Contract law : text and cases [Second edition.] 9780409342628, 0409342629

Citation preview

Contract Law: Text and Cases Second Edition

Dilan Thampapillai BA, LLB (ANU), M.Com (Syd), LLM (Cornell)

Claudio Bozzi BA (Hons) (Melb), PhD (Edin)

Alex Bruce LLB (QUT), LLM (Syd), MA (Theology) (ACU), PhD (ANU)

LexisNexis Butterworths Australia 2016

AUSTRALIA

ARGENTINA AUSTRIA BRAZIL CANADA CHILE CHINA CZECH REPUBLIC FRANCE GERMANY HONG KONG HUNGARY INDIA ITALY JAPAN KOREA MALAYSIA NEW ZEALAND POLAND SINGAPORE SOUTH AFRICA SWITZERLAND TAIWAN UNITED KINGDOM USA

LexisNexis LexisNexis Butterworths 475–495 Victoria Avenue, Chatswood NSW 2067 On the internet at: www.lexisnexis.com.au LexisNexis Argentina, BUENOS AIRES LexisNexis Verlag ARD Orac GmbH & Co KG, VIENNA LexisNexis Latin America, SAO PAULO LexisNexis Canada, Markham, ONTARIO LexisNexis Chile, SANTIAGO LexisNexis China, BEIJING, SHANGHAI Nakladatelství Orac sro, PRAGUE LexisNexis SA, PARIS LexisNexis Germany, FRANKFURT LexisNexis Hong Kong, HONG KONG HVG-Orac, BUDAPEST LexisNexis, NEW DELHI Dott A Giuffrè Editore SpA, MILAN LexisNexis Japan KK, TOKYO LexisNexis, SEOUL LexisNexis Malaysia Sdn Bhd, PETALING JAYA, SELANGOR LexisNexis, WELLINGTON Wydawnictwo Prawnicze LexisNexis, WARSAW LexisNexis, SINGAPORE LexisNexis Butterworths, DURBAN Staempfli Verlag AG, BERNE LexisNexis, TAIWAN LexisNexis UK, LONDON, EDINBURGH LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO

National Library of Australia Cataloguing-in-Publication entry Author: Title: Edition: ISBN: Notes: Subjects:

Other Authors/Contributors: Dewey Number:

Thampapillai, Dilan. Contract law: text and cases. 2nd edition. 9780409342611 (pbk). 9780409342628 (ebk). Includes index. Contracts — Australia — Textbooks. Commercial law — Australia — Textbooks. Bozzi, Claudio; Bruce, Alex; Grolman, Leah; Soo, Nichole. 346.9407.

© 2016 Reed International Books Australia Pty Limited trading as LexisNexis. 1st edition, 2012, published by Oxford University Press. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in Palatino Linotype and Gill Sans MT Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

Preface Contract law is an essential feature of the first or second year curriculum at all Australian law schools. We are delighted to present Contract Law: Text and Cases to our students and colleagues in the hope that it may prove of great assistance in their study of the law. We have specifically written this book for use in a 12-week semester. This book amalgamates the essential and desirable features of a textbook and a casebook. In our view, the use of substantial case extracts enriches our commentaries on various topics in contract law and both the extracts and commentaries illuminate each other. We are deeply indebted to our contributing authors, Leah Grolman and Nichole Soo, for their outstanding contributions to Chapters 9, 15, 19 and 25. We are very grateful to Grace Soutter for her exceptional efforts in preparing this volume. We are also grateful to Sarah Wardell for her work in editing various chapters. We would like to also extend our thanks to LexisNexis Butterworths for producing the second edition of this book. In particular, we would like to thank Pamela O’Neill, Georgia O’Neill, Kim Thomson and Galia Adel. Dilan would like to personally thank Professor Andrew Clark at Victoria University and Professor Samantha Hepburn at Deakin University for their advice and support in the preparation of the first edition of this book. We also wish to express our gratitude to those research assistants who helped us with the first edition: Hannah Stevens, Joshua Todd, Eric Ansell, Jonathan Ferraro, Sarah McBean and Jessica Dickson. In terms of the authors of the various chapters: Dilan Thampapillai

wrote Chapters 1, 3, 4, 5, 8, 9, 11, 12, 13, 14, 16, 17, 18, 19, 20, 21, 23, 24 and 25. Leah Grolman contributed to Chapters 9 and 25. Nichole Soo contributed to Chapter 19. Claudio Bozzi wrote Chapters 2, 6, 7, 10, 15 and 22. Nichole Soo contributed to Chapter 15. Alex Bruce co-wrote Chapter 17. May 2016 Dilan Thampapillai, Senior Lecturer, ANU College of Law Claudio Bozzi, Lecturer, Deakin University Alex Bruce, Associate Professor, ANU College of Law

Table of Cases References are to paragraph numbers 161 Castlereagh Street Pty Ltd v Citadel Property Group (2001) 10 BPR 19,041; [2002] ANZ ConvR 155 …. 3.17

A A v N [2012] NSWSC 354 …. 6.6, 20.19, 20.22 A Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555 …. 22.31, 22.32, 22.33 Abbott v Lance (1860) Legge 1283 …. 3.21 Abbott & Co v Wolsey [1895] 2 QB 97 …. 10.17 Aboody v Ryan (2012) 17 BPR 32,359 …. 18.3 Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2003] 2 AC 541 …. 10.1 Adams v Champion USSC 24 [1935]; 294 US 231 (1935) …. 14.15 — v Lindsell (1818) 2 B & Ald 681; 106 ER 250 …. 4.1, 4.14, 4.15, 4.21 Adaras Development Ltd v Marcona Corporation [1975] 1 NZLR 324 …. 8.18 Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274; 57 ALR 455 …. 13.3 Adenan v Buise [1984] WAR 61 …. 19.5 Adler v Dickson [1955] 1 QB 158 …. 14.13 Administration of the Territory of Papua New Guinea v Leahy (1961) 105 CLR 6; [1961] ALR 691 …. 7.16

Adnunat Pty Ltd v ITW Construction Systems Australia Pty Ltd [2009] FCA 499 …. 4.13 Afovos Shipping Co SA v Pagnan [1983] 1 All ER 449; [1983] 1 WLR 195 …. 24.14 AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454 …. 3.16 Agip SpA v Navigazione Alta Italia SpA (‘The Nai Genova’ and ‘The Nai Superba’) [1984] 1 Lloyd’s Rep 353 …. 22.26, 22.32 Agricultural and Rural Finances Pty Ltd v Gardiner (2008) 238 CLR 570 …. 24.21 Agripay Pty Ltd v Byrne [2011] 2 Qd R 501 …. 19.21 Ailakis v Olivero (No 2) (2014) 100 ACSR 524; [2014] WASCA 127 …. 5.18, 5.19, 5.23 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 …. 7.15, 7.21 Airways Corp of New Zealand Ltd v Geyserland Airways Ltd [1996] 1 NZLR 116 …. 5.18 Ajayi v R T Briscoe (Nigeria) Ltd [1964] 3 All ER 556; [1964] 1 WLR 1326 …. 9.7, 9.8, 24.20 AJG, Re [2004] QCA 88 …. 1.11 Akerhielm v De Mare [1959] AC 789 …. 16.17 Al Khudairi v Abbey Brokers Ltd [2010] EWHC 1486 …. 16.9 Alati v Kruger (1955) 94 CLR 216; [1955] ALR 1047 …. 16.2, 16.27 Albert D Gaon & Co v SIOFA [1960] 2 QB 318 …. 15.8 Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; 9 BPR 16,385 …. 13.15, 13.17, 13.20, 13.21 Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310; 12 ACLR 202 …. 25.13, 25.15 — v Rayson [1936] 1 KB 169 …. 5.7

