as to quality of subject matter Where a contract is for a thing of a particular kind but something different is delivered,65 there may be a total failure of consideration or the contract may be avoided.66 The difference must be sufficient to make the contract different from what was originally agreed to,67 and the fact underlying the agreement must be a condition precedent to the existence of the contract.68

• 22.4 Other categories of mistake A party to a contract may have been mistaken as to their own basis or motive for entering the agreement, whether the other party assumed it to be correct or considered it at all. In Subdivisions Ltd v Payne,69 for example, the defendants mistakenly assumed a former contract to be valid when it was not; but the invalidity did not prevent the valid acceptance by the defendants of an offer to modify that former contract, where such modification was an inducement to accept the offer. Note that a contract is not rendered void by a common mistake about an express term, even if it relates to the subject matter of the contract.70 Furthermore, parties may agree about the subject matter and terminology of a contract but dispute the legal effect of the agreed language.71 Parties commonly enter contracts on the basis of mistake as to the meaning or effect of terms, or a mistake as to the effect of the entire contract. In Goldsbrough Mort & Co Ltd v Quinn72 the purchaser purchased land at the price of £1.10.0 per acre 62 (1956) 96 CLR 186. 63 Bligh v Martin [1968] 1 All ER 1157. 64 See William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016. 65 See Gompertz v Bartlett (1853) 2 E & B 849. 66 See Galloway v Galloway (1914) 30 TLR 531. 67 See Bell v Lever Brothers Ltd [1932] AC 161 and the examples provided by Lord Atkin at 224; see also Robert A Muro & Co Ltd v Meyer [1930] 2 KB 312; Psaltis v Schultz (1948) 76 CLR 547; Leaf v International Galleries [1950] 2 KB 86. 68 See McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. 69 [1934] SASR 214. 70 See Harrison & Jones Ltd v Bunten & Lancaster Ltd [1953] 1 QB 646 (a belief that sold goods were pure kapok when they were in fact mixed with cotton did not void the contract); and Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450 (a mistaken belief that ‘horsebeans’ meant ‘feveroles’). 71 Life Insurance Co of Australia v Philips (1925) 36 CLR 60. 72 (1910) 10 CLR 624.

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‘calculated on a freehold basis’ on the understanding that the amount required to convert conditional purchase and conditional lease to freehold would be paid to the Crown, while the vendor contracted on the basis that £1.10.0 per acre would be paid to him. The High Court decided that the term plainly and unambiguously had the meaning given to it by the purchaser. There was no mutual mistake as the vendor and not the purchaser was mistaken. It is commonly observed that a mistake must be of fact and not law; however, cases have not clearly distinguished between mistakes of fact and law.73 Note also that ‘law’ means general law only, and not the operation of law on facts; the latter gives rise to private rights, and the existence or lack of private rights is treated as fact.74 Finally, a party wishing to enforce a contract against another, who is claiming a defence of mistake, must show that the contract terms were unambiguously intelligible.75

• 22.5 Remedies Remedies for mistake may be addressed under either the common law or equity. Where mistake declares that a contract does not exist at common law, equity cannot be looked to as a remedy; but where the contract is valid, equity may intervene to refuse specific performance, rectify the contract, set the contract aside, or give effect to a right of rescission. As Sir William James VC said in Mackenzie v Coulton:76 ‘Courts of Equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the terms of the contract.’ The basis for equity’s intervention is its established role in offering relief against fraud in its broadest sense, including unconscionable dealing.77 If the contract was executed, equity will not permit the party perpetrating the fraud to retain the benefit of the performance, even if they have themselves provided performance. If the contract was executory, the court can intervene more effectively by declaring it void, ordering specific performance,78 or making adjustments or allowances to ensure restitutio in integrum. Where mistake declares that a contract does not exist at common law, equity cannot be looked to as a remedy; but where the contract is valid, equity may intervene to refuse specific performance, rectify the contract, set the contract aside, or give effect to a right of rescission.

22.5.1  Rescission The remedies available for mistake are dependent on the mistake’s effects. This assumes that the mistake is operative; an inoperative mistake gives rise to no remedy. A common or unilateral79 73 See Avon County Council v Howlett [1983] 1 WLR 605, 620. The distinction between mistake of fact and law was once important in recovery under restitution, so that restitution could be applied for under mistaken fact but not law: see Re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194. However, this distinction is no longer significant. 74 See Cooper v Phibbs (1867) LR 2 HL 149. 75 Falck v Williams [1900] AC 176; Sharp v Thompson (1915) 20 CLR 137; R W Cameron & Co v Slutzkin Pty Ltd (1923) 32 CLR 81. 76 (1869) LR 8 Eq 368, 375. 77 See Taylor v Johnson (1983) 151 CLR 422. 78 See Allen v Richardson (1879) 13 Ch D 524 (order made for a conveyance of property and payment of price). 79 There is no case in which relief has been granted for mutual mistake.

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mistake that goes to the foundations of the contract renders it void ab initio, or gives rise to a right to rescind ab initio. So for instance, if offer and acceptance failed to correspond due to the mistake, or if the object of the contract was entirely misconstrued, the contract may be avoided. In Cooper v Phibbs80 the lessor leased a salmon fishery to the lessee which both parties believed to have been owned by the lessor, but which was in fact owned by the lessee. The lease was set aside on the grounds of common mistake of fact. Relief on the basis of mistake cannot simply be pleaded on the basis of a party’s having misconstrued the contract.81 The other party must have caused or at least contributed to the mistake.82 A mistake regarding a statement of fact which induces a party to enter the contract gives the party so induced the right to rescind the contract (the contract is voidable), but not necessarily to sue for damages arising from a breach of contract, unless the truth of the statement has been guaranteed. If a guarantee is given for the truth of a fact which never existed, the guarantor may be in breach and be exposed to a damages claim,83 because the guarantee is an acceptance of the risk of the statement being untrue and a promise to pay compensation if it is false. Solle v Butcher 84 is a case relating to the notorious Rent Restrictions Acts 1920–1923 (UK).85 The defendant took out a long lease on a dwelling house that had been converted into flats, intending to repair, renovate and refurbish it, and subsequently rent out the flats. In a discussion between the plaintiff and defendant, a rent of £250 for Flat No 1 post-renovation was agreed to, on the basis that the plaintiff and the defendant both believed that the flat was classed as a new dwelling, with a separate identity from the pre-renovation Flat No 1, and was therefore not subject to the Rent Restrictions Acts. If it was subject to the Rent Restriction Acts, the appropriate rent for the flat would have been £140 per year. The plaintiff took out a lease of seven years’ duration, but after the first year sought a declaration in the County Court that the rent was £140 and to recover the excess payments. The defendant’s case was that the flat had a new identity and was not subject to the Acts. He counterclaimed for rescission of the lease on the basis of common mistake. Judgment was entered for the plaintiff and the defendant appealed to the Court of Appeal. The Court of Appeal held that the structural alteration to the building had not destroyed the identity of the flat. It also held that the parties had made a mistake of fact after having considered the issue of the identity of the new flat. The mistake meant that the defendant was entitled to have the lease set aside in equity—in other words, that the lease was voidable but not void.86 Denning LJ contended that the Court had a jurisdiction grounded in equity ‘to set aside the contract whenever it was of the opinion that it was unconscientious for the other party to

80 (1867) LR 2 HL 149. 81 Powell v Smith (1872) LR 14 Eq 85; Dowsett v Reid (1912) 15 CLR 695. 82 Wilding v Sanderson [1897] 2 Ch 534; Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374. 83 See McRae v Commonwealth Disposal Commission (1951) 84 CLR 377. 84 [1950] 1 KB 671. 85 Comprising the Increase of Rent and Mortgage Interest (Restrictions) Act 1920, as amended by the Rent Restrictions (Notices of Increase) Act 1923 and the Rent and Mortgage Interest Restrictions Act 1923. This legislation discouraged the improvement of properties and led to appalling habitation conditions in London. 86 [1950] 1 KB 671, 690–691 per Lord Denning.

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avail himself of the legal advantage which he had obtained’.87 His Lordship was of the view that: A contract is … liable in equity to be set aside if the parties were under a common misapprehension either as to the facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.88

Equity had not, however, developed a doctrine of mistake on which to base relief, but had provided relief in cases of mistake on the basis of preventing injustice from occurring in a particular case.89 This clarifies an issue that arises from Denning LJ’s founding of the remedy upon unconscientious behaviour—because it is not clear who is unconscientious in the case of common mistake. In Australia, Solle v Butcher has been consistently read90 as a case in which the contract was set aside not on the basis of the mistake per se, but because unconscionable advantage had been taken of a mistake for which the plaintiff was not responsible.91 Rescission is available in cases of innocent misrepresentation, including common mistake as to either the subject matter or the parties’ rights. The mistake must be material92 or go to the root of the contract.93 A party in pursuing the performance of the bargain must have acted unconscionably. A party may therefore rescind a contract if: (i) they and the other party laboured under a common mistake; (ii) upholding the contract would be unconscionable under the circumstances; and (iii) the party seeking to have the contract set aside is not at fault.94 ‘Fault’ is a broad concept and will inevitably emerge from a failure to take sufficient care, but does not imply a breach of a duty of care.95 Today, the common law is ruled by Great Peace Shipping Ltd v Tsavliris (International) Ltd.96 The decision in that case reasserted Lord Atkin’s policy statement from Bell v Lever Bros Ltd,97 promoting certainty in contracting, and rejected Denning LJ’s efforts to develop an equitable doctrine of common mistake in Solle v Butcher.

87 Ibid, 692. 88 Ibid, 693. 89 C Macmillan, Mistakes in Contract Law, Hart Publishing (2010), pp. 44–45. 90 See McRae v Commonwealth Disposal Commission (1951) 84 CLR 377; Svanosio v McNamara (1956) 96 CLR 186; Taylor v Johnson (1983) 151 CLR 422. In Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679, a UK court refused to apply Solle v Butcher since it contradicted the decision in Bell v Lever Bros Ltd [1932] AC 161. 91 The case has been applied widely but the law is not settled and indeed Solle v Butcher and the cases which follow it are hard to reconcile with Bell v Lever Bros Ltd [1932] AC 161. In Australia, Solle v Butcher appears to have been adopted in its principles: see for example Classic International Pty Ltd v Lagos (2002) 60 NSWLR 241. In the UK, however, in the case of Great Peace Shipping Ltd v Tsalviris Salvage (International) Ltd [2003] QB 679, the Court declined to apply Solle v Butcher. 92 Bettyes v Maynard (1882) 46 LT 766. 93 Earl of Beauchamp v Winn (1873) LR 6 HL 223. 94 See Solle v Butcher [1950] 1 KB 671, 693 per Lord Denning. 95 See Earl of Beauchamp v Winn (1873) LR 6 HL 223, 234; Grist v Bailey [1967] Ch 532; but compare Laurence v Lexcourt Holdings Ltd [1978] 1 WLR 1128, 1138. In the New Zealand case of Waring v SJ Brentnall Ltd (1975) 2 NZLR 401, Chillwell J suggested replacing the concept of fault with unconscionability. 96 [2002] EWCA Civ No 1407. 97 [1932] AC 161.

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Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ No 1407 Lord Phillips MR at 161–162: We have been in some doubt as to whether this line of authority goes far enough to permit us to hold that Solle v Butcher is not good law. We are very conscious that we are not only scrutinising the reasoning of Lord Denning in Solle v Butcher and in Magee v Pennine Insurance Co, but are also faced with a number of later decisions in which Lord Denning’s approach has been approved and followed. Further, a Division of this Court has made it clear in West Sussex Properties Ltd v Chichester DC that they felt bound by Solle’s case. However, it is to be noticed that while junior counsel in the court below in West Sussex had sought to challenge the correctness of Solle, in the Court of Appeal leading counsel accepted that it was good law unless and until overturned by their Lordships’ House. In this case we have heard full argument, which has provided what we believe has been the first opportunity in this court for a full and mature consideration of the relation between Bell v Lever Brothers Ltd and Solle v Butcher. In the light of that consideration we can see no way that Solle v Butcher can stand with Bell v Lever Brothers. In these circumstances we can see no option but so to hold. We can understand why the decision in Bell v Lever Brothers Ltd did not find favour with Lord Denning. An equitable jurisdiction to grant rescission on terms where a common fundamental mistake has induced a contract gives greater flexibility than a doctrine of common law which holds the contract void in such circumstances. Just as the Law Reform (Frustrated Contracts) Act 1943 was needed to temper the effect of the common law doctrine of frustration, so there is scope for legislation to give greater flexibility to our law of mistake than the common law allows.

Where the contract involves the sale of land, the courts have shown reluctance to set aside the contract except in cases where agreement was obtained by fraud and the vendor had no title to the property, so that there was ‘a total failure of consideration or what amounted to a total failure of consideration’.98 In Svanosio v McNamara,99 unbeknown to either party, the hotel that was the subject of the sale stood partly on Crown land, which the vendor could not convey. The purchasers were still compelled to accept the conveyed title.100 The element of fraud was not present in Svanosio v McNamara, so the parties had to adhere to the terms of the contract.101 As clarified by the High Court in Taylor v Johnson,102 commenting specifically on the decision of Dixon and Fullagar JJ in Svanosio v McNamara, ‘fraud’ in this sense refers to the broad equitable concept of fraud, which includes unconscionable dealing.

98 Svanosio v McNamara (1956) 96 CLR 186, 198 per Dixon and Fullagar JJ. 99 Ibid. 100 Compare Lukacs v Wood (1978) 19 SASR 520. 101 (1956) 96 CLR 186, 196 per Dixon and Fullagar JJ. 102 (1983) 151 CLR 422, 431.

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22.5.2  Unjust enrichment Where a mistake has prevented the formation of a contract, parties may seek relief under the doctrine of unjust enrichment103 Parties are not however able to recover payments obligated under the contract if the contract is not void or voidable104 unless one party has paid and the other received more than the contracted amount105.

22.5.3  Specific performance A party seeking specific performance of a contract may be refused it on the basis of mistake. A reasonable mutual mistake not rendering the contract void may give rise to the right to refuse specific performance.106 Specific performance may be refused at the court’s discretion if the contract is not void and rescission is not claimed.107

22.5.4  Rectification A common or unilateral mistake may be remedied by rectification of the contract.108 The aim of rectification is to eliminate the mistake in a document and the remedy is applicable to common mistake and to certain cases of unilateral mistake alike. Rectification applies retrospectively and its effect is that the contract is executed in its rectified form as if it had always been in that form.109 Rectification is available even where there is no existing binding contract, as long as the parties have formed a ‘concurrent intention … at the date of its execution’ and the executed document fails to give effect to the common intention.110 In the UK case of Joscelyne v Nissen111 a father and daughter agreed that the daughter would purchase her father’s business and pay the father a pension and the expenses of the house in which they both were living, including gas, electricity, coal and domestic services. This situation was observed until a formal document was executed which, however, excluded references to gas, electricity, coal and domestic services. After a falling out, the daughter stopped these payments. The UK Court of Appeal decided that the father was entitled to rectify the contract document. In Swainland Builders Ltd v Freehold Properties Ltd112 the Court held: Rectification applies retrospectively and its effect is that the contract is executed in its rectified form as if it had always been in that form.

The party seeking rectification must show that (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 273. Bell v Lever Bros Ltd (1932) AC 161. National Mutual Life Association of Australia Ltd v Walsh (1987) 8 NSWLR 585. Goldsrough Mort & Co Ltd v Quinn (1910) 10 CLR 674. Swaisland v Dearsley (1861) 29 Beaver 430. Note that the remedy of rectification is not specifically for contracts but documents generally, including contracts: see Mackenzie v Coulson (1869) LR 8 Eq 368. 109 See Malmesbury (Earl) v Malmesbury (Countess) (1862) 31 Beav 407, 418. 110 Slee v Warke (1949) 86 CLR 271, 280; see also Shipley Urban District Council v Bradford Corporation [1936] Ch 375, involving an alleged contract between two bodies corporate incapable of making such a contract without its being under seal; followed in Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662, 664. 111 [1970] 2 QB 86. 112 [2002] EWCA Civ 560. 103 104 105 106 107 108

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in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the document sought to be rectified; (4) by mistake the instrument did not reflect the common intention.113

It is not entirely clear whether this endorses an objective or subjective assessment of the ‘common continuing intention’ of the parties. Decided cases appear to favour an assessment on the basis of a subjective meeting of minds.114

For common mistake Common mistake can attract rectification in circumstances where the parties have imperfectly recorded their agreement (mis-transcription), or where the parties have deliberately used certain words to which they have ascribed the wrong meaning.115 Rectification was therefore not available in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd116 because the contract reflected the parties’ common intention to trade ‘horsebeans’, even though they wrongly mutually assumed that this was another word for ‘feveroles’. The mistake was not made in the process of the parties recording their agreement.117 The mere omission of terms does not justify rectification unless the parties intended those terms to be legally binding, and binding by reason of their inclusion in the document. Therefore, to obtain rectification the plaintiff must show that the document was intended to give effect to the antecedent agreement,118 and also show clearly what rectification is required to be made.119 This first requirement relates to the heavy burden120 of ‘convincing proof ’121—of proof in clear and precise terms122—placed on the plaintiff. If the common intention of the parties is proved, there is no additional requirement to show that the intention was manifested externally.123 However, the plaintiff ’s evidentiary burden may require such a manifestation in order to be discharged. The mistake which is the subject of rectification is with respect to the form and content of the document, and not as to its effect. In Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd, the mistake of referring to ‘horsebeans’ in the written contract (which was consistent with the parties’ previous discussion)s, when in fact both parties intended the contract’s subject matter to be ‘feveroles’, could not be rectified because rectification requires evidence ‘that the parties

113 Ibid, [33] per Peter Gibson LJ. 114 Thomas Bates & Sons Ltd v Wyndham’s (Lingeries) Ltd [1981] 1 WLR 505, 515 (CA). 115 Re Butlins Settlement Trust [1976] Ch 251, 260–263; Cooperative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 (CA). 116 [1953] 2 QB 450. 117 In the German case of RGZ 99,-144 the parties used the Norwegian word for shark meat—‘haakjoringskod’—even though they both intended to agree to the sale of whale meat. 118 See Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; see also RACV Investment Co Pty Ltd v Silbury Pty Ltd (1986) 13 ACLR 555. 119 See Energy World Corp Ltd (ACN 009 124 994) v Maurice Hayes and Associates Pty Ltd (ACN 063 758 181) (2007) 239 ALR 457, 460. 120 See Fowler v Fowler (1859) 4 De G & J 250, 264–265. 121 See Joscelyne v Nissen [1970] 2 QB 86, 98. 122 See Pukallus v Cameron (1982) 180 CLR 447, 452. 123 See NSW Medical Defence Union Ltd v Transport Industries Co Ltd (1986) 6 NSWLR 740, 753; Bush v National Australia Bank Ltd (1962) 35 NSWLR 390, 406; see also Bishopsgate Insurance Australia Ltd v Commonwealth Engineering (NSW) Pty Ltd [1981] 1 NSWLR 429; Pukallus v Cameron (1982) 180 CLR 447, 452; but contrast Etablissments Georges et Paul Levy v Adderley Navigation Co Panama SA (‘The Olympic Pride’) [1980] 2 Lloyd’s Rep 67, 72; see also contrary views expressed in other cases, for example Joscelyne v Nissen [1970] 2 QB 86, 98; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; 350.

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were in complete agreement on the terms of their contract, but by an error wrote them down wrongly’.124 In Pukallus v Cameron,125 purchaser and vendor agreed to a sale of ‘subdivision 1 of portion 1154’, which both parties believed to contain a bore and a cultivated area of land, when in fact a subsequent survey proved that it did not. The High Court held that there existed no intention that the parties intended to contract for the sale of the bore and cultivated land, only for the sale of ‘subdivision 1 of portion 1154’. More recent cases have extended rectification to the effect of documents. This may occur where words have a meaning different from those the parties believed it to have.126 In Winks v W H Heck & Sons Ltd127 Thomas J said: A contract will not be corrected in order to eliminate a party’s error of law if that be the only source of the error. But that is not the situation where parties reach a clear oral agreement (without any mistake of law by either party) and the written agreement then embodies something quite different. A mistake by a party in reading or interpreting such a written agreement (which fails to embody the true agreement of the parties) will not deprive him of the remedy of rectification unless there is a distinct abandonment of the old understanding so that the new agreement is to be taken as the contract irrespective of what might have been earlier agreed.128

In Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd129 rectification was ordered so that the document achieved the intended effect, even though it would as drafted have produced a different legal effect and the parties evinced an intention to execute the document as drafted. Rectification may therefore be ordered where the mistake that has occurred is as to the effect of the document. However, there must be a mistake as to what was actually agreed, and the document must not have superseded the original intentions of the parties.

For unilateral mistake Unilateral mistake was not treated as a case for rectification until much later than common mistake.130 In fact, unliateral mistake does not found rectification of its own accord, but requires the party who was not mistaken about the contract to have both knowledge of the other’s mistake, and to have acted so that it would be unconscionable for them to enforce the recorded contract. In Roberts & Co Ltd v Leicestershire County Council131 a construction company tendered for a contract, specifying a completion date. When it came time to execute the formal contracts, the council inserted a different completion date without notifying the company, knowing the company believed it to be in the same terms on which it tendered. Pennycuik J held that the council’s knowledge prevented it resisting rectification.132

124 [1953] 2 QB 450, 463. 125 (1982) 180 CLR 447. 126 See NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740, 748 per Mahoney JA (CA). 127 [1986] 1 Qd R 226. 128 Ibid, 237. 129 (1995) 41 NSWLR 329, 332. 130 A Roberts & Co Ltd v Leicestershire City Council [1961] Ch 555. 131 [1961] Ch 555. 132 Compare Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] 1 Lloyd’s Rep 547, 561 per Gloster J, where the shipowner’s mistake was not known to the insurers.

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Mistake

The doctrine of rectification for unilateral mistake was formulated in Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd:133 For this doctrine … to apply I think it must be shown: first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be fourth element involved, namely that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resists rectification to give effect to A’s intention on the ground that the mistake was not, at the time of execution of the document, a mutual [i.e. common] mistake.134

Buckley LJ’s reference to B’s awareness of A’s mistake is only one of a range of possible conduct on which to base relief in rectification. B may have actual knowledge,135 or may wilfully or recklessly fail to attend to the truth,136 or fail to make reasonable enquiries as to the facts of a particular relevant state of affairs. Whatever the conduct, however, the court must find that there was some dishonesty137 on B’s part. So while it is probably not necessary to show sharp practice when seeking rectification, the remedy may be applied in a wider spectrum of sharp practices apart from the defendant’s having actual knowledge of the plaintiff’s error. Rectification on the basis of unilateral mistake is a step not taken lightly138 by the courts because it imposes an obligation on the parties in the absence of any prior agreement,139 and it is probably as unfair to impose an agreement on the mistaken party140 as it is to impose the mistaken party’s terms on the non-mistaken party.141 In the case of unilateral mistake, only those mistakes which relate to the documented terms attract the remedy. In Connolly Ltd v Bellway Homes Ltd142 the defendant, who was a developer, purchased land subject to the attainment of a planning permit, which the plaintiff had applied for prior to sale. Experience showed that approval of permits may have taken considerable time. Accordingly, the sale price was indexed so as to enable the plaintiff to benefit from any appreciation in the market value of the land. The indexation formula was based on the difference between the price estimated at the date the agreement was entered, by a surveyor purporting to have appropriate expert knowledge—at £212 per square foot—and the date the planning permission was received. However, at the time the permit was approved—four years later—there appeared

133 134 135 136 137 138 139 140 141 142

[1981] 1 All ER 1077. Ibid, 1086 per Buckley LJ. Agip SpA v Navigazione Alta Italia SpA (‘The Nai Genova’ and ‘The Nai Superba’) [1984] 1 Lloyd’s Rep 353, 359 (CA). Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259, 277–281, 292 (CA). George Wimpey (UK) Ltd v VI Construction Ltd [2005] EWCA Civ 77, [79]; KPMG v Network Rail Infrastructure Ltd [2006] EWHC 67 (Ch); [2006] 2 P & CR 7, [192]. Rowallan Group Ltd v Edgehill Portfolio No 1 Ltd [2007] EWHC 32, [15] (Ch): ‘the remedy of rectification for unilateral mistake is a drastic remedy, for it has the result of imposing on the defendant a contract which he did not, and did not intend to, make’. Littman v Aspen Oil (Broking) Ltd [2005] EWHCA Civ 1579, [20]. Smith v Hughes (1870–71) LR 6 QB 597; Hartog v Colin & Shields [1999] 3 All ER 566. See E Peel, Treitel: The Law of Contract, 12th ed., Sweet and Maxwell (2007), paras [8-044]–[8-051], commenting on Smith v Hughes (1870–71) LR 6 QB 597. [2007] EWHC 895 (Ch).

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to have been no increase in the price of land because the surveyor had grossly overestimated its value at the time of agreement, which should have been about £180 per square foot. The surveyor had in fact known the value he estimated was high, but had expected the plaintiff to negotiate it down. Based on the true figure, the plaintiff could have expected a reasonable benefit. The plaintiff therefore sought rectification, on the basis of unilateral mistake, of the contract figure from £212 to £180. The Court held that the claimant had not made a relevant mistake as to the terms of the document as its intention was to stipulate the figure ‘£212’. The Court said: This is in truth a case where one party has subsequently come to appreciate that it should not have agreed to the inclusion of the particular term. But that is not the sort of error which enables a court to rectify an agreement. The court cannot remake the parties’ bargain just because it has turned out to be significantly to the detriment of one party, and significantly to the benefit of the other.143

From the decided cases it is not clear whether, although actual knowledge is not required,144 the mistake must prejudice the party making the mistake or benefit the party not having made the mistake.145 In the case of unilateral mistake the unmistaken party’s conduct must be unconscionable. Silence may amount to unconscionable conduct only if an honest and reasonable person would have mentioned the point expressly.146 In Riverlate Properties Ltd v Paul147 the lessee had not contributed at all to the lessor’s mistake. The UK Court of Appeal refused the lessor rectification. In Russell LJ’s judgment, the lessee’s conscience had been clear at the time of transaction, and it was not the function of equity to restore fairness to an agreement in which one party had obtained property at a bargain price.148 In the case of unilateral mistake, the Court considered that the defendant must have engaged in sharp practice,149 or intended the plaintiff to make the mistake or otherwise to deceive them.150 Rectification and rescission may be pursued as alternative remedies in the same proceeding.151 In some cases. orders for one or the other have been at the election of the party not mistaken with respect to the effect of the words agreed to.152 Rectification may be barred by methods including laches, where a third party has acquired rights under the original contract for value and without notice,153 and because the contract can no longer be performed.154 143 Ibid, [109] 144 See Commission for New Towns v Cooper (Great Britain) Ltd [1995] Ch 259; Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] 1 Lloyd’s Rep 547, 561. In Budget Stationery Supplies Pty Ltd v National Australia Bank Ltd (Unreported SC NSW (Santow J) 25 September 1996, 4303/93)—affirmed sub nom National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365—held that on the current authorities, knowledge of the mistake was necessary. 145 See Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1, 14 per Kenny JA. 146 Commission for New Towns v Cooper (Great Britain) Ltd [1995] Ch 259, 280. 147 [1975] Ch 133. 148 Ibid, 141. 149 Ibid, 140. 150 See Commission for New Towns v Cooper (Great Britain) Ltd [1995] Ch 259, 280, 281, 282 per Stuart-Smith J, referring to diverting the party’s attention from the contract, false and misleading statements, misrepresentations and smokescreens. 151 See Riverlate Properties Ltd v Paul [1975] Ch 133. 152 See Garrard v Frankel (1862) 30 Beav 445. For a criticism of this approach, see Riverlate Properties Ltd v Paul [1975] Ch 133, 140–141 per Russell LJ. 153 Garrard v Frankel (1862) 30 Beav 445. 154 Borrowman v Rossel (1864) 16 CB (NS) 58.

Chapter 22

Mistake

Ke y p o ints for re v ision A unilateral mistake involves one person making a mistake, but the contract that arises thereby will nevertheless be enforceable unless the other party knew of or contributed to the mistake. A contract may be void for mistake where a party has accepted an offer that they knew the other party could not have intended to make, even if they had not contributed to it. Mistakes may be common, in that parties are equally mistaken in the same way about the same thing, or mutual, in that both parties are mistaken but on different grounds. A contract may be voided for common mistake where the subject matter of the contract had perished at the time the contract was made—but not where the goods never existed. Contracts are not void for mistake where the mistake involves the scope of the subject matter. Things may be of sufficiently different quality to the subject matter of the contract to amount to a total failure of consideration. A mistake that goes to the root of the contract renders the contract void ab initio or gives rise to a right to rescind ab initio. Mistaken statements of fact that induce a party’s entry to a contract allow the induced party to rescind, but the party may only claim damages where the statement was guaranteed. In Australian law, a right to rescission for fundamental mistake will arise where one party is acting unconscionably in pressing for performance of the bargain. Contracts for the sale of land will only be set aside where the mistake was accompanied by fraud, even if there has been a total failure of consideration. Rectification is available for common mistakes where the parties have failed to properly record their agreement or used words to which they attributed a false meaning, but for the omission of words to ground rectification they must have been legally binding words.

problem-solving practice De Luxe Motors (DLM), dealers in prestige European automobiles, entered a hire purchase agreement with Sam Rogan. Rogan visited the DLM dealership and inspected a new Mercedes Benz which he said he was interested in purchasing on a hire-purchase basis. Rogan presented his driver’s licence to the sales representative at the dealership. The sales representative called the finance company which financed the agreements—Kamikaze Credit Global Pty Ltd (KCG)—giving them Rogan’s details. Rogan signed the hire purchase agreement for a new Mercedes Benz. The sales representative then faxed KCG a copy of Rogan’s licence and the signed draft agreement. KCG ran the relevant risk assessments, including a credit scan and a comparative signature analysis. They found them both satisfactory and reported their acceptance of the agreement to the dealer. Rogan then paid a deposit and the sales representative handed Rogan the keys to the car and a folder containing all relevant documentation. Pursuant to the agreement, Rogan was to repay KCG $900 per fortnight. However, Rogan missed several payments and ultimately defaulted. KCG then sought full payment of the price of the car. However it was discovered that ‘Rogan’ had presented a false driver’s licence; that he had forged the signature on the agreement; that he had, since entering the agreement, sold the car to a third party, Enoch Bono; and that he had disappeared.

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KCG then took action against Bono for the recovery of the vehicle, claiming that the contract with Rogan was void for mistake. Will it succeed in its action against Bono, or has Bono good title to the car?

ANSWER The central issue is one of mistaken identity in the context of face-to-face dealings, the leading cases for which are Phillips v Brooks Ltd, Ingram v Little, Lewis v Averay and Shogun Finance v Hudson. The facts are common in scenarios where a rogue (here, Rogan) assumes or steals an identity in order to acquire a valuable commodity which can then be onsold to an unsuspecting third party who purchases the goods in question in good faith, as Bono does here. The rogue typically verifies their identity by producing genuine documents—such as a driver’s licence—which had been procured by deception. The claim is then brought by the finance company (here, KCG) against the third party (here, Bono). The claimant will not be able to claim that the dealing was face to face unless they can show that the dealer was acting as agent for them in the dealings with the rogue. In Shogun, Dyson LJ followed and approved the judgment of Pearce LJ in Ingram v Little that a finding of mistaken identity will depend to a significant extent on the nature of the proposed contract. Dyson LJ also accepted that the identity of the customer is crucial because they will have a specific credit history related to their individual identity, and finance will only be approved by a finance company satisfied with the particular credit rating under review. It is important to consider whether, for example, an emphasis on the creditworthiness of the customer does away with the established distinction between identity and attributes. For some transactions, the attribute in question is effectively the identity of the customer for the purposes of the agreement being entered into; for example, the creditworthiness of a customer seeking finance for the purchase of a valuable good. Dyson LJ questions the distinction, but the dominant view probably continues to distinguish attributes from identity, at least for matters as significant as a customer’s credit rating. Case law maintains that there exists a rebuttable presumption that the party claiming mistake as to identity intended to deal with the person physically before them, and not with their true identity. Whether or not the presumption has been rebutted will depend on the facts. Some courts have taken a more liberal view regarding the success of the attempted rebuttal. Liberality must be balanced against policy, ensuring the certainty of transactions entered into in good faith by parties. Understandably, then, Sedley LJ in Shogun required ‘strong rebutting evidence’ to establish that there had indeed been a mistake with respect to the identity of the party. In the facts of the present scenario, and in transactions of this kind, the credit and signature checks herein described are common, and represent best practice. If reliance on such systems and processes is not secured by court decisions, serious questions will be raised about the effectiveness of any identity checks and the confidence with which finance companies are able to offer finance in these situations. Sedley LJ’s view that the checks did not offer a reasonable basis for confidence in the customer’s identity is therefore potentially troubling for this form of financing. The available remedies and the satisfactoriness of those remedies is contentious. The decision in Shogun was in favour of the claimant, with the third party bearing the entire loss. Sedley LJ’s decision would reverse this, making the claimant bear the risk. This was consistent with Lord Denning in Lewis v Averay, who favoured making the contract in question voidable rather than void as to title. In Ingram v Little Devlin LJ suggested that loss should be apportioned between the parties. As it currently stands the distribution of risk is controlled by the strict application of the doctrine.

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chapter

23

Termination for breach

Chapt e r o v e rv i e w 23.0

Introduction  452

23.1

Right to terminate conferred by contract   452 23.1.1 Restrictions  453 23.1.2 Effect  453

23.2

Right to terminate conferred by law   455 23.2.1 Repudiation  455 Anticipatory breach  459 23.2.2 Breach of essential term or condition   460 23.2.3 Breach causing loss of substantial benefit   463

23.3

Election to affirm the contract   464

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• 23.0 Introduction A breach of contract by one contracting party will generally entitle the other party to terminate it. This right may be conferred by the contract itself  1 or it may be conferred by law. In the case of the former, it is common for parties to include an express term which provides for when and how their contract may be brought to an end. If the contract is silent, then a right to terminate a contract for breach arises in law if the breach constitutes repudiation or breach of an essential term or if it is one which causes loss of the substantial benefit under the contract. There are three common forms of breach of contract. First, an actual failure to perform contractual obligations as prescribed in the contract within a specified or reasonable time is considered a breach of contract. Second, a manifestation of unwillingness or inability to perform a contractual obligation is also considered a breach of contact, regardless of whether it  is accompanied by an actual failure to perform or whether it occurs before performance is due. This is commonly known as repudiation of the contract, or anticipatory breach. Third, a breach of contract can also arise where an innocent contracting party is deprived of a substantial The three forms of breach tend to overlap, benefit under the contract. as an actual failure The three forms of breach tend to overlap, as an actual failure to perform often also to perform often also manifests an unwillingness or inability to manifests an unwillingness perform and can consequently deprive the innocent party of or inability to perform and can consequently deprive a substantial benefit under the contract. the innocent party of a When an innocent contracting party successfully establishes a substantial benefit under breach of contract, the court will award a remedy to that party the contract. accordingly.

• 23.1 Right to terminate conferred by contract Parties are free to specify the circumstances which justify termination, how the right to terminate is to be exercised, and what effect its exercise shall have.2 The contract may even go as far as to provide that a breach shall automatically terminate a contract, although this is more commonly the case in the context of breach of contingent conditions of performance.3 Moreover, parties can also specify that any breach at all, major or minor, shall entitle the other party to terminate.4 This contractual right to terminate will, unless otherwise agreed by

1 See Chapter 24. 2 See also Chapter 24. 3 However, the courts may constitute such clauses as conferring only a right to terminate: Newborn v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723, 733; compare eBay International AG v Creative Festival Entertainment Pty Ltd [2006] FCA 1768, [35]–[37] (a clause on a ticket provided for cancellation on breach of an obligation not to resell for profit; held: breach resulted in automatic termination). 4 This is particularly the case in commercial contracts and in the sale of land: see for example Holland v Wiltshire (1954) 90 CLR 409; Petrie v Dwyer (1954) 91 CLR 99; Cooper v Ungar (1958) 100 CLR 510; Tropical Traders Ltd v Goonan (1964) 111 CLR 41; Sargeant v ASL Developments Ltd (1974) 131 CLR 634; DTR Nominees Pty ltd v Mona Homes Pty Ltd 91978) 138 CLR 423; Brien v Dwyer (1978) 141 CLR 378; Coefficiency Pty Ltd v Workforce International Pty Ltd [2005] NSWCA 300, [13].

Chapter 23

Termination for breach

the parties, operate concurrently with any right conferred by law to terminate for the breach in question.5 Commonly, contractual rights to terminate require the provision of notice to the breaching party in some prescribed manner. In such cases, the notice is considered a condition of the exercise of the right and hence termination is invalid without it.6 The notice must also comply with any prescribed requirements of form or content.7 In contrast, if there are no such requirements, a notice of termination must clearly convey to a reasonable person in the position of the recipient that the contract is being terminated by it.

23.1.1 Restrictions Generally, the exercise of a contractual right to terminate is subject to similar restrictions which apply to a right to terminate a contract which is conferred by law.8 This is the case unless such restrictions are excluded by the contract. Therefore, a contractual right to terminate cannot be exercised by a terminating party who is itself not ready and willing to perform, or who has prevented or dispensed with the performance in question.9 In addition, a contractual right to terminate for breach can be lost if the conduct of the terminating party constitutes an affirmation of the contract or a waiver of the right to terminate, or if it raises an estoppel. Last, a contractual right to terminate cannot be exercised in breach of the implied obligations of cooperation or good faith10 unless the relevant contract excludes such implied terms. The exercise of a contractual right to terminate may also be restricted by equitable or statutory relief against unconscionable conduct.

23.1.2 Effect If a party exercises its contractual right to terminate for breach, the contract comes to an end from the time that the election to terminate is communicated;11 the termination is not retrospective 5 Holland v Wiltshire (1954) 90 CLR 409; Cooper v Ungar (1958) 100 CLR 510; Shevill v Builders Licensing Board (1982) 149 CLR 620; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; Chan v Cresdon Pty Ltd (1989) 168 CLR 242; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd 91989) 166 CLR 623; Batiste v Lenin [2002] NSWCA 316, [62]; Apriaden Pty Ltd v Seacrest Pty Ltd [2005] VSCA 139, especially [74]. For an example of where the parties agree, expressly or by implication, that the right to terminate for breach shall be governed exclusively by the contract, see Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, 30 per Mason J; but see Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49, [56], where French J questioned whether a party can be barred by a term of the contract from terminating on total repudiation by the other party. 6 Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187. 7 Traditionally, such requirements must be specifically conformed with: see Nund v McWaters [1982] VR 575; Lintel Pines Pty Ltd v Nixon [1991] VR 269; Pan Foods Co Importers & Distributors Pty Ltd v ANZ Banking Group Ltd [2000] HCA 20, [13]; Meredith Projects v Fletcher Construction [2000] NSWSC 493, [50]–[53]; but see the more pragmatic approach taken by Kirby J in Pan Foods Co Importers & Distributors Pty Ltd v ANZ Banking Group Ltd [2000] HCA 20. 8 For a detailed explanation, see N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), pp. 1032–1057. 9 Idameneo Pty Ltd v Ticco Pty [2004] NSWCA 329. 10 See Chapter 13. 11 It should therefore be distinguished from rescission ab initio, which is common in cases involving vitiating factors. In such cases, the contract is void from the beginning.

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to the time of breach.12 Upon such communication, the breach cannot be rectified or retracted.13 Further, contracting parties are released from all further performance of the contractual obligations.14 The contract is, however, valid up to the point of termination. This results in a number of important consequences. First, it means that the terms of the contract which are intended to operate in the event of its breach are valid and operative. Thus, arbitration clauses,15 limitation of liability or indemnity clauses16 and liquidated damages clauses17 may all be relied upon after termination, provided that the parties have not agreed otherwise. Second, rights which have accrued to a party under the contract before its termination remain enforceable.18 These include the right of the innocent party to sue for damages for breach of the contract. Importantly, the party in breach may also claim damages for any breach committed by the terminating party prior to termination.19 Third, both the terminating party and the breaching party retain the right to recover money which became unconditionally payable or which accrued before termination.20 For example, a seller may be able to recover an unpaid deposit,21 or an employee who has been justifiably dismissed may recover wages that accrued before the dismissal.22 Last, it should also be noted that the law of restitution can apply to a contract which has been terminated for breach.23 If a party exercises its contractual right to terminate for breach, the contract comes to an end from the time that the election to terminate is communicated; the termination is not retrospective to the time of breach.

review questions 1 Explain whether parties to a contract can determine how their contract is brought to an end. 2 Draft three examples of clauses which can bring a contract to an end. You can, if you choose, utilise real-life examples from contracts which you have entered into in the past.