Alievski v Cross Country Realty Victoria Pty Ltd [2010] VSC 316 …. 18.18 Allcard v Skinner (1887) 36 Ch D 145 …. 18.11, 19.1, 19.2, 19.7, 19.10, 19.13, 19.14, 19.15, 19.16, 19.18 Allen v Carbone (1975) 132 CLR 528; [1975] HCA 14 …. 7.21 — v Richardson (1879) 13 Ch D 524 …. 22.17 Alliance Bank (Ltd) v Broom (1864) 2 DR & SM 289 …. 5.16 Allied Mills Ltd v Gwydir Valley Oilseeds Pty Ltd [1978] 2 NSWLR 26 …. 15.13 Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 …. 8.6 Amalgamated Property Co v Texas Bank (1982) QB 84 …. 9.8, 24.20 AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd (2010) 2 Qd R 101; [2009] QSC 139 …. 8.16, 8.17, 8.18 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 …. 25.23, 25.25 Amman Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527; 92 ALR 601 …. 24.3 Amos v Citibank Ltd [1996] QCA 129 …. 5.23, 5.26 — v Monsour Pty Ltd [2010] FCA 741 …. 5.26 Anaconda Nickel Ltd v Edensor Nominees Pty Ltd (2004) 50 ACSR 679; [2004] VSCA 167 …. 9.26 — v Tarmoola Australia Pty Ltd (2000) 22 WAR 101; [2000] WASCA 27 …. 7.21, 8.3, 8.6 Anangel Atlas Compania Naviera SA v Ishikawajima-Harima Heavy Industries Co Ltd (No 2) [1990] 2 Lloyd’s Rep 526 …. 5.23 Anders v Schluter (1973) 6 SASR 325 …. 10.11 Anderson v Brouwer Claims Canada & Co Ltd [2002] BCSC 1043 …. 22.19, 22.33

Andre et Cie SA v Ets Michel Blanc et Fils [1979] 2 Lloyd’s Rep 427 …. 16.10 Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; 290 ALR 595 …. 25.23, 25.24, 25.25 Ange v First East Auction Holdings Pty Ltd (2011) 284 ALR 638 …. 11.11 Angell v Duke (1875) LR 10 QB 174 …. 10.4 Anglia Television Ltd v Reed [1972] 1 QB 60 …. 25.7 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; [1987] HCA 15 …. 24.6, 24.16 Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54; 17 ALR 513 …. 6.19, 13.8 Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 …. 12.8 Antons Trawling Co Ltd v Smith [2003] 2 NZLR 23 …. 5.23 Apple & Pear Australia Ltd v Pink Lady America LLC [2015] VSC 617 …. 4.13, 5.23 Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635 …. 13.17 Appleby v Pursell [1973] 2 NSWLR 879 …. 11.17 APT SEA Gas Holdings Pty Ltd v ANP SEA Gas Holdings Pty Ltd [2010] NSWSC 1221 …. 4.3, 4.4 Archer v Stone (1898) 78 LT 34 …. 22.3 Arcos Ltd v E A Ronaasen & Son [1933] UKHL 1; [1933] AC 470 …. 24.4, 24.14 Ardee Pty Ltd v Collex Pty Ltd [2001] NSWSC 836 …. 15.39 Ardlethan Options Ltd v Easdown (1915) 20 CLR 285 …. 25.20 Argy v Blunts (1990) 26 FCR 112; 94 ALR 719 …. 17.5

Arizona Retail Systems, Inc v Software Link, Inc 831 F Supp 759 (D Ariz 1993) …. 3.19 Ashton v Australian Cruising Yacht Co Pty Ltd [2005] WASC 192 …. 7.14 — v Pratt (2015) 88 NSWLR 281; 318 ALR 260 …. 8.12, 9.17, 9.28 Asia Pacific International Pty Ltd v Dalrymple [2000] 2 Qd R 229 …. 18.17 Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588; [2000] HCA 25 …. 12.5 Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 All ER 902; [1989] 1 WLR 255 …. 22.1, 22.10 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 …. 24.4, 24.11 Astilleros Canarios SA v Cape Hatteras Shipping Co Inc (The Cape Hatteras) [1982] 1 Lloyd’s Rep 518 …. 10.2 Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (recs and mgrs appt’d) (2009) 25 VR 411 …. 5.4, 5.5, 7.14 Attorney-General v Codner (1973) 1 NZLR 545 …. 9.8 Attorney-General for England and Wales v R [2002] 2 NZLR 91 …. 5.2, 5.7 Attorney-General for England and Wales v R [2004] 2 NZLR 577 …. 19.19 Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261 …. 18.19 Attorney General of Belize v Belize Telecom Ltd [2009] 2 All ER 1127; [2009] 1 WLR 1988 …. 13.3, 13.4, 13.14 Attorney-General of Hong Kong v Humphreys Estate Ltd (1987) 1 AC 114 …. 9.8, 9.24 Attwood v Rattenbury (1822) 6 Moo CP 579 …. 14.8 — v Small [1835–42] All ER Rep 258; (1838) 7 ER 684 …. 16.25

Auckland Harbour Board v R [1924] AC 318 …. 6.18 Aurel Forras Pty Ltd v Graham Karp Developments Pty Ltd [1975] VR 202 …. 15.37 Austin v Sheldon [1974] 2 NSWLR 661 …. 15.35 Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 …. 8.2, 8.11, 9.11, 9.12, 13.19 Australia and New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305 …. 18.4 — v Karam (2005) 64 NSWLR 149 …. 20.1, 20.17, 20.21, 20.22 — v Widin (1990) 26 FCR 21; 102 ALR 29 …. 10.8, 10.12, 10.23, 10.24 Australian and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 …. 8.18 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 …. 12.5, 13.20 Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454; 84 ALR 199 …. 6.1 — v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 …. 7.15, 7.21, 8.1 Australian Capital Territory Rugby League Club Inc v ACT Leagues Club Ltd (1992) 107 FLR 303 …. 7.17 Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 …. 21.10 — v CG Berbatis Holdings Pty Ltd (2000) ATPR 41-778; [2000] FCA 1376 …. 18.5 — v — (2003) 214 CLR 51; 197 ALR 153 …. 18.1, 18.5, 18.14, 18.15, 18.18, 18.20, 20.19 — v Jewellery Group Pty Ltd (2012) 293 ALR 335; [2012] FCA 848 …. 3.9

— v Keshow (2005) ATPR (Digest) 46-265; [2005] FCA 558 …. 18.20, 21.4 — v Lux Distributors Pty Ltd (2013) ATPR 42-429 …. 18.20 — v Lux Pty Ltd [2004] FCA 926 …. 18.20, 21.4 — v Radio Rentals Ltd (2005) 146 FCR 292 …. 18.8, 18.18 — v Samton Holdings Pty Ltd (2002) 117 FCR 301; 189 ALR 76; [2002] FCAFC 4 …. 13.19, 18.20, 24.21 — v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; 178 ALR 304 …. 18.20 — v Zanok Technologies Pty Ltd [2009] FCA 1124 …. 18.20 Australian Crime Commission v Gray [2003] NSWCA 318 …. 9.10, 9.11, 24.20 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560; 307 ALR 512; 88 ALJR 552; [2014] HCA 14 …. 9.16, 9.17, 9.32 Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98 …. 8.6 Australian Meat Industry Employees’ Union v Frugalis Pty Ltd [1990] 2 Qd R 201 …. 13.5 Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364; 274 ALR 731; [2011] FCAFC 19 …. 8.1, 8.13, 8.20 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; 112 ALR 627 …. 9.21 Australian Steel and Mining Corp Pty Ltd v Corben [1974] 2 NSWLR 202 …. 16.26 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453 …. 3.1, 3.7, 3.8, 3.10, 3.11, 3.14, 5.3, 5.4, 5.5, 7.1, 7.16, 14.5

Australis Media Holdings Pty Ltd v Telstra Corp Ltd (1998) 43 NSWLR 104 …. 13.22 Avery v Bowden [1856] EngR 889; (1856) 6 El & Bl 953; 119 ER 1119 …. 15.41, 24.14 Avon County Council v Howlett [1983] 1 All ER 1073; [1983] 1 WLR 605 …. 9.32, 22.16 Avon Finance Co Ltd v Bridger [1985] 2 All ER 281 …. 19.11 Awaroa Holdings Ltd v Commercial Securities and Finance Ltd [1976] 1 NZLR 19 …. 16.13 Axelsen v O’Brien (1949) 80 CLR 219 …. 8.18