12 Larratt v Bankers and Traders Insurance Co Ltd (1941) 41 SR (NSW) 215, 226. 13 Tanaka v Tokyo Network Computing Pty Ltd [2003] NSWSC 114 at [89]. 14 Kaufman v McGillicuddy (1914) 19 CLR 1; McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 469–470, 476–477; Holland v Wiltshire (1954) 90 CLR 409. 15 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 365; see also Vandyke v Vandyke (1976) 12 ALR 621; Western Australian Land Authority v Simto Pty Ltd [1998] WASCA 262. 16 Holland v Wiltshire (1954) 90 CLR 409; port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1980) 144 CLR 300, 306; compare State Government insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228, 243; Van der Sterren v Cibernetics (1970) 44 ALJR 157. 17 Tiplady v Gold Coast Carlton Pty Ltd 91984) ATPR 45-646, 45, 659. 18 Ettridge v Vermin Board of the District of Murat Bay [1928] SASR 124; Striker Resources Nl v Australian Goldfields Nl (In Liq) [2006] WASC 153, [171]. 19 Ettridge v Vermin Board of the District of Murat Bay [1928] SASR 124. 20 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361; Elkhoury v Farrow Mortgage Services Pty Ltd (in liq) (1993) 114 ALR 541; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50, 51; Euphoric Pty Ltd v Ryledar Pty Ltd [2006] NSWSC 2, [199]–[200] (affirmed in Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65. 21 Farrant v Leburn [1970] WAR 179; Bot v Ristevski [1981] VR 120; Ashdown v Kirk [1999] 2 Qd R 1. 22 Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435, 461; compare Ettridge v Vermin Board of the District of Murat Bay [1928] SASR 124, 128–129. 23 See Chapter 27.

Chapter 23

Termination for breach

• 23.2 Right to terminate conferred by law A right to terminate a contract as conferred by law24 is limited to circumstances involving a breach of an essential term, repudiation, or a breach which causes substantial loss. In those circumstances, the innocent party is allowed to elect either to terminate or affirm the contract. Hence, the law does not confer an automatic termination of the contract. The contract will thus remain in existence and be valid until an election to terminate is made. A right to terminate a contract as conferred by law is limited to circumstances involving a breach of an essential term, repudiation, or a breach which causes substantial loss. However, the law does not confer an automatic termination of the contract. The contract will thus remain in existence and be valid until an election to terminate is made. In the first circumstance, a contract is breached if an essential term or a condition is breached. In the second circumstance, a contract is breached if a party manifests an unwillingness or inability to perform the contract, in substance or at all, before or at the time when performance is due. In the third circumstance, a contract is breached if the failure to perform deprives the innocent party of the substantial benefit under the contract. It is commonly the case that an alleged breach fits into all of these three categories. For example, the breaching party may fail to perform an essential term while simultaneously manifesting an unwillingness or inability to perform and thus depriving the innocent party of the substantial benefit under the contract. Despite this potential overlap, breach of an essential term and breach causing substantial loss are limited to failure to perform when performance is due. They are therefore concerned with an actual breach. In contrast, repudiation can occur before performance is due and is therefore concerned with anticipatory breach. In addition, it is possible for repudiation to arise without breach of an essential term and, conversely, breach of an essential term can occur without repudiation. Further, breach can cause substantial loss even though it does not give rise to repudiation or breach of an essential term. In summary, it is important that a right to terminate a contract for breach should be exercised where the alleged breach falls into at least one of the three recognised categories of breach of contract. Note that an unjustifiable termination can constitute a breach by repudiation and this may entitle the other party to accept the repudiation and to sue for damages.

23.2.1 Repudiation Where a party, through their words or conduct, evinces an intention to no longer be bound by a contract or to only fulfil it in a manner substantially inconsistent with their obligations, then that party is said to be repudiating the contract. In the following case, Carr manifested, through his conduct, a clear intention to not be bound by his contractual obligations. This gave J A Berriman Pty Ltd the right to terminate the contract between them.

24 Also commonly known and referred to as the right to ‘discharge’ or in some cases ‘rescind’. The latter can, and arguably should, be used strictly for rescission ab initio, where the contract is void from the outset, for example, due to the presence of a vitiating factor.

[ 455 ]

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Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 Fullagar J (Dixon CJ, Williams, Webb and Kitto JJ agreed) at 340: The contract in question, which was made on 3 May 1950, was a contract under which the company undertook to erect for Carr on certain land owned by him in Parramatta Rd, Flemington, a factory building in accordance with drawings and specifications prepared by Mr H P Oser, a Sydney architect. Mr Oser is the architect referred to in the contract … The date stated in the appendix on which possession of the site is to be given by the owner to the builder is 29 May 1950 … It is necessary to refer to two provisions in the specifications. Under the heading ‘A. Excavator’, it is provided that the general excavation over the site will be carried out by the proprietor with his own plant. The contractor is to assume that the building site will be handed over to him with a level of 44’ 0” throughout in respect to datum 40’ 3” at kerb where shown on the site plan. This provision assumes great importance in the cases. So also does a provision under the head of ‘E. Steelwork’. This part of the specification provides that all steel will be supplied by the proprietor and is to be manufactured by the contractor to engineer’s and architect’s details. This refers to the fabricating of all structural steel. It further refers to the bending and placing of all reinforcement bars. The structural steel is to be delivered by the proprietor to the contractor’s or sub-contractor’s yard provided such yard is within twenty miles of the Sydney GPO … The erection of the building was never, in fact, commenced. On 31 July 1950 the company’s solicitor wrote to the architect, Mr Oser, in the following terms: I am instructed to inform you that the site has not been excavated in accordance with the provisions of clause A 1 of the specifications and that my client immediately upon execution of the contract arranged with a company for fabrication of the steel pursuant to clause E 1 of the specifications. My client regards the proprietor’s failure to prepare the site and his arrangements with Arcos Products Pty Ltd [a third party engaged by Carr to supply the steelwork] contrary to clause E 1 of the specifications as two distinct breaches of the building agreement. I therefore give you notice of cancellation of the contract in accordance with the provisions of clause 20(1) thereof and of my client’s intention to institute immediate action for recovery of damages against the proprietor in accordance with the provisions of clauses 20(3)(ii) and (v) of the said agreement.

… The letter of 31 July alleges two breaches of contract by the building owner as entitling the builder to rescind. The first is a ‘failure to prepare the site’, and the second is the ‘making of an arrangement’ with a company named Arcos Products Pty Ltd … Time was of the essence? Where a contract contains a promise to do a particular thing on or before a specified day, time may or may not be of the essence of the promise. If time is of the essence, and the promise is not performed on the day, the promisee is entitled to rescind the contract, but he may elect not to exercise this right, and an election will be inferred from any conduct which is consistent only with the continued existence of the contract. If time is not of the essence of the promise, the promisee is not entitled to rescind for non-performance on the day.

Chapter 23

Termination for breach

If either (a) time is not originally of the essence, or (b) time being originally of the essence, the right to rescind for non-performance on the day is lost by election, the promisee can, generally speaking, only rescind after he has given a notice requiring performance within a specified reasonable time and after non-compliance with that notice: see, eg, Taylor v Brown (1839) 2 Beav 180 (48 ER 1149); Stickney v Keeble (1915) AC 386; Panoutsos v Raymond Hadley Corporation of New York (1917) 2 KB 473. In the present case it is not necessary to determine whether time was of the essence of the building owner’s promise to excavate and deliver the site on or before 29 May. For the company after 29 May did acts which seem consistent only with the continued existence of the contract after that date. It is sufficient to say that its contract with Hurll & Douglas [a third party engaged by J A Berriman to provide the steelwork] was made after that date, and that up to the middle of July it continued to press for the commencement of the necessary work on the site. And no notice was ever given specifying a time within which performance of the promise to excavate and deliver was required. It cannot, in my opinion, be maintained that the right to rescind for breach of that promise as such had not been lost. Owen J was of opinion that there was a ‘continuing breach’ of that promise: in other words he seems to have held that a fresh right to rescind accrued from day to day. But, as Dixon J pointed out in Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221 ‘If a covenantor undertakes that he will do a definite act and omits to do it within the time allowed for the purpose, he has broken his covenant finally and his continued failure to do the act is nothing but a failure to remedy his past breach and not the commission of any further breach of his covenant’ (1940) 64 CLR, at p. 236. On the other hand, the effect of the builder’s election not to rescind was to leave it open to the building owner to remedy his breach. If he did remedy it, the builder would be bound to accept the late performance, though entitled, of course, to sue for any damage suffered by him through the delay. The position thus remaining open, it is correct, in my opinion, to say, as Mr Ferguson [counsel for the respondent] said, that a failure to remedy the breach might continue so long and in such circumstances as to evince an intention on the part of the building owner no longer to be bound by the contract. In other words, the only legitimate inference might be that he is saying: ‘Not only have I broken my contract by not doing the thing on the due day, but I am not going to do the thing at all’, or ‘I am not going to do the thing at all unless and until I find it convenient to do it’. In this way a right to rescind might arise which is not based on breach of the particular promise as such. That promise, even if essential to begin with, has become non-essential by reason of the election of the promisee, but the promisee may nevertheless be able to establish that the conduct of the promisor with respect to his promise amounts to a refusal to be bound by the contract: cf Associated Newspapers Ltd v Bancks (1951) 83 CLR, at p. 339. It was on this view of the present case that the majority of the Full Court dismissed the appeal. Their Honours thought that the failure to do anything at all towards performance of the contractual duty, the failure to make any attempt even to move any of the machinery from the site, the placing of further machinery on the adjoining land, the absence of any explanation or any assurance that any steps at all would be taken in the immediate

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future—that all these things showed that the building owner intended to take steps towards the performance of his duty if and when it suited him and not before. In other words, they showed that he did not intend to be bound by the contract within the meaning of the authorities. This view of the case rests on a sound legal foundation: the only question is whether it is warranted by the facts. The chief difficulty about accepting it lies in the fact that much heavy rain fell during the whole of June and July, and, although evidence accepted by the learned trial judge indicates that what was required could have been done between 3 and 29 May, other evidence strongly suggests that the weather in June and July presented serious difficulties in connection with the removal of the machinery and the excavation of the site … But the judgment under appeal leaves out of account the second breach of contract on the part of the building owner. And, when that second breach is brought into account, the difficulties of the case seem to me to disappear. This second breach went, as I have said, to a very substantial part of the contract. The estimated profit to the builder on the fabrication of the steel was £450, which was about one-fourth of the total estimated profit on the contract. The building owner’s breach of contract meant that it lost that profit, and meant also, as the building owner must be taken to have known, that it became liable in damages under its own contract with Hurll & Douglas. Those damages were not likely to be less than £450. It is true that at a later date, on 21 August, the building owner’s solicitors offered ‘to allow full and just allowances arising from’ the placing of the fabrication of the steel in other hands. But this could not alter the position created by the breach of contract and by Mr Oser’s letter of 19 July, which had announced that the amount allowed for the fabrication would simply be deducted from the contract price. One would be disposed to think that this second breach alone amounted to such repudiation as justified rescission. It is to be remembered that Carr’s action in placing the fabrication of the steel in other hands was deliberate … But, when this second breach is viewed alongside the existing position with regard to the site, the case does not seem to admit of doubt. An election not to rescind for failure to deliver the excavated site on the due date could not deprive that failure of all significance. When a second breach occurs, the two combined may have a significance which it might not be legitimate to attach to the first alone. The position when Mr Oser’s letter was received was this. The site had not been delivered on the due day. It was covered with heavy material. Nothing had been done towards putting it into the state required for delivery, further material had been placed on adjoining land on which it had been proposed to place the material then on the site itself, and repeated requests to the building owner had failed to produce any assurance that anything would be done within a reasonable time. Possession of the site was, of course, a vitally important matter. It is in this state of affairs that the building owner announces that he has engaged another contractor to carry out a large part of the work comprised in the contract. A reasonable man could hardly draw any other inference than that the building owner does not intend to take the contract seriously, that he is prepared to carry out his part of the contract only if and when it suits him. The intention must be judged from acts: Robert A Munro & Co, Ltd v Meyer (1930) 2 KB 312, at p. 331. The intention ‘evinced’ here is an intention not to

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be bound by the contract. When such an intention is shown, the other party is entitled to rescind the contract. Mr Berriman thought that such an intention had been shown, and he acted accordingly. In my opinion, he was justified in the view which he took, and acted as he was legally entitled to act. From this conclusion two things follow. On the one hand, the builder’s solicitor’s letter of 31 July effected not a repudiation but a lawful rescission of the contract. It affords, therefore, no cause of action to the building owner. It is not suggested that, apart from that letter, the builder had committed any breach of contract. On the other hand, the builder, having lawfully rescinded the contract, is entitled to recover damages for loss of the contract and for any particular loss suffered by it through any breach of contract committed by the building owner before rescission. The building owner’s action, therefore, rightly failed, while that of the builder rightly succeeded. Some words or conduct can clearly evince repudiation of contract, such as where the subject matter of a sale is sold or disposed of to a third party25 or, as can be seen from Carr v J A Berriman, where there are successive breaches which have a combined significance towards the performance of the substance of the contract.26 In such circumstances, a reasonable person might conclude that there has been a repudiation of the contract.27 In other circumstances, the words or conduct of a party might not evince a clear renunciation of the contract, such as where the party clearly attempts to perform it or to cure any breach before any election to terminate is made. Under those circumstances, it will be hard to find repudiation.28

Anticipatory breach If the time of contractual performance is not yet due and a party manifests an inability or an unwillingness to perform the contract at all or in substance, that party may be found to be committing an anticipatory breach or repudiation of the contract. The innocent party may terminate the contract at that point without having to wait until the time of performance falls.29 Once an election to terminate has been made, the contract-breaker cannot retract or cure the breach. However, if an anticipatory breach is not accepted by the innocent party, the contract will remain in existence. This also means that the repudiating party may take advantage of subsequent

25 Hoad v Swan (1920) 28 CLR 258; Mohr v Smith [1914] SALR 92; Re Palmdale Insurance Ltd [1982] VR 921; Elliott v Reading [1999] WASCA 11. 26 Carr v J A Berriman Pty Ltd (1953) 89 CLR 327, 351–352; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; Walter Construction Group Ltd v Walker Corp Ltd [2001] NSWSC 283; Wesoky v Village Cinemas International Pty Ltd [2001] FCA 32, [51]; Batiste v Lenin [2002] NSWCA 316, [26], [52]. 27 The determination of repudiatory conduct involves an objective assessment by reference to the effect it would have on a reasonable person: DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 431; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623, 657–658. 28 Shevill v Builders Licensing Board (1982) 149 CLR 620; Rainbow Spray Sales Pty Ltd v Sanders [1964–65] NSWR 422; Sunstar Fruit Pty Ltd v Cosmo [1995] 2 Qd R 214, 224; Casinos Austria International (Christmas Island) Pty Ltd v Christmas Island Resort Pty Ltd [1998] WASC 387, [29]; Aclaw Pty Ltd v Fullston [2000] SASC 440, [19]. 29 Foran v Wright (1989) 168 CLR 385, 441; see also Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649; Hodgins v Duke Nominees Pty Ltd (2000) 77 SASR 74; Penrith District Rugby League Football Club Ltd v Fittler (Unreported, SC (NSW ), Santow J, 8 February 1996).

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events that excuse performance, such as frustration or non-fulfilment of a contingent condition, or a breach of a condition by the other party.30

23.2.2  Breach of essential term or condition Where a party fails to perform an essential term, express or implied, the innocent party is entitled to elect to terminate the contract.

Where a party fails to perform an essential term, express or implied,31 the innocent party is entitled to elect to terminate the contract. Essential terms are commonly referred to as conditions32 of the contract, and they should be distinguished from warranties or inessential terms. One of the seminal cases in this area is Associated Newspapers Ltd v Bancks.33

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 Dixon, Williams, Webb, Fullagar and Kitto JJ at 336: Was it a condition? The first question is whether the company’s undertaking to present the defendant’s drawings on the front page of the comic is a condition or essential term of the contract going to its very root, the breach of which would immediately entitle the defendant at his option to rescind the contract and sue for damages for the loss of the contract, or a mere warranty or non-essential and subsidiary term the breach of which would entitle the defendant to damages. Various tests have been advanced by the courts from time to time to determine what is a condition as opposed to a warranty … In Bentsen v Taylor, Sons & Co (No 2) (1893) 2 QB, at pp. 280, 281 Bowen LJ, discussing the distinction between a condition and a warranty, points out that in order to decide this question one of the first things you would look to is, to what extent the truth of what is promised would be likely to affect the substance and foundation of the adventure which the contract is intended to carry out. Perhaps the test is better formulated by C B Morison in his Principles of Rescission of Contracts (1916), at p. 86. ‘You look at the stipulation broken from the point of view of its probable effect or importance as an inducement to enter into the contract.’ … The test was succinctly stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632; 55 WN 228. The decision was reversed on appeal (1938) 61 CLR 286, but his Honour’s statement of the law is not affected. He said (1938) 38 SR (NSW), at pp. 641, 642; 55 WN 228: 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

30 Bowes v Chaleyer (1923) 32 CLR 159, 169; Peter Turnbull Co & Co Pty Ltd v Mundus Trading (Australasia) Pty Ltd (1954) 90  CLR 235, 250 per Kitto J, 261–262 per Taylor J; Foran v Wright (1989) 168 CLR 385; City of Camberwell v Camberwell Shopping Centre Pty Ltd [1994] 1 VR 163, 192–193. However, subsequent non-fulfilment or breach of a condition by the other party will not excuse the repudiating party if the repudiation prevented the fulfilment or performance of the condition. 31 An implied term may be considered as essential, see for example Douglas v Cicirello [2006] WASCA 226. 32 Conditions in this context are used to denote promises in the contract, as opposed to contingent conditions. 33 (1951) 83 CLR 322.

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such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor … If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.

At least it is clear that the obligation of the defendant to supply a weekly full-page drawing of ‘Us Fellers’ and the plaintiff’s undertaking to present the drawing each week on the front page of the comic section are concurrent and correlative promises. And it would not seem open to doubt that the obligation of the defendant is a condition. He was not an ordinary employee of the plaintiff. He was employed as a comic artist and his true work was to produce this weekly drawing. It was for this production that his substantial weekly salary was principally payable. It was what he was really engaged to do. It would be strange if his obligation was a condition of the contract while the undertaking of the plaintiff was a subsidiary term the breach of which would only sound in damages. The undertaking is really a composite undertaking comprising three ingredients: (1) to present a full-page drawing; (2) to present it weekly; and (3) to present it on the front page of the comic section. It is impossible to attach different values to the defendant’s obligation and the plaintiff’s undertaking. The plaintiff would not have employed the defendant unless it had been assured that the defendant would perform his promise, and the defendant would not have made the promise unless he was assured that his work would be published in a particular manner. Obviously it was of prime importance to the defendant that there should be continuity of publication so that his work should be kept continuously before the public, that his work should be published as a whole and not mutilated, and that it should be published on the most conspicuous page of the comic section. It is like a contract under which an actor is engaged to act in a theatre. … In the present case the undertaking of the plaintiff company that each weekly full-page drawing would be presented on the front page of the comic section formed a condition a substantial failure in the performance of which would enable the defendant to treat the contract as at an end. The plaintiff committed three successive breaches of this condition and thereupon the defendant was certainly entitled to treat the contract as discharged. Such a failure of the plaintiff to perform the condition went to the root of the contract and gave the defendant as the injured party the right immediately to treat the contract as at an end (Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286). He exercised this right by his letter of 26 February. The defendant had not to prove, as in the case of a breach or breaches of non-essential terms of a contract, that the conduct of the plaintiff was such as to amount to a refusal to be bound by the contract. But when the circumstances are considered they would appear to constitute such conduct. The plaintiff made the original change without consulting the defendant. It maintained that it was entitled to do so despite his protests. On 26 February there had been three publications in breach of the contract and several more were intended. Kennedy’s promise to see what he could do was vague, and it was accompanied

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by an intimation that if anything was done it would be done as a matter of grace and not of right. This evidence all points and points only to a refusal by the plaintiff to perform cl. 5 of the contract and satisfies the test laid down by Lord Selborne. The appeal should be dismissed with costs. It is therefore very important for a contract to clearly stipulate whether the performance of a particular obligation is essential to the contract, even if objectively it has little importance. For example, if performance by a certain date is important to one of the parties, then the contract should contain a term to the effect that time is of the essence. Similarly, any term which indicates with sufficient clarity that performance by one party is conditional on the prior reciprocal performance of an obligation by the other will make that obligation an essential term. The latter party’s performance is a condition precedent to the former party’s obligation to perform.34 It should however be noted that the use of the words ‘condition’ or ‘conditional’ might not be the sole deciding factor.35 It might be the case that those words are used to cover both essential and inessential terms; or, conversely, the parties may use the word ‘warranty’ to emphasise the binding nature of a term and in that way ironically underscore its essentiality.36 Note that the Australian Consumer Law has dispensed with the binarism of essential terms (conditions) and inessential or subsidiary terms (warranties) relating to implied terms in consumer contracts. In their place is the single word ‘guarantee’. In cases where a contract does not expressly indicate whether a term is essential, the legal test of essentiality was succinctly stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd:37 ‘The test of essentiality is whether it appears from the general nature of the contract … that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise … and that this ought to have been apparent to the promisor.’

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 entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor … If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.38

34 Jeppesons Road Pty Ltd v Di Domenico [2005] QCA 391. In addition, a term may be considered essential through implication: see N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1021. 35 ANZ Banking Group Ltd v Beneficial Finance Corp Ltd (1982) 57 ALJR 352, 355; Mealey v Mountains Development Group Pty Ltd [2003] NSWSC 830, [7], [28]. 36 See National Trustees Executors and Agency Co of Australia Ltd v Abercomby & Beatty Pty Ltd [1965] VR 675. 37 (1938) 38 SR (NSW) 632. 38 Ibid, 641, 642. The decision was reversed on appeal ((1938) 61 CLR 286), but his Honour’s statement of the law was not affected.

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Therefore, one must look to the terms of the contract and the circumstances surrounding the entry into the contract. Stephen, Mason and Jacobs JJ stated in DTR Nominees Pty Ltd v Mona Homes Pty Ltd:39 the quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances.40

It is therefore clear that the determination of essentiality involves an objective assessment of the importance of the term in question based on all the relevant evidence, which can also include evidence of post-formational events that retrospectively explain the importance of a term.41 review questions 1 Explain the notion of an anticipatory breach. What is the relationship between this type of breach and other possible types of breach of contract? 2 Explain whether it is necessary for a party to a contract to expressly specify the nature of a particular term. 3 Explain the legal test which is used to determine the essentiality of a particular contractual term.

23.2.3  Breach causing loss of substantial benefit Termination for breach of a condition, or repudiation, is often also justified because it constitutes a ‘fundamental breach’. A fundamental breach deprives the other party of the substantial benefit from the contract42 or causes further commercial performance of the contract to be impossible43. In Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd,44 Direct Acceptance Finance (DAF) agreed to buy furniture from Cumberland with the purpose of renting it out to customers procured by Cumberland. Cumberland agreed to indemnify DAF against non-payment of rental by the customers. DAF failed to perform its obligation to have regular contact with the customers and to recover money owing by them. Cumberland thus argued a breach of contract and purported to terminate the contract. The Court held that DAF’s breach did not deprive Cumberland of the substantial benefit of the contract, since the main benefit which Cumberland received was 39 (1978) 138 CLR 423. 40 Ibid, 431. 41 Tropeano v Riboni [2005] VSC 229, [117]; see also Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 241 CLR 88. 42 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, 31 per Mason J; Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [1965] NSWR 1504, 1511; Nelson v Bellamy [2000] NSWSC 182, [80]; Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443, [70]. 43 Shevill v Builders Licensing Board (1982) 149 CLR 620, 626 per Gibbs J; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, 33 per Mason J; Batiste v Lenin [2002] NSWCA 316, [53]; Command Energy Pty Ltd v Nauru Phosphate Royalties Trust [2003] VSC 261, [787]. In cases involving instalment contracts, the question of whether non-performance of an instalment substantially deprives the other party of the benefit of the contract usually arises. 44 [1965] NSWR 1504.

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payment by DAF of the price of the furniture, which it then rented to customers. The breach therefore did not entitle Cumberland to terminate its contract with DAF.45 In addition, as can be seen from Carr v J A Berriman Pty Ltd,46 repudiation or breach of an essential term can simultaneously cause the innocent party to lose a substantial benefit from the contract. Unless otherwise agreed by the parties, a breach that deprives the other party of the substantial benefit of a contract should entitle that party to terminate it, despite the classification of the term in question as being either essential, intermediate or inessential (warranty), or despite the fact that there is no evidence of repudiation.

• 23.3 Election to affirm the contract In some cases, it may be commercially necessary for a party to elect to affirm the contract and insist on its continuing operation, though reserving the right to damages or other appropriate remedy in respect of the breach.47 However, there might be cases where it is unrealistic or undesirable to permit a party to insist on continued performance of the contract in the face of the other party’s breach. For example, in Automatic Fires Sprinklers Pty Ltd v Watson,48 it was held that an employee had no right to insist on continued employment after dismissal even if the dismissal was wrongful and unjustified. The employee only had the right to claim damages. Automatic Fires Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 Latham CJ at 447: [I]f a dismissed servant, as in the present case, does not accept his dismissal as a breach entitling him to regard the contract as discharged, he cannot ignore the wrongful dismissal and claim still to be the servant of his employer with the rights of a servant. The dismissal, though wrongful, is not a nullity. That this is the case is recognised to some extent in the judgment of the learned Chief Justice in the Full Court, where His Honour says that, except where authority has been given of so special a kind as to be irrevocable, ‘there is nothing to prevent the employer from, effectively though wrongfully, withdrawing from the employee the legal right to act on his behalf in any respect.’ Thus, the wrongful dismissal determines the relationship of master and servant created by the contract, even though the servant may not have accepted his dismissal as entitling him to regard the contract as discharged. Any other view would in effect grant specific performance of a contract of personal service, a remedy which the courts have always refused in such a case—see Lucy v The Commonwealth, (1923) 33 CLR 229, per Knox, CJ, at p. 237. Therefore, if an employer wrongfully dismisses a servant and persists in refusing to allow him to do the work for which his contract of employment provides, the position is

45 Ibid, 1511 per Walsh J. 46 (1953) 89 CLR 327. 47 See for example Bowes v Chaleyer (1923) 32 CLR 159, 169, 190, 197; Peter Turnbull and Co Pty Ltd v Mundus Trading Co (A’asia) Pty Ltd (1954) 90 CLR 235, 250. 48 (1946) 72 CLR 435.

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that the only remedies which the servant has (apart from electing to regard the contract as discharged and thereby releasing himself from any obligations of the contract, and, if he chooses, suing upon a quantum meruit where he has done work for which he has not been paid) are, (1) an action for the enforcement of any rights which have accrued under the contract, e.g., for wages earned in accordance with the terms of the contract but not paid; and (2) an action for wrongful dismissal. There is authority that when he sues for wrongful dismissal an allowance may be included in the damages awarded which might, if the servant had so elected, have been recovered upon a quantum meruit upon an indebitatus count—Goodman v Pocock, (1850) 15 QB 576. Similarly, Seddon and Ellinghaus have commented that the right to affirm the contract after a breach should not be wholly unrestricted: The unqualified endorsement of the right to affirm a contract after breach may enable a plaintiff to obtain the equivalent of a decree of specific performance in circumstances in which equity would probably refuse such a decree, and cuts across the principle requiring an injured party to mitigate any loss caused by breach. The problem could be solved by treating the right to affirm as being subject, like the right to terminate, to implied obligations of co-operation and good faith, and to equitable and statutory relief against unconscionable conduct.49

Ke y p o in ts for re v ision A breach of contract by one contracting party will generally entitle the other party to terminate it. This right may be conferred by the contract itself or it may be conferred by law. There are three common forms of breach of contract: an actual failure to perform contractual obligations; a manifestation of unwillingness or inability to perform a contractual obligation; and where an innocent contracting party is deprived of a substantial benefit under the contract. If a party exercises its contractual right to terminate for breach, the contract comes to an end from the time that the election to terminate is communicated; the termination is not retrospective to the time of breach. A right to terminate a contract as conferred by law is limited to circumstances involving breach of an essential term, repudiation, or a breach which causes substantial loss. Where a party, through their words or conduct, evinces an intention to no longer be bound by a contract, or to only fulfil it in a manner substantially inconsistent with their obligations, then that party is said to be repudiating the contract. Essential terms are commonly referred to as conditions of the contract, and they should be distinguished from warranties or inessential terms. A fundamental breach deprives the other party of the substantial benefit from the contract or causes further commercial performance of the contract to be impossible. In some cases, it may be commercially necessary for a party to elect to affirm the contract and insist on its continuing operation, though reserving the right to damages or other appropriate remedy in respect of the breach. 49 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1012.

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problem-solving practice Aquanas Pty Ltd is a Melbourne-based company which supplies, among other things, squid for both human consumption and for bait. On 16 November 2009, Mr Bill Raymond, the Purchasing Manager of Bay Trawler Supply Pty Ltd contacted Aquanas asking to inspect a sample of squid of the species Illex Danubecus for use as bait. Bay Trawler usually sources its squid from Adelaide, but in 2009 the squid catch from Adelaide was far below normal and accordingly the price increased. In the past, Bay Trawler rarely purchased squid from Melbourne as the quality had not been consistently of the desired level. When it comes to quality, Bay Trawler pays more consideration to the preferences of its customers, in particular the long-liner fishing fleets. Substandard bait would lead to smaller catches and therefore would be unsatisfactory. The best size range for squid as bait to optimise the long-liners’ catch is 100–150 grams per piece, though some product slightly below the range is acceptable, as is some product as high as 200 grams. This is a matter well known in the trade. On 18 November 2009, an agent of Aquanas brought a sample of the said species squid to Bay Trawler to be inspected. The box was labelled ‘2009’. After defrosting the sample carton, Mr Raymond inspected individual squid and was pleased with their excellent condition. The squid fell almost exclusively within the 100–150 grams range. Bay Trawler kept the sample to show to its customers. They all found the squid to be acceptable for their needs. On 24 November 2009, Mr Raymond sent an order form with a cover letter attached to it. On the cover letter, he again expressed his satisfaction with the sample. He stated: I was particularly pleased with the freshness of the squid and I was pleased that it fell almost exclusively within the 100–150 grams range, with an average of 130 grams. Squid falling within this range would give our long-liner fishing fleets the best results. The order form, among other things, set out the method of packaging, the date of delivery (24 January 2010), the quantity being ordered (2 metric tonnes) as well as the total purchase price, being $38 000. Under the heading of ‘Quality’, it stated: ‘As per sample inspected. Grade A, iced on board and blast frozen immediately upon discharge. Certified fit for human consumption.’ On 15 December 2009, Aquanas replied with a Sales Confirmation which replicated the headings and the terms in the offer letter. There was an additional insertion of the heading ‘Catch’, and under this heading the following was also inserted ‘2009 and 2010’. In addition, the delivery date was changed to 15 February 2010. Mr Raymond received this confirmation and sent an email back to Aquanas acknowledging that he has read the confirmation and that all ‘looked good’. He also acknowledged the changed delivery date. On 15 February 2010, Aquanas delivered 2 metric tonnes of squid. Mr Raymond quickly inspected five random cartons which were all labelled ‘2009’. He was again pleased with the freshness and the size of the squid and without inspecting any of the cartons labelled ‘2010’, he delivered all the remaining cartons to two of Bay Trawler’s long-liner customers. With the squid on board, the long-liner fleets went out to sea. When they defrosted some of the squid for use as bait, they discovered in horror that the squid were extremely small, with the majority falling under 100 grams. They contacted Mr Raymond and informed him that they would return the majority of the squid to Bay Trawler. They wanted to be compensated for their losses as they obtained far less catch than they had expected.

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Termination for breach

Mr Raymond quickly contacted Aquanas expressing his dissatisfaction with the situation. Bay Trawler would now have to store the squid in its cold storehouse pending their resale to other customers for human consumption or bait. Bay Trawler asks for compensation for its direct and indirect losses. Aquanas claims that it is under no responsibility to account for any of Bay Trawler’s direct and indirect losses. Aquanas claims that it has supplied squid which conformed both to the sample as well as the contract. The squid which was of a smaller size range came from the 2010 early catch. It claimed that Bay Trawler, as an experienced supplier of fishing products, should have known that squid from the early 2010 catch would be of a smaller size. Using relevant legal principles, advise Bay Trawler on the applicable legal issues.

GUIDE TO ANSWERING The aim of a question which poses a hypothetical fact problem is to test your ability to apply the relevant body of law to the legal problem arising on the facts. Therefore, you need to demonstrate your knowledge of the law, as well as your ability to apply the law to the facts. The IRAC methodology is commonly used by law students, as it is simple and straightforward, and is analogous to the proof-making model used by lawyers to solving legal problems: 1 Identify the issue(s) in the case; 2 Succinctly introduce the relevant principles of law and authority that are applicable to the problem (this is the plan for the answer); 3 Apply those principles to the facts; 4 Conclude. Let us relate the IRAC methodology to this hypothetical fact problem. 1 Identify the issue(s) in the case. The gist of the dispute is whether Aquanas has breached its contract with Bay Trawler. In order to resolve this issue, a number of important questions need to be analysed: • Is there a contract? • What are the terms of the contract? • Are these terms breached? • Is Aquanas liable for the breach? • What will be the remedies for the breach? 2 Succinctly introduce the relevant principles of law and authority that are applicable to the problem. What are the relevant principles/rules/exceptions/tests which will be applied? • Is there a contract? Consider the following: • Formation of the contract—a meeting of the minds (Dickinson v Dodds); • Offer; • Counter-offer; • Acceptance of the counter-offer. • What are the terms of the contract? Consider the following: • Express terms: pre-contractual statements/context; the parol evidence rule (Goss v Lord ­Nugent); was the contract wholly in writing? (Hoyt’s Pty Ltd v Spencer; Equuscorp Pty Ltd v

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Glengallan Investments Pty Ltd); applicability of exceptions to the rule: collateral contract/ estoppel/implied terms; battle of the forms—last shot rule? (Butler Machine Tool Co Ltd v Ex-Cell-O-Corp (England) Ltd); • Implied terms in fact/custom/law: implied in fact? (BP Refinery (Westernport) Pty Ltd v ­Hastings Shire Council); implied in custom? (Con-Stan Industries of Australia Pty Ltd v ­Norwich Winterthur Insurance (Australia) Pty Ltd); implied in law? (Goods Act 1958 (Vic)). • Are these terms breached and is Aquanas liable for any breach? Consider the following: • Non-conformity with the terms of the contract? • Breach of essential terms? (Associated Newspapers Ltd v Bancks; Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd; DTR Nominees Pty Ltd v Mona Homes Pty Ltd); • Anticipatory breach? (Carr v J A Berriman Pty Ltd); • Breach causing substantial loss of benefit? (Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd). • What will be the remedies for the breach? • Termination (Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938)); • Damages: proving compensable losses (Commonwealth of Australia v Amann Aviation Pty Ltd); causation (March v E & M H Stramare Pty Ltd); remoteness (Hadley v Baxendale); mitigation (Bak v Glenleigh Homes Pty Ltd; Simonious Vischer & Co v Holt & Thompson). 3 Apply those principles to the facts: how should the law be applied to the facts? • First and foremost, it is important to determine whether a contract has been formed. This is because liabilities in contract law are largely dependent on the existence of a contract. Here, the conducts of the parties must be scrutinised in order to determine the offer(s) which have been made, and any possible counter-offer(s), especially with the insertion of new clauses and changes to the original order form. Subsequently, acceptance of the offer(s) or counter-offer(s) is to be analysed. • Once the existence of the contract is established, the express and implied terms of the c­ ontract— namely the rights and obligations under the contract—must be construed. This requires the application of principles, rules and tests relevant to the process of construction of contract. For instance, the parol evidence rule might be applicable and one should ask whether the pre-­ contractual statements which were made by the parties can be considered as evidence to prove the intention of the parties and, ultimately, the terms of the contract. It might also possible to prove that there are implied terms pertaining to the size of the squid. Terms can be implied in fact, based on custom or in law. All these possibilities are relevant and must therefore be ­discussed. • The next issue to be analysed would be the breach of contract. Aquanas will argue that there has been no breach of contract as the contractual terms clearly stipulate that the squid will come from both the 2009 and the 2010 catch. This counter-offer to the original offer in the order form was accepted by Aquanas and therefore became a term of the contract. The mere fact that ­Aquanas preferred a certain size for the squid cannot take precedence over the express contractual stipulations. On the other hand, Bay Trawler will argue that there has been a breach of contract, as the squid which were delivered did not conform to the contract. It will have to rely

Chapter 23

Termination for breach

on evidence of pre-contractual statements and the context of the importance of the squid to be sourced from the big size range to optimise the catch of the long liners (see the order form and its covering letter). • A discussion of the nature of the terms which have been breached should also be provided. 4 Conclude: last, the right of the innocent party to obtain remedies must be analysed. Remedies might flow from contract law or other sources of law which might be applicable, common law, equity or statute: on the balance of probabilities, which arguments or principles of law will be likely to prevail? Ask yourself whether you have solved the issue; namely, whether you have thoroughly analysed the facts in determining whether Aquanas is liable to Bay Trawler for breach of contract.

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24

Discharge of contract by performance and agreement

Chapt e r o v e rv i e w 24.0

Introduction  471

24.1

Discharge by performance   471 24.1.1 Time of performance   471 Application of the equitable rules   472 24.1.2 Order of performance   473 24.1.3 Level of performance   474

24.2

Discharge by agreement   475

24.3

Discharge by express or implied contractual terms   475 24.3.1 Failure of contingent conditions   477 Contingent condition to performance and formation   477 Relevance of the duty to cooperate   478 Contingent conditions precedent and subsequent to performance  479

Chapter 24

Discharge of contract by performance and agreement

24.3.2 Non-fulfilment of contingent conditions   479 Consequences of the non-fulfilment of a contingent condition  480 24.3.3 Election to terminate   482 Restrictions on the right to terminate   482 Effect of termination   484 24.4

Discharge by subsequent agreement   485

24.5

Discharge by abandonment   486

24.6

Estoppel and termination   486

• 24.0 Introduction Contractual agreements are by their very nature personal agreements. As a consequence, judicial intervention is only necessary in certain circumstances. It is therefore possible for the parties to be excused from further performance of their obligations under a contract with or without judicial pronouncements. When parties are excused from further performance of their obligations, the contract is said to have been discharged. In such circumstances, the law requires nothing further to be done by the parties. A contract may be discharged by virtue of completed performance of contractual obligations, by an agreement between the parties (including by a subsequent agreement), by operation of law,1 by election after breach of contract2 or by frustration of the contract.3

• 24.1 Discharge by performance As indicated above, a contract may be discharged by virtue of completed performance of contractual obligations. Performance of a particular contractual obligation must match exactly the requirements of the contract, including as to the time of performance, order of performance and level of performance.

24.1.1  Time of performance The time for performance of a contractual obligation is governed by the terms of the contract. If the contract expressly stipulates the time for performance, then a failure to perform on that date will constitute a breach of contract. If the contract does not stipulate the time for performance, the law imposes the duty to perform in ‘a reasonable time’, unless the facts of the case indicate the contrary.4 This illustrates the importance of considering the circumstances as at the date of the

1 2 3 4

See Chapter 23. See Chapter 23. See Chapter 15. Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1, 13; Handley v Gunner [2008] NSWCA 113, [124].