B B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419 …. 15.40 Bacchus Holdings Trust (No 9) [2012] NSWSC 984 …. 8.14 Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan & Co Ltd (1919) 26 CLR 410; [1919] HCA 18 …. 13.11 Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 …. 22.19 Baker v Campbell (1983) 153 CLR 52; [1983] HCA 39 …. 14.18 Baker v Monk (1864) 55 ER 430 …. 18.2 Baldwin v Everingham [1993] 1 Qd R 10 …. 7.17 Balfour v Balfour [1919] 2 KB 571 …. 5.3, 7.2, 7.10 — v Hollandia Ravensthorpe NL (1978) 18 SASR 240 …. 16.9 Ballantine v Harold (1893) 19 VLR 465 …. 10.12 Ballantyne v Phillott (1961) 105 CLR 379; [1962] ALR 22 …. 5.3, 5.12, 5.13 Ballas v Theophilos (No 2) (1957) 98 CLR 193 …. 4.1 Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379; [1906] HCA

83 …. 3.18, 11.6, 11.13 Balog v Crestani (1975) 132 CLR 289; [1975] HCA 16 …. 24.15 Baltic Shipping Co v Dillon (1993) 176 CLR 344; 111 ALR 289 …. 15.41, 25.13, 25.21 — v Dillon (The Mikhail Lermontov) (1991) 22 NSWLR 1 …. 11.11 Bank Line Ltd v Arthur Capel & Co [1919] AC 435 …. 15.3, 15.4, 15.7, 15.13, 15.29 Bank Negara Indonesia v Hoalim (Singapore) [1973] 2 MLJ 3 …. 9.7, 9.8 Bank of Australasia v Palmer [1897] AC 540 …. 11.17, 12.8 Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 …. 12.3, 12.8 Bank of New South Wales v Commonwealth (1948) 76 CLR 1; [1948] HCA 7 …. 17.7 — v Rogers (1941) 65 CLR 42; [1941] HCA 9 …. 19.7, 19.10, 19.15 Bank of Victoria Ltd v Mueller [1925] VLR 642 …. 19.20, 19.21 Banks v Goodfellow (1870) LR QB 549 …. 6.6 — v Williams (1912) 12 SR (NSW) 382 …. 10.7 Bannerman v White [1861] EngR 713; (1861) 10 CB (NS) 844; 142 ER 685 …. 24.4 Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 …. 7.6, 7.7, 7.12, 7.14 Barba v Gas & Fuel Corp of Victoria (1976) 136 CLR 120; 12 ALR 649 …. 5.7 Barclay v Messenger (1874) 43 LJ Ch 449 …. 24.19 Barclays Bank plc v O’Brien [1994] 1 AC 180 …. 19.3 Barlow v Bishop 1 East’s Rep 432 …. 6.26 Barr v Gibson (1838) 3 M & W 390 …. 22.12

Barry v Davies [2001] 1 All ER 944; [2000] 1 WLR 1962 …. 3.16 Barto v GPR Management Services Pty Ltd (1991) 33 FCR 389; ATPR 41-162 …. 17.7 Barton v Armstrong [1973] 2 NSWLR 598; (1973) 3 ALR 355 …. 20.2, 20.6, 20.7 — v Armstrong [1976] AC 104 …. 16.26, 20.1, 20.6, 20.7, 20.15, 20.24 BAS Capital Funding Corp v Medfinco Ltd [2004] 1 Lloyd’s Rep 652; [2003] EWHC 1798 (Ch) …. 15.23 Bastard v McCallum [1924] VLR 9; (1924) 30 ALR 1 …. 4.6, 10.9, 10.16 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622; 4 BPR 9315 …. 7.21 Baxton v Kara [1982] 1 NSWLR 604 …. 10.8 Beach Petroleum NL v Johnson (1993) 43 FCR 1; 115 ALR 411 …. 16.9 Beaton v McDivitt (1985) 13 NSWLR 134 …. 5.5 — v McDivitt (1987) 13 NSWLR 162 …. 2.2, 5.3, 5.4, 5.5, 14.5 Beattie v Lord Ebury (1872) 7 LR Ch App 777 …. 16.9 Beerens v Bluescope Distribution Pty Ltd (2012) 39 VR 1 …. 20.23 Belgravia Investments Pty Ltd v Evans (SC Vic, Smith J, 13 March 1998, unreported) …. 20.19 Bell v Lever Brothers Ltd [1931] UKHL 2; [1932] AC 161 …. 13.5, 13.7, 22.1, 22.10, 22.11, 22.15, 22.20, 22.22, 22.24 Bellgrove v Eldridge (1954) 90 CLR 613; [1954] ALR 929 …. 25.4, 25.9, 25.10, 25.11, 25.12 Bennett v L & W Whitehead Ltd [1926] 2 KB 380 …. 24.18 Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274 …. 24.4 Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 …. 19.18 Beswick v Beswick [1966] Ch 538; [1966] 3 All ER 1 …. 14.2, 14.4, 14.8, 14.13

— v — [1967] UKHL 2; [1968] AC 58 …. 14.1, 14.3, 14.11, 14.13, 14.14, 14.16, 14.17, 14.18 Bettini v Gye (1876) 1 QBD 183 …. 24.4 Bettyes v Maynard (1882) 46 LT 766 …. 22.21 Bevanere Pty Ltd v Lubidineuse (1985) 7 FCR 325; 59 ALR 334 …. 17.6 Bicknell v Bell (1897) 19 ALT 45 …. 10.9 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 …. 5.9, 7.15, 8.2, 8.6, 8.11, 8.18 Bird v Hildage [1948] 1 KB 91 …. 24.19 Birmingham v Renfrew (1937) 57 CLR 666 …. 14.16 Bishopsgate Insurance Australia Ltd v Commonwealth Engineering (NSW) Pty Ltd [1981] 1 NSWLR 429 …. 22.29 Bissett v Wilkinson [1927] AC 177 …. 16.7, 16.16 Black Clawson International Ltd v Papierwerke WaldhofAschaffenberg AG [1981] 2 Lloyd’s Rep 446 …. 15.37 Black Stump Enterprises Pty Ltd and Associated Companies, Re (2005) 228 ALR 591 …. 4.12 Bligh v Martin [1968] 1 All ER 1157; [1968] 1 WLR 804 …. 22.14 Blomley v Ryan (1956) 99 CLR 362 …. 18.1, 18.4, 18.11, 18.14, 18.15 Bodapati v Westpac Banking Corp [2015] QCA 7 …. 18.8 Bolton v Madden (1873) LQ 9 QB 55 …. 5.6 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; 43 ALR 68; [1982] HCA 53 …. 8.2, 8.13, 8.14, 8.15, 8.17, 13.5 Borrowman v Rossel (1864) 16 CBNS 58 …. 22.36 Borthwick v Carruthers (1787) 1 TR 648; 99 ER 1300 …. 6.1 Bosaid v Andry [1963] VR 465 …. 10.7, 10.11, 10.13

Boscaini Investments Pty Ltd v Petrides (1982) ASC 52-222 …. 16.14 Boston v Boston [1904] 1 KB 124 …. 10.3, 10.4 Boughton v Knight (1873) LR 3 PD 64 …. 6.5, 6.8 Boulton v Jones (1857) 2 H & N 564; 157 ER 232 …. 4.2, 22.3 Bourne v Mason [1726] EngR 165; (1669) 1 Vent 6; 86 ER 5 …. 14.2, 14.17 Bowes v Chaleyer (1923) 32 CLR 159; [1923] HCA 15 …. 24.4, 24.14 — v Shand (1877) 2 App Cas 455 …. 24.4 Bowlay Logging Ltd v Domtar Ltd (1978) 87 DLR (3d) 325 …. 25.8 — v — (1982) 135 DLR (3d) 179 …. 25.8 BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925; [1979] 1 WLR 783 …. 15.41 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266; 16 ALR 363; 52 ALJR 20; [1977] HCA 40 …. 13.3, 13.4, 13.7, 13.9, 13.18, 13.19 Bradley Egg Farm v Clifford [1943] 2 All ER 378 …. 6.16 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 …. 3.3, 4.4, 7.21 Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424; [2001] FCA 1833 …. 11.15 Brauer & Co (Great Britain) Ltd v James Clerk (Brush Materials) Ltd [1952] 2 Lloyd’s Rep 147 …. 15.15 Braunbeck v Mercantile Building Land & Investment Co Ltd (1887) 9 LR (NSW) 9 …. 10.12 Breen v Williams (1996) 186 CLR 71; 138 ALR 259 …. 11.13, 13.5, 13.14 Brehm v Wright (2008) Aust Contract R ¶90-282; [2007] NSWSC 1101 …. 5.12, 5.15, 5.16 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA

[1978] 2 Lloyd’s Rep 109 …. 15.37 Bremer Vulkan Schiffbau und Maschinenfabrick v South India Shipping Corp Ltd [1981] AC 909 …. 5.11, 15.37 Brennan v Bolt Burdon [2004] EWCA Civ 1017 …. 16.10 Bressan v Squires [1974] 2 NSWLR 460 …. 4.1, 4.17 Bret v JS (1600) 78 ER 987 …. 5.5 Brickles v Snell [1916] 2 AC 599 …. 24.19 Bridgewater v Leahy (1998) 194 CLR 457; 158 ALR 66 …. 18.1, 18.3, 18.15, 18.20, 20.21 Briginshaw v Briginshaw (1938) 60 CLR 336 …. 10.23 Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 …. 4.20, 4.21 Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143; 26 ALR 525 …. 15.6, 15.8, 15.9, 15.41 Britain v Rossiter (1879) 11 QBD 123 …. 10.20 British and American Telegraph Co v Colson (1871) LR 6 Exch 108 …. 4.16 British Car Auctions Ltd v Wright [1972] 1 WLR 1519 …. 3.16 British Columbia and Vancouver’s Island Spar, Lumber and Saw-Mill Co Ltd v Nettleship (1868) LR 3 CP 499 …. 25.18 British Empire Films Pty Ltd v Oxford Theatres Pty Ltd [1943] VLR 163; [1943] ALR 383 …. 5.9 British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166 …. 15.8, 15.15, 15.29 British Steel Corp v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504 …. 8.13 British Westinghouse Electric and Manufacturing Co Ltd v

Underground Electric Railways Co of London Ltd [1912] AC 673 …. 14.14 British Workman’s & General Insurance Co Ltd v Cunliffe (1902) 18 TLR 502 …. 16.11 Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 …. 3.3, 3.11, 4.13 Brooke v Hewitt (1796) 3 Ves Jr 253 …. 6.20 Brooker v Friend & Brooker Pty Ltd [2006] NSWCA 385 …. 3.3 Brooks, Re (1903) 21 WN (NSW) 4 …. 6.9 Broome v Cassell & Co [1972] UKHL 3; [1972] AC 1027 …. 14.18 Brown v Gould [1972] Ch 53 …. 8.3 — v Heffer (1967) 116 CLR 344; [1967] HCA 40 …. 8.15 — v Jam Factory Pty Ltd (1981) 35 ALR 79; 53 FLR 340 …. 17.2 — v NSW Trustee and Guardian [2011] NSWSC 1203 …. 19.11 — v Raphael [1958] Ch 636 …. 16.8 — v Robertson (1890) 16 VLR 786 …. 10.4 Brownlie v Campbell (1880) 5 App Cas 925 …. 16.20 Bruce v Tyley (1916) 21 CLR 277; 22 ALR 215 …. 15.32 Brusewitz v Brown (1923) NZLR 1106 …. 18.11 Bruton v London & Quadrant Housing Trust [2000] 1 AC 406 …. 6.1 Buckley v Tutty (1971) 125 CLR 353; [1972] ALR 370 …. 7.17 Budget Stationery Supplies Pty Ltd v National Australia Bank Ltd (SC NSW, Santow J, 25 September 1996, No 4303/93, unreported) …. 22.35 Bull v Australian Quarter Horse Association [2015] NSWCA 354 …. 13.3 — v Fulton (1942) 66 CLR 295; [1942] ALR 221; [1942] HCA 13 …. 6.6,

6.8 Bullock v Lloyds Bank Ltd [1995] 1 Ch 327 …. 19.16 Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 …. 13.15, 13.16, 13.17, 13.19, 13.20, 13.21 Burgess v Cox [1951] Ch 383; [1950] 2 All ER 1212 …. 10.8, 10.9, 10.12, 10.14 Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; 69 ALR 11 …. 25.17 Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 …. 22.29 Bustfree Pty Ltd v Llewellyn [2013] QCA 103 …. 20.19 Butcher v Lachlan Elder Realty Pty Ltd (2002) 55 NSWLR 558; 11 BPR 20,317 …. 16.5, 17.3 Butler v Fairclough (1917) 23 CLR 78; 23 ALR 62 …. 5.13, 5.15 Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd [1979] 1 All ER 965; [1979] 1 WLR 401 …. 4.6 Butlins Settlement Trusts, Re [1976] Ch 251 …. 22.28 Butt v M’Donald (1896) 7 QLJ 68 …. 13.22 Butts v O’Dwyer (1952) 87 CLR 267; [1953] ALR 117; [1952] HCA 74 …. 8.15, 10.2 Buxton v Bellin (1877) 3 VLR (E) 243 …. 10.7, 10.11 Byers v Brown (1859) 2 Legge 1136 …. 10.11 — v Dorotea Pty Ltd (1986) 69 ALR 715; (1987) ASC 55-534 …. 17.15 Byrne, Re; Ex parte Norco Co-op Ltd (1986) 15 FCR 255 …. 10.11 Byrne v Australian Airlines Ltd (1995) 185 CLR 410; 131 ALR 422 …. 13.3, 13.4, 13.10, 13.13, 13.14 — v van Tienhoven (1880) LR 5 CPD 344 …. 3.20

C

C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350 …. 25.17, 25.18 Cable (1956) Ltd v Caratti [1971] WAR 86 …. 10.13 Cadogan Estates Ltd v McMahon [2001] 1 AC 378 …. 6.20 Callisher v Bischoffheim (1870) LR 5 QB 449 …. 5.13 Calvo v Sweeney [2009] NSWSC 719 …. 19.4 Cameron v Avery (1873) 4 AJR 141 …. 10.8 — v Hogan (1934) 51 CLR 358; [1934] ALR 298 …. 7.14, 7.17 Campbell v University of Adelaide (2006) 150 IR 225; [2006] SASC 92 …. 3.3 Campbelltown City Council v WSN Environmental Solutions Pty Ltd [2015] NSWSC 155 …. 12.5 Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45; 169 ALR 677 …. 17.11 Canada Steamship Lines Ltd v R [1952] AC 192 …. 12.9 Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478 …. 8.14 Canning v Temby (1905) 3 CLR 419; [1905] HCA 45 …. 24.16 Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 …. 22.5 Carberry v Gardiner (1936) 36 SR (NSW) 559 …. 10.2 Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1; [1893] 1 QB 256 …. 3.1, 3.4, 3.7, 3.9, 3.10, 3.11, 4.1, 4.2, 4.10, 4.13, 7.9, 7.10 Carlingford Australia General Insurance Ltd v EZ Industries Ltd [1988] VR 349 …. 8.3 Carlton Cricket Football Social Club v Joseph (1970) VR 487 …. 6.16, 6.17 Carmichael v National Power Plc [1999] 4 All ER 897; [1999] UKHL 47; [1991] 1 WLR 2042 …. 11.15

Carnegie v Waugh (1823) 1 LJ (KB) 89 …. 14.2, 14.17 Carnival Cruise Lines, Inc v Shute 499 US 585, 113 L Ed 2d 622, 111 S Ct 1522 (1991) …. 3.19 Carpenter v McGrath (1996) 40 NSWLR 39 …. 15.33 Carr v JA Berriman Pty Ltd (1953) 89 CLR 327; [1953] HCA 31 …. 24.9, 24.11, 24.13, 24.15, 24.16, 24.17 Carrington Slipways Pty Ltd v Patrick Operations Pty Ltd (1991) 24 NSWLR 745 …. 14.20 Carter v Hyde (1923) 33 CLR 115; 29 ALR 430 …. 4.1, 4.2, 4.5 Casey’s Patents, Re; Stewart v Casey [1892] 1 Ch 104 …. 5.11 Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 …. 13.13 Cathels v Commissioner of Stamp Duties (1959) 79 WN (NSW) 271 …. 14.5, 14.7 Causer v Browne [1952] VLR 1; [1952] ALR 12 …. 11.8 Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd (2014) 45 VR 79 …. 23.4, 25.25 Cedar Meats Pty Ltd v Five Star Lamb Pty Ltd [2013] VSC 164 …. 25.25 Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33 …. 13.18, 13.20 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 …. 9.6, 9.7, 9.8 Chalmers, Ex parte (1873) LR 8 Ch App 289 …. 6.20, 6.23 Chambers v Rankine [1910] SALR 73 …. 10.12 Chapelton v Barry Urban District Council [1940] 1 KB 532 …. 11.5, 11.6, 11.8, 11.9 Chaplin v Hicks [1911] 2 KB 786 …. 25.6