[ 471 ]

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contract, as well as the circumstances existing at the time when performance takes place or when the party demanding the performance asserts it should have taken place.5 Delay or late performance is a breach even where an obligation has been or will be substantially performed. The question thus arises as to when such delay justifies termination? At common law, performance on time was generally treated as essential, whether the contract expressly stipulate for it or not.6 In addition, delay in performance also justified termination if it manifested repudiation of the contract.7 Equity, on the other hand, treats performance on time as being essential only where this has been expressly agreed upon by the parties8 and is thus illustrated in the contract. It follows that unless there is an express mention in the contract, equity generally treats performance as inessential and failure to perform on time as not conferring any immediate right of termination. It only allows termination after expiry of a notice setting a further reasonable period for performance. In these respects, equity seem to provide more protection from termination for breach than the common law. Legislation in Australia confirms the application of the equitable rules.9

Application of the equitable rules Despite the application of the equitable rules, it is still relevant to ask whether time is of the essence in performing a particular contract. Where the parties have expressly agreed that time is of the essence, both equity and the common law will normally give effect to that agreement. On the other hand, if the contract fixes the time for performance only approximately, it is a fortiori more likely to be inferred that performance on time is not essential. Therefore, a promise ‘to proceed with all due despatch’ was held to be non-essential.10 Similarly, phrases such as ‘on or about’ or ‘as soon as possible’ would give an inference against a finding of essentiality.11 Furthermore, where the contract fixes no time at all for performance, the obligation to perform on time is not likely to be an essential term.12

5 Handley v Gunner [2008] NSWCA 113, [97]; Business and Professional Leasing Pty Limited v Akuity Pty Limited [2008] QCA 215, [46]. 6 See Canning v Temby (1905) 3 CLR 419. 7 See Chapter 23. 8 There are two exceptions to this general rule. First, in the sale of a property of a fluctuating value, time is of the essence regardless of whether the parties have agreed upon it being such: Ballas v Theophilos (No 2) (1957) 98 CLR 193, especially 197. A similar exception applies to the sale of business: Wacal Investments Pty Ltd v Hurley [1992] 1 Qd R 455, 458. Second, payment of a deposit on time is also prima facie essential due to its special character as an important contractual term and commonly as a condition precedent: Brien v Dwyer (1978) 141 CLR 378; Romanos v Pentagold Investments Pty Ltd [2003] HCA 58, [1]. 9 Conveyancing Act 1919 (NSW), s 13; Property Law Act 1974–78 (Qld), s 62; Law of Property Act 1936–75(SA), s 16; Supreme Court Civil Procedure Act 1932 (Tas), s 11(7); Property Law Act 1958 (Vic), s 41; Property Law Act 1969 (WA), s 21; Civil Law (Property) Act 2006 (ACT), s 501; Law of Property Act (NT), s 65. On the complex relationship between common law and equity, see J W Carter, E Peden and G J Tolhurst, Contract Law in Australia, 5th ed., LexisNexis (2007), pp. 664–665; see also R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 4th ed., LexisNexis (2002), pp. 108–110. 10 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 430–431. 11 Rainbow Spicy Sales Pty Ltd v Sanders [1964–65] NSWR 422; Amann Aviation Pty Ltd v Commonwealth of Australia (1990) 92 ALR 603, affirmed in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64. 12 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; see also Asia Pacific International Pty Ltd v Peel Valley Mushrooms Pty Ltd [2000] QSC 168, [68]–[71]; Tekely v Pryce [2000] NSWCA 6; Earnshaw v Gorman & Sons Pty Ltd [2001] NSWCA 291; Douglas v Cicirello [2006] WASCA 226; R & A Cab Co Pty Ltd v Rutty [2007] VSC 62.

Chapter 24

Discharge of contract by performance and agreement

In commercial contracts, the courts have traditionally regarded In commercial performance on time of all significant obligations as being contracts, the courts have essential, provided that the test of essentiality of terms from the traditionally regarded case of Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd13 can be performance on time of all significant obligations as applied. In this respect, failure to perform on time is therefore being essential. 14 similar to substantive breach of contract. In sale of goods contracts, stipulations of the time of payment are specifically deemed not to be of the essence unless otherwise agreed by both parties.15 In contrast, in a contract for the continuing provision of services, it is readily inferred that payment of accounts by the due date is essential.16 In summary, if time is considered to be of the essence both in equity and at common law, and performance is not given when due, the innocent party may immediately terminate the contract.17 If, on the other hand, time is not of the essence, or has ceased to be of the essence, the innocent party cannot terminate a contract for delay without first giving notice requiring performance within a specified time. The contract can only be terminated if the notice is not complied with. In addition, the time allowed in the notice to terminate must be reasonable and the notice must clearly indicate that if it is not complied with, termination may follow. The onus is on the party giving the notice to show that a reasonable time has been allowed.18 Importantly, a party giving such a notice must itself be ready and willing to perform at the time when notice is served, and the notice must no demand more than is due under the contract.19

24.1.2  Order of performance The order of performance might also be an important issue in determining whether parties have discharged their contract through performance of their contractual obligations. Usually, the terms of the contract fix the order for performance of contractual obligations. However, if the contract is silent on the issue, it becomes a question of construction of the contract to ascertain the intention of the parties as to the order in which obligations are to be performed.20

13 (1938) 61 CLR 286: see Chapter 23, section 23.2.2. 14 But see Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, 562; Alliance Petroleum Australia NL v Australian Gas Light Co (1985) 39 SASR 84, 105; RJR Holdings Pty Ltd v Balleroo Pty Ltd (1991) 56 SASR 151, 156–157. 15 See for example Sale of Goods Act 1954 (ACT), s 15; Sale of Goods Act 1923 (NSW), s 15; Sale of Goods Act 1896 (Tas), s 15; Goods Act 1958 (Vic), s 15; Sale of Goods Act 1896 (Qld), s 13; Sale of Goods Act 1895 (WA), s 10. Whether any other stipulation as to time is essential will depend on the terms of the contract. 16 21st Century Promotions Australia Pty Ltd v Telstra Corp [2001] SASC 299, [50]. 17 Carr v J A Berriman Pty Ltd (1953) 89 CLR 327, 348; Tropical Traders Ltd v Goonan (1964) 111 CLR 41; Brien v Dwyer (1978) 141 CLR 378; Lowe v Evans [1989] 1 Qd R 295. 18 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623, 640, 647; Sunstar Fruit Pty Ltd v Cosmo [1995] 2 Qd R 214; Earnshaw v Gorman & Sons Pty Ltd [2001] WASCA 50, [27]. 19 Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286, 299; Louinder v Leis (1982) 149 CLR 509, 523; McNally v Waitzer [1981] 1 NSWLR 294; Wilde v Anstee (1999) 48 NSWLR 387, 395; Alexus Pty Ltd v Pont Holdings Pty Ltd [2000] NSWSC 1171; Earnshaw v Gorman & Sons Pty Ltd [2001] WASCA 50, [27], [42]; Australian Mortgage v Baclon [2001] NSWSC 774, [81]. 20 Burton v Palmer [1980] 2 NSWLR 878, 895.

[ 473 ]

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Contract Law: Text and Cases

In addition, in determining the order of performance, a distinction is usually drawn between independent and dependent obligations. Where the parties’ obligations are independent of one another, the order of performance is irrelevant. An example of such obligations include where a buyer is obliged to pay for goods under a sale of goods contract irrespective of the date of actual delivery.21 It is more likely for obligations to be considered dependent. For instance, in an employment contract, the employer’s obligation to pay wages is dependent upon the employee performing their work for the relevant pay period. If the employee has not performed, the employer is not obliged to make payment.22 Due to the interdependent nature of such obligations, it is often the case that one party’s ability to perform its obligations will depend upon the other party’s cooperation in carrying out its own obligations. Such a duty to cooperate may be expressly provided for in the contract or alternatively, if it is not, then it may have to be implied. In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd, 23 Mason J, with whom the other members of the High Court agreed, quoted the following statement of Lord Blackburn from Mackay v Dick:24 As a general rule … where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.25

In fact this obligation to cooperate is a general obligation implied in every contract and is usually accompanied by an express term to the effect that a party will not prevent the performance of an obligation by the other party.26 Any attempts to obstruct performance or to refuse tender of performance may therefore be treated as breach of contract, which may in turn discharge the contract.

24.1.3  Level of performance Failure to perform an obligation exactly as and when promised is a breach of the contract— what is required is precise compliance with the contract.

The next important issue to consider is the level of performance required under a contract. This substantive element is equally as important as the temporal element required of contractual performance. Thus, failure to perform an obligation exactly as and when promised is a breach of the contract—what is required is precise compliance with the contract.27 It also follows that unless otherwise agreed, substantial performance of a contract

21 Sale of Goods Act 1954 (ACT), s 52(2); Sale of Goods Act 1923 (NSW), s 51(2); Sale of Goods Act 1972 (NT), s 51(2); Sale of Goods Act 1896 (Qld), s 50(2); Sale of Goods Act 1896 (Tas), s 53(2); Goods Act 1958 (Vic), s 55(2); Sale of Goods Act 1895 (SA), s 48; Sale of Goods Act 1895 (WA), s 48(2). 22 Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435, 465. 23 (1979) 144 CLR 596. 24 (1881) 6 App Cas 251. 25 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, 607; Mackay v Dick (1881) 6 App Cas 251, 263. 26 For discussion on the implied duty to cooperate, see Chapter 13; see also CSS Investments Pty Ltd v Lopiron Pty Ltd (1987) 76 ALR 463, 479–480. 27 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; compare Bowes v Chaleyer (1923) 32 CLR 159.

Chapter 24

Discharge of contract by performance and agreement

is inadequate performance. Therefore in Highmist Pty Ltd v Tricare Ltd,28 the Queensland Court of Appeal held that small deviation in the size of the relevant property, being 3.015 per cent, constituted non-conformity with the explicit requirements of the contract. Keane J commented that it was: not to the point to consider whether or not the respondent would have received ‘substantially what it had contracted to purchase’. The clear terms of the contract required the appellant to register a plan of subdivision in conformity with … explicit requirements … this was not done. To excuse this failure because the amount by which the specifications of the registered plan deviated from those stipulated in the contract was ‘small’ would be to deprive the terms agreed upon by the parties … of any real meaning. The common law does not operate in this way.29

Strict performance of contractual obligations is also notably required by the various Sale of Goods Acts in Australia. They provide that, subject to contrary agreement or usage, the buyer of goods may reject delivery of the wrong quantity of goods, or of contracted goods which are mixed with other goods.30 Note that a similar requirement of exactness in the observance of time stipulations is also necessary.31 It should also be noted that a performance which is not compliant with the contract will constitute a breach even if the performance is of equal or greater economic value than the performance contracted for. Hence, a builder who erects a house which departs from contract specifications is in breach of the contract even if the value of the house has not been affected.32

• 24.2 Discharge by agreement Discharge by agreement can be achieved in a number of ways: (i) by an express or implied contractual term within the original contract; (ii) by a subsequent agreement; or (iii) by abandonment. Furthermore, contractual parties may also relinquish enforceable rights against each other under the doctrine of waiver.33 When the contract is effectively discharged, the parties are released from their future’s obligations and rights.

• 24.3 Discharge by express or implied contractual terms It is common for parties to include an express term which provides for when and how their contract may be brought to an end.34 This is particularly the case in long-term commercial contracts. Express terms of termination may come in different forms. For example, the term could 28 [2005] QCA 357. 29 Ibid, [41], [17], Jerrard JA agreeing, Cullinane J concurring. 30 Sale of Goods Act 1954 (ACT), s 37; Sale of Goods Act 1923 (NSW), s 33; Sale of Goods Act 1972 (NT), s 33; Sale of Goods Act 1896 (Qld), s 32; Sale of Goods Act 1896 (Tas), s 35; Goods Act 1958 (Vic), s 37; Sale of Goods Act 1895 (SA), s 30; Sale of Goods Act 1895 (WA), s 30. 31 See Aussie Invest Corp Pty Ltd v Pulcesia Pty Ltd [2005] VSC 362, [278], for a review of relevant authorities. 32 Bellgrove v Eldridge (1954) 90 CLR 613, especially 617. 33 See below, section 24.3.3. 34 See also Chapter 23.

[ 475 ]

[ 476 ]

Contract Law: Text and Cases

prescribe a fixed period of time for the contract to last, or it might provide a unilateral or bilateral right to terminate the contract. The exercise of such a right can in turn be further regulated or qualified by additional terms, such as those which provide discretion on the parties or those which allow parties to terminate the contract after a specified period of notice has been given, or those which allow parties to terminate once a triggering event occurs. Such triggering events may include breach of contract by one of the parties,35 or the non-fulfilment of a contingent condition. Express terms of termination may also specify a procedure to be followed before the contract is effectively terminated. This may include the requirement of notice to be given to the other party. Such requirement is not to be construed in an overly technical or restrictive manner. In Pan Foods Company Importers & Distributors Pty Ltd v Australian and New Zealand Banking Group Ltd,36 a bank provided finance to Pan Foods through a number of loans. The relevant contract provided that if any of a number of specified events of default occurred, the bank could terminate its obligations under the agreement and declare any moneys owing immediately due and payable. In order for the bank to be able to exercise this right, the bank was required under the contract to give Pan Foods a written notice which was to be given by an ‘authorised representative’ of the bank. The bank’s solicitors prepared the relevant notice and an authorised representative of the bank handed the notice to the office holders of Pan Foods. Pan Foods sought to challenge the validity of the notice. One argument it put forward was that the notice was from the solicitors of the bank and not the bank itself. This argument was rejected by the High Court as the circumstances in which the notice was handed over made it clear that the notice was from the bank. Hence, a practical or pragmatic approach in interpreting such requirements is to be preferred, provided that the apparent non-compliance with those requirements does not prejudice the other contracting party in If the contract any substantial way. is silent on the If the contract is silent on the circumstances which will circumstances which discharge the parties’ obligations or on the consequences of will discharge the parties’ obligations or termination, a term might have to be implied to provide for such on the consequences of gap. If this is the case, the normal rules relating to implication of termination, a term might terms as set out in BP Refinery (Westernport) Pty Ltd v Hastings Shire have to be implied to Council 37 must be met. In Crawford Fitting Co v Sydney Valve & Fitting provide for such gap. Pty Ltd 38 McHugh JA said: When the question arises whether a commercial agreement for an indefinite period may be terminated, the answer depends upon whether the agreement contains an implied term to that effect. The existence of the term is a matter of construction. But the question of construction does not depend only upon a textual examination of the words or writings of the parties. It also involves consideration of the subject matter of the agreement, the circumstances in which it was made, and the provisions to which the parties have or have not agreed.39

35 36 37 38 39

See Chapter 23. (2000) 170 ALR 579. (1977) 180 CLR 266: see Chapter 13, section 13.1.1. (1988)14 NSWLR 438. Ibid, 443.

Chapter 24

Discharge of contract by performance and agreement

In addition—similar to the notice requirement which is usually required by an express term of termination in a contract—an implied term of termination also carries with it a requirement of notice to be given to the other contracting party.40

24.3.1  Failure of contingent conditions It is also important to note that contractual parties may expressly specify the performance of their contract conditional or contingent upon the occurrence of a specified event which is out of the control of either party. Similarly, parties may also make performance of their contract conditional upon a particular event not occurring and this may also be out of the control of both parties. As no promise has been given by either party that the specified event will or will not occur, non-fulfilment of such a condition is therefore not in itself a breach of contract.41 It follows that contingent conditions should be distinguished from promissory conditions, as the latter are capable of being breached. For example, a contract for the sale of land may be made subject to the purchaser obtaining finance to complete the purchase. This would be a contingent condition, and if the purchaser fails to obtain such finance by the required date, then either party may terminate the contract but the purchaser will not be liable for damages for failing to obtain the finance. In other words, the purchaser had not breached a promissory condition in the contract. Determining whether a condition is promissory or contingent depends on the construction of the contract in the circumstances of the case. The language used by the parties must be closely analysed, especially where fulfilment of the condition depends on the act of a party.42 It is common for contingent conditions to be expressed using phrases such as ‘subject to’ or ‘provided that’, but this is by no means always the case. What is important to remember is that any express stipulation—in whatever form—that has the effect of making an obligation to perform conditional on the occurrence or non-occurrence of a non-promissory event qualifies as a contingent condition of performance. Such a condition may also be implied.43

Contingent condition to performance and formation A contingent condition may qualify the performance of all of the obligations under a contract, or a particular obligation only. If the condition is not fulfilled, then the parties will not be obliged to perform the relevant contractual obligations until the condition is fulfilled. Their obligation to perform is therefore suspended. This, however, does not prevent the contract from coming into existence. This is important as even before the fulfilment of the condition, the parties will be bound to the contract and may not do anything inconsistent with the relevant contractual obligations. For example, if a contract for the sale of land is made subject to the purchaser

40 Ibid, 445–446. 41 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; Meehan v Jones (1982) 149 CLR 571; McTier v Haupt [1992] 1 VR 653. 42 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; Meredith Projects v Fletcher Construction [2000] NSWSC 493; compare Tricontinental Corp v HDFI Ltd (1990) 21 NSWLR 689; see also Cooper v Ungar (1958) 100 CLR 510, 515; Howard F Hudson Pty Ltd v Ronayne (1972) 126 CLR 449; Lantry v Tomule Pty Ltd [2007] NSWSC 81, [57]–[58]. 43 The usual criteria of implication apply: see The Australian Meat Industry Employees’ Union v Frugalis [1990] 2 Qd R 201; Commonwealth of Australia v Spotless Catering Services Ltd [2000] WASCA 302; Elliott v Reading [1999] WASCA 11; J Boag & Son Brewing Ltd v Bridon Investments Pty Ltd [2001] TASSC 29.

[ 477 ]

[ 478 ]

Contract Law: Text and Cases

obtaining finance to complete the sale, neither party will be obliged to perform the contract unless or until the purchaser obtains finance or the condition is waived. However, if the vendor decides to sell the property to another party, then the vendor is in breach of the contract. The vendor would only be free to sell the property to another party after the original contract had been terminated on the ground that the purchaser could not obtain finance or did not obtain finance by the required time. In contrast to contingent conditions which are used to qualify performance of all or some of the obligations of a contract, contingent conditions may also be used to qualify the formation of a contract. Where such a condition exists, the parties are not bound by the contract unless and until the condition is fulfilled.44 For example, consider a document which states that the parties’ agreement in respect of the sale of land is subject to the preparation of a formal contract by the parties’ solicitors and the execution of that contract. This condition is likely to be interpreted as relating to the formation of a binding contract. It follows that the parties will have no contractual obligations until a formal contract is prepared and executed. Consequently, either party may withdraw from the agreement prior to that time. Whether a contingent condition qualifies performance of contractual obligation or, alternatively, formation of a contract depends on the construction of the parties’ agreement. Courts are inclined to treat contingent conditions as qualifying performance and not formation. This is especially the case where the parties have fully settled the terms of their transaction. In Perri v Coolangatta Investments Pty Ltd,45 Mason J stated: In most cases it is artificial to say, in the face of the details settled on, that there is no binding contract until the event in question happens. It is in conformity with the intention of the parties that there is a contract which makes the stipulated event a condition precedent to the duty of one party, or both parties, to perform. Furthermore it gives the courts greater scope in adjusting the rights of the parties. For these reasons the condition will not be construed as precedent to formation unless the contract plainly compels this conclusion.46

Relevance of the duty to cooperate As previously noted, non-fulfilment of a contingent condition of performance is not a breach of contract as neither party has undertaken to be liable. However, if a contract is already in existence, a promise to cooperate is implied in it.47 This essentially means that, to the extent to which fulfilment of a condition is within the control or influence of the parties, each party impliedly undertakes to do what is reasonably necessary to enable the condition to be fulfilled, or at least to refrain from action that would prevent its fulfilment.48 For example, in Perri v Coolangatta Investments Pty Ltd 49 it was held that the buyers, whose obligation to complete the contract was conditional on the sale of their present property, were by implication required to make reasonable efforts to achieve that sale. Similarly, it is common for a contract for the sale of a business to be made conditional on the acceptance by the lessor of the premises of the buyer as a tenant. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537. (1982) 149 CLR 537. Ibid, 552. See Chapter 13, section 13.3.2. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, 553 per Mason J (compare 566 per Brennan J); Secured Income Real Estate (Aust) Ltd v St Martines Investments Pty Ltd (1979) 144 CLR 596. 49 (1982) 149 CLR 537. 44 45 46 47 48

Chapter 24

Discharge of contract by performance and agreement

This carries with it an implication that the buyer will ‘do whatever may be reasonably required of him to procure his acceptance’.50 A defaulter who breaches the duty to cooperate is not only disqualified from reliance on non-fulfilment of a condition, but will also be treated as breaching the contract. A concurrent right to terminate the contract for breach may thus arise, as well as the right to claim damages51 or specific performance.52 In addition, where non-fulfilment of a contingent condition confers a right to terminate the contract, that right is subject to restrictions which also apply to termination for breach of contract.53

To the extent to which fulfilment of a condition is within the control or influence of the parties, each party impliedly undertakes to do what is reasonably necessary to enable the condition to be fulfilled, or at least to refrain from action that would prevent its fulfilment.

Contingent conditions precedent and subsequent to performance A distinction must be drawn between a contingent condition precedent which must be fulfilled before the parties are bound to perform their contractual obligations, and what is on the other hand a condition subsequent. The latter applies where the parties’ obligation to perform is immediately binding, but will come to an end should the event specified in the condition occur. For example, if a contingent condition in a contract for the sale of goods provides that performance of the parties’ obligations is subject to the vendor obtaining an import licence, then this condition can be construed as a condition precedent. An example of a condition subsequent, which can be used in the same context, is a condition that performance of the contract is subject to the vendor’s import licence not being revoked. This distinction between a contingent condition precedent and a contingent condition subsequent has been criticised by Mason J in Meehan v Jones:54 [The distinction is] an artificial and theoretical question. In one sense performance of the condition is precedent to the right of a party to call for performance. In another sense there is a valid contract which may be determined for non-performance of the condition is subsequent.55

It is therefore more appropriate, in dealing with contingent conditions, to identify the effect of the condition than to attach the labels ‘precedent’ or ‘subsequent’.

24.3.2  Non-fulfilment of contingent conditions Whether a party can terminate a contract based on non-fulfilment of a contingent condition will depend on proof that the specified event has not occurred within the specified time, or, if no time has been fixed under the contract, within a reasonable time. The requirement of

50 Kennedy v Vercoe (1960) 105 CLR 521, 529 per Dixon CJ, Kitto, Windeyer JJ. 51 (1982) 149 CLR 537, 559 per Wilson J, 541 per Gibbs CJ, 553 per Mason J, 566 per Brennan J, Stephen J concurring; Smith v Pisani (2001) 78 SASR 548. 52 See Niesmann v Collingridge (1921) 29 CLR 177; Masters v Cameron (1954) 91 CLR 353, 361. 53 See Chapter 23. 54 (1982) 149 CLR 517. 55 Ibid, 592 per Mason J; see also Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, 541 per Gibbs CJ; 543, 564–565 per Brennan J, Stephen J concurring.

[ 479 ]

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exact compliance with the contract that is relevant in determining whether a contract has been breached also applies to the determination of non-fulfilment of conditions. Moreover, whether the fulfilment of a contingent condition is judged by an objective or a subjective test depends on the language of the condition. In some cases, the condition will clearly refer to an objective fact and thus its fulfilment depends on a course of external events over which the parties have no influence or control. An example of such a condition would be where a council’s approval is required. The fulfilment of the condition is therefore dependent on an objective test as to whether the council’s approval is actually granted. In other cases, the law also recognises that a contract may be subject to a contingent condition the fulfilment of which dependent on a party’s decision or judgment. For example, one party may have to be ‘satisfied’ with or ‘approve’ a particular matter. In these sorts of cases, fulfilment of the condition will thus have a subjective element and the party making the judgment must make the decision honestly and in accordance with its implied duty to cooperate.56 The relevant party may also be required to act reasonably in making the judgment.57

Consequences of non-fulfilment of a contingent condition A contract will usually provide for the consequences of nonfulfilment of a contingent condition. If a contingent condition which relates only to a particular obligation is not fulfilled, then generally the parties will be excused from performance of that obligation and the contract will remain on foot. On the other hand, if the contingent condition relates to performance of the entire contract and such condition is not fulfilled, the contract will generally be voidable.58 This means that one or both of the parties may individually have a right to elect to terminate the contract. If neither party elects to do so, the contract will continue on foot. On the other hand, if the contract is terminated, neither of the parties will be liable in damages merely for the fact that the condition has not been fulfilled, unless there has been a breach of the implied duty to cooperate. Therefore, if the contract itself expressly or impliedly provides for the right to terminate in the event of non-fulfilment of a contingent condition, the determination of the parties’ rights can easily be made. The contract usually does not come to an end until a party elects to exercise the contractual right to terminate. In contrast, it is more difficult to determine the consequences of non-fulfilment of a contingent condition where the contract provides expressly for automatic termination on non-fulfilment of a condition. For example, in Suttor v Gundowda Pty Ltd,59 the parties had agreed that their contract ‘shall be deemed to be cancelled’ in the event that the Treasurer did not consent to the contract by a specified date. The High Court held that where the event upon which the condition depends may be brought about by the default of one of the parties, the contract is voidable at the option of the party not in default. If neither party is in default, the contract is voidable at the option of either party. Therefore, what appeared to be If a contingent condition which relates only to a particular obligation is not fulfilled, then generally the parties will be excused from performance of that obligation and the contract will remain on foot.

56 57 58 59

Meehan v Jones (182) 149 CLR 571. For a detailed discussion, see Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, 533–534 per Gibbs CJ. (1950) 81 CLR 418.

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an automatic termination clause was not afforded such an automatic construction. The contract was made voidable and not void.60 A similar clause was used in Gange v Sullivan61 and it was again treated as requiring an election to terminate instead of resulting in an automatic termination. Gange v Sullivan (1966) 116 CLR 418 Taylor, Menzies and Owen JJ at 442–443: As a first step to deciding this decisive question [whether the contract was voidable or void], it is necessary to understand the condition and its significance to the parties. Without doubt, it was intended to safeguard the purchaser by making the continuance of the contract depend upon his obtaining the council’s approval for using the land for the three purposes therein set out. Yet, although the condition was for the protection of the purchaser, it nevertheless affected the vendor, for it obliged the purchaser to make his application for the council’s approval within seven days; it provided for the contract coming, or being brought, to an end if the council’s approval was not granted by 31 May; and it fixed the date for the completion of the contract by reference to the only event which could give rise to any obligation to complete—that is, the council’s approval. It was argued for the appellant that the condition did not mean that the contract was brought to an end automatically when the council had not granted approval by 31 May. Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, together with other cases, was relied upon to support the conclusion that non-fulfilment of the condition did not of itself bring the contract to an end but did no more than render the contract voidable at the instance of a  party not responsible for the non-fulfilment of the condition. Whilst the effect of a condition must in every case depend upon the language in which it is expressed and a decision upon the meaning of one condition cannot determine the meaning of a different condition, the authorities cited do show a disposition on the part of courts to treat non-fulfilment of a condition such as that here under consideration as rendering a contract voidable rather than void in order to forestall a party to a contract from gaining some advantage from his own conduct in securing, or contributing to, the non-fulfilment of a condition bringing the contract to an end. Accordingly, notwithstanding that the language of the condition here is susceptible of meaning that the contract came to an end if 31 May passed without the council’s approval, we are prepared to treat non-fulfilment of the condition as rendering the contract voidable rather than void. So understood, nonfulfilment of the condition could, in the absence of default contributing thereto, be relied upon by either party as a ground for determining the contract. An examination of what took place on 25 May and the first and second days of June leaves us in no doubt that, unless the condition had been fulfilled by the letter of 2 April [council’s letter of approval ‘in principle’], the contract was brought to an end by the vendor’s positive rescission in the absence of a communicated readiness on the part of the purchaser to complete without some further approval from the council. 60 Ibid, 418, 441. 61 (1966) 116 CLR 418.

[ 481 ]

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The principle from Suttor and Gange has been applied in a number of cases to preclude automatic termination on non-fulfilment. Some have argued that such approach to construction is inimical to the parties’ clear and plain intentions in using such clear language of automatic termination. In contrast, Seddon and Ellinghaus have suggested: Although contracting parties must ultimately be free to decide for themselves what the effect of non-fulfillment of a condition shall be, there is something to be said for the view that, in general, a contract should not come to an end without a clear election by one of the parties, at least where this is compatible with its language, construed in context. Self-executing conditions are inherently problematical and liable to generate confusion. It may be wise to adhere in general to the proposition that ‘if neither party exercises the right to terminate, the contract continues on foot.62

24.3.3  Election to terminate The elective right to terminate the contract arises immediately on expiry of the period specified for fulfilment of the contingent condition. Notice is not required before the right to terminate is exercised.63 The position is thus different from aspects of breach of promissory conditions generally—failure to perform a promissory condition on time confers a right to terminate immediately only if time is ‘of the essence’. In other cases, notice must be given, setting a further reasonable period for performance. In addition, whether one or both of the parties can terminate a contract for non-fulfilment of a contingent condition will depend on the construction of the contract. Generally, both parties will be entitled to terminate unless it can be proved that the non-fulfilment is the result of the default of one of the parties. It may be the case that the defaulting party had failed to cooperate or had made their decision dishonestly. If this is the case, the defaulting party will not be entitled to rely on the non-fulfilment as a reason for terminating the contract.64

Restrictions on the right to terminate It should be noted that the right to terminate a contract based on non-fulfilment of a contingent condition is not an absolute right. A party’s ability to exercise a right to terminate or to insist on termination may be restricted due to a number of factors, such as: (i) (ii) (iii) (iv) (v)

waiver of the contingent condition; prevention of or dispensation with the fulfilment of the contingent condition; affirmation of the contract, waiver of the right to terminate or estoppel; breach of obligations of cooperation and good faith; unconscionability in equity or under legislation.

First, parties to a contract may agree to waive a contingent condition, in which case they will be bound by their contract and many not terminate the contract for non-fulfilment of the condition.

62 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), pp. 992–994. 63 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, 546 per Gibbs CJ, 569–570 per Brennan J, Stephen J concurring. 64 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; Gange v Sullivan (1966) 116 CLR 418; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; ETNA v ARIF [1999] 2 VR 353.

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In some cases, fulfilment of a contingent condition may also be waived by one party acting alone where the condition is for the benefit of that party.65 By doing this, the party in effect is deleting the contingent condition from the contract, hence depriving itself as well as the other party of the right to rely on its non-fulfilment. Whether a condition will be for the benefit of a particular party—that is, whether it is onesided—is dependent on the facts of the case. For example, in Gange v Sullivan,66 a condition in the contract of sale of land which made completion ‘subject to the purchaser obtaining development approval’ from the local council was considered to be waivable by the purchaser, as it was ‘primarily for’ the purchaser’s benefit. This was the case even though it also affected the vendor. Similarly, in Perri v Coolangatta Investment Pty Ltd,67 a condition that the contract was subject to sale of the buyers’ existing property was also held to be waivable by them. The condition was variously characterised as being for the buyers’ benefit,68 substantially for their benefit,69 wholly for their benefit,70 or inserted for their protection,71 although the vendor’s interests were again conceded to be affected. In contrast, in Gough Bay Holdings Pty Ltd v Tyrwhitt-Drake,72 a contract was made conditional upon the local authority approving the purchaser’s plan of subdivision. The vendors were retaining land adjacent to the land to be sold, as well as other land in the area. Evidence was produced to show that the land retained by the vendors would be enhanced if the purchaser could successfully subdivide the land which was the subject of the sale. The Court therefore concluded that the condition benefited the vendors as well as the purchaser, and hence it was not capable of unilateral waiver by the purchaser.73 Second, a party’s right to terminate the contract for non-fulfilment of a contingent condition would be affected if they have prevented or dispensed with fulfilment of the condition. This factor has sometimes been explained in terms of waiver,74 and at other times, in terms of estoppel.75 In Grieve v Enge,76 the parties entered into a contract for the sale of land on the condition that the purchaser obtained finance by a specified date. In finding for the plaintiff purchaser, Cullinane J held that the defendant vendor’s refusal to allow a financier access to the property, combined with statements by the defendant that constituted repudiatory conduct, effectively prevented the defendant from relying on the plaintiff’s failure to obtain finance by the time stated in the condition. Third, a right to terminate a contract for non-fulfilment of a contingent condition can also be lost by subsequent conduct constituting an election to affirm the contract, or a waiver of the

65 Gange v Sullivan (1966) 116 CLR 418, 430, 443; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, 543, 552, 560, 565. 66 (1966) 116 CLR 418, 430 per Barwick CJ, 441 per Taylor, Menzies, Owen JJ, 443 per Windeyer J. 67 (1982) 149 CLR 537. 68 Ibid, 543 per Gibbs CJ. 69 Ibid, 565 per Brennan J. 70 Ibid, 560 per Wilson J. 71 Ibid, 552 per Mason J. 72 [1976] VR 195. 73 Ibid, 204. 74 Foran v Wight (1989) 168 CLR 385, 396 per Mason CJ. 75 Ibid, 422 per Brennan J, 434 per Deane J. 76 [2006] QSC 37.

[ 483 ]

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right to terminate, or when the party who is trying to rely on the right to terminate is estopped from such reliance.77 Fourth, it should also be noted again that where a contract is subject to a contingent condition, the duty to cooperate and to act in good faith imposes on each party the duty to do what is reasonably necessary to enable its fulfilment. If the condition is not fulfilled because of a breach of this obligation, the party in breach has no right to terminate the contract. In other words, the failure to cooperate or act in good faith disqualifies the defaulter from reliance on non-fulfilment of the condition.78 Last, the High Court has, on a number of occasions, acknowledged the power of equity to restrain the unconscionable exercise of any right to terminate a contract, whether conferred by contract or by law.79 The case of Godfrey Constructions Pty Ltd v Kanangra Parl Pty Ltd 80 provided the High Court with one such occasion. In that case, there was a condition in a contract of sale of land which entitled the seller to terminate the contract if ‘unable or unwilling to comply with’ any requisition of the buyer. When the buyer requisitioned the removal of a caveat, the seller responded by terminating the contract in reliance on this condition. The High Court held that the termination was invalid as the seller had relied on the condition in order to force the buyer to give up a justifiable demand to a title free of any caveat.81 The reliance on the condition for this purpose was thus unreasonable or unconscionable.82 The effect of termination for nonfulfilment of a contingent condition is prospective— unless the parties agree otherwise, the contract comes to an end prospectively and all the accrued obligations are unaffected.

Effect of termination Similar to termination of contract based on a breach or frustration, the effect of termination for non-fulfilment of a contingent condition is prospective.83 This means that unless the parties agree otherwise,84 the contract comes to an end prospectively and all the accrued obligations are unaffected. Moreover, the law of restitution may also apply to a contract which has been terminated for non-fulfilment of a contingent condition. Any money which has been paid, or the value of

77 Equitable Life Aussrance of the US v Bogie (1905) 3 CLR 878; Paterson v McNaghten (1905) 2 CLR 615, affirmed in (1907) 6 CLR 257 (PC); Mitchell v Pattern Holdings Pty Ltd [2001] NSWSC 199 (estoppel); Christiansen v Klepac [2001] NSWSC  385 (affirmation, estoppel); Abram v A V Jennings Ltd [2002] SASC 417, [75] (waiver); Barooga Projects (Investments) Pty Ltd v Duncan [2004] QCA 149 (affirmation); Sumampow v Mercator Property Consultants Pty Ltd [2005] WASCA 64 (variation, affirmation, estoppel); MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWSC 1066 (waiver, estoppel); Tarongo Land Pty Ltd v Lyons [2005] VSC 49 (estoppel); Quinn Villages P/L v Mulherin [2006] QCA  433 (affirmation, estoppel); Neate v Parfit [2006] WASC 121 (waiver, affirmation); Trupkovic v Furrer [2007] QSC 027 (affirmation, estoppel). 78 This principle is analogous to the prerequisite of readiness and willingness which applies to termination for breach. It is also analogous to the principle which precludes a party from relying on self-induced frustration: see Plumor Pty Ltd v Handley (1996) 41 NSWLR 30, 34–35. 79 Statutory unconscionability provisions from the Australian Consumer Law might also be triggered. 80 (1972) 128 CLR 529. 81 Ibid, 544. 82 Ibid, 538, 546, 552. 83 Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361; see also GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50, 651; Redglove Projects Pty Ltd v Ngunnawal Local Aboriginal Land Council [2005] NSWSC 892, [111]–[112]. 84 This should be contrasted with retrospective annulment or rescission ab initio: Rawson v Hobbs (1961) 107 CLR 466; ANZ Banking Group Ltd v Wrenport Pty Ltd [1995] QCA 140; [1996] ANZ Conv R 102.

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non-monetary benefits conferred prior to the termination of contract, may be recoverable as restitution for unjust enrichment. review questions 1 Explain whether a contractual obligation can be discharged if the party in question substantially performs the obligation. 2 Explain the nature of contingent conditions, conditions precedent and conditions subsequent. 3 Explain how, on the one hand, some contingent conditions are used to qualify performance of all or some of the obligations of a contract, and on the other hand, they are used to qualify the formation of a contract. How important is the distinction between the two possible uses?

• 24.4 Discharge by subsequent agreement In addition to cases where parties are discharged from their In order for the obligations due to performance or to express or implied rights subsequent agreement to in the contract, parties might also be discharged from their be binding, it must comply obligations by making subsequent agreement under which each with all the ordinary rules of contract formation, agrees to release the other from the original contract.85 In order including the requirements for the subsequent agreement to be binding, it must comply of offer, acceptance and with all the ordinary rules of contract formation, including the consideration. requirements of offer, acceptance86 and consideration. In relation to the requirement for consideration, there will be no difficulty if both parties still have obligations to perform under the contract. In such cases, each party will provide consideration by agreeing to release the other party from their remaining obligations; that is, each party gives up the right to enforce the original contract. The position is different where the contract has been wholly performed on one side only, for example where a seller has delivered the goods but the buyer has not paid the price. If the seller decides to forgo payment, the decision is effectively a gift unless supported by a fresh consideration from the buyer. In the absence of fresh consideration, such an agreement is not enforceable as a contract unless made by deed. Furthermore, an existing original contract may be discharged where a subsequent agreement of ‘compromise’, ‘forbearance’, or ‘accord and satisfaction’ is entered into. This type of contract typically involves a party in the contract compromising or forbearing a suit for breach of the original contract, thus extinguishing the cause of action.

85 In some cases it is unclear as to whether the parties to a contract intend to discharge it by a further agreement. The determination of this issue requires a process of construction of both contracts. For example, a contract to terminate an existing contract can be inferred from conduct which manifests a clear intention to bring all obligations to an end: Creamoata Ltd v Rice Equalization Association Ltd (1953) 89 CLR 286. 86 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).

[ 485 ]

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• 24.5 Discharge by abandonment In some cases, parties to a contract may treat their contract as at an end even if there is no subsequent contract to discharge it. This commonly occurs after a dispute resulting in or following on from breach. In such cases, termination for breach and termination by abandonment may occur concurrently.87 In the case of DTR Nominees Pty Ltd v Mona Homes Pty Ltd,88 the parties to a contract of sale of land each purported to terminate it for breach by the other. This was done notwithstanding the fact that neither party was entitled to do it. Moreover, a five-month period of inactivity followed thereafter. The Court held that the contract had essentially been abandoned: Neither party had effectively rescinded. But when these proceedings were commenced, neither party intended that the contract should be further performed. The parties must be regarded as having so conducted themselves as to abandon the contract.89

In the 1918 case of Summers v Commonwealth,90 Isaacs J emphasised the importance of the parties’ conduct in cases of alleged abandonment of a contract: Whatever the terms of a contract may be, it is possible for the parties so to conduct themselves as mutually to abandon or abrogate it … in my opinion that is the legal position here. Informally, but effectively, the parties have so acted in relation to each other as to abandon or abrogate the contract.91

More recently, in CGM Investments Pty Ltd v Chelliah,92 Finkelstein J reviewed a number of relevant authorities and his Honour concluded that the question as to whether an agreement has been abandoned does not require the examination of the parties’ actual subjective intention of abandoning the agreement; rather, it requires an examination of the parties’ intention as objectively manifested by their conduct.93

• 24.6 Estoppel and termination The modern doctrine of estoppel by conduct aims to prevent an unjust departure by one party from an assumption adopted by another. This may therefore be applicable to conduct by one party which induces the other to assume that their contract has been terminated. For example, in Tavefund Pty Ltd v Stephen Fitzgerald & Co Pty Ltd,94 a seller of land was estopped from denying

87 Ryder v Frohlich [2004] NSWCA 472, [133], [152]. 88 (1978) 138 CLR 423. 89 Ibid, 434; see also Buchanan v Byrnes (1906) 3 CLR 704; Gange v Sullivan (1966) 116 CLR 418, 433; Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309; Highmist Pty Ltd v Tricare Ltd [2005] QCA 357, [68]. 90 (1918) 25 CLR 144. 91 Ibid, 151–152; see also DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 434; Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, 321–324; Liristis v Wallville [2001] NSWSC 428, [29]ff. 92 [2003] FCA 79. 93 Ibid, [18] reversed on other grounds in Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279; adopted in Marminta Pty Ltd v French [2003] QCA 541, [22] per Jerrard JA, Williams JA and Philippides J concurring; Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 716, [351] per Einstein J. 94 [1989] ACTSC 57.

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the discharge of the contract of sale as it had accepted payment of a sum determined to be due under the contract.95

Ke y p o in ts for re v ision Contractual agreements are by their very nature personal agreements. A contract may be discharged by virtue of completed performance of contractual obligations, by an agreement between the parties (including a subsequent agreement), by operation of law, by election after breach of contract or by frustration of the contract. The time for performance of a contractual obligation is governed by the terms of the contract. If the contract expressly stipulates the time for performance, then a failure to perform on the stipulated date will constitute a breach of contract. If the contract does not stipulate the time for performance, the obligation must be performed within a reasonable time unless the facts of the case indicate the contrary. Failure to perform an obligation exactly as and when promised is a breach of the contract. A contingent condition may qualify the performance of all of the obligations under a contract or a particular obligation only. A distinction must be drawn between a contingent condition precedent, which must be fulfilled before the parties are bound to perform their contractual obligations, and a condition subsequent. A contract will usually provide for the consequences of non-fulfilment of a contingent condition. In some cases, parties to a contract may treat their contract as at an end even if there is no subsequent contract to discharge it.

problem-solving practice Martina is considering the purchase of a townhouse in a new development. She has been given the Contract for the Sale of Real Estate which includes in it a proposed Plan of Subdivision setting out a schedule of lot entitlement. The contract also includes a number of Special Conditions. These are conditions which are additional to the default General Conditions in the contract. 1 Martina has come to you for advice relating to Special Condition 6. She would like to understand the meaning of each of the subconditions. Special Condition 6—Plan of Subdivision 6.1 Registration (a) The Land is a Lot on the Plan of Subdivision. The Vendor shall without delay and at its own expense use all reasonable endeavours to have the Plan registered by the Registrar of Titles within the period set out in Special Condition 6.2. (b) Notwithstanding the foregoing, if the Vendor considers any requirements of the Registrar, the Council or any other Public Authority that may be required to enable registration of the Plan too onerous, the Vendor may terminate the Contract by giving the Purchaser 10 Business Days notice in writing.

95 Ibid, especially [40]–[42]; see also Quanta Software International Pty Ltd v Quanta Systems Ltd [2004] FCA 1182, [88] (party estopped from denying termination of licence).

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6.2 Registration Time If the Plan is not registered by the Plan Registration Date, either party may, at any time after the expiration of that period but before the Plan is registered, rescind the Contract by giving notice to the other. 2 In addition, Martina is also concerned about Special Condition 8: Special Condition 8—Overriding Provision Despite any other Special Conditions in this Contract, the Vendor may at any time give notice in writing to the Purchaser that in the Vendor’s estimation the Development cannot or will not proceed to its completion and by that notice rescind this contract and the Vendor shall refund the Deposit. The Purchaser acknowledges the Vendor may serve the rescission notice under this Special Condition for any reason including but not limited to changes in the Vendor’s circumstances, movements in the property market, changes in applicable laws or government policy, union disputes, the availability or cost of labour or materials or adverse weather conditions. 3 Last, Martina requests an explanation pertaining to the following notice which is found in Part 1 of the contract: IMPORTANT NOTICE TO PURCHASERS Section 31 Sale of Land Act 1962 Cooling-off period You may end this contract within 3 clear business days of the day you sign the contract if none of the exceptions listed below applies to you. You must either give the vendor or vendor’s agent written notice that you are ending the contract or leave the notice at the address of the vendor or the vendor’s agent to end this contract within this time in accordance with this cooling-off provision. You are entitled to a refund of all the money you paid EXCEPT for $100 or 0.2% if the purchase price (whichever is more) if you end the contract in this way. EXCEPTIONS—The 3-day cooling-off period does not apply if: • You bought the property at or within 3 clear business days before or after a publicly advertised auction; • You received independent advice from a legal practitioner before signing the contract; • The property is used mainly for industrial or commercial purposes; • The property is more than 20 hectares in size and is used mainly for farming; • You and the vendor previously signed a similar contract for the same property; or • You are an estate agent or a corporate body. You are required to draft a letter of advice addressing all of Martina’s concerns and queries.

GUIDE TO ANSWERING A letter of advice is usually produced when a client requests assistance and explanation as to their legal position. Your answer should be presented in a letter format and be addressed to the client. It should begin by stating the basic facts of the case and the instructions given by the client. It should then proceed to

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explain the relevant law—in this case, the relevant contractual provisions—and apply that law to the given facts. You should conclude the letter with your advice to the client based on their instructions. For example, in order to fully advise Martina, you must provide explanations pertaining to the following matters: • The rights and obligations of both parties as provided for under Special Conditions 6 and 8; • The level and time of performance as required for registration of the Plan; • The circumstances where one or both parties can bring the contract to an end; • The requirements for bringing the contract to an end; • Any other matters which might be relevant, such as relevant legislative provisions.

[ 489 ]

[ 490 ]

chapter

25

Common law damages

Chapt e r o v e rv i e w 25.0

Introduction  491

25.1

Damages  491 25.1.1 The compensatory nature of damages   492 25.1.2 Proof of loss   492

25.2

Types of damages   493 25.2.1 Expectation and reliance damages   493 Loss of profits   497 Loss of chance or opportunity   498 Loss of use of money   500 Personal injury  501 Mental distress and loss of reputation   501 25.2.2 Restitution damages  502

Chapter 25

25.3

Account of profits (disgorgement)   502

25.4

Liquidated damages  504

25.5

Valuation and assessment   506

Common law damages

25.5.1 Market value  508 25.6

Contributory negligence  511

25.7

Proportionate liability  511

• 25.0 Introduction Provided an action for breach of contract is brought within six years from the date on which it occurred, a plaintiff who has suffered from losses (the innocent party) as a result of the breach may seek common law or statutory remedies, or both, from a defendant.1 The entitlement to remedy will arise where the defendant has breached a contractual term or where the defendant has repudiated the contract (anticipatory breach). The most common remedies for breach of contract are damages under the common law and an action in equity for specific performance, an injunction or restitution.2 These remedies are curial by their very nature and depend on the existence of a court order in favour of the plaintiff. They can be contrasted to the right to terminate the contract for breach or repudiation,3 which does not depend on a court order.

• 25.1 Damages Damages are a sum of money which the court orders the defendant to pay to the plaintiff. The court would generally order an award of damages should a plaintiff successfully prove, on the balance of probabilities, that a defendant has breached a contract. The right to claim damages is an implied right in law.4 This right is presumed to be concurrent with any remedial provisions provided in the contract itself.5 In addition, termination of the contract which has been breached is not a prerequisite of the

The right to claim damages is an implied right in law. This right is presumed to be concurrent with any remedial provisions provided in the contract itself.

1 The period for breach of contract is six years in all Australian jurisdictions except the Northern Territory, where it is three years: Limitation Act 1985 (ACT), s 11(1); Limitation Act 1969 (NSW), s 14(1)(a) (or six years for actions brought under the Frustrated Contracts Act 1978 (NSW): see s 14A); Limitation Act 1981 (NT), s 12(1)(a); Limitation of Actions Act 1974 (Qld), s 10(1)(a); Limitation of Actions Act 1936 (SA), s 35(a); Limitation Act 1974 (Tas), s 4(1)(a); Limitation of Actions Act 1958 (Vic), s 5(1)(a); Limitation Act 2005 (WA), s 13 (for actions accruing from 15 November 2005). 2 See Chapters 27 and 28. Note that remedies under the common law can also include remedies under tort, and that there are in addition a range of statutory remedies, for example, under the Competition and Consumer Act 2010 (Cth), for damages or rescission. For instance, a plaintiff can be awarded statutory damages if it can be proven that, in addition to the breach of contract, there has been a breach or infringement of any of the provisions of the Act. 3 See Chapters 23 and 24. 4 Photo Production Ltd v Securicor Transport Ld [1980] AC 827, 849. 5 MLW Technology Pty Ltd v May [2005] VSCA 29, [58]–[64].

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right to claim damages.6 The only exception to this general rule is in repudiation cases, where termination in response to the repudiatory conduct is a necessary step to complete the plaintiff’s cause of action.7

25.1.1  The compensatory nature of damages An award of damages is compensatory in nature. This guiding principle is best illustrated by the statement of Parke B in Robinson v Harman:8 ‘where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position with respect to damages, as if the contract had been performed’. Hence, damages for breach of contract are awarded to compensate for the loss caused by the breach and not to penalise a defendant. It follows that in the absence of provable loss, only nominal damages will be awarded.9 In addition, the motive or intention of the defendant will not affect the measure of damages.10 This should be contrasted with the situation under the law of tort, where exemplary or punitive damages are sometimes awarded to punish a defendant.11 ‘Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position with respect to damages, as if the contract had been performed.’

25.1.2  Proof of loss A plaintiff who has suffered loss by reason of the defendant’s breach has the onus of proving the extent of that loss. It must be established that the loss is caused by the defendant’s breach, that it is not too remote, that the plaintiff has not contributed to the loss and that the plaintiff has taken steps to lessen or mitigate the loss.12 Various types of losses may flow from a breach of a contract, but only some types will be compensable. The court will have to decide the limit of a particular defendant’s liability for breaching the contract. The loss to be compensated is the loss to the plaintiff and not the gain or savings made by the defendant.13 For instance, if a The loss to be compensated is the loss breach arises as a result of non-delivery by a particular seller to the plaintiff and not the and the market price of the goods which have not been delivered gain or savings made by has fallen, the buyer’s right to recover any transaction costs or the defendant. expenditures will be limited. This is the case because the buyer 6 7 8 9 10 11 12 13

Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286. Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444, 450; 9 ALR 309; see also Chapter 23, section 23.2.1. (1848) 1 Ex 850, 855. Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; see also Simply Irresistible Pty Ltd v Couper (No 2) [2011] VSC 33. Butler v Fairclough (1917) 23 CLR 78, 89 per Griffith CJ; Gray v Motor Accident Commission ( formerly State Government Insurance Commission) (1998) 196 CLR 1, 6; 158 ALR 485. Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 (even if the contractual relationship is fiduciary); Johnson v Unisys Ltd [2003] 1 AC 518, 530. See Chapter 26. See for example Tito v Waddell (No 2) [1977] Ch 106; Alucraft Pty Ltd (in liq) v Grocon Ltd (No 2) (1994) [1996] 2 VR 386 at 400–1.

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can arguably purchase equivalent goods for a lower price in the market. Simply showing that the seller has sold the goods to a third party for a higher price will not have an effect on the buyer’s right to claim damages. A distinction should also be made between nominal damages and substantial damages. The former will be awarded in cases where the plaintiff, although having proven the defendant’s breach, cannot show an actual loss occasioned from that breach. In such cases the damages are awarded to indicate the violation of a legal right and not to compensate the plaintiff for any quantifiable loss.14 Substantial damages, on the other hand, are awarded to compensate the plaintiff for the plaintiff’s loss, which is quantifiable.

• 25.2 Types of damages As damages for breach of contract are awarded to compensate for the loss caused by the breach, the objective is to place the innocent party, in monetary terms, in the same position they would have been in if the contract had been performed.15 The plaintiff will therefore be compensated for: (i) the gains or benefits which the plaintiff expected to receive from the completion of the promised performance (expectation damages); (ii) any of the plaintiff’s incidental expenditure of a type which was reasonably contemplated by the contracting parties at the time the contract was made (reliance damages); (iii) any benefit in the form of a payment or services which the plaintiff conferred on the defendant without receiving reciprocal performance (restitution damages). A plaintiff may therefore apply for expectation damages, reliance damages, restitution damages, or a combination of them. However, these should not be treated as separate and wholly alternative measures of damages as they are simply manifestations of the guiding principle enunciated in Robinson v Harman.16

25.2.1  Expectation damages and reliance damages Expectation damages are awarded to protect not only the unfulfilled expectation of performance of the contract, but importantly the unfulfilled expectation of receiving the benefits flowing from that performance. Loss of profit and loss of a commercial opportunity as a result of the breach are thus commonly compensated.17 However, in Commonwealth v Amann Aviation Pty Ltd18 Mason CJ and Dawson J attempted to limit the ambit of expectation damages in compensating an innocent party. Their Honours stated the importance of proving, on the balance of probabilities, the likelihood of the plaintiff attaining the hypothetical expectation 14 15 16 17 18

Expectation damages are awarded to protect not only the unfulfilled expectation of performance of the contract, but importantly the unfulfilled expectation of receiving the benefits flowing from that performance.

See for example Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 23 per Mason CJ and Dawson J. (1848) 1 Ex 850. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 24–25 per Mason CJ and Dawson J. Ibid.

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in the event that the contract is performed. In other words, mere expectations of benefits or of outcomes are not a sufficient basis for claiming damages: The award of damages for breach of contract protects a plaintiff’s expectation of receiving the defendant’s performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as ‘expectation damages’. The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff’s expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation.19

A plaintiff can also be awarded reliance damages to compensate for the expense or loss which the plaintiff has reasonably incurred in reliance on the promised performance and which is consequently wasted or not recouped due to the defendant’s breach.20 The claim for reliance damages does not, however, usually form the main basis for an award of damages.21 This is because a plaintiff is generally adequately compensated by damages awarded on an expectation basis. The case of McRae v Commonwealth Disposals Commission22 is therefore a peculiar one. The plaintiff was awarded a contract for the salvage of an oil tanker. It equipped a vessel and sent it from Sydney to the supposed location of the tanker, which was some distance from Port Moresby. It later transpired that no such tanker existed, and the High Court held that the appropriate way to compensate the plaintiff was to award damages based on the wasted expenditure in searching for the tanker. These expenses were held to be reasonable and, in addition, the defendant failed to prove that, had the tanker existed, the expenditure would have been wasted in any event. Similarly, in the case of Commonwealth v Amann Aviation Pty Ltd,23 the respondent, Amann, contended that it was entitled to reliance damages as it had incurred wasted expenditure in equipping itself to carry out its contractual obligations. Amann entered into a contract with the Commonwealth to provide surveillance for Australia’s northern coastline for three years. Both parties contemplated a preparatory period of six months, as Amann had to acquire 14 aircraft from the United States, finance had to be obtained, and suitable planes had to be located, purchased and modified accordingly. Subsequently, the aircraft had to be flown to Australia and to be certified as meeting Australian requirements. The assembling process of the fleet also took much longer than expected. Upon the expiry of the preparatory period, Amann commenced flights. At this stage, Amann did not have all its aircraft ready, nor did its aircraft comply in every respect with specifications prescribed by the contract. The Commonwealth decided to give notice of termination of the contract. Amann treated the notice of termination as repudiation of the contract by the Commonwealth and, based on this, Amann elected to terminate the contract. Amann’s pre-operational expenditure was $854 943. In addition, it had also arranged for acquisition and fitting of aircraft at a cost of $5 281 521. The resale value of the aircraft was only $917 329—a difference of $4 364 192 (the large discrepancy can be explained by the fact that the 19 Ibid, 24. 20 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. Liability incurred to third parties is also compensable: Carr v J A Berriman Pty Ltd (1953) 89 CLR 327. 21 J W Carter, E Peden and G J Tolhurst, Contract Law in Australia, 5th ed., LexisNexis (2007), pp. 812–813. 22 (1951) 84 CLR 377. 23 (1991) 174 CLR 64.

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aircraft had been adapted to a special use for which there was limited demand). Amann had also paid to the Commonwealth a ‘security deposit’ of $113 000, and it had been obliged to make termination payments to its employees totalling $143 049. Due to large nature of these costs, a period of operation longer than three years was needed to generate a substantial profit. Amann had a strong prospect of securing a renewal of its contract, because it would be fully equipped. The Commonwealth argued that Amann was not entitled to damages on a reliance basis. It argued that an award for reliance damages should not be made where the plaintiff would have made a loss. It also argued that since there was no commitment from the Commonwealth to renew the contract, Amann’s gains from the potential renewal should not be included for the purposes of assessing its reliance damages. Mason CJ and Dawson J disagreed with these arguments. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Mason CJ and Dawson J at 25–27: In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profits. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit. The expression ‘damages for loss of profits’ should not be understood as carrying with it the implication that no damages are recoverable either in the case of a contract in which no net profit would have been generated or in the case of a contract in which the amount of profit cannot be demonstrated. It would be an invitation to the repudiation of contractual obligations if the law were to deny to an innocent plaintiff the right to recoupment by an award of damages of expenditure justifiably incurred for the purpose of discharging contractual obligations simply on the ground that the contract breached would not have been or could not be shown to have been profitable. If the performance of a contract would have resulted in a plaintiff, while not making a profit, nevertheless recovering costs incurred in the course of performing contractual obligations, then that plaintiff is entitled to recover damages in an amount equal to those costs in accordance with Robinson v Harman, as those costs would have been recovered had the contract been fully performed. Similarly, where it is not possible for a plaintiff to demonstrate whether or to what extent the performance of a contract would have resulted in a profit for the plaintiff, it will be open to a plaintiff to seek to recoup expenses incurred, damages in such a case being described as reliance damages or damages for wasted expenditure. A further example of a plaintiff entitled to claim damages for wasted expenditure is in a contract for services, such as between a solicitor and a client. Where a solicitor has breached his or her contractual duty of care, the measure of damages to which a client will be entitled will be such an amount as would put the client in the position he or she

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would have been in had the contract of retainer been performed without negligence. Where, had non-negligent advice been given, the client would not have entered into a subsequent transaction, for example a purchase of real property, then, in conformity with Robinson v Harman, the client [82] will be entitled to recover as damages expenditure wasted on account of the negligent advice, less anything subsequently recovered and given reasonable acts of mitigation: Hayes v Dodd [1988] EWCA Civ 8; (1990) 2 All ER 815, per Staughton LJ at p. 820. The amount of wasted expenditure will be the appropriate measure of damages in such a situation because, it having been established that the client would not have entered into the subsequent contract if proper advice had been given, it is not sensible to speak of loss of profits. Hayes v Dodd is a useful illustration of the statement that the expressions ‘expectation damages’, ‘damages for loss of profits’, ‘reliance damages’ and ‘damages for wasted expenditure’ are simply manifestations of the central principle enunciated in Robinson v Harman rather than discrete and truly alternative measures of damages which a party not in breach may elect to claim … When reliance damages are sought, the onus of proof lies on the plaintiff. It will be prima facie sufficient to prove that the expenditure was reasonably incurred.24 The onus then shifts to the party in breach to establish that such expenditure would not have been recouped even if the contract has been fully performed. If this onus is not discharged, the plaintiff’s entitlement to reliance damages remains intact.25 In this case, The Commonwealth had failed to discharge the onus resting upon it, as the party in breach, to establish that Amann’s reliance expenditure would have been wasted even had the contract been performed. Their Honours stated: Placing the onus on a defendant amounts to a presumption that a party would not enter a contract in which its costs were not recoverable. Until that presumption is rebutted, a plaintiff may rely on it to recover reasonable expenses both in a contract which would not have been profitable and where the outcome of the contract cannot be demonstrated with any certainty.26

In relation to the prospect of the renewal of the contract, their Honours concluded that Amann was entitled to recover such damages as arise naturally—that is, according to the usual course of things—from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties as a probable result of the breach.27 Amann was therefore entitled to compensation which took into account the value of the loss of the prospect. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Mason CJ and Dawson J at [53], [57]–[59]: What was in the contemplation of the parties depends upon a consideration of the terms of the contract in the light of the matrix of circumstances in which it was made. As we

24 25 26 27

Ibid, 40. Ibid, 40. Ibid, 42 per Mason CJ and Dawson J. Ibid, 51 per Mason CJ and Dawson J.

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have seen, performance of the contract by Amann would have placed it in an advantageous position to secure a renewal of the contract with the benefits that would entail. The prospect of renewal was a distinct commercial benefit, inevitably contemplated by the parties as enuring to the advantage of Amann on, and by reason of, its performance of the contract. It was not an advantage which would accrue to Amann independently of performance of the contract or incidentally. The corollary is that the parties necessarily contemplated the loss of that prospect as the probable result of a repudiation or fundamental breach of the contract on the part of the Commonwealth … In assessing damages, the court is necessarily engaged in a hypothetical exercise, that is, ascertaining how the contract would have turned out had it not been brought to an end by Amann’s acceptance of the Commonwealth’s wrongful repudiation. On the assumption that the contract would have proceeded to completion, it would have been to the Commonwealth’s advantage to have agreed to a renewal, rather than to have negotiated a fresh contract with a third party who would have been in the position of starting from scratch and thus have sought and insisted upon large financial rewards in order to compensate for heavy initial expenditure of the kind incurred by Amann. Accordingly, there would have been a strong prospect of renewal. This being so, the value of the prospect of a renewal of the contract was a matter to be taken into account in determining whether Amann would or would not have recouped its expenditure. The consequence of this conclusion, in view of the onus cast upon the Commonwealth as the party in breach, is that the Commonwealth must demonstrate that the value to Amann of the prospect of renewal of the contract when combined with those expenses that would have been recovered by way of gross receipts was less than the total expenses to be incurred by Amann in the performance of its contractual obligations. If the Commonwealth was able to demonstrate that this would have been the result, had the contract been fully performed, then, in conformity with Robinson v Harman, Amann would not be entitled to all of its expenditure incurred in reliance on the Commonwealth’s promise to perform and wasted as a result of the Commonwealth’s breach. The Commonwealth was unable, however, to demonstrate this and so discharge the onus. Accordingly, the presumption that Amann would not have entered into a contract in which it would not recover the value of its expenditure incurred remains undisturbed. We agree with the Full Court’s conclusion that Amann was entitled to recover as damages an amount commensurate with what it had expended in reliance upon the Commonwealth’s promise to perform its contractual obligations.

Loss of profits As stated in Amann, damages for loss of profits—which are defined as the difference by which gross receipts (total contract price) would have exceeded expenditure (the estimated cost which would have been incurred in performing the contractual obligation)—is also compensable.28 The onus 28 Ibid, 24 per Mason CJ and Dawson J.

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is on the plaintiff to prove that, on the balance of probabilities, ‘the plaintiff’s expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation’.29

Loss of chance or opportunity Amann provided a spur to claims for lost commercial opportunity as a head of damage in commercial litigation. A plaintiff can be awarded damages for loss of chance, opportunity, profit or benefit which are causally linked to the breach of contract by the defendant. The High Court in Amann held that such loss may be recovered whenever it is foreseeable as a probable result of the breach30 and it is to be quantified by reference to the degree of likelihood of the contract’s realisation. For example, damages have been awarded to a litigant who, as a result of negligent legal advice, is deprived of the opportunity of pursuing a claim.31 Damages have also been made available for loss of a chance of obtaining better terms,32 of a renewal,33 reinstatement,34 extension35 or expansion.36 In other cases, courts have awarded damages for deprivation of the chance of avoiding a loss or detriment,37 earning a profit38 or other benefits (such as tips), publicity, or reconciliation.39 A plaintiff can be awarded damages for loss of chance, opportunity, profit or benefit which are causally linked to the breach of contract by the defendant … such loss may be recovered whenever it is foreseeable as a probable result of the breach.

29 Ibid, 24 per Mason CJ and Dawson J. 30 This is the case whether they result from breach of contract, tort or statutory contravention: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355 per Mason CJ, Dawson, Toohey and Gaudron JJ; Naxakis v Western General Hospital (1999) 197 CLR 269. Both of these cases involved claims in negligence and under s 52 of the Trade Practices Act 1974 (Cth), as well as claims for breach of contract. 31 Harwood v Gayler and Cleland (Unreported, Qld CA, No 2567, 1 November 1996); Denkewitz v Hodgson [1998] QSC 261; Darvall McCutcheon (a firm) v H K Frost Holdings Pty Ltd (in liq) [2002] VSCA 85; but note that there is no compensable loss if the claim was not viable: Radosavljevic v Radin [2003] NSWCA 217. 32 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; Cade Pty Ltd v Thomson Simmons [1998] SASC 6912. 33 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, [51], [57] and per Brennan J at [8]; Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475, 509; Dymocks Holdings Pty Ltd v Top Ryde Booksellers Pty Ltd [2000] NSWSC 795; Tasmania Development & Resources v Martin (2000) 97 IR 66; Walker v Citigroup Global Markets Australia Pty Ltd [2006] FCAFC 101, [85]. 34 Feletti v Kontoulas [2000] NSWCA 59; Tasmania Development & Resources v Martin (2000) 97 IR 66; Walker v Citigroup Global Markets Australia Pty Ltd [2006] FCAFC 101, [85]. But in New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68, it was held that a wrongfully dismissed employee was not entitled to damages for the loss of chance of re-appointment. This decision was later applied in Murray Irrigation Ltd v Balsdon [2006] NSWCA 253, the court expressly disapproved on Martin and Walker at [55]–[58]. However, in Walker, the Full Federal Court allowed damages for loss of the chance of renewal to an employee in a case of repudiation of the employment contract and not dismissal by the employer. 35 TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130. 36 Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187, [596]. 37 Kintella Pty Ltd v Scotte [1999] ACTSC 100, [35]; Bak v Glenleigh Homes Pty Ltd [2006] NSWCA 10; QBE Insurance Ltd v Moltoni Corp Pty Ltd (2000) 22 WAR 148. 38 Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 437, 503–505; Garden State Packers v Lancken [2000] NSWSC 139; Glenmont Investments Pty Ltd v O’Loughlin (No 2) (2000) 79 SASR 185; English v Plath [2003] QSC 222; Park v Brothers [2005] HCA 73. 39 Manubens v Leon [1919] 1 KB 208; White v Austrlian and New Zealand Theatres Ltd (1943) 67 CLR 266, both approved in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, [8] per Brennan J; compare Fink v Fink (1947) 74 CLR 127, especially 135.

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The existence and loss of the chance must be proved on the balance of probabilities by the plaintiff. It is also crucial to establish that the chance had some value and was not merely speculative or negligible.40 Once the onus is discharged, the likelihood of its realisation will be assessed and damages reflecting the likelihood will then be quantified. The recent High Court case of Tabet v Gett,41 although denying the existence of loss of chance of a better medical outcome as a compensable head of damage, gave some useful insights into the process of assessing damages for lost commercial opportunity. Tabet v Gett (2010) 240 CLR 537 Gummow ACJ at 49–50: Chaplin v Hicks is authority for the proposition that if a plaintiff, by the breach of contract by the defendant, has been deprived of something which has a monetary value, there is to be an assessment of damages notwithstanding difficulty in calculation or impossibility of making an assessment with certainty. This Court, speaking in McRae v Commonwealth Disposals Commission of Chaplin v Hicks, said that the broken promise in effect had been to give the plaintiff a chance and that she would have had a real chance of winning a prize, and thus that it was proper enough to say that the chance was worth something. To the same effect, Kiefel J said at 124: What cases in contract, such as The Commonwealth v Amann Aviation Pty Ltd and Sellars v Adelaide Petroleum NL, have in common is that the commercial interest lost may readily be seen to be of value itself. The same cannot be said of a chance of a better medical outcome or a person’s interest in it. Lord Hoffmann observed in Gregg v Scott that most cases where there has been recovery for loss of a chance have involved financial loss, where the chance itself can be regarded as an item of property. And in Sellars v Adelaide Petroleum NL Brennan J observed that, ‘[a]s a matter of common experience, opportunities to acquire commercial benefits are frequently valuable in themselves’. So long as an opportunity provides a substantial and not merely a speculative prospect of acquiring a benefit, it can be regarded as of value and therefore loss or damage. A loss of a chance of a better medical outcome cannot be regarded in this way. As the assessment of damages in this case shows, the only value given to it is derived from the final, physical, damage.

Her Honour then turned her attention to the different standards of proof applicable depending on whether the enquiry is causation of a loss (the existence of a loss) or the assessment of damages for the loss. She said at 137: Thus in the case of the loss of a commercial opportunity, the plaintiff must first establish the fact of the loss, for example by reference to the fact that it had a commercial interest of value which is no longer available to be pursued because of the defendant’s negligence. The damages assessed of that loss, the estimation of its value, reflect the chance, often expressed in a percentage, that the opportunity

40 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355, 367; Sinclair v SSET Constructions Pty Ltd [2002] NSWCA 125; Sensis Pty Ltd v McMaster-Fay [2005] NSWCA 163. 41 (2010) 240 CLR 537.

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would have been pursued to a successful outcome. The award is proportionate in that sense.

Subsequently, Her Honour warned against confusing the two and allowing chance analysis to creep into the causation analysis, saying at 143: Resort to the language of ‘chance’ cannot displace the analysis necessary for the determination of the issue of causation of damage.

Recently, Allsop P, extra-judicially, provided a valuable distillation into this issue of standard of proof in cases involving an alleged loss of chance: The principles appear to be: (a) The courts distinguish between the occurrence or non-occurrence of historical events on the one hand and past hypothetical events on the other; (b) Whether an event did or did not happen is determined on the balance of probabilities; (c) Whether an event will or will not happen is determined by prediction, conjecture and weighing up probabilities; (d) As to past hypothetical events—what would or might have happened if the world had been different in some way—the approach is different depending upon the nature of the enquiry. Causation, even involving such hypothetical events is to be proved on the balance of probabilities; (e) The qualification upon the last proposition is that if the loss to be proved is a loss of a commercial opportunity or chance the plaintiff must prove some loss, that is that the lost opportunity or chance would have been taken had the default not occurred; (f) Thus, what the plaintiff would or would not have done in taking up the opportunity or chance in the hypothetical circumstances of an absence of breach is to be assessed on the balance of probabilities. However, how others would have acted in that opportunity is part of the valuation of the chance or opportunity, not part of the proof of existence. (g) Past hypothetical events when part of the assessment of damages, including the assessment of the value of the lost chance or opportunity, are assessed conjecturing the probabilities and possibilities.42

Loss of use of money Damages can be awarded to a plaintiff who, as a result of breach of contract, is deprived of a specific sum of money and the loss of its use. In such cases, damages will include both the money and the loss of its use.43 42 J Allsop, ‘Causation in Commercial Law’, a paper given at the Torts in Commercial Law Conference, Sydney, December 2010. 43 Hungerfords v Walker (2989) 171 CLR 125. However, damages for loss of use of money, although they may be quantified by reference to relevant interest rates, must be distinguished from interest on damages awarded under legislation providing for pre-judgment interests: see N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1110.

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Personal injury Damages may be recovered for physical injury caused by breach of contract.44 For this purpose, physical injury includes emotional trauma, psychiatric illness and nervous stress or shock.45

Mental distress and loss of reputation In breach of contract cases, disappointment, anger, anxiety and other injurious distress on a plaintiff is common. Generally, no damages will be awarded for such distress.46 Some of the reasons for this include the alleged difficulty of assessing compensation for injured feeling, the notion of voluntary assumption of risk of anxiety as it is a concomitant of breach of contract, and the possibility that the injury might be too remote to be regarded as within the contemplation of the parties.47 However, these arguments are at odds with the fact that compensation for mental distress has long been awarded in at least some tort actions. The High Court has seemed to acknowledge the fact that the general rule is conceptually at odds with the fundamental principle governing contract damages48 and that it is probably based on pragmatism rather than logic.49 However, the High Court in Baltic Shipping Co v Dillon50 did not abolish the rule; instead it subjected the rule to two qualifications: first, where physical injury or inconvenience has been caused to the other party by the breach;51 second, where the breach is of an express or implied promise to provide pleasure, relaxation or freedom from distress.52 Such promise to provide freedom from distress may be expressed or implied ‘in many contracts the object of which is to provide a service or facility conducive to peace of mind, tranquillity of environment or ease of living’.53 review questions 1 Explain the nature of a plaintiff’s right to obtain common law damages. 2 Explain the nature of an award of damages. Explain the significance of the High Court decision in Commonwealth v Amann Aviation Pty Ltd. 44 Australian Knitting Mills Ltd v Grant (1933) 50 CLR 387; David Jones Ltd v Willis (1934) 52 CLR 110; Woolworths Ltd v Crotty (1942) 66 CLR 603; Atlas Tiers Ltd v Briers (1978) 144 CLR 202; Baltic Shipping Co v Dillon (1993) 176 CLR 344; Chappel v Hart (1998) 195 CLR 232; Jones v Bartlett (2000) 176 ALR 137; Redken Laboratories (Aust) Pty Ltd v Docker [2000] NSWCA 100. 45 Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383; Baltic Shipping Co v Dillon (1993) 176 CLR 344, especially 363, 404; Mouritz v Hegedus [1999] WASCA 1061. 46 Fink v Fink (1946) 74 CLR 127, 142–143; Mann v Capital Territory Health Commission (1982) 148 CLR 97, 103; Baltic Shipping Co v Dillon (1993) 176 CLR 344; Turner v Kwikshift Pty Ltd (1993) 113 FLR 8. 47 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1096. 48 Baltic Shipping Co v Dillon (1993) 176 CLR 344, 362 per Mason CJ, 383 per Toohey J, 387 per Gaudron J; but contrast 369, Brennan J: ‘there is a sound policy underlying this rule’. 49 Baltic Shipping Co v Dillon (1993) 176 CLR 344, 381 per Deane and Dawson JJ; compare 397 per McHugh J. 50 (1993) 176 CLR 344. 51 See Thorpe v Lochel [2005] WASCA 85 (travel and living in rented premises not a relevant physical inconvenience); Plenty v Seventh-Day Adventist Church of Port Pirie [2006] SASC 361, [49]–[50] (deprivation of use of buildings not proved). 52 Baltic Shipping Co v Dillon (1993) 176 CLR 344, 382–383 per Deanne and Dawson JJ; 370 per Brennan J; 405 per McHugh J; see also N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1097. 53 Baltic Shipping Co v Dillon (1993) 176 CLR 344, 370 per Brennan J.

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3 In what categories of case can an award of damages be made for injured feelings, inconvenience or disappointment?

25.2.2  Restitution damages In majority of cases, a plaintiff will be able to recoup the value of the benefit on the defendant through the general award of expectation damages. This is because expectation damages will award to a plaintiff the price of the performance that the plaintiff expected to receive from the defendant. Therefore, restitution damages only become relevant when a plaintiff has conferred a benefit, in the form of a payment or services, on the defendant without receiving reciprocal performance. The claim for damages in such cases is based on the unjust enrichment of the defendant. The plaintiff may prefer to bring a restitutionary claim, on the basis of unjust enrichment, instead of claiming for general damages per se.54

• 25.3 Account of profits (disgorgement) The possibility of awarding damages which are based on the gain made by the defendant in breaching the contract has not yet been ruled out by the High Court. However, in Hospitality Group Pty Ltd v Australian Rugby Union Ltd,55 Hill and Finkelstein JJ held that the claim for account of profits is inconsistent with the compensatory nature of contract damages. Their Honours also discussed the approach of the House of Lords in the case of Attorney-General v Blake.56 Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040 Hill and Finkelstein JJ at [155]: In Attorney-General v Blake [2000] UKHL 45; [2000] 3 WLR 625, the House of Lords decided that an account of profits could be awarded as a discretionary remedy for breach of contract. The facts were extraordinary. Blake was a member of the intelligence service but became a secret agent for the Soviet Union. He was sentenced to 42 years’ imprisonment for passing on information to a foreign government. He escaped and made his way to Moscow. There he wrote an autobiography. The Crown brought proceedings to prevent Blake from receiving royalties from his publisher. Two causes of action were relied upon: breach of fiduciary duty and breach of contract. The fiduciary claim failed. The case in contract succeeded and the remedy granted was an account. Lord Nicholls delivered the leading speech. He said (at 638): there seems to me to be no reason, in principle, why the court must in all circumstances rule out an account of profits as a remedy for a breach of contract. I prefer to avoid the unhappy expression ‘restitutionary damages’. Remedies are the law’s response

54 See Chapter 27. 55 [2001] FCA 1040. 56 [2001] 1 AC 268.

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to a wrong (or, more precisely, to a cause of action). When, exceptionally, a just response to a breach of contract so requires, the court should be able to grant the discretionary remedy of requiring a defendant to account to the plaintiff for the benefits he has received from his breach of contract. In the same way as the plaintiff’s interest in performance of the contract may render it just and equitable for the court to make an order for specific performance or grant an injunction, so the plaintiff’s interest in performance may make it just and equitable that the defendant should retain no benefit from his breach of contract.

Later, (at 639) Lord Nicholls said: An account of profits will be appropriate only in exceptional circumstances. Normally the remedies of damages, specific performance and injunction, coupled with the characterisation of some contractual obligation as fiduciary, will provide an adequate response to a breach of contract. It will be only in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the  breach occurred, the consequences of the breach and the circumstances in which relief is being sought. A  useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit.

156. ARU [Australian Rugby Union Ltd] relies on this case to argue that an account of profits is an appropriate remedy that should be awarded in its favour. It should be made quite clear, so that there be no doubt about it, ARU does not seek an account of profits based on some principle of equity such as constructive trust (as in Snepp v United States, [1980] USSC 60; 444 US 507 (1980)) or in reliance on principles of unjust enrichment. Its claim is founded on the proposition that the remedy is available for breach of contract and in tort. In view of the finding that THG [the Hospitality Group Pty Ltd] is not in breach of contract, ARU now seeks the remedy to satisfy only its tortious claim. Whether the remedy is available in an action in tort has not yet been considered in Australia. Before dealing with that question, it is convenient, first, to determine whether the remedy might be available for breach of contract. 157. The general rule of the common law was laid down by Baron Parke in Robinson v Harman [1848] EngR 135; (1848) 1 Ex 850; 154 ER 363. Parke B said that the aim of contract damages was to place the plaintiff in the same position he would have occupied had the contract been performed. See also Teacher v Calder [1899] UKHL 1; [1899] AC 451. In Tito v Waddell (No 2) [1977] Ch 106, when considering the appropriate remedy for the failure by the British Phosphate Commissioners to restore Ocean Island following the termination of mining operations, Megarry VC said (at 332): it is fundamental to all questions of damages that they are to compensate the plaintiff for his loss or injury by putting him in the same position he would have been in had he not suffered the wrong. The question is not one of making the defendant disgorge what he has saved by committing the wrong but one of compensating the plaintiff.

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158. This principle has been accepted as correct by the High Court. See, e.g., Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 (‘Amann Aviation’). Moreover, as Mason CJ and Dawson J said in Amann Aviation (at 82): The corollary of the principle in Robinson v Harman is that a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed.

… 159. Whether or not the law of contract is ‘seriously defective’ (Attorney-General v Blake [1998] Ch 439 at 457 per Lord Woolf MR), if the court is unable to award disgorgement damages (the terminology proposed by L Smith in ‘Disgorgement of the Profits of Breach of Contract: Property, Contract and “Efficient Breach’” (1994) 24 Canadian Business Law Journal 121), the position in Australia is that the loss recoverable for breach of contract is limited to that laid down in Robinson v Harman (supra). That is, the aggrieved party is entitled only to compensation. If he has suffered no loss, he is not entitled to be compensated. In an appropriate case, the aggrieved party may be able to recover (by a claim in restitution) benefits that he has made available to the wrongdoer; for example, he may be able to recover the price paid under an incomplete contract or recover possession of goods sold but not paid for. Presently, however, it would be inconsistent with the current principles laid down by the High Court to confer a windfall on a plaintiff under the guise of damages for breach of contract.

• 25.4 Liquidated damages In cases where the relevant contracts have been properly and fully drafted, it is common to find stipulations of an agreed amount—called liquidated damages—to be paid to the aggrieved party should the contract be breached. These are sometimes referred to as ‘agreed damages’ clauses. By reaching an agreement on the outset, there is no requirement for the innocent party to prove loss or damage, and recovery of compensation is therefore efficiently facilitated. An agreed damages clause may be unenforceable if it is considered by the court as an unfair term in a standard form consumer contract.57 Such clauses may also be unenforceable if they are considered to be penalties, and they will be considered as such if they are not a genuine preestimate of loss or damage. In the case of Ringrow Pty Ltd v BP Australia Pty Ltd,58 the High Court, in a joint judgment, reaffirmed as the applicable law in Australia: the decision of the House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd.59

57 Competition and Consumer Act 2010 (Cth), Schedule 2 (Australian Consumer Law), Ch 2, Pt 2.3, ss 23 and 25(1)(c). 58 [2005] HCA 71. 59 (1915) AC 79.

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Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 Full Court at [10]: The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach. 11. The starting point for the appellant was the following passage in Lord Dunedin’s speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd: 2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted preestimate of damage … 3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach … 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are: (a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach … (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid … (c) There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’.

12. Neither side in the appeal contested the foregoing statement by Lord Dunedin of the principles governing the identification, proof and consequences of penalties in contractual stipulations. The formulation has endured for ninety years. It has been applied countless times in this and other courts … It is therefore proper to proceed on the basis that Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country …

In practice, if the agreed damages clause is classified as a penalty, then the plaintiff is still able to claim damages for breach of contract.60 However, the plaintiff will have to show evidence of loss or damage; otherwise they will only obtain a nominal sum.

60 See for example Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] 2 AC 694, 702; W & J Investments Ltd v Bunting [1984] 1 NSWLR 331, 335–336.

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• 25.5 Valuation and assessment Damages are generally assessed on a ‘once and for all’ basis as at the date of the breach.61 This essentially involves looking at the events which have occurred, or could reasonably be expected to occur, as at that date and to market or other rates that were then prevailing or predictable. Due to the nature of this process, the choice of the date for assessment may have considerable impact on the plaintiff who might have to bear the risk of inflation.62 Therefore, the courts have become more pragmatic and flexible in their approach; for instance, another date may be chosen if it is necessary to do so in order to give fair compensation.63 Similarly, damages for rectification or replacement are normally not assessed at the date of breach. Instead they are assessed at the date of trial or, in some cases, at a later stage—for example, if the plaintiff cannot afford rectification until compensated for the loss, and the defendant’s breach has caused that situation.64 In cases where rectification or replacement has occurred, the actual costs of the rectification will be used as the basis for an award of damages and not its probable cost at the time of breach.65 In Burger King Corp v Hungry Jack’s Pty Ltd,66 the Court considered the appropriate time for assessing the breach to be the time at which the loss crystallised. Whether a similar choice will be made in other cases will depend upon the structure of the contract, the nature of the breach and upon whether the breach has been cured by the defendant. It is also important to remember that assessment at the time of breach, as illustrated in Commonwealth v Amann Aviation Pty Ltd,67 does not exclude loss which will be incurred in future. This is in line with the objective of contract damages to put the innocent party in the position they would have been in if the contract had been performed. In addition, in cases where it is difficult to assess damages, this difficulty will not prevent the recovery of damages, provided that the difficulty does not arise from the lack of evidence of loss or damage. Where there is such lack of evidence or where the court cannot surmount mere speculation or guesswork, the plaintiff will only be awarded nominal damages or no damages at all.68 In the case of Howe v Teefy,69 Street CJ found that difficulty in assessment of damages was not a barrier to recovery. The plaintiff, who was a horse trainer, leased a racehorse from the defendant for a period of three years. Three months later the defendant took the horse back Damages are generally assessed on a ‘once and for all’ basis as at the date of the breach.

61 Johnson v Perez (1988) 166 CLR 351; Wenham v Ella (1972) 127 CLR 454, 473; Smith New Court Securities Ltd v Citibank NA [1997] AC 254, 265, 284. 62 Johnson v Perez (1988) 166 CLR 351; but compare Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; SVI Systems Pty Ltd v Best & Less Pty Ltd [2001] FCA 279, [132]. The law in this area is therefore not settled. 63 Cade Pty Ltd v Thomson Simmons [1998] SASC 6912 (damages assessed at trial); Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31 (damages assessed as at date subsequent to sale of business after breach). 64 Glenmont Investments Pty Ltd v O’Loughlin (No 2) (2000) 79 SASR 185, 268; Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313. 65 Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313. 66 [2001] NSWCA 187. 67 (1991) 174 CLR 64. 68 See for example Atkinson v Hastings Deering (Queensland) Pty Ltd (1985) 8 FCR 481, 494–496; Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31, [31]–[32]; Longden v Kenalda Nominees Pty Ltd [2003] VSCA 128; Gerrard v Slamar [2004] WASCA 253, [28]–[34]. 69 (1927) 27 SR (NSW) 301.

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and thus breached the contract. The plaintiff claimed damages for loss of prospective betting winnings and stable commissions. The jury awarded £250 accordingly. The plaintiff appealed, arguing that the jury could have no basis to assess the value of such losses. The Court rejected this argument.70 Howe v Teefy (1927) 27 SR (NSW) 301 Street CJ at 304–308: This appeal is brought upon the ground that [the jury] should have been directed (1) that the prospective winnings of the plaintiff from bets and stable commissions were too remote and too contingent to be recovered as damages, and (2) that there was no evidence on which they could assess any such winnings and that only nominal damages should have been awarded. Assuming that the damages claimed are capable of assessment, I do not think that it can be said that they are too remote. The determination of that question depends upon whether they were within the contemplation of both parties, that is whether both parties were aware of the circumstances with a view to which the plaintiff was leasing the horse. The sole object of the agreement was to give him a chance of making money by training and racing the horse, and what is complained of is that it was taken from him and that he was deprived of that chance. Nor does the fact that his opportunities of making money depended upon contingencies, including the volition of other people, suffice to render the damages for the defendant’s breach of contract incapable of assessment. … The question in every case is has there been any actual loss resulting from the breach of contract complained of. There may be cases where it would be impossible to say that any assessable loss had resulted from a breach of contract, but, short of that, if a plaintiff has been deprived of something which has monetary value, a jury is not relieved from the duty of assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty. In Chaplin v Hicks [1911] 2 KB 786, Vaughan Williams LJ, speaking of the rule as to the measure of damages in the case of a breach of a contract for the delivery of goods, said (at p. 792): Sometimes, however, there is no market for the particular class of goods; but no one has ever suggested that, because there is no market, there are no damages. In such a case the jury must do they best they can, and it may be that the amount of their verdict will really be a matter of guesswork. But the fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages for his breach of contract …

In the present case the question is whether the plaintiff, by having the horse wrongfully taken out of his possession sustained any loss which had a monetary value and which he was entitled to have estimated by a jury. I think that it is clear that he was deprived of something which was of value. The injury which he sustained was the deprivation of his right under his agreement to train and race the horse, and make what profit he could 70 Howe v Teefy (1927) 27 SR (NSW) 301, 306. A full statement of principle and review of authorities may be found in JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237, 241–242 per Brooking J.

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out of doing so. Can it be said that that was a right which had no monetary value, and which no one would give money to possess? … In this case the plaintiff agreed to pay a substantial price under his contract for the right to the advantages to be got from training and racing the horse, and he was afterwards deprived of his right by the defendant’s breach of contract. How can it be said then that that right was incapable of estimation in money, and that the assessment of damages was not a matter for the jury? The calculation which they had to make was not how much he would probably have made in the shape of profit out of his use of the horse, but how much his chance of making that profit, by having the use of the horse, was worth in money. He was willing to pay for the right when he entered into the agreement, and, though the subsequent failure of the horse to win races was an element to be taken into consideration in calculating the value of the chance or right of which he was deprived, I do not think that it can be said that in being deprived of that right he did not suffer an injury which was capable of being calculated in money. I think that he did, and I think that the jury’s award cannot be interfered with.

25.5.1  Market value Assessment of loss in cases involving non-performance or defective performance of contractual obligations will be based on the market value of the lost performance at the time of breach. Therefore, if a particular buyer breaches a contract by rejecting goods which are marketable in a particular market, the seller of those goods can claim for damages amounting to the difference, if any, between the contract price and the price obtainable in the market at the time of the breach.71 Similarly, a buyer of goods which have not been delivered by the Reference to market seller or which have been justifiably rejected, may be entitled to value will only be relevant any difference between the contract price and the price charged where there is in actuality in the market at the time of breach.72 Loss in the sale of land is an available market in also normally assessed by reference to the difference between its which the subject matter of the sale in question— contract price and its market value at the time of breach.73 whether land, goods, It should be noted that reference to market value will only be rights or services—can be relevant where there is in actuality an available market in which the readily sold or bought. subject matter of the sale in question—whether land, goods, rights 71 Sale of Goods Act 1954 (ACT), s 53(3); Sale of Goods Act 1923 (NSW), s 52(3); Sale of Goods Act 1972 (NT), s 52(3); Sale of Goods Act 1896 (Qld), s 51(3); Sale of Goods Act 1895 (SA), s 49(3); Sale of Goods Act 1896 (Tas), s 54(3); Goods Act 1958 (Vic), s 56(3); Sale of Goods Act 1895 (WA), s 49(3). However, this has been held not to apply to a seller of standard items in ready supply, who can claim that, instead of resale of the goods rejected, a further sale of other goods, and another profit, would have been made: Cameron v Campbell & Worthington Ltd [1930] SASR 402; compare Beneficial Finance Corp Ltd v Sharker (1993) 32 NSWLR 161, 172–173. 72 Sale of Goods Act 1954 (ACT), s 54(3); Sale of Goods Act 1923 (NSW), s 53(3); Sale of Goods Act 1972 (NT), s 53(3); Sale of Goods Act 1896 (Qld), s 52(3); Sale of Goods Act 1895 (SA), s 50(3); Sale of Goods Act 1896 (Tas), s 55(3); Goods Act 1958 (Vic), s 57(3); Sale of Goods Act 1895 (WA), s 50(3). A similar principle applies in the sale of land: Victorian Economic Development Corp v Clovervale Pty Ltd [1992] 1 VR 596 at 605; and to the sale of shares: Brimaud v Boston Securities Entertainment Pty Ltd [1998] 1392 FCA (9 October 1998). 73 Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 133, [11], [36], [53]; but see Hocking Stuart (Hawthorn) Pty Ltd v Vernea [2005] VSCA 129: vendor’s damages for agent’s breach of authority were assessed as at the date of trial.

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or services—can be readily sold or bought.74 It follows that ‘if the seller cannot promptly resell, or the buyer cannot promptly acquire a substitute performance, there is no relevant market’.75 In some cases where the market substitute is not a true equivalent of the performance contracted for, the innocent party may not adequately be compensated by a market-based award. In such a case, the actual cost of remedying the breach may then be awarded instead.76 Bellgrove  v Eldridge77 illustrates the concern shown by courts in such cases to compensate the plaintiff genuinely for their expectation loss. In this case, the appellant, a builder, entered into a contract with the respondent to build for her a two-storey ‘brick house villa’ in accordance with certain plans and specifications for the sum of £3500. The respondent claimed for damages in respect of substantial departures from the specifications in the contract. The trial judge found that the appellant’s failure to comply with the specifications had resulted in grave instability in the building as erected. The trial judge based the respondent’s damages on the cost of demolishing and re-erecting the building in accordance with the plans and specifications. The following is an extract from the appeal to the High Court. Bellgrove v Eldridge (1954) 90 CLR 613 Dixon CJ, Webb and Taylor JJ at 617–620: In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building of her land which is substantially in accordance with the contract. One or two illustrations are sufficient to show that the prima facie rule for assessing damages for a breach of warranty upon the sale of goods has no application to the present case. Departures from the plans and specifications forming part of a contract for the erection of a building may result in the completion of a building which, whilst differing in some particulars from that contracted for, is no less valuable. For instance, particular rooms in such a building may be finished in one colour instead of quite a different colour as specified. Is the owner in these circumstances without a remedy? In our opinion he is not; he is entitled to the reasonable cost of rectifying the departure or defect so far as that is possible. Subject to a qualification to which we shall refer presently the rule is, we think, correctly stated in Hudson on Building Contracts, 7th ed. (1946), p. 343. ‘The measure of the damages recoverable by the building owner for the breach of a building contract is, it is submitted, the difference between the contract price of the work or building contracted for and the

74 Wenham v Ella (1972) 127 CLR 454. If the innocent party to the contract in fact resorted to the market, the burden of proof lies on the defendant to show that the transaction did not reflect market value. 75 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1105. 76 Bellgrove v Eldridge (1954) 90 CLR 613. 77 Ibid.

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cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach’ … But the work necessary to remedy defects in a building and so produce conformity with the plans and specifications may, and frequently will, require the removal or demolition of some part of the structure. And it is obvious that the necessary remedial work may call for the removal or demolition of a more or less substantial part of the building. Indeed— and such was held to be the position in the present case—there may well be cases where the only practicable method of producing conformity with plans and specifications is by demolishing the whole of the building and erecting another in its place. In none of these cases is anything more done than that work which is required to achieve conformity and the cost of the work, whether it be necessary to replace only a small part, or a substantial part, or, indeed, the whole of the building is, subject to the qualification which we have already mentioned and to which we shall refer, together with any appropriate consequential damages, the extent of the building owner’s loss. The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt. No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks. In such circumstances the work of demolition and re-erection would be quite unreasonable or it would, to use a term current in the United States, constitute ‘economic waste’. (See Restatement of the Law of Contracts, (1932) par. 346). We prefer, however, to think that the building owner’s right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions ‘necessary’ and ‘reasonable’, for the expression ‘economic waste’ appears to us to go too far and would deny to a building owner the right to demolish a structure which, though satisfactory as a structure of a particular type, is quite different in character from that called for by the contract. Many examples may, of course, be given of remedial work, which though necessary to produce conformity would not constitute a reasonable method of dealing with the situation and in such cases the true measure of the building owner’s loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials. As to what remedial work is both ‘necessary’ and ‘reasonable’ in any particular case is a question of fact. But the question whether demolition and re-erection is a reasonable method of remedying defects does not arise when defective foundations seriously threaten the stability of a house and when the threat can be removed only by such a course. That work, in such circumstances, is obviously reasonable and in our opinion, may be undertaken at the expense of the builder. … For the reasons which we have given we are of the opinion that the appeal should be dismissed.

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• 25.6 Contributory negligence If a plaintiff has been careless or negligent in contributing to their loss following a negligent act, omission, or a breach of contract, by the defendant, the amount of damages may be reduced or apportioned accordingly. Traditionally, as illustrated in Astley v Austrust Ltd,78 such finding of contributory negligence did not apply to contract claims. However, legislations in all Australian jurisdictions have reversed this.79 Contributory negligence can therefore result in the reduction or apportionment of damages if the liability is tortuous in nature or one which amounts to a breach of contractual duty of care that is concurrent and coextensive with a duty of care in tort. This essentially reinforces the law that a duty of care may be implied in a contract while concurrently imposed by the law of negligence. In some cases, a plaintiff’s negligent act or omission can break the chain of causation between the defendant’s breach and the plaintiff’s loss.80

• 25.7 Proportionate liability More than one defendant might be involved in an action for damages for economic loss or for damage to property arising from a failure to take reasonable care. In accordance with proportionate liability legislation, the responsibility of each defendant will be allocated between them on a percentage basis and each defendant only pays their own share.81 The plaintiff therefore takes the risk of one defendant being unable to pay. It should however be noted that the legislation affects claims for breach of contract only where the breach relied on is a failure to take reasonable care. To establish such a breach, it is necessary to show that a duty was incorporated in the contract, expressly or by implication. Examples of where such a duty is implied include in professional services contracts, contracts for work and materials requiring reasonable care and skill to be exercised, employment contracts and bailment contracts.

Ke y p o ints for re v ision The court would generally order an award of damages should a plaintiff successfully prove, on the balance of probabilities, that a defendant has breached a contract. Damages are a sum of money which the court orders the defendant to pay to the plaintiff. Damages for breach of contract are awarded to compensate for the loss caused by the breach. The objective is therefore to place the innocent party, in monetary terms, in the same position they would have been in if the contract had been performed.

78 (1999) 197 CLR 1. 79 The following amendments were made in response to the High Court’s decision in Astley v Austrust Ltd (1999) 197 CLR 1: Civil Law (Wrongs) Act 2002 (ACT), ss 101–102; Law Reform (Miscellaneous Provisions) Act 1965 (NSW), ss 8–9; Law Reform (Miscellaneous Provisions) Act (NT), ss 15–16; Law Reform Act (Qld), ss 5, 10; Law Reform (Contributory Negligence and Apportionment of Liability Act 2001 (SA), ss 3, 7; Wrongs Act 1954 (Tas), ss 2, 4; Wrongs Act 1958 (Vic), ss 25–26; Law Reform (Contributory Negligence and Tortfeasors) Contribution Act 1947 (WA), ss 3A–4. 80 For a more detailed discussion, see Chapter 26, section 26.1.3. 81 Civil Law (Wrongs) Act 2002 (ACT), s 107B; Civil Liability Act 2002 (NSW), s 34; Law Reform (Miscellaneous Provisions) Act 1956 (NT), s 4; Civil Liability Act 2003 (Qld), s 28; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA), s 8; Civil Liability Act 2002 (Tas), s 43; Wrongs Act 1958 (Vic), s 24AF; Civil Liability Act 2002 (WA), s 5AI.

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Expectation damages are awarded to protect not only the unfulfilled expectation of performance of the contract, but importantly the unfulfilled expectation of receiving the benefits flowing from that performance. A plaintiff can also be awarded reliance damages to compensate for the expense or loss which the plaintiff has reasonably incurred in reliance on the promised performance and which is consequently wasted by the defendant’s breach. By reaching an agreement on damages at the outset, there is no requirement for the innocent party to prove loss or damage, and recovery of compensation is therefore efficiently facilitated. Damages are generally assessed on a ‘once and for all’ basis as at the date of the breach. If a plaintiff has been careless or negligent in contributing to their loss following a negligent act, omission or breach of contract, by the defendant, the amount of damages may be reduced or apportioned accordingly. Where more than one defendant is involved in an action for damages for economic loss or damage to property arising from a failure to take reasonable care, the responsibility of each defendant will be allocated between them on a percentage basis.

problem-solving practice Pinnacle Conferences Service Pty Ltd (‘Pinnacle’) operates ‘high end’ conference facilities. In spring 2011, Pinnacle purchased a luxury yacht for use as a conference venue. Pinnacle sought to refurbish the yacht with the latest in cabin and conference technologies. As part of the refurbishment, Pinnacle engaged Executive IT Pty Ltd (‘Executive’) to supply, install and configure a master control system that was critical to the overall refurbishment. The total contract price was $450 000. The contract with Executive specified the completion date of the installation of the master control system to be 15 December 2011. This was crucial as the yacht was to hold an event by the Association of CEO Australia (the ‘Association’) for the period 15–18 February 2012. Executive attempted to source the components of the master control system from a third company. However, due to a delay by that third company, Executive breached its contract with Pinnacle, as the installation could not be completed on 15 December 2011. Due to this delay, the installation of other systems and technologies on the yacht were all affected. As a result, the event scheduled for the Association could not take place on the yacht. When it became evident to Pinnacle in December 2011 that the yacht would not be available to host the event, Pinnacle discussed a number of alternative venues with the Association, including one of Pinnacle’s onshore facilities which was available on the dates of the event. Unfortunately, the organisers from the Association stated that the publicity for the event had emphasised that the event was to be held on a luxury yacht. The members had commented very positively on this and the Association could not therefore accept an onshore venue as a substitute. As a result, Pinnacle had to find another luxury yacht. At that point in time, there were very few comparable yachts and Pinnacle commissioned a broker to find a substitute one. The broker successfully found a comparable yacht at a cost of $400 000. In addition, Pinnacle paid the broker the standard brokerage commission of 10 per cent of the rental cost, $40 000 and a further $25 000 as a success fee. In order to retain its goodwill and ensure future business, Pinnacle also decided to make a payment of $75 000 to the Association. Advise both parties on the issue of remedies.

Chapter 25

Common law damages

GUIDE TO ANSWERING This guide to answering utilises the IRAC methodology discussed in Chapter 23. 1 Identify the issue(s) in the case. The gist of the dispute is whether Executive is liable to compensate Pinnacle for its losses arising from Executive’s breach of contract. In order to resolve this issue, two important questions need to be analysed: • Is Executive liable for the breach? • What will be the remedies for the breach? 2 Succinctly introduce the relevant principles of law and authority that are applicable to the problem. What are the relevant principles/rules/exceptions/tests which will be applied? • Is Executive liable for the breach? Consider termination for delay in performance (Carr v J A ­Berriman Pty Ltd). • What will be the remedies for the breach? Consider the following in relation to damages: • Proving compensable losses (Commonwealth v Amann Aviation Pty Ltd); • Purpose of damages (Robinson v Harman); • Causation (March v E & MH Stramare Pty Ltd); • Remoteness (Hadley v Baxendale); • Mitigation (Bak v Glenleigh Homes Pty Ltd; Simonious Vischer & Co v Holt & Thompson; Shindler v Northern Raincoat Co Ltd). 3 Apply those principles to the facts: how should the law be applied to the facts? • From the facts, it is clear that a contract was entered into by Pinnacle and Executive for the ­supply, installation and configuration of the master control system. It is also clear that Executive breached this contract, as it failed to perform its contractual obligation as it fell due. • If Pinnacle can successfully argue that Executive has breached the contract, the court could order an award of damages. Damages are a sum of money which the court orders the defendant to pay to the plaintiff. • The objective of damages is to place the innocent party, in monetary terms, in the same position they would have been in if the contract had not been breached. Here, it means compensating Pinnacle for having to make an alternative arrangement for the Association. • As will be shown in Chapter 26, Pinnacle will also have to prove that it would not have suffered its losses ‘but for’ the breach of contract by Executive. This is the causation test. Furthermore, the losses must not be too remote; that is, they must: • arise naturally according to the usual course of things from the breach; or • be such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as a probable result of the breach. • Issues of remoteness may arise in relation to the success fee and the voluntary payment to the Association to protect Pinnacle’s goodwill. This must be discussed fully. • Finally, Pinnacle’s duty to mitigate its losses should also be discussed. 4 Conclude: • On the balance of probabilities, which arguments/principles of law will be likely to prevail? • Ask yourself whether you have fully advised both parties.

[ 513 ]

[ 514 ]

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Limitations on the award of damages

Chapt e r o v e rv i e w 26.0

Introduction  515

26.1

Causation  515 26.1.1 The ‘but for’ test   515 26.1.2 Concurrent causes  516 26.1.3 Intervening events  516 Contributory negligence breaking the chain of causation  522 Intervening event created or enlarged by the breach   525

26.2

Remoteness  526 26.2.1 Hadley v Baxendale  527 The first limb of Hadley v Baxendale  528 The second limb of Hadley v Baxendale  529

26.3

Mitigation  531 26.3.1 Rationale for the mitigation obligation   532 26.3.2 Reasonable steps  533

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Limitations on the award of damages

26.3.3 The impecunious plaintiff   533 26.3.4 Attempts at mitigation which increase loss   534

• 26.0 Introduction A plaintiff who has suffered loss due to the defendant’s breach has the onus to prove the extent of that loss. It must be established that the loss is caused by the defendant’s breach, that it is not too remote and that the plaintiff has taken steps to lessen or mitigate the loss.

• 26.1 Causation The existence of a causal connection between the defendant’s breach of contract and the plaintiff’s loss is a question of fact.1 The burden of proof lies on the plaintiff to show that the loss for which compensation is claimed was caused by the defendant’s breach of contract. In determining whether the plaintiff has discharged the burden of proof, the courts have favoured a commonsense approach which takes into account ‘everyday life and thoughts and expressions’ instead of ‘philosophic speculation’.2 It follows that causation will be established if the breach is so connected to the plaintiff  ’s loss or damage that, ‘as a matter of ordinary common sense and experience it should be regarded as a cause of it’.3

26.1.1  The ‘but for’ test One of the preliminary tests commonly utilised in determining causation is the ‘but for’ test.4 A straightforward application of the test can be seen in Kenny & Good Pty Ltd v MGICA.5 The defendant, a valuer, negligently made an error in assessing the value of a property.6 As a result of this, a lender advanced a loan to the owner of the property on the security of a mortgage which was insured by the plaintiff. The owner defaulted and the lender sold the property at a loss. The plaintiff indemnified the lender and subsequently sought to recover the amount of the indemnity from the defendant. The High Court held that the defendant was liable. The plaintiff would not have insured the mortgage but for the erroneous valuation. Gaudron J found that ‘as

1 Bennett v Minister for Community Welfare (1992) 176 CLR 408, 412–413; 107 ALR 617. 2 Monarch SS CO Ltd v A/B Karlshamns Oljefabriker [1949] AC 196, 228; see also Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310, 315, 350, 352. 3 March v E & MH Stramare (1991) 99 ALR 423, 424. Although this case concerned the tort of negligence, the principles apply equally to a claim for damages for breach of contract. 4 Fitzgerald v Penn (1954) 91 CLR 268, 277; Mahoney v J Kruschich (Demolitions) Pty Ltd (1985) 156 CLR 522, 528–529; March v E & MH Stramare (1991) 99 ALR 423; Bennett v Minister of Community Welfare (1992) 176 CLR 408, 413; Medlin v The State Government Insurance Commission (1995) 182 CLR 1, 6; Chappel v Hart (1998) 195 CLR 232; Bank Ltd v Nemur Varity Pty Ltd [2002] VSCA 18, [39]–[41]. 5 (1999) 199 CLR 413. 6 Although the case rests on negligence and misleading conduct, the plaintiff also relied on breach of contract. McHugh and Gummow JJ regarded contract as an equivalent source of liability in the circumstances and proceeded to draw no distinction between the cause of action in negligence or in breach of contract relating to causation: 199 CLR 413, 434, 446.

[ 515 ]

[ 516 ]

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the valuation was a decisive consideration in MGICA’s decision to insure the loan, it is simply common sense to treat that transaction as resulting from the valuation’.7 Similarly, in the case of Pilmer v The Duke Group Ltd (in liq),8 the plaintiffs were successful in alleging that but for the negligence of the defendants in certifying a takeover to be at fair value, the takeover would not have proceeded and would not have resulted in loss to the plaintiffs.

26.1.2  Concurrent causes Although the application of the ‘but for’ test can be straightforward in most cases, the test has its limitations. For instance, the test is not satisfactory insofar as it requires the sole presence of the breach and the absence of any other cause. The law recognises the possibility for events to be determined by multiple causes. A particular breach of contract may simply be one cause among others, but it may nevertheless attract legal liability so long as it materially caused or contributed to the harm suffered. In other words, it does not have to be the sole cause of the loss complained of.9 In Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad,10 an underwater pipeline owned by Caltex was broken by The Dredge Willemstad as a result of negligent navigation. The Dredge was equipped with navigation aids which were installed by Decca. These aids incorrectly showed the area where Caltex’s pipeline was located as safe for dredging. Caltex sued both the Dredge and Decca. Decca argued that the negligent navigation of the Dredge had broken the chain of causation between the defect in the Decca system and the damage sued for. The High Court rejected this argument, holding that the negligence of the navigators and of Decca’s aids were ‘concurrent causes leading to a common result’.11 These two different acts of negligence each played their part in causing the damage sued for. One did not intervene with the other to break the chain of causation. In such cases, the principles of proportionate liability will become relevant.12 The law recognises the possibility for events to be determined by multiple causes. A particular breach of contract may simply be one cause among others, but it may nevertheless attract legal liability so long it materially caused or contributed to the harm suffered.

An intervening event must be powerful enough to break the chain of causation, so that it ‘can be treated in a practical sense as the sole cause of the damage’.

26.1.3  Intervening events If a particular event intervenes to break the chain of causation between the first alleged breach of contract and the loss, the court will scrutinise each event closely. Some novus actus interveniens may be caused by the plaintiff, in which case the plaintiff may be contributing to the negligence and the loss.13 It might also be the case that the

7 Ibid, 426 per Gaudron J; see also 448 per Gummow J, 457 per Kirby and Callinan JJ. 8 (2001) 180 ALR 249. 9 Henville v Walker (2001) 182 ALR 37, especially 59; see also Gould v Vaggelas (1985) 157 CLR 215, 236, 250–251; March v E & MH Stramare Pty Ltd (1991) 99 ALR 423; Medlin v State Government Insurance Commission (1995) 182 CLR 1, 7. 10 (1976) 136 CLR 529. 11 Ibid, 543 (Gibbs J). 12 See Chapter 27, section 25.7. 13 See below, section 26.1.3

Chapter 26

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intervening events are beyond the control of the parties, including the act of third parties. In Alexander v Cambridge Credit Corp Ltd,14 it was said that an intervening event must be powerful enough to break the chain of causation, so that it ‘can be treated in a practical sense as the sole cause of the damage’.15 If its impacts are merely collateral or ancillary, then the chain of causation remains unaffected. In that case, the auditors of Cambridge Credit Corp Ltd, in their annual audit certificates in 1971, failed to note that the balance sheet and other accounts did not show provisions which should have been made. Had the appropriate provisions been made, it was highly probable that a receiver would have been appointed in 1971. If the receiver was then appointed, the sum to be obtained from the realisation of Cambridge’s assets would fall short of the sum required to meet its liabilities by $10m. However, Cambridge continued to trade until 1974 when it then became unable to pay an instalment interest on its debentures and unsecured debts. It ultimately went into receivership that year, when the deficiency between its assets and the sum required to meet its liabilities was $155m. In proceedings where Cambridge claimed damages for negligence against the auditors for breach of contract, Rogers J found that, but for the breach of contract by the auditors in issuing the audit certificates, Cambridge would have gone into receivership in 1971. He subsequently awarded damages of $145m to Cambridge, being the increase between 1971 and 1974 in the deficiency of assets required to meet the company’s liabilities. The auditors appealed this decision. McHugh and Mahoney JJA allowed the appeal as it was their Honours, finding that there was no causal connection between the breach of contract and the loss suffered by Cambridge. They held that the losses were the result of an unforeseeable ‘credit squeeze’ imposed by the Queensland Government and not the auditors’ negligent act. Glass JA dissented.

Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 Glass JA (dissenting) at 313: The detailed exposition of the materials for judgment in the reasons prepared by McHugh JA enable me to dispense with a full treatment of the issues debated before us. In my opinion the appeal should be dismissed for the following reasons … Was the plaintiff’s damage caused by the failure to appoint a receiver in 1971? The trial judge held that the plaintiff had established that the collapse of the company in September 1974 was caused by the auditors’ default as the company in its weakened financial state was vulnerable to such an event … The plaintiff contended that the damage suffered by it was not the collapse of the company in 1974 but the deterioration in the company’s financial position during the period September 1971 to September 1974 as a result of being in trade. The appointment of a receiver in 1974 was not the event causing detriment to the company. It marked the end of the three year period of trading activity in which the detriment suffered was the difference between a net worth of minus $10 million

14 (1987) 9 NSWLR 310. 15 Ibid, 361.

[ 517 ]

[ 518 ]

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at the beginning and a net worth of minus $67 million at the end of the period. The question which attracted most attention in the written submissions and oral argument was whether that damage claimed by the plaintiff and so defined had been caused by the default in question. The relevant principles of causation and remoteness: In determining whether the plaintiff’s proofs establish its claim for damages, I would direct myself that the following propositions are valid under Australian law and are the relevant principles for application. I do not propose to discuss in what respects the English law may be different. 1 The plaintiff must establish that the defendants’ default caused the damage suffered and that he is responsible for it in law. [315] 2 There is no occasion to consider whether responsibility is incurred for the plaintiff  ’s loss until it is first established that the defendants’ default caused it, Chapman v Hearse (1961) 106 CLR 112 at 122. 3 The doctrine of remoteness marks out the limits beyond which a defendant is no longer liable for loss caused by him: ibid. 4 It is irrelevant to inquire whether the defendants’ default was the dominant, effective or real cause of the plaintiff’s loss. If the evidence is suggestive of multiple causation, the inquiry to be made is whether the defendants’ default was a cause of the plaintiff’s loss: Fitzgerald v Penn (1954) 91 CLR 268 at 273. 5 The test of causation poses the question whether the plaintiff’s loss would not have been suffered but for the defendants’ default. The question is to be answered by applying that test in a practical commonsense way: Nader v Urban Transit Authority of New South Wales (1985) 2 NSWLR 501 at 530–531 and cases there cited. 6 If the defendants’ conduct is in this sense a cause of the plaintiff  ’s loss, the existence of another concurrent cause which combines to produce the loss is of no relevance. 7 If there is a consecutive event but for which the plaintiff would not have suffered the loss claimed, that intervening event may be described as a novus actus interveniens. 8 The evidentiary picture may be such that it is proper to think that the intervening event is in a practical commonsense way the only cause of the loss to the exclusion of the earlier event: Mahony v J Kruschich (Demolitions) Pty Ltd (1985) 156 CLR 552 at 528. 9 Where, however, the earlier event remains a cause notwithstanding the intervention of a later event, it is necessary to consider whether the intervening event has metaphorically broken the chain linking the plaintiff  ’s loss to the defendants’ default which ex hypothesi was a cause of it. This is determined by principles of remoteness. 10 Where the defendant is a tortfeasor the intervention will not have that effect if the intervention is foreseeable as a possibility in a general sort of way: Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383. 11 Where the default is a breach of contract, the intervention will not have the effect of terminating the defendants’ responsibility for the loss caused by it, if the parties should have contemplated at the time of the contract that in the event of the sort of breach which did occur an intervention of that general kind was a serious possibility or a not unlikely occurrence: Koufos v C Czarkinow Ltd [1969] 1 AC 350.

Chapter 26

Limitations on the award of damages

Was the plaintiff’s damage caused by the defendants’ default? In considering how the causal question should be answered in a common sense way it is necessary to have regard to the events before the period began as well as the events which occurred during the period. The plaintiff submits that both kinds of event favour its submission. The company had a track record of failed investments. It was and continued to be in breach of its two borrowing ratios. During the three year period, so it is submitted, the company’s business activities were marked by a number of features. It failed to realise land development stock held at September 1971. Instead it held much of it through the boom and into the slump. It acquired more land stock [316] by borrowing money on a grand scale with the intention of holding it for development and retained a good deal of that land through the boom and into the slump. It made modest profits but after three years trading its net worth had increased from minus $10 million to minus $67 million. … The question is a finely balanced one of deciding in a practical commonsense way whether it was the failure to appoint a receiver which was one of the causes of the deterioration in its financial position. It seems to me that it is not wanting in practicality to say that the company was financially worse off in 1974 by $57 million because it had traded during that period and that being in trade was a cause of its damage. Some bad business decisions and external developments adverse to its business doubtless contributed to the deterioration. But the auditors by their default failed to close the company down in 1971. It was that failure which in a commonsense way was a cause of the damage since but for the failure it would not have traded and in the events which happened would not have run down its assets in the calamitous way it did. Nor do I think that the intervening events constituted causes of the deterioration so as to exclude the fact that the plaintiff was in trade as another cause in a commonsense way … the evidence here in my view supports the commonsense conclusion that but for this company’s continuance in trade in the same line of business, under the same management in breach of the same ratios it would not have run down its assets. Being in trade when it should have been in receivership was a cause of the $57 million loss it suffered. If an unseaworthy vessel puts to sea because marine surveyors have negligently certified it, its loss will also be due to the marine hazards which cause it to founder. But it is equally true that its loss could not have occurred but for the fact that it put to sea as a result of a negligent survey. Was the plaintiff’s loss too remote from the defendants’ default to be recoverable? The auditors were aware of substantial trading losses 1967–1971. They were aware that the trustee depended on them to ensure that the company was put into receivership when serious and irremediable breaches of both [borrowing] ratios were disclosed. The failure to close the company down in those circumstances carried with it the serious possibility that the exigencies of the market would inflict further serious loss. Those exigencies included business miscalculations, market fluctuations and economic change. The auditors of a land development company riding a boom should reasonably contemplate that the boom will be followed by a slump. A company in breach of both its borrowing ratios should be closed down by the combined action of auditor and trustee to avoid the risk of

[ 519 ]

[ 520 ]

Contract Law: Text and Cases

further deterioration. The failure to close it down produced the very developments which should have been contemplated [317]as serious possibilities in the event of that failure. The relevant loss, the remoteness of which is in question, is not the company’s parlous position in 1974. It is the financial deterioration produced by three years trading to be measured by a comparison of its bad position in 1971 with its much worse position in 1974 … McHugh JA (Mahoney JA agreeing) at 358: In general, the application of the ‘but for’ test will be sufficient to prove the necessary causal connection. But that test is only a guide. The ultimate question is whether, as a matter of commonsense, the relevant act or omission was a cause. Causation-in-this-case: In my opinion Cambridge failed to prove that the breach of contract by the auditors in 1971 was a cause of the loss of $145 000 000 which it suffered … [359] In the proved circumstances of this case, I do not think that the issue of the certificates by the auditors constituted a cause of Cambridge’s loss of $145 000 000. The existence of a company, as counsel for Cambridge conceded, cannot be a cause of its trading losses or profits. Yet that is what the case for Cambridge comes to. Except in the sense that the issue of the certificates induced the trustee not to take action against Cambridge and thereby permitted Cambridge to exist as a trader, the issuing of the certificates was not one of the conditions which were jointly necessary to produce the loss of $145 000 000. To assert in these circumstances that the issue of the certificates was a cause of the loss in my opinion is to depart from the commonsense notion of causation which the common law champions. Moreover, whatever causal significance the certificates of the auditors in 1971 may have had in keeping the company in trade, their effect was well and truly spent by 1973. If Cambridge had ceased to trade and been wound up in 1973 or if it had been taken over, it would be impossible to contend that it had sustained a loss as the result of the auditors’ breach of contract in 1971 … [361] Novus actus interveniens: … Notwithstanding that a defendant’s act or omission has a causal connection with the damage of the person aggrieved, no liability arises if an independent intervening act or event in conjunction with the defendant’s act or omission has brought about the plaintiff’s damage and the intervening act or event can be treated in a practical sense as the sole cause of the damage. In this case the auditors contended that in a practical sense the credit squeeze was the sole cause of Cambridge’s loss. … The intervening act/s in this case: If, contrary to my view, the breach of contract by the auditors in 1971 was a cause of the loss of $145 000 000 by Cambridge the collapse of the real estate market, as the result of the policies of the then Australian government, constituted a novus actus interveniens which in point of law broke the causal connection. Strictly speaking, it may be more correct to

Chapter 26

Limitations on the award of damages

regard the novus actus interveniens as consisting of a package of the following factors which intervened after the auditors’ breach of contract in 1971. 1 The expansionary budget of August 1972. 2 The unprecedented rate of monetary expansion in 1972/1973 brought about by the large current account surplus and the high rate of capital inflow. 3 The acceleration of inflation in early 1973. 4 The boom in land sales and the spectacular increase in the prices of land. 5 The intensity of the demand for housing. 6 The sharp reversal of monetary policy bringing about ‘a spectacular turnaround in rates of growth of real monetary aggregates in such a short space of time’. 7 The tightening of liquidity in the second half of 1973/1974. 8 The severity of the government induced credit squeeze. 9 The very rapid rise of interest rates during 1973/1974. 10 Investment in dwellings declining nearly three times as rapidly as the decline in other components of gross private fixed investment. 11 The collapse of land prices. 12 The period of financial instability and near panic in August 1974. 13 The inability of Cambridge to raise further working capital. The dramatic changes in economic conditions and policies between 1972 and 1974 clearly influenced the expansion and ultimately brought about the destruction of the business of Cambridge as a real estate investor … [363] Cambridge’s business activities expanded dramatically while monetary policy was highly expansionary throughout the period 1972–1973. But once liquidity became very tight in the last half of the financial year 1973–1974 as the result of ‘the credit squeeze engineered by the authorities’, Cambridge’s position became hopeless particularly as income from land sales dried up. Saddled with interest bearing debts of over $150 000 000 and, because of the policy of the then government, unable to borrow to meet its commitments and finding it difficult to sell its land in a falling market, Cambridge simply collapsed. If, contrary to my view, there was a connection between the issue of the certificates in 1971 and this collapse, it was so superseded in potency by supervening events as not to rank as a cause either in commonsense or in law. The package of economic factors together with the decisions of the directors of Cambridge to increase its borrowings and investment in real estate constituted a novus actus interveniens. If, notwithstanding the statements in Mahony v J Kruschich (Demolitions) Pty Ltd, a defendant is liable for intervening events of a kind which he ought to reasonably foresee, then in my opinion the novus actus interveniens was beyond the reasonable foresight of an ordinary person or, if it matters, an auditor or businessman. So if, contrary to my view, there was a causal connection between the breach of contract and the loss of $145 000 000, then, by reason of the novus actus interveniens, the auditors are not responsible for that loss. The package of factors, together with the investment and borrowing decisions of the directors of Cambridge after 1971, were, in a practical sense, the sole cause of the loss of $145 000 000 …

[ 521 ]

[ 522 ]

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Remoteness in this case: … [367] To impose liability upon the auditors in this case seems to me to exceed that which the auditors could fairly be regarded as having contemplated and been willing to accept. The track which the parties looked down in 1970 bore few, if any, resemblances to the track which Cambridge went down between 1972 and 1974. Moreover, I think that the auditors were correct in contending that Cambridge did not suffer a single loss or losses of a single kind. If the individual losses were to be segregated, I think that it would be found that there were a number of independent causal chains leading to those losses. The auditors pointed out, for example, that after devastating flooding in Queensland, an embargo was placed on canal development which had a dramatic effect on many of Cambridge’s projects in Queensland. Accordingly, even if there was a causal connection between the breach of contract in 1971 and the loss of $145 000 000 and no novus actus interveniens, that loss was too remote to be recoverable in these proceedings. The appeal should be allowed on the grounds so far argued.

Contributory negligence breaking the chain of causation In Lambert v Lewis,16 a purchaser of a towing hitch brought proceedings against the retailers claiming that the retailers had breached their implied obligation under the relevant Sale of Goods Act by supplying a towing hitch which was not fit for its purpose. This breach ultimately resulted in an accident. The House of Lords refused damages to the purchaser on the basis that the purchaser had broken the chain of causation between the retailers’ breach and the accident by continuing to tow using the hitch, despite his knowledge that a part of the hitch was broken. Similarly, in Quinn v Burch Bros (Builders) Ltd,17 the defendants breached their contract in not supplying the plaintiff with adequate equipment. The defendants could have foreseen that their failure might give rise to an accident. The accident actually happened and the plaintiff was injured as a result. The Court of Appeal held that, following the breach of contract on the part of the defendants, it was the voluntary choice of the plaintiff which caused the accident. The breach of contract was not causally connected to the accident; it merely gave the plaintiff the opportunity to injure himself by his choice to use the unsuitable equipment despite his appreciation of the risks involved. The preceding cases were revisited by Ipp JA in the recent case of Allianz v Waterbrook.18 Allianz v Waterbrook [2009] NSWCA 224 Ipp JA (Hodgson JA concurring) at [106]: Traditionally, it is generally accepted that the free, deliberate and informed act or omission of a human being negatives causal connection: H L A Hart and Tony Honore, Causation

16 [1982] AC 225. 17 [1966] 2 QB 370. 18 [2009] NSWCA 224.

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Limitations on the award of damages

In The Law 2nd ed., (1985) Oxford University Press at 136. The rule was expressed by Lord Sumner in his speech in Weld-Blundell v Stephens [1920] AC 956 as follows (at 986): In general … even though A is in fault, he is not responsible for injury to C which B, a stranger to him, deliberately chooses to do. Though A may have given the occasion for B’s mischievous activity, B then becomes a new and independent cause. A case where the plaintiff knowingly and deliberately decides to act in a way that causes himself or herself injury, is an a fortiori situation.

[107] There are exceptions to this rule. The intervening act will not break the chain of causation if the contractual duty of which the defendant is in breach was to guard against the very act that occurred: Alexander v Cambridge Credit Corporation Ltd at 361 per McHugh JA. Another situation where the exception operates was that in Symonds v Vass [2009] NSWCA 139. In that case it was held (at [271]) that the deliberate decision of clients to compromise their claim on adverse terms did not preclude them from suing their solicitors for breach of duty to take reasonable care in preparing their case. Symonds v Vass is to be explained on the basis that the compromise was merely a link between the alleged breach of duty by the solicitors and the damages sustained by the clients. In reality, the clients (on their case) entered into the compromise as an act of mitigation to limit the damage caused by the breach of duty on the part of their solicitor. For that reason, the chain of causation was not broken. [108] In Lambert v Lewis [1982] AC 225 knowledge of defects that constituted a breach of warranty was held to defeat the claim of the beneficiary of the warranty. The plaintiff had been injured and her husband killed when a trailer became detached from a farmer’s Land Rover and struck their car. The plaintiff brought an action for damages against the farmer, the dealers who had supplied the trailer coupling, and the manufacturers of the coupling. The farmer brought third party proceedings against the dealers based upon a breach of a statutory warranty provided by s 14 of the Sale of Goods Act 1893 (UK) as to the fitness of purpose and merchantable quality of the coupling. The trial judge found that the farmer ought to have been aware that the coupling was damaged. Section 53(2) of the Sale of Goods Act provided ‘the measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty’. In rejecting the farmer’s breach of warranty claim against the dealers, Lord Diplock (with whom the other members of the House of Lords agreed) stated (276–277): After it had become apparent to the farmer that the locking mechanism of the coupling was broken, and consequently that it was no longer in the same state as when it was delivered, the only implied warranty which could justify his failure to take the precaution either to get it mended or at least to find out whether it was safe to continue to use it in that condition would be a warranty that the coupling could continue to be safely used to tow a trailer on a public highway notwithstanding that it was in an obviously damaged state. My Lords, any implication of a warranty in these terms needs only to be stated to be rejected. So the farmer’s claim against the dealers fails in limine. In the state in which the farmer knew the coupling to be at the time of the accident, there was no longer any warranty by the dealers of its continued safety in use on which the farmer was entitled to rely.

[ 523 ]

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The Court of Appeal reasoned that, since there was no break in the chain of causation between negligence of the manufacturers, which consisted in the defective design of the coupling, and the plaintiff’s damage, there could be no such break between the dealers’ breach of warranty, which likewise consisted in the defective design of the coupling, and the farmer’s loss occasioned by his share of the liability for the plaintiff’s damage. With respect, this reasoning was erroneous. The farmer’s liability arose not from the defective design of the coupling but from his own negligence in failing, when he knew that the coupling was damaged, to have it repaired or to ascertain if it was still safe to use. The issue of causation, therefore, on which the farmer’s claim against the dealers depended was whether his negligence resulted directly and naturally, in the ordinary course of events, from the dealer’s breach of warranty. Manifestly it did not. [109] Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370 is not dissimilar. In breach of contract, a building contractor failed to supply a stepladder to a sub-contractor. The relationship was not regarded as one of employer and employee. The sub-contractor decided to obtain his own and used an unstable trestle from which he fell and injured himself. The sub-contractor failed in his claim for breach of contract against the building contractor as the sub-contractor’s injuries were held by the English Court of Appeal to have been caused by his own decision in using the trestle. Application to the facts of the case [110] In my opinion, applying the same reasoning, a successor in title who acquires a building in full knowledge of its defects, suffers no loss from the existence of those defects. In those circumstances, the builder’s breach of statutory warranty could not be said to have diminished the successor’s assets, nor increased its liabilities. Any adverse impact to the successor’s financial position, and any loss to the successor, would result from the successor knowingly and deliberately paying more for the building than it was worth. The loss would be caused by the successor’s own decision to purchase at the agreed price. [111] The observations in [110] are predicated on the ‘full knowledge’ of the defects being not only knowledge of the existence of the defects but also knowledge of their significance. A party may know of the existence of defects (because they are patent), but may not appreciate—even acting reasonably—that major expenditure would be required to remedy them. … [113] Causation in contract is to be determined by commonsense principles: Alexander v Cambridge Credit Corporation Ltd at 358 per McHugh JA … Applying those principles, should it be found that Waterbrook acquired the retirement village in full knowledge of the defects that exist, I would conclude that Waterbrook would fail to establish causation and legal responsibility for its loss. In such circumstances, Waterbrook’s knowing and deliberate act in acquiring the Village would constitute a new and independent cause of harm … [116] I have pointed out that where defects are patent a party, even though acting reasonably, might be unaware that major expenditure would be required to remedy them. The repair of patent defects that on their face appear to be trivial, might—on opening up the work—be found to require major reconstruction. In my opinion, applying general

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principles of causation, in such circumstances the knowledge of a successor in title of the patent defects might not be a new intervening cause. In that event, the chain of causation would not be broken and the successor would be able to prove that it suffered loss.

Intervening event created or enlarged by the breach Subsequent to Alexander v Cambridge Credit Corp Ltd, the High Court in March v E & MH Stramare Pty Ltd19 held that a particular defendant cannot rely on an event as breaking the chain of causation if the risk of its occurrence was created or enlarged by the breach itself. Hence, in this case, the plaintiff  ’s drunkenness could not be relied upon by the defendant to show the breaking of the chain of causation as the defendant’s negligent conduct of parking his truck in the middle of the road created the risk that the plaintiff would run into it.20 This in essence is similar to Glass JA’s dissenting comments in Alexander:21 If an unseaworthy vessel puts to sea because marine surveyors have negligently certified it, its loss will also be due to the marine hazards which cause it to founder. But it is equally true that its loss could not have occurred but for the fact that it put to sea as a result of a negligent survey.22

In March, the plaintiff sued to recover damages for personal injuries sustained when his motor vehicle ran into the rear of a truck, owned by the first defendant, which was parked along the centre line of Frome Street, Adelaide. The second defendant had parked the truck there for the purpose of loading it with bins containing fruit and vegetables from premises where the first respondent carried on business. The primary judge found that the plaintiff was intoxicated at the time of the accident, but that the second defendant was negligent in so parking the truck. He found the plaintiff guilty of contributory negligence. Liability was apportioned 70 per cent against the plaintiff and 30 per cent against the defendants. The Full Court, by majority, held that the second defendant’s negligence was not causative of the plaintiff  ’s injuries, the negligence of the plaintiff being the ‘real cause’.23 The plaintiff appealed and the High Court allowed the appeal. Mason CJ, Toohey and Gaudron JJ held that the defendants’ negligence was a cause of the accident and of the plaintiff’s injuries. The purpose of imposing the common law duty on the second defendant was to protect motorists from the very risk of injury that befell the appellant. The chain of causation was not broken by a novus actus interveniens.24 They also held that although the ‘but for’ test—applied as a negative criterion of causation—had an important role to play, the results which it yielded must be tempered by the making of value judgments and the infusion of policy considerations.25 Their Honours also held that the ‘but for’ test did not provide

19 (1991) 171 CLR 507. 20 See also Chappel v Hart (1998) 195 CLR 232, 240, 244; NRMA Ltd v Morgan [1999] NSWSC 407, [1283]; Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462, [62]–[65]. 21 (1987) 9 NSWLR 310. 22 Ibid, 316. 23 (1991) 99 ALR 423, 423. 24 Ibid, 423. Their Honours applied Chapman v Hearse (1961) 106 CLR 111. 25 Ibid, 423, 431 per Mason CJ. Their Honours applied Fitzgerald v Penn (1954) 91 CLR 268.

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a satisfactory answer in those cases in which a novus actus interveniens was said to break the chain of causation which would otherwise have resulted from an earlier wrongful act: When the defendant’s wrongful conduct had generated the very risk of injury resulting from the negligence of the plaintiff or a third party and that injury occurred in the ordinary course of things, the negligence of the plaintiff or a third party should not be regarded as a superseding cause. In such a situation the defendant’s negligence satisfied the ‘but for’ test and was properly to be regarded as a cause of the consequence because there was no reason in common sense, logic or policy for refusing to so regard it.26

Deane and Gaudron JJ held that the plaintiff’s injuries were caused by the fault of both the plaintiff and the second defendant. According to their Honours, for the purposes of the apportionment of liabilities, the question of causation arose as to whether an identified negligent act or omission of the defendant was so connected with the plaintiff  ’s loss or injury that, as a matter of ordinary common sense and experience, it should be regarded as a cause of it. The ‘but for’ test is accordingly not a comprehensive definitive test of causation in the law of negligence.27 On the other hand, McHugh J was of the opinion that the ‘but for’ test should be seen as the test of legal causation. It followed that, but for the breach of the duty which the defendants owed to the plaintiff in the present case, the damage which he suffered would not have occurred. Consequently, the defendants’ breach of duty was a cause of the accident. The defendants should not be exempted from responsibility on the ground that the plaintiff  ’s damage was not within the scope of the risk created by the defendants’ breach of duty.28 review questions 1 Explain the approach(es) taken by the courts in determining whether a loss is caused by an alleged breach of contract and therefore is prima facie compensable. 2 Explain the different rationales behind the judges’ decisions in Alexander v Cambridge Credit Corp Ltd. 3 Explain the effects of novus actus interveniens on the chain of causation and ultimately on the issue of contractual liability.

The promisor implicitly accepts responsibility for the usual consequences for a breach of the promise in question, while the promisee implicitly agrees not to hold the promisor responsible for unusual consequences.

• 26.2 Remoteness Another important requirement a plaintiff who has suffered from losses has to prove is that the losses are not too remote. A causal link by itself is an insufficient prerequisite to the recovery of damages. In practice, if there is no express clause in the contract dealing with the assessment of damages, the law provides a standard test which specifies the extent of responsibility implicitly undertaken

26 Ibid, 423. Their Honours applied Caterson v Commissioner of Railways (1973) 128 CLR 99. 27 Ibid. 28 Ibid, 445.

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by the promisor. There is a reciprocal allocation of risks. The promisor implicitly accepts responsibility for the usual consequences for a breach of the promise in question, while the promisee implicitly agrees not to hold the promisor responsible for unusual consequences.

26.2.1  Hadley v Baxendale Hadley v Baxendale29 laid down the general rule as to remoteness of loss. In that case, the plaintiffs’ mill was brought to a standstill by the breakage of their only crankshaft. The defendant carriers failed to deliver the broken shaft to the manufacturer at the time they had promised to do. The plaintiffs then sued to recover the profits they would have made had the mill been started again without the delay. The claim failed on the ground that the defendants could not have reasonably contemplated that the profits of the mill would have been affected by an unreasonable delay in their delivery of the broken shaft to the engineers for the purpose of manufacturing a new shaft. The remoteness test therefore ultimately depends on the express or implied intention of the parties. Alderson B in delivering the judgment of the Court said: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either as arising naturally, that is, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.30

Therefore there are two grounds for holding that loss of the kind that occurred should have been within the defendant’s contemplation: (i) first, if a reasonable person would have realised that such a loss was likely to occur as a usual consequence of such a breach; (ii) second, if the defendant should have realised that such a loss was likely to occur on the basis of the defendant’s actual knowledge of the circumstances. Under this second limb, the defendant may be liable for an unusual type of loss if they are made aware of the risk and thus expressly or impliedly accept responsibility for it: Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendant, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. On the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.31

The two limbs of the Hadley v Baxendale rule refer to the contemplation of both parties. Recent cases have, however, placed a greater emphasis on whether the defendant should have realised 29 (1854) 9 Exch 341. 30 Ibid, 354. 31 Ibid, 355.

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that the loss in question was a probable result of the breach. The rule has therefore been restated in C Czarnikow Ltd v Koufos:32 In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff’s loss was directly caused by the defendant’s breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised … that loss of that kind should have been within his contemplation.33

The first limb of Hadley v Baxendale Under the first limb, a loss will not be too remote if it is likely to occur as a usual consequence of such a breach. Two questions arise from this. First, what degree of likelihood of occurrence is required? There have been many formulations offered in response to this question. In Monarch SS Co Ltd v A/B Karlshamns Oljefabriker,34 Lord du Parcq put the test in terms of what would have been foreseen as a ‘serious possibility’, and Lord Morton spoke of a ‘grave risk’.35 Another example comes from Victoria Laundry (Windsor) Ltd v Newman Industries Ltd,36 where the UK Court of Appeal used terms such as ‘reasonably foreseeable losses’, losses which are ‘likely to result’, or even those which are ‘on the cards’.37 In C Czarnikow Ltd v Koufus,38 the House of Lords was of the opinion that the criterion of ‘reasonable foreseeability’ was more appropriate to tort than to contract cases. Moreover, ‘on the cards’ was said to be far too imprecise. Lord Reid preferred the criterion of ‘not unlikely’ to result as being the criterion for remoteness.39 The balance of authority in Australia would seem to favour this criterion.40 The second question which arises under this first limb is what is to be regarded as being in the ‘usual course of things’. The answer depends on the facts of each case. for example, in Hadley v Baxendale, the defendant carriers could not have reasonably contemplated that the profits of the mill would have been affected by an unreasonable delay in their delivery of the broken shaft to the engineers for the purpose of manufacturing a new shaft. The plaintiffs might, for example, have had a spare shaft in their possession, and therefore the plaintiffs’ loss of profit was not something which the defendants should have contemplated as occurring in the usual course of things. Similarly, the defendant auditors in Alexander v Cambridge Credit Corp Ltd 41 would not have contemplated the events which ultimately aggravated the plaintiff’s loss as they were not in the ‘usual course of things’. The defendants had, therefore, not assumed the risk of liability. 32 [1969] 1 AC 350. 33 Ibid, 385 per Lord Reid. This passage has been expressly adopted by the High Court in Wenham v Ella (1972) 127 CLR 454, 471–472 per Gibbs J; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653, 667 per Wilson, Deane and Dawson JJ; Commonwealth v Amann Pty Ltd (1991) 174 CLR 64, 92, 99 per Mason CJ, Dawson and Brennan JJ; Baltic Shipping Co v Dillon (1993) 176 CLR 344, 368 per Brennan J. 34 [1949] AC 196. 35 Ibid, 233 per Lord du Parcq, 245 per Lord Morton. 36 [1949] 2 KB 528. 37 Ibid, 539, 540. 38 [1969] 1 AC 350. 39 Ibid, 385, 388–389. 40 Wenham v Ella (1972) 127 CLR 454, 471–472; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653, 667; National Australia Bank Ltd v Nemur Varity Pty Ltd (2002) 4 VR 252, 270; Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176 CLR 344, 365, 368, 370. 41 (1987) 9 NSWLR 310.

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The second limb of Hadley v Baxendale A plaintiff who fails to satisfy the first limb of the Hadley v Baxendale A plaintiff who fails rule might still be able to claim damages if they can satisfy the to satisfy the first limb of second limb, by proving that the defendant has actual knowledge the Hadley v Baxendale that the loss was likely to occur. rule might still be able to claim damages if they In C Czarnikow Ltd v Koufus,42 the defendant, who was the owner can satisfy the second of the vessel Herron II had agreed to carry sugar from Constanza limb, by proving that the to Basrah, but deviated during the voyage. This resulted in nine defendant has actual knowledge that the loss days’ delay in the arrival of the sugar at Basrah. A fall in sugar was likely to occur. prices on the Basrah market subsequently caused the plaintiffs to suffer loss of profit by having to sell at a lower price than would have been obtained had the vessel not deviated. The House of Lords held that the plaintiffs’ loss was not too remote. The defendant knew that the plaintiffs were sugar merchants and that there was a market for sugar at Basrah. It was irrelevant that the defendant had no actual knowledge of the plaintiffs’ intention to sell because the defendant ought to have contemplated that the plaintiffs would, under the criteria applied, suffer the loss in question. Lord Reid commented: In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff ’s loss was directly caused by the defendant’s breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised … that loss of that kind should have been within his contemplation.43

In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd,44 the requisite degree of knowledge was lacking. The plaintiffs, who carried on a business as launderers and dyers, purchased a boiler of considerable capacity from the defendant for the purpose of expansion. The plaintiffs sent a lorry to take delivery but found that the boiler had been damaged. They therefore refused to take delivery until repairs had been carried out. This resulted in approximately five months’ delay. The plaintiffs sought to claim loss of business profits which they would have made had the boiler been delivered punctually. The plaintiffs alleged that the defendant had the knowledge that the plaintiffs were launderers and dyers who needed the boiler for use in their business—in fact, during negotiations, the defendant had been informed of the plaintiffs’ intention ‘to put it into use in the shortest space of time’. The plaintiffs further argued that a very large number of new customers could have been served and that a number of highly lucrative contracts for the Ministry of Supply would have been available to them. The Court held that although the plaintiffs were entitled to recover some amount for the lost profits, they were not entitled to recover the profits actually lost. This was because the defendant did not know of the precise role of the boiler; that is, whether it was to be an extra unit or whether it was to operate as a substitute for another boiler. In addition, the defendant had no knowledge of the potential lucrative arrangements involving the Ministry of Supply. The plaintiffs’ claim to recover the profit on these arrangements was therefore rejected. 42 [1969] 1 AC 350. 43 Ibid, 385 per Lord Reid. 44 [1949] 2 KB 528.

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The New South Wales Court of Appeal case of Stuart Pty Ltd v Condor Commercial Insulation Pty Ltd  45 provides another example of the application of the second limb of the Hadley v Baxendale rule. The Court of Appeal discussed in particular the important and most difficult aspect of the second limb of the rule, being the extent to which the defendant must have agreed to accept the risk of damage when entering into the contract. In the past an express term was needed to indicate the defendant’s acceptance of the risk, such as through a liquidated damages clause, but this is no longer the case. The defendant can now be treated to have impliedly undertaken to accept the risk, regardless of whether there is an express term indicating acceptance of such risk. Diplock CJ commented in Robophone Facilities Ltd v Blank:46 [The defendant’s] actual knowledge of the special circumstances is relevant as one of the factors from which his undertaking can be implied. The second factor is also necessary, viz, that he should have acquired this knowledge from the plaintiff, or at least that he should know that the plaintiff knew that he was possessed of it at the time the contract was entered into and so could reasonably foresee at that time than an enhanced loss was liable to result from a breach. Where both these factors are present, the defendant’s conduct in entering into the contract without disclaiming liability for the enhanced loss which he can foresee gives rise to the implication that he undertakes to bear it.47

The presumption of the acceptance of risk implied by actual knowledge of the special circumstances can be rebutted if the defendant can show that there was no acceptance of the risk of liability for the damage. In commercial contracts, this might be achieved by an express exclusion of liability clause. In other types of contract, the defendant may perhaps rely on the fact that the price for performance is out of proportion with the risk implied by the knowledge obtained.48 In Stuart Pty Ltd v Condor Commercial Insulation Pty Ltd, the appellant entered into a contract with the Commonwealth of Australia to replace wool insulation in residential properties as part of the Sydney Aircraft Noise Insulation Program (SANIP). There were 932 properties in total that were due to be insulated, and the appellant had been allocated 71 pursuant to its contract with SANIP. The appellant subcontracted this work to the respondent, with each property being subject to a separate contract comprising a purchase order together with a scope of works schedule particularising the requirements for that property. This included, where relevant, the requirement that all down-lights be boxed before being covered with insulation. On 28 January 1999, the appellant and respondent entered into a subcontract for the installation of insulation at a property at 98 Newington Road, Marrickville. That contract failed to identify any down-lights that needed to be boxed, despite the fact that there were five downlights. On 27 July 1999, the insulation ignited and caused a fire to break out which damaged the property. Subsequently SANIP, having conducted a quality assurance audit, terminated the appellant’s contract, in part due to faulty workmanship by the respondent. The appellant brought proceedings against the respondent, claiming damages for its loss of profits resulting from the termination of its contract with SANIP. The trial judge found that the fire was the principal reason that SANIP suspended the allocation of work to the appellant and that the faulty workmanship by the respondent led to the termination of the contract. However the trial judge dismissed the appellant’s claim for damages as too remote. 45 46 47 48

[2006] NSWCA 334. [1966] 1 WLR 1427. Ibid, 1448. However, it is clear that an express clause in the contract is not necessary, regardless of the characterisation of the contract: see C Czarnikow v Koufos [1969] 1 AC 350, 421–422 per Upjohn LJ.

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On appeal, Beazley JA held that the loss of profits from the SANIP contract was not a risk the respondent was likely to have undertaken, even if it was aware of special circumstances relating to the contract; that is, the appellant’s contract with SANIP. The respondent did in fact know of the existence of this contract and that the appellant expected it to be profitable. By virtue of the existence of this knowledge, the Court could infer the respondent’s undertaking of the risk, subject to a rebuttal of any such inference. Two matters were considered to be rebuttals to this inference. First, the appellant remained responsible for the works under its contract with SANIP, and the respondent did not undertake any contractual responsibility to supervise the work on behalf of the appellant. It would not have been in the reasonable contemplation of the respondent that poor workmanship on its part would result in the loss of the appellant’s entire contract with SANIP. Second, the price of the contract between the appellant and the respondent, which was less than $10 000, was so out of proportion to the risk of being liable for damages for the loss of the appellant’s contract with SANIP to not be within the reasonable contemplation of the parties. In addition, the event that gave rise to the loss in this case was the fire, which was an unusual catastrophic event and was not one which was ‘not unlikely to occur’. Therefore the loss in question would not have been in the reasonable contemplation of the parties and was too remote. Ipp JA drew a distinction between what is ‘reasonable contemplation’ of the parties and what is ‘reasonably foreseeable’ by the parties, the latter being less restrictive and more apt for tort cases. His Honour held that it would not reasonably have been in the respondent’s contemplation, when it entered into the contract with the appellant, that not only would the respondent breach its contract by missing the existence of the down-lights in the dwelling (and not boxing them), but that the appellant would also breach its contract with SANIP by failing to detect the same downlights. His Honour also held that the trial judge was in error in finding that all witnesses agreed that if a down-light was not boxed, the insulation could be set on fire. The non-inflammable qualities of the insulating material, as evidenced by the respondent’s witnesses, meant that the respondent did not contemplate its breach would cause a fire to break out. In concluding, contractual parties must always inform themselves of the anticipated risks in entering into a particular contract. If the risks outweigh the price of the contract, the parties must decide whether to accept them or whether to obtain insurance cover or to agree on exclusion clauses as a method of avoiding or shifting liability which may arise in the event that those risks eventuate.

• 26.3 Mitigation One of the foremost important rules relating to mitigation of damages is that a plaintiff cannot recover damages for any part of the plaintiff’s loss caused by the defendant’s breach if the claimant could have avoided the loss by taking reasonable steps. In other words, the plaintiff cannot recover for any avoidable loss.49 The onus of proof is on the defendant to show that the plaintiff ought, as a reasonable person, to have taken certain steps to mitigate the loss and could thereby have avoided some part of the loss.50

A plaintiff cannot recover damages for any part of the plaintiff’s loss caused by the defendant’s breach if the claimant could have avoided the loss by taking reasonable steps. In other words, the plaintiff cannot recover for any avoidable loss.

49 H McGregor, McGregor on Damages, 14th ed., Sweet and Maxwell (1980), para 209. 50 Roper v Johnson (1873) LR8CP 167; Pilkington v Wood [1953] Ch 770; Edwards v Society of Graphical and Allied Trades [1971] Ch 354; Strutt v Whitnell [1975] 1 WLR 870; TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; CFA Group v Mars Trading [2001] NSWSC 112.

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The second rule, which is the corollary of the first, is that where the plaintiff does take reasonable steps to mitigate the loss, the plaintiff can recover for loss incurred in taking those reasonable steps. This will be the case even when the resulting damage is greater than it would have been had the mitigating steps not been taken.51 The third rule dictates that where the plaintiff does take steps to mitigate the loss and those steps are successful, the defendant is entitled to the benefit accruing from the plaintiff ’s action and is liable only for the loss as lessened. This rule applies even though the plaintiff would not have been disallowed under the first rule for recovering the whole loss, which would have accrued in the absence of the plaintiff’s successful mitigating steps, by reason of those steps not being ones which were required of him under the first rule. Put succinctly, the plaintiff cannot recover for avoided loss. The time for the plaintiff to mitigate may depend on when the plaintiff discovered or ought to have discovered that the defendant has breached the contract.52

26.3.1  Rationale for the mitigation obligation There are various rationales behind the rules of mitigation. First, mitigation can be regarded as an aspect of causation. The failure to mitigate, and not the breach of contract, can be considered to be the major contributor to the loss.53 Mitigation might also be linked to the issue of remoteness. In some cases, it could not reasonably be within the contemplation of the parties, or at least of the defendant, that the plaintiff would Mitigation can be fail to prevent loss that could be avoided by reasonable effort. regarded as an aspect Aside from aspects of causation and remoteness, the rules of of causation. The failure mitigation can also be explained by the notion of unconscionability. to mitigate, and not the breach of contract, can A plaintiff who could have avoided a loss may be regarded as acting be considered to be unconscionably in requiring another party to pay for it.54 Note that the major contributor to the unconscionable element lies in the request for compensation the loss. over avoidable loss.

26.3.2  Reasonable steps A plaintiff is not ‘under any obligation to do anything other than in the ordinary course of business’.55 As the defendant is the wrongdoer: The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken (emphasis added).56

Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653. East Ham Corp v Bernards Sunley & Sons Ltd [1966] AC 406; Van den Hurck v R. Martens & Co Ltd [1920] 1 KB 850. Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 133, [21]. Kintella Pty Ltd v Scotte [1999] ACTSC 100, [46]. Dunkirk v Colliery Co v Lever (1878) 9 Ch D 20, 25, approved by Lord Haldane in British Westinghouse Electric Co Ltd v Underground Electric Rys [1912] AC 673, 689. 56 Banco de Portugal v Waterlow [1932] AC 452, 506. 51 52 53 54 55

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Taking reasonable steps can include accepting substitute performance for the defendant’s work from a third party. An unjustifiable failure to obtain such performance has been held to be not compensable.57 Importantly, the plaintiff may also have to accept such substitute performance or other amelioration which is offered by the defendant.58 However, if a substitute performance is not readily obtainable, then the plaintiff will not be penalised from not obtaining it.59

26.3.3  The impecunious plaintiff In some cases, an impecunious plaintiff might be prevented from taking reasonable steps to mitigate the loss. The High Court in Burns v MAN Automotive (Aust) Pty Ltd 60 discussed whether a failure to mitigate the damage flowing from a breach of contract might have an impact on an award of damages when the failure is due to the impecuniosity of the injured party. In July 1977, the appellant, an interstate haulier, and the respondent entered into a contract by which the respondent agreed to sell a diesel prime mover to a finance company, Esanda Ltd, for hire to the plaintiff, warranting that the engine had been fully reconditioned. The respondent did not recondition the engine, despite its knowledge that the appellant intended to use the vehicle in business. In July 1978, the appellant learned that the engine had not been fully reconditioned at the time he bought it and that it was very defective. The respondent would not rectify the state of the engine, although pressed by the appellant to do so. In addition, the appellant could not afford to pay the amount, approximately $8000, required at that time to put the engine in the warranted condition. Therefore, until the end of 1979, the appellant used the vehicle, within his own state only, and his business was carried on at a loss. At the end of 1979, the vehicle broke down and was repossessed by the finance company, Esanda Ltd. The appellant sued the respondent for damages for breach of warranty. The damages awarded to the appellant included a sum for loss of earnings for the period of four years after the date of purchase, on the footing that it was the period for which the engine would have been expected to operate efficiently if it had been fully reconditioned. The respondent appealed to the Full Court of the Supreme Court, which held that the appellant could not recover for loss of profits after the condition of the engine had been discovered in July 1978. The appellant subsequently appealed to the High Court against the reduction of damages. Gibbs CJ and Brennan J were of the opinion that it was within the reasonable contemplation of the parties, at the time when the contract was made, that if the warranty was broken the appellant might lose the profits which he might otherwise have made in the business of an interstate haulier and that any such loss of profits should be recoverable as damages for breach of warranty.61 Their Honours also held that the appellant should not be debarred from claiming such part of the damages as was attributable to his failure to take the necessary steps in mitigation when he was unable to take those steps because of his lack of means. Further, the appellant’s duty

57 Wenham v Ella (1972) 127 CLR 454, 460–461, 463–464, 472. 58 Kargotich v Mustica [1973] WAR 167, 169–171; Saad v TWT Ltd [1998] NSWSC 282;Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, 623–624, 654. 59 Beneficial Finance Corp Ltd v Sharker (1993) 32 NSWLR 161, 172–173. 60 (1986) 69 ALR 11. 61 Their Honours applied Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145; Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528; C Czarnikow Ltd v Koufos [1969] 1 AC 350; Wenham v Ella (1972) 127 CLR 454.

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to mitigate did not require him to do what was unreasonable.62 Their Honours concluded that in the present case, the financial difficulties of the appellant were largely brought about by the actions of the respondent. Interestingly, Wilson, Deane and Dawson JJ considered the case as not being a case of mitigation of damage at all, but that it called simply for a determination of that point in time beyond which any damage suffered by the appellant could not have been within the reasonable contemplation of the parties as flowing from the breach. In other words, the issue was one of remoteness of loss.63 This illustrates the close relationship between the rules on mitigation and those on remoteness, especially where what is ‘within reasonable contemplation’ and what is ‘reasonable’ mitigation are treated as interchangeable concepts. For example, in Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B),64 Lord Wright commented (with reference to the decision of the House of Lords in Muhammad Issa el Sheikh Ahmad v Ali 65): damages consequent on impecuniosity were held not too remote because … the loss was such as might reasonably be expected to be in the contemplation of the parties as likely to flow from breach of the obligation undertaken.66

In addition, Wilson, Deane and Dawson JJ also concluded that the case at hand was not a case where the appellant was locked into a situation from which he could not escape. It was their Honours’ opinion that in July 1978, the appellant could have terminated the hiring by returning the vehicle in accordance with s 12 of the Hire-Purchase Act 1959 (Qld). Similarly, Gibbs CJ held that the appellant was under no compulsion to go on losing money. Therefore, in the calculation of damages, it was not wrong to hold that the respondent should not be charged with actual losses incurred by the appellant after his discovery of the breach of warranty, although the appellant was entitled to any loss of profit suffered after that date, if proved.

26.3.4  Attempts at mitigation which increase loss Where a plaintiff takes reasonable steps to mitigate the loss, the plaintiff can recover for loss incurred in taking those reasonable steps. Importantly, this will be the case even when the resulting damage is greater than it would have been had the mitigating steps not been taken.67 As Samuels JA noted in his judgment in Simonius Vischer & Co v Holt & Thompson:68 Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency 62 Their Honours applied Dodd Properties v Canterbury City Council [1980] 1 WLR 433; [1980] 1 All ER 928; Perry v Sidney Phillips & Son [1982] 3 All ER 705; [1982] 1 WLR 1297; distinguished Liesbosch, Dredger v Edison, SS (Owners) [1933] AC 449. 63 Their Honours applied Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196; Trans Trust SPRL v Danubian Trading Co Ltd [1952] 2 QB 297. 64 [1949] AC 196. 65 (1947) AC 427. 66 [1949] AC 196, 224. 67 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322. 68 Ibid, 355.

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has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken (emphasis added).

Ke y p o ints for re v ision A plaintiff who has suffered loss due to the defendant’s breach has the onus to prove the extent of that loss. The existence of a causal connection between the defendant’s breach of contract and the plaintiff’s loss is a question of fact. If a particular event intervenes to break the chain of causation between the first alleged breach of contract and the loss, the court will scrutinise each event closely. A causal link by itself is an insufficient prerequisite to the recovery of damages. In practice, if there is no express clause in the contract dealing with the assessment of damages, the law provides a standard test which specifies the extent of responsibility implicitly undertaken by the promisor. There are two grounds for holding that loss of the kind which occurred should have been within the defendant’s contemplation: first, if a reasonable person would have realised that a loss was likely to occur as a usual consequence of such a breach; second, if the defendant should have realised that such a loss was likely to occur on the basis of the defendant’s actual knowledge of the circumstances. A plaintiff cannot recover damages for any part of the plaintiff’s loss caused by the defendant’s breach if the claimant could have avoided the loss by taking reasonable steps.

problem-solving practice Printing Quick Pty Ltd provides a range of services and products to its customers. Recently it has successfully negotiated a contract with one of the biggest political parties in Australia, the Advance Australia Party. Under this very lucrative contract, Printing Quick agrees to produce all Advance Australia’s campaign-related pamphlets, brochures and banners. In order to fulfill its existing orders as well as any new orders, including the new orders for campaign materials, Printing Quick enters into a contract with High Tech Printing Pty Ltd for the procurement of a new cutting-edge printer which will halve Printing Quick’s printing production time. All the existing printers are still functional and will continue to be used by Printing Quick. Due to late delivery of the printer from Japan, High Tech Printing is not able to deliver it to Printing Quick in accordance with the time stipulation in the contract. This resulted in approximately five months’ delay. Printing Quick is now seeking to claim loss of business profits which it would have made had the printer been delivered in accordance with the stipulated time. It argues that High Tech Printing knew that Printing Quick needed the printer and in fact, during negotiations, Printing Quick’s employee mentioned the need to put the printer into use in the shortest space of time.

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Printing Quick further argues that a very large number of new customers could have been served and that a number of other highly lucrative contracts would have been available to them had there been a timely delivery of the printer from High Tech Printing. In addition, Printing Quick claims that it should also be compensated for the repair costs of one of its existing printers which broke down because it exceeded its functional capacity, due to being extensively used during the period when the contract with Advance Australia Party was in place. Advise Printing Quick as to its ability to claim damages from High Tech Printing.

GUIDE TO ANSWERING This guide to answering utilises the IRAC methodology discussed in Chapter 23. 1 Identify the issue(s) in the case. The gist of the dispute is whether High Tech Printing is liable to compensate Printing Quick for its losses. In order to resolve this issue, two important questions need to be analysed: • Is High Tech Printing liable for the breach? • What will be the remedies for the breach? 2 Succinctly introduce the relevant principles of law and authority that are applicable to the problem. What are the relevant principles/rules/exceptions/tests which will be applied? • Is High Tech Printing liable for the breach? Consider termination for delay in performance (Carr v J A Berriman Pty Ltd (1953). • What will be the remedies for the breach? Consider the following in relation damages: • Proving compensable losses (Commonwealth v Amann Aviation Pty Ltd ); • Purpose of damages (Robinson v Harman); • Causation (March v E & M H Stramare Pty Ltd ); • Remoteness (Hadley v Baxendale); • Mitigation (Bak v Glenleigh Homes Pty Ltd; Simonious Vischer & Co v Holt & Thompson; Shindler v Northern Raincoat Co Ltd ). 3 Apply those principles to the facts: How should the law be applied to the facts? • From the facts, it is clear that a contract was entered into by Printing Quick and High Tech Printing for the supply of a new printer. It is also clear that High Tech Printing breached this contract, as it failed to perform its contractual obligation as it fell due. • The appropriate remedy in this case would be damages. • The objective of damages is to place the innocent party, in monetary terms, in the same position they would have been in if the contract had not been breached. Here, it means compensating Printing Quick for its losses. • Printing Quick has to first identify its losses. It then has to show that these losses were caused by the breach. • Furthermore, the losses must not be too remote; that is, they must: • arise naturally according to the usual course of things from the breach; or • be such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as a probable result of the breach. • Issues of remoteness may arise in relation to the loss of business opportunities and profits. This must be discussed fully.

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• Finally, Quick Printing’s duty to mitigate its losses should also be discussed. Should it perhaps have rented another printer while waiting for the delivery from High Tech printing? Discuss all the reasonable measures that Quick Printing could and, in fact did, take to mitigate its losses. 4 Conclude: • On the balance of probabilities, which arguments/principles of law will be likely to prevail? • Ask yourself whether you have answered the question and fully advised Quick Printing.

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27

Restitution and debt

Chapt e r o v e rv i e w 27.0

Introduction  539

27.1

Restitution and contract provisions   539

27.2

The unjust enrichment principle   540 27.2.1 Recovery of the value of non-monetary benefits   540 27.2.2 Recovery of money   540 Failure of consideration   540 Mistake  542 27.2.3 Defences to claims for money   542

27.3

Debt  544 27.3.1 The doctrine of substantial performance   544

27.4

Deposits  546

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Restitution and debt

• 27.0 Introduction Without an express or implied right to payment under a contract to enable a plaintiff to claim the payment as a contract debt, the plaintiff must, in respect of a benefit conferred under the contract to the defendant, make a claim for damages or, alternatively, restitution. Restitution is, therefore, an additional or an alternative source of rights and obligations for contracting parties. Having said that, it is important to note that the law of restitution is concerned with whether a plaintiff can claim a benefit from the defendant, rather than whether the plaintiff can be compensated for loss suffered per se. It is therefore distinct from remedies which are traditionally available in contract, as recognised by Lord Wright in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd:1 It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is, to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep. Such remedies in English law are generally different from remedies in contract or in tort, and are now recognised to fall within a third category of the common law which has been called quasi-contract or restitution.2

• 27.1 Restitution and contract provisions It follows that restitutionary remedies are available where the defendant has been unjustly enriched at the expense of the plaintiff. This might be the case because the plaintiff—in a  connection with a contract which was never formed, or a contract which was invalid when formed, or a contract which was terminated—has paid over money or conferred a non-monetary benefit to the defendant. Therefore, one important characteristic of a restitutionary liability is its ability to be imposed by the law irrespective of a contractual right of recovery; namely, the agreement between the parties. If, on the other hand, the parties have came up with an agreement to cover such circumstances, Restitutionary then this agreement will prevail, illustrating the subordination of remedies are available where the defendant has the law of restitution to the law of contract.3 Therefore, in Pavey & been unjustly enriched 4 Matthews Pty Ltd v Paul, Deane J stated that restitution is available at the expense of the for a claim for reasonable remuneration for work done under an plaintiff. unenforceable building contract simply because: in such a case, it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution.5

1 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32. 2 Ibid, 61. 3 Guiness Plc v Saunders [1990] 2 AC 663, 697–698 per Lord Goff; Taylor v Motoability Finance Ltd [2004] EWHC 2619 (Comm), 23 per Cooke J; Lumbers v W Cook Builders Pty Ltd [2008] HCA 27, para 46 per Gleeson CJ. 4 (1987) 162 CLR 221. 5 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256.

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• 27.2 The unjust enrichment principle There are two common types of restitutionary claims based on unjust enrichment, namely recovery of the value of non-monetary benefits transferred to the defendant and recovery of money paid to the defendant. The High Court has unequivocally indicated that the basis of recovery in such cases is a general duty imposed by law to make restitution for unjust enrichment.6 Cases where restitutionary remedies have been sought include those where a defendant has received and accepted a benefit in circumstances where: (i) the contract is said to be unenforceable because of lack of compliance with the writing requirements; (ii) the contract has become frustrated; (iii) money has been paid as a result of a mistake of law; (iv) there has been illegality or the presence of some vitiating factor, such as unconscionability or misrepresentation; (v) in consequences of the receipt of the benefit, a party has become unjustly enriched. Other cases include where the contract is illegal, or where it has been terminated as a result of non-fulfilment of contingent condition or breach by either party.

27.2.1  Recovery of the value of non-monetary benefits In the absence of a contract between the parties, the retention of benefits conferred to a defendant may constitute unjust enrichment. Restitution by way of an award of the reasonable value of the benefits conferred has therefore been allowed in cases where a contract was mistakenly assumed to exist.7 Similarly, restitution may be available where services or other benefits were provided in anticipation of the formation of a contract that did not eventuate. In such cases, an unjust enrichment arises from the free acceptance of such benefits.8

27.2.2  Recovery of money Failure of consideration Where there is a breach of a condition or a serious intermediate term in a contract, the innocent party may elect to affirm the contract or terminate it. If the innocent party elects to terminate the contract, they may have concurrent or alternative rights to recover damages for breach of contract or restitutionary relief for unjust enrichment.9 In order to pursue such restitutionary 6 The modern law of restitution therefore subsumes all claims previously classified as quasi-contractual: see Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; ANZ Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Baltic Shipping Co v Dillon (1993) 176 CLR 344; Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68. 7 Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26. 8 See for example Fensom v Cootamundra Racecourse Reserve Trust [2000] NSWSC 1072 (caretaker of racecourse entitled to restitution in respect of improvements carried out in anticipation of employment); Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd [2002] VSC 248 (consultancy services provided in anticipation of hope for contract); Dowell v Custombuilt Homes Pty Ltd [2004] WASCA 171 (equipment transferred in anticipation of sale of business); Hughes v Molloy [2005] VSC 240 (tenant’s improvements to house in anticipation of purchase). 9 The recovery of a deposit can be justified on either basis, although the courts have inclined to prefer a restitutionary analysis. Restitutionary claims could also arise in the context of recovery of money where a contact has been frustrated.

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relief, the plaintiff must establish that there has been a total failure A total failure of of consideration. A total failure of consideration arises where a consideration arises payment is made under a contract in return for a performance where a payment is made that has not eventuated and will not eventuate. This is true even if under a contract in return for a performance that no contractual right to the performance exists, for example has not eventuated and because  the contract was unenforceable or invalid from the will not eventuate. This is outset.10 true even if no contractual right to the performance It should also be noted that the right to restitution extends to exists, for example the party in breach. For example, a buyer of land whose default because the contract was caused the seller justifiably to terminate the contract of sale may unenforceable or invalid from the outset. recover instalments that have been paid, on the basis that the consideration for their payment—the transfer of title—has failed. Where there is a partial performance of a contract, the first question to be asked is whether the plaintiff has performed a part of the contract which is to be separately paid for by the defendant. For example, if a seller under an instalment goods contract has made deliveries which have been accepted by the buyer, restitution is not relevant as an action for the agreed price—namely, an action for debt—is available even if the contract has been validly terminated by the buyer for breach by the seller. This is because the buyer retains the right to claim damages for breach. As the law currently stands, unless a particular contract is severable and the payment was made for the receipt of a severable part of the defendant’s performance obligations, there is no unjust enrichment if the failure of consideration is less than total.11 For example, in Baltic Shipping Co v Dillon (The Mikhail Lermontov),12 a passenger who paid the whole fare for a cruise in advance was not entitled to restitution when the vessel sank as after eight of the promised fourteen days, there was only a partial failure of consideration from the defendant. The passenger could only claim compensation for the loss which she suffered instead of the entire sum of the trip: The consideration in the present case was the provision of a holiday experience. It did not wholly fail. Baltic provided and Dillon accepted and enjoyed eight complete days of the cruise. The catastrophe of the shipwreck undoubtedly outweighed the benefits of the first eight days. It did not, however, alter the fact that those benefits, which were of real value, had been provided, accepted and enjoyed.13

In a case involving severable consideration, Roxborough v Rothmans of Pall Mall Australia Ltd,14 the plaintiffs were tobacco retailers who bought cigarettes from the defendant, a wholesaler. The plaintiffs brought an action to recover amounts which they had paid to the defendant to meet the licence fees imposed on the sale of tobacco products by a particular piece of New South Wales legislation. The amounts so paid were a component of the price charged by the defendant for cigarettes, but they were separately identified on its invoices. The relevant Act was later declared unconstitutional by the High Court, and this essentially meant that the fees ceased to be payable. At the time, the defendant held funds paid by the plaintiffs on account of licence fees that had not yet been passed on to the New South Wales Government. The plaintiffs sued to recover these funds. The defendant argued that the funds could not be recovered as there had been no total failure of consideration. A majority of the High Court held that the amounts claimed had been 10 11 12 13 14

Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59. Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68. (1993) 176 CLR 344. Ibid, 378–379 per Dawson and Deane J J; see also 350–351 per Mason CJ. [2001] HCA 68.

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Contract Law: Text and Cases

paid for a severable consideration, namely the payment of licence fees, and could therefore be recovered. In addition, failure of consideration can result from the termination for a contract. Therefore, where a contract has been terminated for non-fulfilment of a condition—hence depriving a party who has paid over money of the consideration for the payment that would otherwise have been provided—the amount paid over is prima facie recoverable in restitution.15

Mistake Restitution will prima facie be available for a party who pays money to another as a result of a mistake. This is particularly the case where the retention of that money would amount to the holder being unjustly enriched. In David Securities Pty Ltd v Commonwealth Bank of Australia,16 David Securities argued that it was entitled to restitution of money it had repaid to the Commonwealth Bank under a clause in a loan contract that was void under the Income Tax Assessment Act 1936 (Cth). The payment was made under the mistaken belief that the clause was valid. The High Court was of the opinion that, similar to a mistake of fact, a mistake of law can, prima facie, give rise to a restitutionary right for recovery of a payment.17 A plaintiff in such an action needs only to establish the fact of the mistake and a causal connection between the mistake and the payment. Moreover, the mistake is not required to be fundamental and it can include positive incorrect belief as well as ignorance and other situations.18 Once the plaintiff has shown the necessary causal link, the defendant can bring evidence to rebut the inference of unjust enrichment by showing that the retention of the money is not unjust, for example because good consideration was in fact received by the plaintiff, or because counter-restitution is due to the payee.19 This is sometimes referred to as the ‘good consideration’ defence. Restitution will prima facie be available for a party who pays money to another as a result of a mistake, particularly where the retention of that money would amount to the holder being unjustly enriched.

27.2.3  Defences to claims for money In addition to the good consideration defence, a recipient of a payment made in connection with a contract can rely on a number of other defences to displace an inference of unjust enrichment: (i) voluntariness; (ii) change of position; (iii) double recovery.

15 Findlay & Co Stockbrokers (Underwriters) Pty Ltd v Carminco Gold & Resources Ltd [2007] FCA 573, [86]–[87]. 16 (1992) 175 CLR 353. 17 Based on the facts of the case, the High Court held that it had not been proved that the payment had been caused by the mistake, as it might have been paid to ensure a rollover of the loan. The High Court therefore remitted the issue to the primary judge: ibid, 368. 18 Ibid, 375. 19 Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6, distinguished in Lactos Fresh Pty Ltd v Finishing Services Pty Ltd (No 2) [2006] FCA 748.

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Restitution and debt

First, a payment is not recoverable if it is made voluntarily; that is, if the payor is prepared to assume the validity of the obligation or make the payment irrespective of the validity of the obligation, rather than contest the claim for payment.20 Second, the defence of change of position is extremely important as it is ‘necessary to ensure that enrichment of the recipient is prevented only where it would be unjust’.21 Therefore, if the payee can point to expenditures or commitments which can be specifically ascribed to the payment, then the defence of change of position can be pleaded. Third, in cases where there is a total failure of consideration, for instance because of a breach of contract, there cannot be recovery of the same sum twice over—once as damages for loss of money, and once as restitution. Thus in Baltic Shipping Co v Dillon (The Mikhail Lermontov),22 the passenger sued for breach of contract, claiming damages for distress and disappointment as well as restitution of the fare. The High Court held that the claim for recovery of the fare was not a claim for breach of contract but an action for restitution, based on failure of consideration.23 The passenger could not therefore claim restitution of the full fare as well as damages for loss of the benefit for which she had been paid at the same time. The rule against double recovery also operates in the assessment of damages for breach of contract. In some cases, the recipient of payment may argue that the payor has actually recovered the amounts being paid to the recipient and hence restitution should not be available. For instance, in Roxborough v Rothmans of Pall Mall Australia Ltd,24 the Court rejected the defendant’s argument that the plaintiffs had already recovered the amounts in question by passing them on to consumers as a component of the price of cigarettes. The Court applied the statement of Mason CJ in Commissioner of State Revenue (Vic) Royal Insurance Australia Ltd:25 Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss. Instead it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched … the subtraction from the plaintiff’s wealth enables one to say that the defendant’s unjust enrichment has been ‘at the expense of the plaintiff’, notwithstanding that the plaintiff may recoup the outgoing by means of transaction with third parties.26

review questions 1 Explain the availability of restitutionary remedies. Are these remedies dependent on the existence of a contract? 2 Provide an example of a party’s failure to provide consideration in a transaction. Explain the effect of this failure.

20 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 372; compare 397–399, 403; Hookway v Racing Victoria Ltd [2005] VSCA 310, [22]–[47] per Ormiston JA. Mere carelessness or negligence will not prevent recovery: Simos v National Bank of A’asia Ltd (1976) 10 ACTR 4; Commercial Bank of Australia Ltd v Younnis [1979] 1 NSWLR 444, 450; however, recklessness or indifference may prevent recovery: South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65, 75. 21 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 385. 22 (1993) 176 CLR 344. 23 Ibid, 375, 377, 380 per Deane and Dawson JJ; see also 359 per Mason CJ, 387 per Gaudron J. 24 [2001] HCA 68. 25 (1994) 182 CLR 51. 26 Ibid, 75.

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• 27.3 Debt Where a breach of contract involves the non-payment of a sum of money due under the contract, the innocent party can bring an action to recover the sum as a debt. The action can be quite speedy, as the judgment for a debt can usually be obtained in default of appearance and on the basis of minimal evidence. Moreover, as the onus to prove that a debt has been paid lies with the defendant, there is no necessity for the innocent party to prove loss.27 Therefore, if A contracts to sell their car to B and proceeds to transfer ownership to B on the date stipulated, but B fails to pay the price, A can maintain an action in debt for the agreed price. What amounts to sufficient performance of a plaintiff’s contractual obligations to entitle the plaintiff to claim payment of a debt will depend on the distinction between entire and divisible obligations, and on the doctrine of substantial performance. An ‘entire obligation’ is one that must be wholly performed for a plaintiff to be entitled to recover any of the payment for that performance specified in the contract. On the other hand, where a contract is divisible into corresponding segments or milestones, the plaintiff will be entitled to payment for each segment or part of the work which has been fully performed.28

27.3.1  The doctrine of substantial performance The doctrine of substantial performance may allow recovery of the contract price where a plaintiff has substantially performed their obligations under the contract. The level of performance sufficient to amount to substantial performance was considered in Hoenig v Isaacs,29 where an appeal from Sir Lionel Reach, the official referee, was brought to the UK Court of Appeal. The plaintiff was an interior decorator and furniture designer. The defendant engaged the plaintiff to decorate his flat and to supply it with furniture—including bedstead, wardrobe and bookcase fitments—for a sum of £750. The plaintiff argued that he had carried out the work in compliance with the contract and requested payment of £350, being the balance of the money owing under the contract. In contrast, the defendant alleged that the plaintiff had failed to perform his contract, or, alternatively, that the work was done The doctrine of negligently, unskilfully and in an incompetent manner. The official substantial performance referee held that the door of a wardrobe required replacement, may allow recovery and that a bookshelf, which was too short, would have to be of the contract price where a plaintiff has remade. The official referee was nevertheless of the opinion that substantially performed there had been a substantial compliance with the contract and their obligations under the that the defendant was liable for £750 less the cost of rectification contract. of the defects.

27 Young v Queensland Trustees Ltd (1956) 99 CLR 560; see also McCarthy v McIntyre [1999] FCA 784; Cavasinni v Cavasinni [2001] NSWSC 223; Mackenzie v Albany Finance Ltd [2003] WASC 100, [7]; Evalena Pty Ltd v Rising Sun Holdings Pty Ltd [2003] NSWSC 622, [157]; Downey v Crawford [2004] FCA 1264, [203]. 28 This type of arrangement is illustrated in Steele v Tardiani (1946) 72 CLR 386. The case also discusses the situations where, even though the relevant part of a contract was not substantially performed, payment for the work done might be claimed on the basis of restitution. 29 [1952] 2 All ER 176.

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Restitution and debt

Hoenig v Isaacs [1952] 2 All ER 176 Denning LJ at 180: This case raises the familiar question: Was entire performance a condition precedent to payment? That depends on the true construction of the contract … In determining the issue the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not [181] as a condition. It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or, alternatively, set them up in diminution of the price. The measure is the amount which the work is worth less by reason of the defects and omissions, and is usually calculated by the cost of making them good. It is, of course, always open to the parties by express words to make entire performance a condition precedent. A familiar instance is when the contract provides for progress payments to be made as the work proceeds, but for retention money to be held until completion. Then entire performance is usually a condition precedent to payment of the retention money, but not, of course, to the progress payments. The contractor is entitled to payment pro rata as the work proceeds, less a deduction for retention money. But he is not entitled to the retention money until the work is entirely finished, without defects or omissions. In the present case, the contract provided for ‘net cash, as the work proceeds; and balance on completion’. If the balance could be regarded as retention money, then it might well be that the contractor ought to have done all the work correctly, without defects or omissions, in order to be entitled to the balance. But I do not think the balance should be regarded as retention money. Retention money is usually only ten per cent, or 15 per cent, whereas this balance was more than 50 per cent. I think this contract should be regarded as an ordinary lump sum contract. it was substantially performed. The contractor is entitled, therefore, to the contract price, less a deduction for the defects. Even if entire performance was a condition precedent, nevertheless the result would be the same. Because I think the condition was waived. It is always open to a party to waive a condition which is inserted for his benefit. What amounts to a waiver depends on the circumstances. If this was an entire contract, then, when the plaintiff tendered the work to the defendant as being a fulfilment of the contract, the defendant could have refused to accept it until the defects were made good. But he did not refuse to accept the work. On the contrary, he entered into possession of the flat and used the furniture as his own, including the defective items. That was a clear waiver of the condition precedent. Just as in a sale of goods the buyer who accepts the goods can no longer treat a breach of condition as giving

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a right to reject but only a right to damages, so also in a contractor for work and labour, an employer who takes the benefit of the work can no longer treat entire performance as a condition precedent, but only as a term giving rise to damages. The case becomes then an ordinary lump sum contract governed by the principles laid down in Mondel v Steel (1841) 8 M & W 858; 151 ER 1288 and H Dakin & Co Ltd v Lee. The employer must, therefore, pay the contract price subject to a deduction for defects or omissions.

Somervell LJ and Romer LJ agreed that the appeal be dismissed.

• 27.4 Deposits In some cases, a party may make the payment of a particular sum of money, such as a deposit, independent of performance of the contract. A deposit is a percentage of the overall purchase price payable by a purchaser on entering into a contract of sale. The deposit is paid by the purchaser in return for the vendor entering into the transaction. If the transaction goes ahead, the deposit is treated as part of the purchase price. In contract, if the vendor, in breach of contract, does not complete the transaction, the purchaser will generally be entitled to recover the deposit. If the transaction is not completed by reason of the default of the purchaser, the vendor will retain the deposit. This right to retain the deposit following breach by the purchaser is not conditional upon the subsequent completion of the transaction. Therefore in Bot v Ristevski,30 the Supreme Court of Victoria held that the vendor, who discharged the contract in consequence of the purchaser’s repudiation of it, could recover a deposit that should have been paid before the contract was discharged.

Ke y p o in ts for re v ision Restitution is an additional or an alternative source of rights and obligations for contracting parties. There are two common types of restitutionary claims based on unjust enrichment: recovery of the value of non-monetary benefits transferred to the defendant and recovery of money paid to the defendant. A total failure of consideration arises where a payment is made under a contract in return for a performance that has not eventuated and will not eventuate. Where there is a partial performance of a contract, the first question to be asked is whether the plaintiff has performed a part of the contract which is to be separately paid for by the defendant. Where a breach of contract involves the non-payment of a sum of money due under the contract, the innocent party can bring an action to recover the sum as a debt. The doctrine of substantial performance may allow recovery of the contract price where a plaintiff has substantially performed their obligations under the contract.

30 [1981] VR 120.

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Restitution and debt

problem-solving practice In Lumbers v W Cook Builders Pty Ltd (in liquidation), why did the High Court decide that there was no unjust enrichment and hence preclude a successful quantum meruit claim?

GUIDE TO ANSWERING You must first read the judgment of this case. Make note of the following matters: • citation, including the name of the case; • court, including single judge, Full Court or Court of Appeal; • brief statement of the material facts (usually found in the headnote) • procedural history (if required); • grounds for appeal and/or issues to be decided by the court; • summary of the court’s analysis of law (usually found in the headnote); • principle(s) of law to be applied; • how the principles(s) of law were applied to the facts; • the decision of the court; • any divergence(s) of judges’ opinions or decisions; • the orders made by the court. When analysing the decision of the court, you should ask the following questions: • Was the court’s decision appropriate? • Does the decision change or conform with existing law? • What will be the impact of this decision on existing law? • Was the reasoning consistent with previous reasoning in similar cases? Did the court adequately justify its reasoning? • Was its interpretation of the law appropriate? • Did the court consider all or omit some issues and arguments? And, if there was omission, does this weaken the merit of the decision? • What are the policy implications of the decision? Are there alternative approaches or features which could lead to more appropriate public policy in this area? • If the decision creates legal precedent, or conversely, upholds legal precedent, what does that  mean? What are the implications for the legal and public policy contexts in which this ­decision sits? Sometimes you might also be able to find case notes for a particular case. They usually provide you with summary analysis of the decision of a particular case, for example: • Angus O’Brien, ‘The Relationship Between the Laws of Unjust Enrichment and Contract—Case Note; Lumbers v W Cook Builders Pty Ltd (in liq)’ (2011) 32 Adelaide Law Review 83; • Michael Bryan, ‘Restitution for Services and the Allocation of Contractual Risk—Case Note; L­ umbers v W Cook Builders Pty Ltd (in liq)’ (2009) 33 Melbourne University Law Review 320. Once you have conducted a critical analysis and evaluation of the case, remember to answer the question!

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EXAMPLE BRIEF FACTS The Lumbers engaged W Cook & Sons Pty Ltd (‘Sons’) to construct an expensive house on their land. The contract was not in writing and no price was agreed upon. During construction, Sons entered into a separate oral contract with an associated company, W Cook Builders Pty Ltd (‘Builders’), under which Builders was to perform much of the work under the original building contract between the Lumbers and Sons. The Lumbers were unaware of this contract and at all relevant times, they had no knowledge that Builders was in fact involved in the construction. Builders completed the work in accordance with its contract with Sons. The Lumbers made certain payments to Sons, but Sons paid Builders less than the amount to it under the subcontract. The house was eventually completed to the satisfaction of the Lumbers. Despite this, Builders remained underpaid. Builders eventually went into insolvent liquidation and its liquidator commenced proceedings against both Sons and Lumbers. At trial, Builders argued unsuccessfully that there had been an assignment of Sons’ contract with Lumbers to Builders. On appeal to the Full Court of the Supreme Court of South Australia, Builders submitted a claim for restitutionary quantum meruit for work or labour done or money paid. A majority of the court (Sulan and Layton JJ; Vanstone J dissenting) upheld the claim. The Lumbers appealed. COURT’S REASONING First, Builders failed to establish how the facts gave rise to a quantum meruit claim for work and labour done or money paid. This was because Sons, not the Lumbers, had requested Builders to complete the relevant work. This therefore fails to satisfy an essential element of a claim for reasonable remuneration for work and labour done; namely that there was a request by the defendant to the plaintiff to do the work. Second, the restitutionary claim was unavailable to Builders as it would have interfered with the contractual allocation of risk between the parties. Both the Lumbers and Sons had undertaken to observe each other’s rights and obligations under their contract. They assumed those rights and obligations. To impose on the Lumbers an obligation to instead pay a third party would constitute a radical alteration of the agreement struck between the Lumbers and Sons. Third, the joint judgment of Gummow, Hayne, Crennan and Kiefel JJ appears to focus on the first element of the unjust enrichment framework. Their Honours found that the Lumbers were not enriched as either they had paid Sons, or even if they had not, they were liable under their contract with Sons. The Lumbers could not therefore be said to have received a windfall. Gleeson CJ appeared to focus on whether there has been an enrichment at the plaintiff’s expense (here, at Builders’ expense). His Honour found that as the Lumbers had not requested or accepted any benefit from Builders, they could not have been enriched at the expense of Builders. If they were enriched, it was actually at the expense of Sons because Sons remained liable to Builders in contract. It would seem that the High Court reaffirmed the established principle that restitutionary liability will not be allowed to upset contractual liability and that the mere entry into a contract implicitly limits the contracting parties’ rights to pursue a restitutionary remedy against third parties. In short, liability in unjust enrichment cannot interfere with the contractual allocation of risk, as the law of unjust enrichment is ‘subsidiary’ to the law of contract.

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28

Equitable remedies

Chapt e r o v e rv i e w 28.0

Introduction  550

28.1

Specific performance  550 28.1.1 Jurisdictional requirements  550 Consideration  550 Enforceability  551 Inadequacy of common law damages   551 28.1.2 Discretionary requirements for an order of specific performance  552 (i)

Fairness  552

(ii) Hardship to the defendant   552 (iii) Breach of contract by the plaintiff   553 (iv) R  eadiness and willingness of the plaintiff to perform  553 (v) Contracts for personal services   556 (vi) Constant supervision by the court   557

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28.2

Injunctions  558

28.3

Declarations  559

28.4

Equitable damages  559

• 28.0 Introduction In contrast to common law remedy of damages, which is designed to provide monetary compensation for the plaintiff for losses resulting from a breach of contract by the defendant, the equitable remedies of specific performance and injunction are designed to force a defendant to perform their contractual obligations. There are also other equitable remedies, such as the issuing of a declaration or equitable damages, which have slightly different characteristics to those of specific performance and injunctions. These remedies are curial in nature and can be ordered in the absence of a breach of contract as long as the circumstances justify intervention by a court of equity.1

• 28.1 Specific performance The order of specific performance is appropriate where the contractual obligation is positive; that is, where the defendant is required to perform some positive act (a positive covenant). This is to be distinguished from a negative contractual obligation, which involves the defendant refraining from performing a certain act (a negative covenant). Similar to all equitable remedies, the order for specific Similar to all equitable performance is discretionary and hence a plaintiff has no equitable remedies, the order for right to the order simply because a breach of contract has occurred. specific performance is The court can refuse specific performance on the basis that it discretionary and hence a plaintiff has no equitable has no jurisdiction to hear the claim, or it can refuse to grant the right to the order simply order in the exercise of its discretion. In either case, if the order is because a breach of refused, the plaintiff is limited to pursuing their claim for damages contract has occurred. at common law.

28.1.1  Jurisdictional requirements There are three essential requirements for a decree of specific performance: consideration, enforceability, and the inadequacy of common law damages.

Consideration The contract must have been made for valuable consideration.2 This is in line with the equitable maxim: ‘Equity will not assist a volunteer.’3 Hence a voluntary, one-sided covenant is not enforceable in equity. This is the case even if the covenant is set out in a deed.4 1 2 3 4

Turner v Bladin (1951) 82 CLR 463; Hasham v Zenab [1960] AC 316. Jefferys v Jefferys (1841) Cr & Ph 138; 41 ER 443. Corin v Patton (1990) 169 CLR 540, 557. Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516, 556.

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In addition, for the consideration to be valuable it must have ‘a real and substantial value, and not one which is merely nominal or trivial or colourable’.5 Therefore, a nominal sum of money such as $1 has been found not to be valuable consideration for the purposes of this rule.6

Enforceability In addition to the requirement for the contract to be supported by consideration before the court orders specific performance, the contract in question must also be enforceable; that is, it cannot be invalid at law. For example, it must not have been made for an illegal purpose, and there must be no unfair conduct on the part of the plaintiff, such as misrepresentation or duress. In cases involving non-compliance with statutory requirements of writing, specific performance will only be ordered where it is considered inequitable or unconscionable for the defendant to rely on the statute under the equitable doctrines of part performance or equitable estoppel.7

Inadequacy of common law damages The most important restriction on the availability of specific performance is the requirement that damages at common law must be an inadequate remedy for breach.8 In most cases involving breach of contract, damages at common law would provide adequate reparation; for instance, where the contract is one for the sale of The most important goods which are easily procurable in the market, or for the delivery restriction on the of stocks or shares for which there is a free market. However, there availability of specific are other circumstances where an award of damages might be performance is the requirement that damages inadequate, such as where a vendor refuses to convey an interest at common law must be 9 in land. The inadequacy of damages would defeat the just and an inadequate remedy reasonable expectations of the plaintiff. This in turn gives rise to for breach. the necessity for the remedy of specific performance.10 The necessity may also arise in cases where a purchaser refuses to proceed with a purchase of land, although in such cases it may be futile to contemplate specific performance if, for example, the purchaser is under financial difficulty. In Pasedina (Holdings) Pty Ltd v Khouri,11 it was found that the difficulty in finding purchase money did not of itself constitute hardship so as to preclude an order for specific performance.

5 Barton v Official Receiver (1986) 161 CLR 75, 86. 6 R Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies, 4th ed., LexisNexis (2001), p. 654; see also Nurdin & Peacock plc v DB Ramsden & Co Ltd [1999] 1 EGLR 119. 7 See for example Regent v Millett (1976) 133 CLR 679; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 8 Beswick v Beswick [1968] AC 58. 9 Where a vendor repudiates a contract for the sale of land, a purchaser may sue for specific performance before the time agreed for completion of the agreement (settlement): Katz v Jones [1967] NZLR 861. In Grieve v Enge [2006] QSC 37, Cullinane J ordered specific performance in favour of a purchaser of land even though the land had been registered in a third party’s name. The third party was held to have fraudulently purchased the land knowing of the plaintiff’s rights. In Consolidated Credit Network Pty Ltd v Sonenco Apartments Pty Ltd [2001] NSWSC 1000, Windeyer J characterised a contract for the purchase of units in the course of construction as a contract for sale of land and ordered specific performance because damages would not have redeemed the purchaser’s commercial reputation with the many buyers to whom it had agreed to sell the units. 10 Dougan v Ley (1946) 71 CLR 142; see also L Aitken, ‘When are Damages an Adequate Remedy?’ (2004) 78 ALJ 544. 11 (1977) 1 BPR 9460.

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The justification for ordering specific performance in cases involving the purchaser’s default is that the vendor has legitimate interest in divesting themselves of the land. The same argument may also justify an order for specific performance against a purchaser of a business.12

28.1.2  Discretionary requirements for an order of specific performance The court’s discretion in ordering the remedy of specific performance is governed by a number of well-established rules which define those circumstances where it would be inappropriate to exercise the discretion. These relate to: (i) (ii) (iii) (iv) (v) (vi)

fairness; hardship to the defendant; breach of contract by the plaintiff; readiness and willingness of the plaintiff to perform; contracts for personal services; degree of supervision by the court.

(i) Fairness An order for specific performance will not be granted if it would be unjust. The reasons for withholding the remedy may be related to the defendant’s situation or the plaintiff’s conduct. For example, the plaintiff’s remedy will be limited to common law damages where the plaintiff has been guilty of delay; or where a grant of specific performance would mean forcing upon the defendant a precarious title liable to forfeiture, or where the defendant will be unable to enter the land that they have agreed to buy unless they are fortunate enough to obtain a licence from adjoining owners; or where unconscionable conduct by the plaintiff may disentitle the plaintiff from an order of specific performance.13

(ii) Hardship to the defendant An order for specific performance will not be granted if it would inflict a hardship to the defendant, such as where the plaintiff has been guilty of delay or where there is lack of candour and suppression of the truth on the part of the plaintiff. The hardship must be clearly established and a line must be drawn between a hardship and a mere discomfort or unpleasantness which may arise from what is seemingly an unwelcome contract. It has been held that the fact that the transaction is unbusinesslike or unwise or risky will not constitute sufficient ground for refusing to grant specific performance.14 Along similar lines, difficulty experienced by the defendant in finding finance will not necessarily constitute hardship.15 Nor will there be a hardship simply because the defendant is being compelled to carry out a fair bargain, because more advantageous terms could have probably been extracted from the plaintiff.16 12 Newcombe v Chapple (1985) 3 BPR 9391. 13 Specific performance was barred by delay in Carter v Hyde (1923) 33 CLR 115; Lamshed v Lamshed (1963) 109 CLR 440 at 453; precarious title: Norton v Angus (1926) 38 CLR 523 at 534, 540; license required: Denne v Light (1857) 8 De GM & G 774; 44 ER 588; unconscionable conduct: Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565. 14 Axelsen v O’Brien (1949) 80 CLR 219, 226 per Dixon J. 15 Pasedina (Holdings) Pty Ltd v Khouri (1977) 1 BPR 9460; Ready Construction Pty ltd v Jenno [1984] 2 Qd R 78. 16 Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674, 700 per Isaacs J. However, a grossly inadequate consideration, known to be so by the plaintiff, would disentitle the plaintiff: Jacobs v Bills [1967] NZLR 249, 153; compare Philegan & Co Pty Ltd v Blacktown Municipal Council (1974) 29 LGRA 231.

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In addition, the relevant hardship must have arisen out of the contract itself and the circumstances surrounding the contract, and not out of any changes to extraneous circumstances, such as subsequent altered financial circumstances of the defendant.17 ‘A consideration in favour of refusal is the fact that the plaintiff would not suffer special loss if specific performance were not granted whereas the defendant would if it were granted.’18

(iii)  Breach of contract by plaintiff Whether a plaintiff has committed a breach of contract may have an effect on the granting of an order of specific performance. Generally, a plaintiff who is seeking the order must not be in breach of terms of the contract which are interdependent with the relevant undertakings of the defendant that are the subject of the order. Therefore, a breach of an essential condition by the plaintiff might disentitle them to the order of specific performance.19 In contrast, a breach of an inessential term might not result in disentitlement. The case of Legione v Hateley 20 provides an illustration of the balancing exercise which is required to be undertaken by the court in exercising its discretion to grant the order of specific performance. It clearly illustrates that there must be a compelling reason for the granting of such an order in cases where the contract has been substantially breached by the plaintiff. In that case, a purchaser of land was in breach of an essential term of the contract as it had failed to raise the necessary finance. The High Court was nevertheless prepared to grant the order of specific performance in favour of the purchaser by way of relief against forfeiture. One of the deciding factors was the fact that the vendor, who was seeking to cancel the contract, would have stood to gain a free house built by the purchaser. The High Court in Tanwar Enterprises Pty Ltd v Cauchi 21 also made it clear that, despite the plaintiff’s serious breach, an order of specific performance can be granted if the defendant has acted unconscionably.

(iv) Readiness and willingness of the plaintiff to perform Another discretionary factor in the granting of an order of specific performance is the general proposition that a plaintiff seeking an order of specific performance will be denied the order unless they establish that they are ready and willing to perform A plaintiff seeking obligations remaining to be performed in the future.22 The High an order of specific Court in Mehmet v Benson23 affirmed this proposition but confined performance will be it to readiness and willingness to perform only the essential denied the order unless terms. However, the High Court also pointed that unreadiness they establish that they are ready and willing or unwillingness to perform terms which are not essential to perform obligations may preclude the plaintiff from obtaining an order of specific remaining to be performed performance if such unreadiness or unwillingness amounts to in the future. repudiatory conduct. 17 Baker v McLaughlin [1967] NZLR 405, 414. 18 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1139. 19 Legione v Hateley (1983) 152 CLR 406, 449 per Mason And Deanne JJ. 20 Ibid. 21 (2003) 217 CLR 315. 22 Canning v Temby (1905) 3 CLR 419; Fitzgerald v Masters (1956) 95 CLR 420, 434; Mehmet v Benson (1965) 113 CLR 295; Green v Sommerville (1979) 141 CLR 594, 610. 23 (1965) 113 CLR 295.

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Contract Law: Text and Cases

In Mehmet v Benson, Mehmet entered into an instalment contract for the purchase of a half-share in land from Benson for £16 000. Settlement was delayed until payment of the final instalment, with possession in the interim given to Mehmet. An initial deposit of £3000 was payable and this was followed by a further instalment two months later of the same amount. Subsequently, the balance of the purchase price was to be paid by way of annual instalments of £1500 each plus interest. The contract provided for time to be of the essence, and there was an express right given to Benson to rescind or terminate the contract in the event that Mehmet failed to comply or otherwise breached it. In addition, in the event of default the whole contract price became immediately due and payable. Mehmet was able to pay the deposit and the first instalment, but thereafter fell into arrears and negotiated settlement of the balance with Benson, making good a portion of the arrears. Eventually, Mehmet was declared bankrupt. Benson proceeded to serve a notice of rescission on the basis of Mehmet’s earlier failure to make an instalment payment on time and to forfeit the instalment payments already made. After Mehmet was discharged from bankruptcy, he sought specific performance of the contract. The issue before the High Court was whether Mehmet, in order to obtain an order of specific performance, had been able to demonstrate his readiness, willingness and ability to perform the essential terms of the contract at the time envisaged by the contract. Barwick CJ, McTiernan and Windeyer JJ unanimously held that, Mehmet was, at the time of the hearing, ready, willing and able to perform the contract, and that there was thus no reason to refuse to grant the order. The fact that he would not have satisfied this requirement at the time when he was an undischarged bankrupt was irrelevant. Mehmet v Benson (1965) 113 CLR 295 Barwick CJ at 307: The question as to whether or not the plaintiff [Mehmet] has been and is ready and willing to perform the contract is one of substance not to be resolved in any technical or narrow sense. It is important to bear in mind what is the substantial thing for which the parties contract and what on the part of the plaintiff in a suit for specific performance are his essential obligations. Here the substantial thing for which the defendant [Benson] bargained was the payment of the price: and, unless time be and remain of the essence, he obtains what he bargained for if by the decree he obtains his price with such ancillary orders as recompense him for the delay in its receipt. To order specific performance in this case would not involve the court in dispensing with anything for which the vendor essentially contracted. Of course, the plaintiff must not by his unreadiness or unwillingness to perform have disowned his obligation to do so, or abandoned his rights to the benefit of the contract. But it is the essential terms of the contract which he must be ready and willing to perform. He seeks a transfer of the interest in land, the subject of the contract: the counterpart obligation is the payment of the price. In considering the question of the plaintiff’s readiness and willingness in this respect in this case there are many factors. His default in paying the instalments of the price, whilst not conclusive, is amongst these factors. For a substantial period the plaintiff was under the disability of an available act of bankruptcy,

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of which no doubt the defendant might have sought to profit but did not. The concession of the plaintiff in Jennings’ Trustee v King (1952) 1 Ch, at p. 909 that so long as it is available, an act of bankruptcy must prevent a purchaser from succeeding in specific performance, because he cannot make an effective payment in return for the conveyance, is justified by the two cases to which Harman J in that case refers. But neither of these cases, nor any others which I have been able to discover, would justify the conclusion that after the act of bankruptcy had ceased to be available, and in default of any effective action by the other party to bring the contract to an end meantime, a purchaser otherwise entitled to succeed must be denied specific performance because during the period the act of bankruptcy was available he was unable to complete. Windeyer J at 314: It is necessary that the plaintiff in an action for specific performance should allege in his pleading and prove at the hearing his readiness and willingness to perform the contract on his part: and readiness involves an ability to perform it: Ellis v Rogers (1884) 29 Ch D 661, at p. 667 … At the date when the suit is commenced the plaintiff must then be in a position to say that he is ready and willing to do at the proper time in the future whatever in the events that have happened the contract requires that he do: see Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 524, at p. 549. And he must show too that he has performed or been ready and willing to perform the terms of the contract on his part: see Fry on Specific Performance, 6th ed. (1921) p. 435. But if, notwithstanding earlier breaches, the contract remained on foot, then [315] it seems to me a plaintiff is not necessarily barred from having a decree for specific performance if those breaches, not having resulted in a valid rescission, can be made good by the payment of interest. An allegation in the terms of para. 5 of the statement of claim is not a novelty in equity pleading: see, for example, Van Heythuysen, Equity Draftsman, 2nd ed by Hughes (1928), Vol 1, p. 15. No doubt it negatives any suggestion that the plaintiff had ever repudiated the contract. But, generally speaking, it is I think sufficient that the plaintiff in a purchaser’s suit should allege that he is presently ready and willing and offers to pay the purchase money and that it is not strictly necessary in every case for him to go further: see e.g. Drewry, Forms of Claims and Defences in the Chancery Division (1876) p. 12. If some conditions had earlier been waived in the plaintiff’s favour and therefore not complied with, it is inappropriate to allege that he was always ready and willing to perform them. It were better in such a case to allege that, save in so far as performance of any condition was waived or excused by the defendant, the plaintiff had performed, or been always ready and willing to perform, the contract on his part according to its terms. However that may be, I do not think that in this case the appellant should have been refused specific performance because he did not prove all that he alleged. The case is difficult and unusual. I would, however, allow the appeal and substitute for the decree of the Supreme Court a decree for specific performance. But, as I am not convinced that the appellant is now ready and willing to complete the contract, I think there should be a proviso to meet the situation if he should prove to be unready promptly to complete the contract by payment in full. To that end the respondent should be expressly enabled to apply to the Supreme Court to fix a date for completion. If the appellant is not then ready to complete, the Supreme Court could make a decree for rescission.

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(v)  Contracts for personal services An order for specific performance may not be granted in cases where it is impossible or undesirable to compel an unwilling party to maintain continuous personal relations with another.24 Therefore, a contract for personal services cannot be specifically enforced. This is also the case with contracts of agency,25 of partnership26 and of apprenticeship.27 The following statement from Megarry J explains the rationale behind the undesirability of ordering specific performance in contracts involving personal services. His Honour also stresses the importance of scrutinising the alleged element of personal service in the relevant contract. An order for specific performance may not be granted in cases where it is impossible or undesirable to compel an unwilling party to maintain continuous personal relations with another.

C H Giles & Co Ltd v Morris [1972] 1 All ER 960 Megarry J at 969: The reasons why the court is reluctant to decree specific performance of a contract for personal services (and I would regard it as a strong reluctance rather than a rule) are … more complex and more firmly bottomed on human nature. If a singer contracts to sing, there could no doubt be proceedings for committal if, ordered to sing, the singer remained obstinately dumb. But if instead the singer sang flat, or sharp, or too fast, or too slowly, or too loudly, or too quietly, or resorted to a dozen of the manifestations of temperament traditionally associated with some singers, the threat of committal would reveal [970] itself as a most unsatisfactory weapon; for who could say whether the imperfections of performance were natural or self-induced? To make an order with such possibilities of evasion would be vain; and so the order will not be made. However, not all contracts of personal service or for the continuous performance of services are as dependent as this on matters of opinion and judgment, nor do all such contracts involve the same degree of the daily impact of person on person. In general, no doubt, the inconvenience and mischief of decreeing specific performance of most such contracts will greatly outweigh the advantages, and specific performance will be refused. But I do not think that it should be assumed that as soon as any element of personal service or continuous services can be discerned in a contract the court will, without more, refuse specific performance. Of course, a requirement for the continuous performance of services has the disadvantage that repeated breaches may engender repeated applications to the court for enforcement. But so may many injunctions and the prospects of repetition, although an important consideration, ought not to be allowed to a negative right. As is so often the case in equity, the matter is one of the balance of advantage and disadvantage in relation to the particular obligations in question; and the fact that the balance will usually lie on one side does not

24 Atlas Steels (Australia) Pty Ltd v Atlas Steels Ltd (1984) 49 SR (NSW) 157, 161 (Sugerman J); C H Giles & Co Ltd v Morris [1972] 1 All ER 960. 25 Tri-Global (Aust) Pty Ltd v Colonial Mutual Life Assurance Society Ltd [1992] ATPR 40, 374; Chinnock v Sainbury (1860) 30 LJ (Ch) 409. 26 Scott v Rayment (1868) LR 7 Eq 112. 27 Webb v England (1860) 29 Beav 44; 54 ER 541.

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turn this probability into a rule. The present case … requires not the performance of personal services or any continuous series of acts, but merely … the execution of an agreement which contains a provision for such services or acts.

(vi)  Constant supervision by the court Another important factor to consider in the granting of an order of specific performance is whether constant supervision or superintendence is required to ensure obedience by the defendant. In fact, this is one of the justifications for not granting an order of specific performance to enforce employment contracts or contracts involving personal services, as has just been discussed.28 Therefore, the court will most likely not grant an order of specific performance where it is foreseeable that the plaintiff is highly likely to return to the court complaining that the order was not carried out properly. For instance, in J C Williamson Ltd v Lukey and Mulholland  29 the High  Court ruled that an agreement conferring an exclusive right to sell sweets and confectionary  in a theatre could not be specifically enforced as it would require constant superintendence. Similarly, a court will not enforce specific performance of a contract to erect or repair buildings as constant supervision over the work will be required and, in most cases, damages would be an adequate remedy. However, if the defendant has purchased or taken a lease of land from the plaintiff and has agreed to erect a building upon it, the plaintiff may succeed in an action for specific performance if certain conditions are satisfied. First, the particulars of the work must be clearly defined so that the court can ascertain without difficulty the nature of the required performance. Second, the interest of the plaintiff in obtaining performance of the work must be of such a substantial nature that common law damages will not be an adequate compensation. The constant supervision or superintendence factor has attracted a lot of controversy and comments from both the High Court and the House of Lords. It has been argued to be ‘the most intractable and ubiquitous reason for denying the remedy’.30 On a practical note, its operation may affect virtually all commercial contracts involving complex obligations. In Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd,31 a major tenant in a shopping mall could not fulfill its undertaking to keep its supermarket open for retail trade during usual business hours. This was due to a lack of profitability. The tenant subsequently took the drastic step of ceasing trading and removing all the fixtures and fittings from the premises. The landlord brought an action for specific performance to enforce the undertaking. The trial judge declined the remedy, but the UK Court of Appeal considered that this type of undertaking would be virtually useless if not specifically enforced, and hence the landlord was granted the remedy. Damages would have been clearly inadequate. Moreover, other smaller tenants—which were 28 An obligation to mediate or otherwise engage in alternative dispute resolution will also not be enforced by an order of specific performance for the same reason. However, such an obligation may be indirectly enforced by a court ordering a stay of proceedings until the alternative dispute resolution process has been exhausted: Aiton Australia Pty Ltd v Transfield Pty ltd (1999) 153 FLR 236; [1999] NSWSC 996, [26] per Einstein J. 29 (1931) 45 CLR 282. 30 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed., LexisNexis (2008), p. 1146. 31 [1996] Ch 286 (CA); [1998] AC 1 (HL).

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lured by the attraction of the major tenant—would have no remedy at all. All judges rejected the constant supervision rationale for refusing specific performance. Subsequently, the House of Lords came to the conclusion that specific performance should not have been ordered because it was oppressive to force a business to operate at a loss.32 Lord Hoffmann was of the opinion that the constant supervision rationale is still of central importance, though he agreed that, by itself, the factor is not a sufficient reason to refuse the order. He pointed out a distinction which should be drawn between cases where a court order is sought to achieve a particular outcome—where, if the outcome can be sufficiently precisely stipulated, then specific performance will be available—and cases where a court is asked to order a continuing series of acts or tasks. As for the latter situation, if the court will be required to constantly supervise the performance of those acts or tasks, then an order of specific performance should not be granted. The High Court in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia33 commented that the difficulty of supervision should be a matter of degree rather than an absolute bar to the order of specific performance. The justices also referred to Lord Hoffmann’s speech in the Argyll case and agreed that the constant supervision factor, by itself, is no longer an effective or useful criterion to justify the refusal of an order of specific performance.34

• 28.2 Injunctions An order for an injunction may be granted to restrain a breach of contract which the defendant has threatened to commit, or the continuance or repetition of a breach already committed. As a general rule, an injunction may only be used to restrain a negative obligation in a contract; that is, some express term by which one party promises not to do something. Commonly, an injunction is sought to prevent the disclosure of confidential information, or to enforce a legal restraint of trade clause. Similar to specific performance, the use of injunction to restrain a breach of contract is discretionary and similar considerations apply to the exercise of the discretion as are applied in cases where specific performance is sought. Therefore, an injunction will not be granted if damages in common law would be an adequate remedy for the plaintiff. In addition, the court will consider other discretionary factors before deciding whether it would be fair and reasonable in all the circumstances to grant an injunction. Cases where an injunction has not been granted include where the enforcement of the injunction would require continuous supervision,35 where the alleged negative obligation cannot be expressed with sufficient precision,36 where the party seeking the injunction is not prepared As a general rule, an injunction may only be used to restrain a negative obligation in a contract; that is, some express term by which one party promises not to do something.

32 In Diagnostic X-Ray Services Pty Ltd v Jewell Food Stores Pty Ltd (2001) 4 VR 632; [2001] VSC 9, Beach J was prepared to order a mandatory injunction requiring a tenant to continue operating a petrol station. 33 (1998) 105 CLR 1. 34 Ibid, 46–47, citing A Tettenborn, ‘Absolving the Undeserving: Shopping Centres, Specific Performance and the Law of Contract’ [1998] The Conveyancer 23, 27–28; see also (1998) 105 CLR 1. 87–91 per Callinan J, who was cautious about a court in effect becoming involved in the business dealings of the parties. 35 J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282; Lamond v Calcraft (1945) 53 SR (NSW) 103. 36 J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282, 299–300 per Dixon J, 308 per Evatt J; Wood v Corrigan (1928) 28 SR (NSW) 492, 500 per Long Innes J.

Chapter 28

Equitable remedies

to do equity by agreeing to suitable arrangements to secure the other party’s rights under the contract through providing security,37 or where the grant of the injunction would, in effect, be forcing the parties to continue with a contract of personal service.38 In Lumley v Wagner,39 an injunction was granted to restrain a singer from breaching a contractual promise that she would not ‘use her talents at any other theatre’ during the season for which she was contracted to the plaintiff. This is an example of a ‘restraint of trade’ clause. The case has been distinguished from situations where the injunction sought would effectively force the defendant to perform the contract for personal services or be put out of work altogether.40 A case where an injunction was denied on the basis that the defendant would effectively be required to perform the contract for personal services is Page One Records Ltd v Britton.41 In that  case, ‘The Troggs’, a music group, had a contract whereby it engaged the plaintiff as its manager and music publisher. The agreement had four years remaining. Stamp J refused to grant an interlocutory injunction42 restraining the group from using a rival manager or music publisher on the basis that the injunction would effectively compel the group to continue to employ the plaintiff, and this would indirectly require the performance of a contract for personal services.43

• 28.3 Declarations Another equitable remedy in the area of contract law is a declaration or declaratory relief. This relief is also discretionary in nature and it may be made in relation to any contractual or contractrelated issue that may arise. For example, a declaration may be made to clarify the existence or validity of a contract. It may also be made in the context of the construction, performance or termination of a contract. A court will only grant a declaratory relief where it would serve a useful purpose and where it would not be futile.44

• 28.4 Equitable damages There are legislative provisions in all Australian jurisdictions which allow a court to award damages either in addition to, or in lieu of, specific performance or an injunction.45 These are very important in situations where no damages are recoverable at law. In addition, they are commonly used where specific performance or an injunction is refused on discretionary grounds, or where 37 Telstra Corp Ltd v First Netcom Pty Ltd (1997) 148 ALR 202, 207. 38 See for example Page One Records Ltd v Britton [1967] 3 All ER 822; but see Andoy Pty Ltd v S & M Cannon Pty Ltd (1990) 17 IPR 533. 39 (1852) 42 ER 687. 40 See for example Heine Bros (Aust) Pty Ltd v Forrest [1963] VR 383. 41 [1967] 3 All ER 822. 42 The injunction was intended to last for a limited time only, being the remaining four years left in the contract. 43 For a different approach, see for example Buckenara v Hawthorn Football Club Ltd [1988] VR 39. 44 See for example Gregory v Philip Morris ltd (1988) 80 ALR 455, 482 per Wilcox and Ryan JJ; Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286, 307 per Barwick CJ and Jacobs J; Rothmans of Pall Mall (NZ) Ltd v Attorney-General [1991] 2 NZLR 323, 330–331. 45 Supreme Court Act 1933 (ACT), ss 26, 27; Supreme Court act 1970 (NSW), s 68; Equity Act 1867 (Qld), s 62; Supreme Court Act 1935 (SA), s 30; Supreme Court Civil Procedure Act 1932 (Tas), s 11(13); Supreme Court Act 1986 (Vic), s 38; Supreme Court Act 1935 (WA), s 25(10).

[ 559 ]

[ 560 ]

Contract Law: Text and Cases

it is necessary to award damages in addition to specific performance in order to compensate the plaintiff for some loss suffered as a result of the defendant’s breach. The legislative provisions provide discretion for the courts in determining the appropriate method of assessment. However, in most cases, equitable damages are assessed in the same way as common law damages.

Ke y p o in ts for re v ision In contrast to common law remedy of damages which is designed to provide monetary compensation to the plaintiff for losses resulting from a breach of contract by the defendant, the equitable remedies of specific performance and injunction are designed to force a defendant to perform their contractual obligations. The order of specific performance is appropriate where the contractual obligation is positive; that is, when the defendant is required to perform some positive act (a positive covenant). This is to be distinguished from a negative contractual obligation, which involves the defendant refraining from performing a certain act (a negative covenant). Similar to all equitable remedies, the order for specific performance is discretionary and hence a plaintiff has no equitable right to the order simply because a breach of contract has occurred. An order for an injunction may be granted to restrain a breach of contract which the defendant has threatened to commit, or the continuance or repetition of a breach already committed. Another equitable remedy in the area of contract law is a declaration or a declaratory relief. There are legislative provisions in all Australian jurisdictions which allow a court to award equitable damages either in addition to, or in lieu of, specific performance or an injunction.

problem-solving practice Analyse the decision in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd.

GUIDE TO ANSWERING First, re-read the guidelines for answering questions of this nature at the end of Chapter 27. Brief facts The claimant, which was a landlord, had granted a 35-year lease to the defendant of premises in a shopping centre in Sheffield. The defendant agreed to keep the premises open as a supermarket for the duration of the term. With 19 years of the term remaining, the defendant abruptly ceased trading from the premises. A majority of the Court of Appeal ordered specific performance of the covenant to keep the premises open. Court’s reasoning On appeal, the House of Lords relied on the established authority that the court will not order specific performance of a covenant to carry on a business (‘keep-open covenant’), as this will require constant supervision by the court. The appropriate remedy in cases involving such covenants should instead be in damages. To hold otherwise would, as Lord Hoffmann stated, mean that the court would possibly

Chapter 28

Equitable remedies

have to give an indefinite series of rulings on whether the order was being obeyed, and the prospect of enforcement through the use of quasi-criminal procedure of punishment for contempt would become a real one. This aspect of his Lordship’s judgment has been criticised by David Pearce as being unduly pessimistic (David Pearce, ‘Remedies for Breach of a Keep-Open Covenant’ (2008) 24 Journal of Contract Law 199, 201). Experience in jurisdictions where orders to keep premises open have been granted has not indicated evidence of expensive litigation, nor has it indicated that the granting of the orders have been frequent or have consumed an undue amount of court time. In addition, if a proceeding for contempt was to be brought, the burden of proof would significantly be more difficult to be discharged, as it is one of criminal standard. Moreover, the primary defendant is usually a company for which there will be no prospect of imprisonment. Last, even if the company’s officers are liable to committal, it is perhaps more likely that any sanctions would be directed at the company and would take the form of a fine or sequestration of its assets. Lord Hoffmann’s other ground for refusing specific performance was that it would have been oppressive to the defendant. The prospective cost to the defendant of running the business for an indefinite period of time may substantially exceed the potential loss that the claimant would suffer from the covenant being broken. This would essentially place the claimant in a strong bargaining position from which it may extract, as a release fee, a sum greater than its likely loss. In other words, the claimant would be enriched at the expense of the defendant. This aspect of his Lordship’s judgment has also been criticised. The breach of contract by the defendant was always likely to cease well before the date of the next rent review, and the lease had in fact been assigned before the hearing in the House of Lords. Moreover, the defendant here had the means to comply with the order, even though the specific store in question was running at a loss. For instance, the defendant had made total pre-tax profits of £375m in the financial year prior to the closure of the store in Sheffield. That figure rose to £400m the following year. Hence, although the Sheffield store was making a daily loss of less than £200, the business as a whole was making a daily profit of more than £1m. Therefore, in the context of the defendant’s overall financial position, it is nonsensical to describe prospective annual losses in the order of £70 000 as oppressive. The defendant sought to disregard its obligations under the lease not because it could not perform them, nor because it could not afford to perform them, but simply because it chose not to perform them. The approach evident in Scotland is arguably more robust. In Oak Mall Greenock Ltd v McDonalds’s Restaurants Ltd (Outer House), Lord Drummond Young stated that the risk of loss arises from the very nature of commercial activity and that even severe loss cannot be an excuse for non-performance. Last, in relation to the possibility of the claimant being unjustly enriched due to being able to negotiate a higher release fee, David Pearce has commented that ‘it might be perverse for the court to refuse specific performance on the ground that the claimant might, as a result, negotiate a release fee which exceeds its actual loss, only for the court then to award damages measured in just this way’. The unanimous decision of the House of Lords in this case leaves a very little prospect, at least for the near future, of any significant relaxation of the courts’ settled practice to refuse specific performance of a keep-open covenant.

[ 561 ]

[ 562 ]

Index

Index absolute contracts  292 acceptance 53–68 communication of the acceptance  57–60 acceptance by conduct  59–60 silence as acceptance  59 consciousness of the offer  56–7 meeting of minds  54–5 offer and acceptance  25–6 prescribed mode of acceptance  61–7 Brinkibon Ltd v Stahag Stahl und Stahlwarendhandelgesellschaft mbH [1983] 65–7 instantaneous methods of communication 64–7 postal rule  61–4 sale of goods  178–9 see also offer account of profits (disgorgement)  502–4 adequacy of consideration  74 admissibility of evidence  203–11 agreement discharge of contract by  see discharge by agreement ambiguity contract as bargain  14 anticipatory breach  459–60 assessment common law damages  506–10 associations unincorporated associations capacity to contract  96–8 liability of committees  97–8 voluntary associations intention to create legal relations  117–18 assumption in promissory estoppel  157 auctions 37–8 Australian Consumer Law (ACL)  417–18 examples of unfair terms  423–4 misleading or deceptive conduct  329–30 see also unfair contract terms award of damages  see limitations on the award of damages bankrupts capacity to contract  100–4 bargain, contract as  see contract as bargain bargain requirement in consideration  72–3

benefit/detriment requirement in consideration 71–2 bilateral contracts  36 breach causing loss of substantial benefit  463–4 discretionary requirements for an order of specific performance  553 equitable remedies  553 of essential term or condition  460–3 intervening event created or enlarged by the breach 525–6 termination for  see termination for breach burden of performance in doctrine of frustration  287 business efficacy formal contracts  223–4 ‘but for’ test  515–16 capacity to contract  87–105 bankrupts 100–4 disclaiming onerous property  101–2 rights and responsibilities following bankruptcy 102–4 vesting and transfer of property on bankruptcy 100–1 contracts preceding incorporation  95–6 corporations 93–6 defined 93–4 legal capacity to contract  94–5 Crown, The  98–100 married women  104–5 mentally disabled and intoxicated persons  91–3 minors 88–91 position under the common law  88–9 statutory amendments to the common law 89–91 unincorporated associations  96–8 liability of committees  97–8 case law analysis skills  5 causation limitations on the award of damages  515–26 certainty and completeness  120–40 agreements to negotiate in good faith  135–9 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982)  133–5 certainty 123–30 clauses capable of more than one meaning 125–7

Index

discretion and ‘subject to finance’ clauses 127–30 severability 123–5 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 137–8 completeness 132–5 specific performance  133–5 illusory promises  130–2 Meehan v Jones (1982)  131 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968)  126–7, 128–30 Walford v Miles [1992]  138–9 Whitlock v Brew (1968)  124–5 character merchandising examples of misleading or deceptive cases  340–1 child and parent relationships  378 clarity in formal contracts  226 collateral contracts  209–10 commercial arrangements intention to create legal relations  110–16 misleading or deceptive conduct  330–3 committees liability of   97–8 common and mutual mistake  435 common law damages  490–513 account of profits (disgorgement)  502–4 Bellgrove v Eldridge (1954)  509–10 Commonwealth v Amann Aviation Pty Ltd (1991) 495–7 compensatory nature of   492 contributory negligence  511 generally 491–3 Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] 502–4 Howe v Teefy (1927)  507–8 liquidated damages  504–5 proof of loss  492–3 proportionate liability  511 remedies 248–50 restitution damages  502 Ringrow Pty Ltd v BP Australia Pty Ltd [2005]  504–5 Tabet v Gett (2010)  499–500 types of damages  493–502 expectation damages and reliance damages 493–502 loss of chance or opportunity  498–500 loss of profits  497–8 loss of use of money  500 mental distress and loss of reputation  501 personal injury  501

valuation and assessment  506–10 market value  508–10 common law estoppel  161 common mistake rectification for  445–6 comparative advertising examples of misleading or deceptive cases  339 compensatory nature of damages  492 Competition and Consumer Act 2010 (Cth), Sch 2  see Australian Consumer Law (ACL); unfair contract terms completeness  see certainty and completeness compromise as consideration  78–9 concurrent causes limitations on the award of damages  516 consent hypothetical and actual  14–16 consideration 69–86 adequacy 74 bargain requirement  72–3 benefit/detriment requirement  71–2 compromise as  78–9 defining 70–3 doctrine of   245–7 duress and  398 equitable remedies and specific performance 550–1 existing duties  79–84 imposed by a contract  80–4 imposed by law  80 failure of   540–2 forbearance to sue as  79 illusory 76–7 must move from the promisee  73–4 past consideration not adequate  77–8 promises to pay lesser sums  84 sufficiency 75–6 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 82–4 consistency in formal contracts  226 constant supervision by the court  557–8 constitutional or situational disadvantage  347–8 construing terms  202–19 admissibility of evidence  203–11 collateral contracts  209–10 parol evidence rule  203–6 partly oral and partly written contracts  206–9 variation of contracts and rectification of documents 210 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] 204–6

[ 563 ]

[ 564 ]

Index

construing terms cont. estoppel and the construction of written contracts 216 extrinsic evidence admitted  211–16 evidence in support of implication of terms 214 evidence of customary or common usage 214–15 evidence of subjective intention  212–14 evidence of subsequent conduct  215 inoperative or contingent documents  216 Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] 207–9 summary of Australian courts’ approach  216 consumer contracts unfair terms in  420–1 contract as bargain  11–16 ambiguity 14 history 11–12 hypothetical and actual consent  14–16 standard form contracts  13–14 theory 13–16 contract as promise  16–18 contract as property  18–22 reliance theory of contract and  20–1 remedial action  21–2 corrective justice principle  22 harm principle  21–2 contract terms construing  see construing terms discharge by  475–85 express  see express terms implied terms implied by custom  227–9 terms implied by law  229–37 terms implied in fact  221–7 see also implied terms unfair  see unfair contract terms unilateral mistake as to terms  433–4 contracting 432 capacity to contract  see capacity to contract at a distance  431 face to face  432 contracts discharge of   see discharge of contracts election to affirm  464–5 estoppel and the construction of written contracts 216 partly oral and partly written contracts  206–9 privity of   see privity of contract theories of contract law  10–22

variation of contracts and rectification of documents 210 see also intention to create legal relations contracts, types of   36–47 auctions 37–8 MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125 39–44 ProCD v Zeidenberg (1996) 86 F3d 1447  44–7 shop sales  36–7 tenders 38 ticket cases  38–47 unilateral and bilateral contracts  36 contributory negligence  511 limitations on the award of damages  522–5 cooperate, duty to  236–7 discharge by express or implied contractual terms 478–9 core legal skills  see legal skills corporations capacity to contract  93–6 defined 93–4 corrective justice principle  22 course of dealing incorporation of express terms through  199 court supervision for an order of specific performance  557–8 court’s approach to construing terms  216 Crown, The capacity to contract  98–100 culpable misrepresentation  320–2 custom terms implied by  227–9 damages common law  see common law damages equitable remedies  551–2, 559–60 inadequacy of   551–2 limitations on the award of   see limitations on the award of damages death or incapacity doctrine of frustration  286–7 debt 544–6 see also restitution and debt deceptive conduct  see misleading or deceptive conduct defences to claims for money  542–3 unconscionable conduct  364 delay in doctrine of frustration  291–2

Index

deposits 546 detriment benefit/detriment requirement in consideration 71–2 detrimental reliance in promissory estoppel 157–8 disappointed expectations  289 discharge by abandonment  486 discharge by agreement  475 discharge by subsequent agreement  485 estoppel and termination  486–7 discharge by express or implied contractual terms 475–85 contingent conditions failure of   477–9 non-fulfilment of   479–82 to performance and formation  477–8 precedent and subsequent to performance 479 duty to cooperate  478–9 Gange v Sullivan (1966)  481 termination effect of   484–5 election to terminate  482–5 restrictions on the right of   482–4 discharge by performance  471–5 application of the equitable rules  472–3 estoppel and termination  486–7 level of performance  474–5 order of performance  473–4 time of performance  471–3 discharge by subsequent agreement  485 discharge of contracts by agreement  see discharge by agreement doctrine of frustration  see doctrine of frustration operation of law  see law: right to terminate conferred by by performance  see discharge by performance by subsequent agreement  see discharge by subsequent agreement termination for breach  see termination for breach disciple and religious adviser relationship  380–7 disgorgement (account of profits)  502–4 doctrine of consideration  245–7 doctrine of frustration  270–302 absolute contracts  292 application of the doctrine  271–85 Davis Contractors Ltd v Fareham Urban District Council [1956]  274 frustrating event  276

Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942]  280–3 L’Office Cherifien des Phosphates v YamashitaShinnihon Steamship Co Ltd [1994]  278 onus of proof   279–83 radical alteration of the performance of the contract 283–5 without the fault of either party  276–83 effects of frustration  296–300 automatic discharge of obligation  296–8 discharge in futuro 298–300 land 292–6 Austin v Sheldon [1974]  294–5 Fletcher v Manton (1940)  293–4 what can constitute a frustrating event?  285–92 delay 291–2 disappointed expectations  289 external events  285–6 frustration of purpose: the principle of Krell v Henry 287–8 illegality 289–90 increased burden of performance  287 personality: death or incapacity  286–7 uncontemplated events  288–9 war 290–1 doctrine of substantial performance  544–6 domestic arrangements intention to create legal relations  108–10 duress 395–415 categories of duress  399–408 Australia and New Zealand Banking Group v Karam (2005) 405–8 duress of goods  401 duress to the person  399–400 economic duress  401–8 threats 399–400 Universe Tankship of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’) [1983]  401–8 causation 413 contracts made under duress are voidable  398–9 elements of duress  396–7 legal boundaries of duress  397–8 duress and consideration  398 duress, undue influence and unconscionability 397 overborne will and the nature of the threat 408–13 Australia and New Zealand Banking Group v Karam (2005) 411–12 nature of the threat  409–13

[ 565 ]

[ 566 ]

Index

duress cont. overborne will  409 remedies 414 unconscionable conduct and  397 undue influence and  397 duty of good faith  231–6 duty to cooperate  236–7 discharge by express or implied contractual terms 478–9 earnest and part payment for sale of goods  179 economic duress  401–8 election to affirm the contract  464–5 see also termination for breach enforceability equitable remedies and specific performance 551 equitable estoppel  159–61 equitable remedies  251–6, 549–61 declarations 559 equitable damages  559–60 injunctions 558–9 specific performance  550–2 C H Giles & Co Ltd v Morris [1972]  556–7 consideration 550–1 discretionary requirements for an order of  552–8 enforceability 551 inadequacy of common law damages  551–2 jurisdictional requirements  550–2 Mehmet v Benson (1965)  554–5 see also account of profits (disgorgement); rectification estoppel 141–62 common law estoppel  161 concept of estoppel  142–4 Commonwealth of Australia v Verwayen (the Voyager case) (1990)  144–5, 146–8 distinctions maintained in  146–8 unified doctrine  144–6 construction of written contracts and  216 promissory estoppel  148–61 elements of   155–8 Giumelli v Giumelli (1999)  159–61 relief under equitable estoppel  159–61 Walton Stores (Interstate) v Maher (1988)  150–5 evidence parol and oral evidence  177–8, 203–6 what should the written evidence contain?  170–2 see also admissibility of evidence; extrinsic evidence

executed documents effect of   433 existing duties, consideration and  79–84 expectation damages and reliance damages  493–502 express terms  188–201 discharge of contract by  475–85 express exclusions  110–11 incorporation of terms  196–9 incorporation by reference and reasonable notice 198–9 incorporation by signature  197–8 incorporation through course of dealing 199 pre-contractual terms  188–90 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] 189–90 Hospital Products Ltd v United States Surgical Corp (1984) 191–5 promissory nature  190–6 external events in doctrine of frustration  285–6 extrinsic evidence  211–16 failure of consideration unjust enrichment principle  540–2 fairness discretionary requirements for an order of specific performance 552 fiduciary relationships silence and  319–20 forbearance to sue as consideration  79 formal contracts implied terms in  222–6 formalities 163–86 effect of non-compliance  179–80 part performance  180–5 Australia and New Zealand Banking Group Ltd v Widin (1990)  182 Maddison v Alderson (1883)  183–4 sale of goods  178–9 acceptance 178–9 earnest and part payment  179 Statute of Frauds 1677 (Imp)  164–5 joinder of documents  174–8 parol and oral evidence  177–8 Popiw v Popiw [1959]  169–70 Powercell v Cuzeno [2003]  167–8 relevant provisions  166–70 signature 172–4 what should the written evidence contain? 170–2

Index

fraudulent misrepresentation  320 see also Statute of Frauds free will rebutting the presumption of undue influence 388 frustration  see doctrine of frustration good faith agreements to negotiate in  135–9 duty of   231–6 goods, duress of   401 government schemes and agreements  116 guardian and ward relationship  378–80 Hadley v Baxendale limitations on the award of damages  527–31 hardship to the defendant order of specific performance  552–3 harm principle  21–2 history contract as bargain  11–12 hypothetical and actual consent  14–16 identity unilateral mistake as to  430–2 illegality in doctrine of frustration  289–90 illusory consideration  76–7 illusory promises  130–2 impecunious plaintiff  533–4 implied terms  220–38 discharge of contract by  475–85 terms implied by custom  227–9 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 227–9 terms implied by law  229–37 implied duty of good faith  231–6 implied duty to cooperate  236–7 Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 236–7 terms implied in fact  221–7 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982)  225–6 formal contracts  222–6 informal contracts  227 incapacity in doctrine of frustration  286–7 incorporation contracts preceding  95–6 incorporation of terms  196–9 independent advice

rebutting the presumption of undue influence 387–8 inducement in promissory estoppel  157 influence, undue  see undue influence informal contracts implied terms in  227 injunctions equitable remedies  558–9 injury, personal  501 innocent misrepresentation  322 intention, statements of   311 intention to create legal relations  106–19 commercial arrangements  110–16 Ermogenous v Greek Orthodox Community of SA Inc 114–16 Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976]  112–13 express exclusions  110–11 mere representations and puffery  111–13 from presumption to construction  113–16 domestic arrangements  108–10 from presumption to construction  109–10 particular situations  116–19 government schemes and agreements 116 registered companies  118–19 voluntary associations  117–18 interpretation extrinsic evidence admitted in the interpretation of documents  211–16 statutory 6 intervening events limitations on the award of damages  516–26 intoxicated persons capacity to contract  91–3 invitations to treat  29–32 Carlill v Carbolic Smoke Ball Co [1893]  30–2 framework for  32 joinder of documents  174–8 jurisdictional requirements equitable remedies and specific performance 550–2 knowledge in promissory estoppel  158 Krell v Henry frustration of purpose  287–8 land in doctrine of frustration  292–6

[ 567 ]

[ 568 ]

Index

law positive misrepresentation of statements of  312–15 right to terminate conferred by  455–64 terms implied by law  229–37 law school  1–9 as a first-year law student  2 tips for studying at  see study tips legal problem solving skills  5–6 legal relations  see intention to create legal relations legal skills case law analysis  5 common law method  4–5 legal problem solving  5–6 legal writing  6 research 6–7 statutory interpretation  6 see also study tips lesser sums, promises to pay as consideration  84 limitations on actions for misrepresentation  323–5 limitations on the award of damages  514–37 attempts at mitigation which increase loss  534–5 causation 515–26 Alexander v Cambridge Credit Corp Ltd (1987) 517–22 Allianz v Waterbrook [2009]  522–5 ‘but for’ test  515–16 concurrent causes  516 contributory negligence  522–5 intervening events  516–26 intervening events, created or enlarged by the breach 525–6 impecunious plaintiff  533–4 mitigation 531–5 rationale for the mitigation obligation  532 reasonable steps  532–3 remoteness 526–31 Hadley v Baxendale 527–8 Hadley v Baxendale, first limb  528 Hadley v Baxendale, second limb  528–31 liquidated damages  504–5 loss of chance or opportunity  498–500 loss of profits  497–8 loss of reputation  501 loss of use of money  500 market value valuation and assessment of common law damages 508–10 married women capacity to contract  104–5

meeting of minds defined 54 mental distress and loss of reputation  501 mentally disabled and intoxicated persons capacity to contract  91–3 mere puffery  see puffery minors capacity to contract  88–91 misleading or deceptive conduct  328–42 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 331–3 conduct in trade or commerce  330–3 establishing 334–6 CampomarSociedadLimitada v Nike International Limited (2000)  336–8 ordinary and reasonable person  336–8 Taco Bell steps  334–6 examples of   339–41 character merchandising  340–1 comparative advertising  339 promises 340 silence where disclosure is expected 339–40 see also puffery objective of Australian Consumer Law, s 18 329–30 misrepresentation 303–27 culpable misrepresentation  320–2 fraudulent misrepresentation  320 L Shaddock & Associates v Council of the City of Parramatta (1981)  321–2 negligent misrepresentation  320–2 general rule  305 elements of an actionable misrepresentation 305 innocent misrepresentation  322 positive misrepresentation  306–15 Bissett v Wilkinson [1927]  309–10 mere puffery  111–13, 306–9; see also puffery Mitchell v Valherie (2005)  306–9 Public Trustee v Taylor [1978]  312–15 statements of intention  311 statements of law  312–15 statements of opinion  309–10 rescission 325–6 silence 315–20 Krakowski v Eurolynx Properties Pty Ltd (1995) 316–19 where the parties are in a fiduciary relationship 319–20

Index

where the silence distorts some positive representation 316–19 where the statement becomes untrue 319 who may sue for misrepresentation?  322–3235 limitations on actions for misrepresentation 323–5 where the misrepresentation is not material 325 where the plaintiff does not act on the representation 324–5 where the plaintiff is unaware of the representation 324 where the plaintiff knows that the representation is false  325 where the statement is non-inducing  323 mistake 427–50 common and mutual mistake  435 rectification for  445–6 other categories of   439–40 remedies 440–50 Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002]  443 rectification 444–8 rescission 440–3 specific performance  444 unjust enrichment  444 subject matter of the contract  436–40 absence of   437–9 identifying 436–7 mistake as to quality of   439 partial absence of   439 total failure of consideration  437–9 unilateral mistake  430–4 the effect of an executed document  433 as to identity  430–2 rectification for  446–8 ‘snapping up’ an offer  434 as to terms  433–4 when the parties have contracted at a distance 431 when the parties have contracted face to face 432 unjust enrichment principle  542 mitigation limitations on the award of damages  531–5 money loss of use of   500 recovery of   540–2 mutual mistake  435 duress and  409–13

negligence contributory  511, 522–5 negligent misrepresentation  320–2 negotiation agreements to negotiate in good faith 135–9 non-compliance, effect of   179–80 non-monetary benefits recovery of the value of   540 obviousness formal contracts  224–6 offer 23–51 acceptance and  25–6 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 27–8 consciousness of the offer  56–7 existence of a definite promise  28–9 generally 26–9 is there an offer?  26–8 R v Clarke (1927)  56–7 termination of   see termination of offers see also acceptance; invitations to treat onus of proof in doctrine of frustration  279–83 opinion, statements of   309–10 opportunity loss  498–500 oral contracts partly oral and partly written contracts 206–9 see also parol and oral evidence overborne will  409 parent and child relationships  378 parol and oral evidence parol evidence rule  203–6 Statute of Frauds 1677 (Imp)  177–8 part payment sale of goods  179 part performance  180–5 particular situations intention to create legal relations  116–19 past consideration is not adequate consideration  77–8 performance discharge of contract by  see discharge by performance increased burden of, in doctrine of frustration 287 person, duress to the  399–400 personal injury  501

[ 569 ]

[ 570 ]

Index

personal services contracts discretionary requirements for an order of specific performance 556–7 personality: death or incapacity doctrine of frustration  286–7 positive misrepresentation  306–15 pre-contractual terms  188–90 presumption to construction intention to create legal relations  109–10, 113–16 privity of contract  239–69 Beswick v Beswick [1968]  252 Coulls v Bagot’s Executor & Trustree Co Ltd (1967)  245–7, 248 Darlington BC v Wiltshier Northern Ltd [1995] 253 development of the privity rule  240–3 doctrine of consideration and  245–7 exceptions to the privity rule  267 generally 243–7 Jackson v Horizon Holidays [1975]  249–50 remedies 247–56 damages at common law  248–50 remedies in equity  251–6 trusts 254–6 third party beneficiaries and exclusion clauses 268–9 Trident v McNiece (1988)  254–5, 256–66 profits, loss of   497–8 promisees consideration must move from the  73–4 existing duties  80–4 promises contract as promise  16–18 examples of misleading or deceptive cases  340 existence of a definite promise  28–9 illusory promises  130–2 to pay lesser sums  84 promissory nature of pre-contractual terms 190–6 promissory estoppel  148–61 proof of loss  492–3 property  see contract as property; land proportionate liability  511 puffery 33–5 defined 33 examples of misleading or deceptive cases  340 intention to create legal relations  111–13 Leonard v Pepsico Inc 88 F Supp 2d (SDNY 1999) 33–5 positive misrepresentation  306–9

readiness and willingness of the plaintiff to perform 553–5 reasonableness limitations on the award of damages  532–3 in promissory estoppel  158 reasonable and equitable terms in formal contracts 223 rebutting the presumption of undue influence  387–8 recovery of money  540–2 of the value of non-monetary benefits  540 rectification 444–8 of documents  210 reference and reasonable notice incorporation of terms by  198–9 registered companies intention to create legal relations  118–19 reliance damages  493–502 relief under equitable estoppel  159–61 religious adviser and disciple relationships  380–7 remedies contract as property, remedial action regarding 21–2 duress 414 equitable  see equitable remedies for mistake  440–50 privity of contract  247–56 Trident v McNiece (1988)  254–5 unconscionable conduct  364 undue influence  392 unfair contract terms  424 remoteness limitations on the award of damages  526–31 representation  see misrepresentation repudiation right to terminate conferred by law  455–60 reputation, loss of   501 rescission 325–6 remedies 440–3 research skills  6–7 restitution and debt  538–48 debt 544–6 doctrine of substantial performance  544–6 Hoenig v Isaacs [1952]  545–6 deposits 546 restitution and contract provisions  539 restitution damages  502 unjust enrichment principle  540–3 defences to claims for money  542–3 failure of consideration  540–2

Index

mistake 542 recovery of money  540–2 recovery of the value of non-monetary benefits 540 revoking a unilateral contract  49–51 sale of goods  178–9 shop sales  36–7 signature incorporation of terms by  197–8 Statute of Frauds 1677 (Imp)  172–4 silence misrepresentation and  315–20 where disclosure is expected  339–40 ‘snapping up’ an offer  434 special disadvantage elements of unconscionability  346–9, 350 specific performance completeness 133–5 discretionary requirements for an order of   552–8 equitable remedies  550–8 inadequacy of common law damages  551–2 remedies for mistake  444 standard form contracts contract as bargain  13–14 unfair contract terms  421–2 statements of intention positive misrepresentation  311 statements of law positive misrepresentation  312–15 statements of opinion positive misrepresentation  309–10 Statute of Frauds 1677 (Imp)  164–5 joinder of documents  174–8 parol and oral evidence  177–8 Popiw v Popiw [1959]  169–70 Powercell v Cuzeno [2003]  167–8 relevant provisions  166–70 signature 172–4 what should the written evidence contain?  170–2 statutory interpretation skills  6 statutory unconscionability  364–5 study tips be seen  8–9 practise the core legal skills  4–7 read widely  9 remember that law is a skills profession  9 remember that reputation matters  7–8 understand what law is  2–3 work effectively  3–4

subject matter of the contract mistake and  436–40 subsequent agreement discharge by  485 substantial performance doctrine of   545–6 sufficiency of consideration  75–6 suing for misrepresentation  322–3235 Taco Bell steps  334–6 tenders 38 termination for breach  451–69 Automatic Fires Sprinklers Pty Ltd v Watson (1946) 464–5 election to affirm the contract  464–5 right to terminate conferred by contract  452–4 effect 453–4 restrictions 453 right to terminate conferred by law  455–64 anticipatory breach  459–60 Associated Newspapers Ltd v Bancks (1951)  460–2 breach causing loss of substantial benefit 463–4 breach of essential term or condition  460–3 Carr v J A Berriman Pty Ltd (1953)  456–9 repudiation 455–60 see also discharge of contracts termination of offers  48 Mobil Oil Australia v Wellcome International (1998) 81 FCR 475  49–51 revoking a unilateral contract  49–51 terms  see contract terms third party beneficiaries and exclusion clauses  268–9 threats duress and  399–400, 409–13 ticket cases  38–47 trade misleading or deceptive conduct  330–3 Trade Practices Act 1974 (Cth)  see Australian Consumer Law (ACL); unfair contract terms treat, invitations to  see invitations to treat Trident v McNiece (1988) privity of contract  254–5, 256–66 trusts privity of contract  254–6 types of contracts  see contracts, types of unconscionable conduct  343–67 defences 364 duress and  397 elements of unconscionability  344–64

[ 571 ]

[ 572 ]

Index

unconscionable conduct cont. ACCC v CG Berbatis Holdings Pty Ltd (2003) 348–9 constitutional or situational disadvantage 347–8 special disadvantage  346–9 knowledge of special disadvantage  350 in promissory estoppel  158 remedies 364 statutory unconscionability  364–5 taking unconscionable advantage  350–64 ACCC v CG Berbatis Holdings Pty Ltd (2003) 350–2 Bridgewater v Leahy 353–8 Louth v Diprose 358–64 uncontemplated events in doctrine of frustration  288–9 undue influence  368–94 categories of   370–7 actual undue influence  370–2 Johnson v Buttress (1936)  372–7 presumed undue influence  372–7 duress and  397 Garcia v National Australia Bank (1998)  389–92 rebutting the presumption  387–8 free will  388 independent advice  387–8 remedies 392 specific relationships of influence  378–87 guardian and ward  378–80 Hartigan v International Society for Krishna Consciousness Incorporated [2002] 381–5 Khan v Khan (2004)  385–7 parent and child  378 Powell v Powell [1900]  378–80 religious adviser and disciple  380–7 Yerkey v Jones, principle in  388–92

unfair contract terms  416–26 application and operation  420–4 consumer contract  420–1 examples of   423–4 remedies 424 standard form contract  421–2 Unfair Contract Terms regime rationale  418–20 unilateral contracts  36 revoking 49–51 unilateral mistake  430–4 rectification for  446–8 unincorporated associations capacity to contract  96–8 unjust enrichment principle 540–3 remedies 444 untruth silence and  319 valuation and assessment common law damages  506–10 variation of contracts  210 violence, as duress to the person  399–400 voluntary associations intention to create legal relations  117–18 war in doctrine of frustration  290–1 ward and guardian relationships  378–80 women, married capacity to contract  104–5 written contracts estoppel and the construction of written contracts 216 partly oral and partly written contracts  206–9 Yerkey v Jones undue influence  388–92

Contract Law: Text and Cases is a blend of comprehensive academic commentary supported by key cases, setting students up with the fundamental contract knowledge and skills that will see them through their law degree and into professional practice.

Key Features

• Case extracts are integrated into the text and serve as illustrations of the key principles. • Problem-solving practice at the end of chapters, along with sample answers or guidance for answering the question help students apply the law and practise their essential skills for law school. • Mid-chapter review questions help students consolidate learning. • End of chapter dot-point summaries will remind students of the key elements of each chapter. Dilan Thampapillai is a Lecturer in the School of Law at Deakin University. Vivi Tan is a Lecturer in the Victoria Law School at Victoria University. Claudio Bozzi is a Lecturer in the School of Law at Deakin University.

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