Chappel v Hart (1998) 195 CLR 232; 156 ALR 517 …. 25.14 Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 …. 2.2, 5.8 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 …. 12.5 Chinnock v Marchioness of Ely [1865] EngR 335; (1865) 4 De GJ & S 638; 46 ER 1066 …. 7.20 Ciavarella v Polimeni [2008] NSWSC 234 …. 9.22 Circle Freight International Ltd v Medeast Gulf Exports Ltd [1988] 2 Lloyd’s Rep 427 …. 11.11 City Bank of Sydney v McLauglin (1909) 9 CLR 615; 16 ALR 353 …. 6.8 City of Gosnells v Roberts (1994) 12 WAR 437 …. 6.16 CJ Bova Pty Ltd v Geoffrey Needham Pty Ltd [2009] NSWSC 1353 …. 4.4 Clark v Macourt (2013) 253 CLR 1; 304 ALR 220 …. 25.2, 25.3, 25.4 Clarke v Dunraven [1897] AC 59 …. 3.1 — v Lonergan (1960) 78 WN (NSW) 367 …. 10.8 Classic International Pty Ltd v Lagos (2002) 60 NSWLR 241; 11 BPR 20,573 …. 22.20 Claude Neon Ltd v Hardie [1970] Qd R 93 …. 15.7 Cleaver v Mutual Reserve Fund Life Association [1892] 1 QB 147 …. 14.10, 14.17 Clifton v Coffey (1924) 34 CLR 434; [1924] HCA 35 …. 24.4 Clohesy v Maher (1880) 6 VLR (L) 357 …. 10.11 Clough v London and North Western Railway Co (1871) LR 7 Exch 26 …. 16.27 CMA Corp Ltd v SNL Group Pty Ltd [2012] NSWCA 138 …. 5.25 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 …. 8.1, 8.2, 8.4, 8.11, 8.16, 8.17, 8.18

Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (‘The Marine Star’) [1996] 2 Lloyd’s Rep 383 …. 15.40 Coastal Estates Pty Ltd v Melevende [1965] VicRp 60; [1965] VR 433 …. 16.27, 24.18 Cockburn v Alexander [1848] EngR 1009; (1848) 6 CB 791; 136 ER 1459 …. 25.7 Cocking v Ward (1845) 1 CB 858 …. 10.4 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; 41 ALR 367; [1982] HCA 24 …. 7.21, 11.3, 11.16, 11.17, 12.3, 12.5, 12.6, 13.2, 13.3, 13.7, 13.14, 15.3, 15.4, 15.5, 15.6, 15.8, 15.10, 15.16, 15.20, 15.22, 15.24, 15.27 Cohen v Cohen (1929) 42 CLR 91; [1929] ALR 204 …. 7.2 — v iSoft Group Pty Ltd [2012] FCA 1071 …. 5.23 — v Roche [1927] 1 KB 169 …. 10.16 Collen v Wright (1857) 8 El & Bl 647 …. 6.19 Collin v Holden [1989] VR 510 …. 10.11 Collins v Godefroy (1831) 109 ER 1040 …. 5.18 Combe v Combe [1952] EWCA Civ 7; [1951] 2 KB 215 …. 9.8 Combis, Trustee of the Property of Peter Jensen (Bankrupt) v Jensen (No 2) (2009) 112 ALD 301; [2009] FCA 1383 …. 5.15 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402 …. 18.1, 18.3, 18.5, 18.7, 18.8, 18.9, 18.10, 18.11, 18.14, 18.15, 18.16, 20.17, 20.21 Commercial Banking Co of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337; [1972–73] ALR 393 …. 16.21 Commercial Base Pty Ltd v Watson [2013] VSC 334 …. 20.21 Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 …. 22.32, 22.33, 22.35

Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329; 7 BPR 15,083 …. 22.30 Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178; [1920] HCA 45 …. 14.15 Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; 312 ALR 356 …. 13.1, 13.4, 13.14, 13.15 — v Doggett [2014] VSC 423 …. 20.10, 20.11 — v Poynten (1996) Aust Contract R 90-065 …. 2.3 — v Shannon [2013] NSWSC 1076 …. 24.10 — v Spira (2002) 174 FLR 274 …. 13.17 — v TLI Management Pty Ltd [1990] VR 510 …. 7.12 Commonwealth Development Bank of Australia Ltd v Cassegraine [2002] NSWSC 965 …. 13.17 Commonwealth Homes and Investment Co Ltd, Re [1943] SASR 211 …. 10.10 Commonwealth of Australia v VL Investments (Vic SC, Marks J, 18 December 1987, unreported) …. 22.17 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 104 ALR 1 …. 25.7, 25.8 — v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567; 54 FLR 439 …. 6.18 — v John White & Sons (NT) Pty Ltd (1967) 13 FLR 172 …. 10.15 — v Ling (1993) 44 FCR 397; 118 ALR 309 …. 6.18 — v Scituate Savings Bank (1884) 137 Mass 301 …. 9.8 — v Verwayen (1990) 170 CLR 394; 95 ALR 321 …. 9.1, 9.2, 9.3, 9.4, 9.5, 9.11, 9.12, 9.13, 9.15, 9.16, 9.19, 9.20, 9.26, 9.30, 9.31, 9.32, 24.20, 24.21 Como v Helmers [2011] WASC 179 …. 9.27

Comptoir d’Achat et de Vente du Boerenbond Belge S/A v Luis de Ridder Limitada (The Julia) [1949] AC 293 …. 15.3, 15.29 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; 92 ALR 193 …. 17.7 Concrete Pty Ltd v Parramatta Design and Developments Pty Ltd (2006) 229 CLR 577; 231 ALR 663 …. 13.22 Concut Pty Ltd v Worrell (2000) 176 ALR 693; 75 ALJR 312 …. 23.3, 24.12 Conlon v Simms [2006] 2 All ER 1024 …. 16.15 Connolly Ltd v Bellway Homes Ltd [2007] EWHC 895 (Ch) …. 22.34 Connor v Martin 3 Wils 5 …. 6.26 Conservative and Unionist Central Office v Burrell (Inspector of Taxes) [1982] 2 All ER 1; [1982] 1 WLR 522 …. 7.17 Consolidated Neon (Phillips Systems) Pty Ltd v Tooheys Ltd (1942) 42 SR (NSW) 152 …. 15.3, 15.18 Con-Stan Industries v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226; 64 ALR 481; [1986] HCA 14 …. 13.11, 13.14, 24.20 Construction Technologies Australia Pty Ltd v Doueihi (2014) 17 BPR 33,457 …. 9.12, 9.20, 9.21, 9.25, 9.28 Continental C & G Rubber Co Pty Ltd, Re (1919) 27 CLR 194 …. 15.37, 15.41, 22.16 Coogee Esplanade Surf Motel Pty Ltd v Commonwealth (1976) 50 ALR 363 …. 6.19, 10.8 Cooney v Burns (1922) 30 CLR 216; 28 ALR 181 …. 10.23, 10.24 Cooper v Phibbs (1867) LR 2 HL 149 …. 22.10, 22.16, 22.18 Cooperative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 …. 22.28 Corcoran v O’Rourke (1888) 14 VLR 889 …. 10.8, 10.12, 10.15

Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd (2013) 29 BCL 329; [2012] NSWCA 184 …. 12.5, 24.10 Corley v Chippendale (1882) 1 QLJ 69 …. 10.8 Cornish & Co v Kanematsu (1913) 13 SR (NSW) 8 …. 15.19 Corporation of the City of Adelaide v Adelaide City Fines Pty Ltd (2009) 253 ALR 417 …. 21.4 Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2014] VSCA 353 …. 9.11, 9.21, 11.18 Cottee v Franklins Self-Serve Pty Ltd [1997] 1 Qd R 469; (1995) Aust Contract R 90-060 …. 3.15 Couldery v Bartrun (1880) LR 19 Ch D 394 …. 5.25 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385; [1967] HCA 3 …. 5.6, 14.1, 14.2, 14.3, 14.5, 14.8, 14.10, 14.13, 14.16, 14.17 Coulson v Allison (1860) 2 De GF & J 521; 45 ER 723 …. 16.11 — v — (1860) 2 Giff 279; 66 ER 117 …. 16.11 Council of the City of Sydney v West (1965) 114 CLR 481; [1966] ALR 538 …. 12.9 County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 …. 11.15 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 All ER 716; [1975] 1 WLR 297 …. 8.17 Courtney v Powell [2012] NSWSC 460 …. 19.11 Couturier v Hastie (1856) 5 HL Cas 673 …. 22.12, 22.13 Cox v Prentice (1815) 3 M & S 344 …. 22.11 Crabb v Arun District Council [1975] EWCA Civ 7; [1976] Ch 179 …. 9.5, 9.8, 24.20 Crago v McIntyre [1976] 1 NSWLR 729 …. 6.8

Craig (dec’d), Re [1971] Ch 95 …. 19.3, 19.4 Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305; [1920] HCA 64 …. 24.18, 24.19 Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 …. 22.27 Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438 …. 23.2 Crears v Hunter (1887) 19 QBD 341 …. 5.16 Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 …. 20.6, 20.16, 20.17, 20.19, 20.21, 20.22, 20.24 Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 …. 15.8, 15.36, 15.37 Crossley v Maycock (1874) LR 18 Eq 180 …. 7.20 Crown v Clarke (1927) 40 CLR 227; [1928] ALR 97 …. 5.3 Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2013] VSC 614 …. 9.11 CTN Cash and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714 …. 20.11 Cumming v Ince (1847) 116 ER 418 …. 20.1 Cundy v Lindsay (1878) 3 App Cas 459 …. 22.1, 22.4, 22.6 Currie v Misa (1875) LR 10 Exch 153 …. 5.3, 5.5 Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 …. 11.4, 11.5 Curwen v Yan Yean Land Co Ltd (1891) 17 VLR 745 …. 16.13 Cutter v Powell (1795) 6 TR 320 …. 15.21 Cutts v Buckley (1933) 49 CLR 189 …. 11.19

D D J Hill Co Pty Ltd v Walter H Wright Pty Ltd [1969] VR 749 …. 11.2 DA Starke Pty Ltd v Yard (2012) 279 LSJS 101; [2012] SASC 19 …. 3.9

Dabbs v Seaman (1925) 36 CLR 538; [1925] HCA 26 …. 24.20 Dahl v Nelson (1881) 6 App Cas 38 …. 15.30 Dalgety & Co Ltd v Gray (1919) 26 CLR 249 …. 10.4 Dance With Mr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332 …. 12.5 Darbey v Whitaker [1857] EngR 762; (1857) 4 Drew 134; 62 ER 52 …. 8.15 Darlington Borough Council v Wiltshier Northern Ltd [1995] 3 All ER 895; [1995] 1 WLR 68 …. 14.3, 14.14 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; 68 ALR 385 …. 12.9 Darmanin v Cowan [2010] NSWSC 1118 …. 7.15 Darter Pty Ltd v Malloy [1993] 2 Qd R 615 …. 10.2, 10.7 Daulia Ltd v Four Millbank Nominees Ltd [1978] 1 Ch 231 …. 3.21, 10.4 Daunt v Daunt [2013] VSC 706 …. 19.12 — v — [2015] VSCA 58 …. 19.12 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; 109 ALR 57 …. 9.16, 16.10 Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642; [1954] ALR 831 …. 12.9 — v Reilly [1898] 1 QB 1 …. 24.19 Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3; [1956] AC 696 …. 13.7, 15.3, 15.5, 15.6, 15.7, 15.8, 15.11, 15.14, 15.15, 15.24, 15.27 De Choisy v Hynes [1937] 4 All ER 54 …. 6.24 De Garis and Rowe’s Lease, Re [1924] VLR 38 …. 15.36 De Leuil v Jeremy (1964) 65 SR (NSW) 137 …. 10.12, 10.13

De Soysa v De Pless Pol [1912] AC 194 …. 24.16 Deane v The City Bank of Sydney (1904) 2 CLR 198 …. 11.15 Debtor, Re; Ex parte the Debtor [1908] 1 KB 344 …. 24.19 Deemcope Pty Ltd v Cantown Pty Ltd [1995] 2 VR 44 …. 20.10, 20.19 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; 110 ALR 608 …. 16.12, 16.22, 17.14 Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699 …. 15.11 Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 …. 15.3, 15.5, 15.28, 15.33, 15.37, 15.41 Derry v Peek (1889) 14 App Cas 337 …. 16.17 Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167 …. 10.17 Dey v Victorian Railways Commissioners (1949) 78 CLR 6; [1949] HCA 1 …. 24.18 DH MB Pty Ltd v Manning Motel Pty Ltd [2014] NSWCA 396 …. 3.7 DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728; 285 ALR 311 …. 9.5, 9.24, 9.25, 9.28, 9.32 Di Biase v Rezek [1971] 1 NSWLR 735 …. 10.8, 10.11, 10.12 Diakogiannis v Johnson (1989) NSW ConvR ¶55-472 …. 4.14 Dickinson v Dodds (1876) 2 Ch D 463 …. 3.20 Digital Equipment Corp v Uniq Digital Technologies, Inc 73 F3d 756 (7th Cir 1996) …. 3.19 Dillwyn v Llewelyn (1862) 4 De G F & J 517; 45 ER 1285 …. 5.5, 9.15, 9.28, 9.30 Dimmock v Hallett (1866) LR 2 Ch App 21 …. 16.5 Dimond v Moore (1931) 45 CLR 159; [1931] ALR 177 …. 15.36 Dimskal Shipping Co SA v International Transport Workers

Federation (‘The Evia Luck’ No 2) [1992] 2 AC 152 …. 20.6, 20.17, 20.19, 20.21, 20.25 Dinan v Harper [1922] VLR 49 …. 10.8 Diploma Construction (WA) Pty Ltd v Best Bar Pty Ltd (No 2) [2015] WASC 230 …. 20.10 Diprose v Louth (No 1) (1990) 54 SASR 438 …. 18.11 Director General of Fair Trading v First National Bank plc [2001] UKHL 52; [2002] 1 AC 481 …. 21.9, 21.10 Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd (Civil Claims) [2008] VCAT 1332 …. 21.5, 21.8, 21.9 — v Trainstation Health Clubs Pty Ltd (Civil Claims) [2008] VCAT 2092 …. 21.5 Director of Public Prosecutions for Victoria v Le (2007) 232 CLR 562; 240 ALR 204 …. 5.7, 5.8 Discount and Finance Ltd v Gehrig’s NSW Wines Ltd (1940) 40 SR (NSW) 598 …. 9.1 Donaldson v Natural Springs Australia Ltd [2015] FCA 498 …. 13.1 Donis v Donis (2007) 19 VR 577 …. 9.31 Dougan v Ley (1946) 71 CLR 142 …. 10.18 Doull, In the Estate of (1881) 7 VLR (IP & M) 70 …. 6.1, 6.5 Dowdell v Knispel Fruit Juices Pty Ltd (t/as Nippys) [2003] FCA 851 …. 7.14 Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd [2012] QSC 290 …. 8.14 Downtown King West Development Corp v Massey Ferguson Industries Ltd 28 OR (3d) …. 22.33 Dowsett v Reid (1912) 15 CLR 695; 19 ALR 15 …. 18.17, 22.19

Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250; [1953] 2 All ER 1475 …. 14.2, 14.4, 14.13 Druin Pty Ltd atf Druin No 3 Trust t/as Harvey Norman Commercial Division v Corbin [2014] NSWSC 510 …. 3.7 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223; [1978] HCA 12 …. 11.17, 12.6, 23.1, 23.4, 24.12, 24.13 Dublin City Distillery (Great Brunswick Street, Dublin) Ltd v Doherty [1914] AC 823 …. 10.17 Dudgeon v Chie (1955) 55 SR (NSW) 450 …. 10.7 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 …. 25.22 — v Selfridge & Co Ltd [1915] UKHL 1; [1915] AC 847 …. 2.2, 5.5, 5.6, 14.1, 14.2, 14.5, 14.6, 14.8, 14.13, 14.14, 14.17 Dunlop v Higgins (1848) 9 ER 805 …. 4.1, 4.2, 4.4 Dunn v McDonald [1897] 1 QB 555 …. 6.19 Dunton v Dunton (1892) 18 VLR 114 …. 5.8 Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24 …. 20.2, 20.6 Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd (1968) 2 QB 839 …. 9.8 Dutton v Poole (1678) 83 ER 523 …. 14.2 Dynevor Pty Ltd v Proprietors, Centrepoint Building Units [1995] QCA 166 …. 5.23 Dyster v Randall & Sons [1926] 1 Ch 932 …. 22.3

E E Johnson & Co (Barbados) Ltd v NSR Ltd [1997] AC 400 …. 15.34 E T Fisher & Co Pty Ltd v English Scottish & Australian Bank Ltd (1940) 64 CLR 84; [1941] ALR 1 …. 5.25

Earl of Aylesford v Morris (1873) 8 Ch App 484 …. 18.2 Earl of Beauchamp v Winn (1873) LR 6 HL 223 …. 22.21 Earl of Chesterfield v Janssen (1751) 28 ER 32 …. 18.2 Earl of Potmore v Taylor (1831) 4 Sim 182 …. 18.2 Earney v Australian Property Investment Strategic Pty Ltd [2010] VSC 621 …. 24.8 Eastwood v Kenyon (1840) 113 ER 482 …. 5.2, 5.3, 5.4 Easyfind (NSW) Pty Ltd v Paterson (1987) 11 NSWLR 98 …. 22.31 eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450 …. 11.7 Eccles v Bryant and Pollock (1948) Ch 93 …. 7.20 Edgar v Blick [1814] EngR 53; (1816) 1 Stark 464; 171 ER 531 …. 3.18 Edgington v Fitzmaurice (1885) 29 ChD 459 …. 8.10, 16.9, 16.26 Edlin v Williams [1998] QCA 439 …. 5.15, 5.16 Edwards v Skyways Ltd [1964] 1 All ER 494; [1964] 1 WLR 349 …. 7.6, 7.7, 7.10, 7.11 Edwinton Commerical Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] 2 Lloyd’s Rep 517 …. 15.8, 15.26 Egan v Caveny [1921] VLR 27 …. 10.11 — v Ross (1928) 29 SR (NSW) 382 …. 10.8 Egis Consulting Australia Pty Ltd v First Dynasty Mines Ltd [2001] WASC 22 …. 4.21 Elder’s Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1941) 65 CLR 603; [1941] HCA 31 …. 24.18 Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25; [2014] HCA 7 …. 4.3, 12.4, 12.5, 12.6 Electricity Generation Corp t/as Verve Energy v Woodside Energy

Ltd [2013] WASCA 36 …. 20.6, 20.21, 20.22 Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646; [1982] 3 All ER 801 …. 10.1, 10.11, 10.12, 10.13, 10.14, 10.19 Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1994) 63 SASR 235 …. 4.17 Ellery v Beck and The Royal Insurance Fire and General (NZ) Ltd (1990) 6 ANZ Ins Cas 61-045 …. 24.20 Ellimark Pty Ltd v Calvo [2015] NSWSC 1240 …. 18.7 Ellul v Oakes (1972) 3 SASR 377 …. 8.1, 10.12, 11.19 Embiricos v Sydney Reid & Co [1914] 3 KB 45 …. 15.30, 15.31 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 …. 4.1, 4.2, 4.13 Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission (2006) 32 WAR 204 …. 11.18, 11.19 Enderby Town Football Club Ltd v Football Association Ltd [1971] Ch 591 …. 7.17 Energy World Corp Ltd v Maurice Hayes and Associates Pty Ltd (2007) 239 ALR 457 …. 22.29 Entores Ltd v Miles Far East Corp [1955] 2 QB 327 …. 4.1, 4.14, 4.20, 4.21 Equitable Life Assurance Society v Hyman [2002] 1 AC 408 …. 12.2 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 …. 20.17, 20.21 Equiticorp Financial Services Ltd (NSW) v Equiticorp Financial Services Ltd (NZ) (1992) 29 NSWLR 260; 9 ACSR 199 …. 20.19 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; 211 ALR 101; [2004] HCA 55 …. 7.21, 11.15, 11.17 — v — [2006] QCA 194 …. 5.26

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; 187 ALR 92; [2002] HCA 8 …. 7.13, 7.14, 7.15, 7.21, 11.3 Erratt v Grills [2015] NSWSC 594 …. 13.15 Errington v Errington [1952] 1 KB 290 …. 5.5 Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260 …. 15.28 Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241; 142 ALR 750 …. 16.18 Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175 …. 14.17 Esso Australia Resources Ltd v Plowman (1995) 183 CLR 10; 128 ALR 391 …. 11.13 Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477 …. 13.15, 13.20 — v — [2005] VSCA 228 …. 13.15, 13.19, 13.21 Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117; [1976] 1 WLR 1 …. 7.10 — v Mardon [1976] QB 801 …. 16.7, 16.18 Etablissments Georges et Paul Levy v Adderley Navigation Co Panama SA (‘The Olympic Pride’) [1980] 2 Lloyd’s Rep 67 …. 22.26, 22.29 European Bank Ltd v Citibank Ltd (2004) 60 NSWLR 153 …. 15.40 — v Robb Evans of Robb Evans & Associates (2010) 240 CLR 432; 264 ALR 1 …. 25.17 Evans v Braddock [2015] NSWSC 249 …. 9.23 — v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237; [2012] FCAFC 81 …. 7.15 — v Wyatt (1880) 43 LT 176 …. 24.18 Evda Nominees Pty Ltd v Victoria (1984) 154 CLR 311; [1984] HCA 18

…. 14.18 Eveready Australia Pty Ltd v Gillette Australia Pty Ltd (No 4) [2000] ATPR ¶41-751 …. 16.2, 16.6 Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160 …. 13.20, 13.21 Ezishop.Net Ltd (in liq) v Veremu Pty Ltd (2003) 45 ACSR 199 …. 15.22

F F L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 …. 11.17 FA Tamplin SS Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 …. 15.13, 15.18 FAI General Insurance Co Ltd v Ocean Marine Mutual Protection and Indemnity Association (1997) 41 NSWLR 559 …. 16.27 FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 …. 7.14 Falck v Williams [1900] AC 176 …. 22.16 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 …. 12.3 Farmer v Honan (1919) 26 CLR 183; [1919] HCA 13 …. 7.20, 8.10 Farmers’ Co-operative Executors & Trustees Ltd v Perks (1989) 52 SASR 399 …. 19.3, 19.4, 19.6 Farmer’s Mercantile Union and Chaff Mills Ltd v Coade (1921) 30 CLR 113; 28 ALR 17 …. 4.1, 4.13 Farmers Mutual Insurance Ltd v Slavich (1995) 9 ANZ Ins Cas 61-295 …. 24.20 Farr Smith & Co Ltd v Messers Ltd [1928] 1 KB 397 …. 10.16, 10.18 Farrelly v Hircock (No 1) [1971] Qd R 341 …. 10.10

Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1979] AC 757 …. 24.9, 24.13 Feltham’s Trusts, Re (1855) 1 K & J 528; 69 ER 528 …. 12.8 Felthouse v Bindley (1862) 142 ER 1037 …. 4.1, 4.12, 4.13 Ferme v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384 …. 21.10 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 …. 15.28, 15.41 Field v Shoalhaven Transport Pty Ltd [1970] 3 NSWR 96 …. 16.26 Filby v Hounsell (1896) 2 Ch 737 …. 7.20 Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 …. 7.21 Finch v Sayers [1976] 2 NSWLR 540 …. 15.21 Finelvet AG v Vinava Shipping Co Ltd [1983] 1 WLR 1469 …. 15.29 Fink v Fink (1946) 74 CLR 127; [1946] HCA 54 …. 25.6, 25.8 Finlayson v Carr [1978] 1 NSWLR 657 …. 7.17 — v Finlayson & Gillam (2002) 174 FLR 165; [2002] FamCA 898 …. 15.26 Finucane v NSW Egg Corporation (1988) 80 ALR 486 …. 11.15 Firstpost Homes Ltd v Johnson [1995] 4 All ER 355; [1995] 1 WLR 1567 …. 10.11 Firth v Halloran (1926) 38 CLR 261 …. 15.36 Fisher v Bell [1961] 1 QB 394 …. 3.9, 3.15 Fishlock v Campaign Palace Pty Ltd [2013] NSWSC 531 …. 24.14 Fitch v Snedaker 38 NY 248 (1886) …. 4.8 Fitzgerald v Masters (1956) 95 CLR 420; [1956] HCA 53 …. 8.5 Fitzpatrick v Michel (1928) 28 SR (NSW) 285 …. 16.8

Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566 …. 16.9 Fleming v Beevers [1994] 1 NZLR 385 …. 7.3, 7.13 Fletcher v Manton (1940) 64 CLR 37; [1940] ALR 337 …. 15.33, 15.34 — v Minister for the Environment and Heritage (1999) 73 SASR 474; [1999] SASC 223 …. 4.4 Flight v Booth [1834] EngR 1087; (1834) 1 Bing (NC) 370; 131 ER 1160 …. 24.4 Flinn v Flinn [1999] 3 VR 712; [1999] VSCA 109 …. 24.20 Flower v London and North Western Railway Co [1894] 2 QB 65 …. 6.2 Floyd v Buckland (1703) 2 Freeman 268 …. 10.22 Foakes v Beer (1884) 9 App Cas 605 …. 5.7, 5.23, 5.24, 5.25, 5.26 Fong v Cilli (1968) 11 FLR 495 …. 3.20 Foran v Wight (1989) 168 CLR 385; 88 ALR 413 …. 9.4, 24.14 Forbes v Australian Yachting Federation Inc (1996) 131 FLR 241 …. 9.26 Ford v Young (1882) 8 VLR (E) 93 …. 10.8 Ford Motor Co of Australia Ltd v Arrowcrest Group Pty Ltd (2003) 134 FCR 522 …. 20.11 Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd [2006] 1 SLR 927 …. 12.8 Foremost Pro Color, Inc v Eastman Kodak Co 703 F2d 534 (9th Cir 1983) …. 3.13 Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; [2012] HCA 39 …. 8.13 Foster v Wheeler (1888) LR 38 Ch D 130 …. 8.18 Fowler v Fowler (1859) 4 De G & J 250 …. 22.29

Foyle Enterprises Pty Ltd v Steve Parcell Building Services Pty Ltd [2015] QDC 225 …. 5.23 Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 …. 12.5 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; 264 ALR 15; [2009] NSWCA 407 …. 7.21, 11.14, 12.3, 12.5 Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 …. 22.1, 22.16, 22.26, 22.28, 22.30 Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59 …. 10.19, 10.24 Freeman v Cooke (1848) 2 Ex 654; 154 ER 652; [1848] EngR 506 …. 3.7 Freeth v Burr (1874) LR 9 CP 208 …. 24.9 Friedeberg-Seeley v Klass (1957) 101 Sol Jo 275 …. 20.1 Frizzo v Frizzo [2011] QSC 107 …. 6.6 Frost v Knight (1872) LR 7 Exch 111 …. 24.14 FTV Holdings Cairns Pty Ltd v Smith [2014] QCA 217 …. 3.20 Fujitsu Australia Ltd v Dewar Electronics Pty Ltd & Adda Corp [2001] VSC 222 …. 4.21 Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 524; [1923] HCA 12 …. 24.4 Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217 …. 10.11, 10.19, 17.16

G G Scammell & Nephew Ltd v HC & JG Ouston [1941] AC 251 …. 8.1, 8.4, 8.7, 8.12, 8.13 Galafassi v Kelly (2014) 87 NSWLR 119 …. 24.7, 24.8, 24.19 Galaxidis v Galaxidis [2001] NSWSC 1123 …. 5.5

— v — [2004] NSWCA 111 …. 24.20 Galaxy Media Pty Ltd, Re (2001) 167 FLR 149; 39 ACSR 483 …. 8.4, 8.10 Galloway v Galloway (1914) 30 TLR 531 …. 22.15 Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226 …. 15.3, 15.28 Garcia v National Australia Bank Ltd (1998) 194 CLR 395; 155 ALR 614 …. 6.26, 18.3, 19.20, 19.21 Gardiner v Grigg [1938] NSWStRp 40; (1938) 38 SR (NSW) 524 …. 10.18, 11.15 Garrard v Frankel (1862) 30 Beav 445 …. 22.36 Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149 …. 7.14 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; 63 ALR 600 …. 11.19 Gay v Loh [2009] 2 SLR 332; [2009] SGCA 3 …. 5.1, 5.23 Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14,551 …. 7.21 Gel Custodians Pty Ltd v Dewar [2014] WASC 177 …. 18.3 Gelling v Crespin (1917) 23 CLR 443; 24 ALR 41 …. 15.4 George Hudson Holdings Ltd v Rudder (1973) 128 CLR 387 …. 4.14 George Wimpey (UK) Ltd v VI Construction Ltd [2005] EWCA Civ 77 …. 22.32 Georgiou v Sindel [1982] 1 NSWLR 435 …. 10.7 Getreide-Import GmbH v Contimar SA Compania Industrial, Comercial y Maritima [1953] 1 WLR 207 …. 4.18 Giasoumi v Hutton [1977] VR 294 …. 10.7 Gibbons v Wright (1954) 91 CLR 423; [1954] ALR 383; [1954] HCA 17

…. 6.4, 6.5, 6.6 Gibson v Manchester City Council [1978] 2 All ER 583; [1978] 1 WLR 520 …. 3.3, 3.5 — v — [1979] 1 All ER 972; [1979] 1 WLR 294 …. 3.3 Gidley v Lord Palmerston (1822) 3 B & B 275 …. 6.19 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR (NSW) 122 …. 4.14 Gill & Duffus SA v Rionda Futures Ltd [1994] 2 Lloyd’s Rep 67 …. 10.7 Gillen v Atalanta Systems, Inc 997 F2d 280 (7th Cir 1993) …. 3.19 Gillespie Brothers & Co v Cheney, Eggar & Co [1896] 2 QB 59 …. 11.15 Gillett v Holt [2001] Ch 210 …. 9.16, 9.23, 9.24 Gillette Australia Pty Ltd v Energizer Australia Pty Ltd (2002) 193 ALR 629; 56 IPR 1 …. 17.13 Gino D’Alessandro Constructions Pty Ltd v Powis [1987] 2 Qd R 40 …. 10.2 Gipps v Gipps [1978] 1 NSWLR 454 …. 16.24 Gippsreal Ltd v Registrar of Titles & Kurek Investments Pty Ltd (2007) 20 VR 157 …. 3.14, 5.9 Giumelli v Giumelli (1999) 196 CLR 101; 161 ALR 473; [1999] HCA 10 …. 9.11, 9.18, 9.23, 9.28, 9.30, 9.31 Given v Pryor (1979) 24 ALR 442; 39 FLR 437 …. 16.2 Gladstone v Ball (1862) 1 W & W (E) 277 …. 10.11 Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270 …. 5.18 Glendarroch, The [1894] P 226 …. 15.13 Goldsbrough Mort & Co Ltd v Carter (1914) 19 CLR 429 …. 15.37 Godecke v Kirwan (1973) 129 CLR 629; 1 ALR 457; [1973] HCA 38 …. 7.21, 8.11, 8.13, 8.15, 8.18

Golden Key Ltd (in rec), Re [2009] EWCA Civ 636 …. 12.4, 12.7, 12.9 Goldsborough Mort & Co Ltd v Carter (1914) 19 CLR 429 …. 15.37 — v Quinn (1910) 10 CLR 674; 17 ALR 42 …. 3.20, 22.16, 22.25 Goldsworthy v Brickell [1987] Ch 378; [1987] 1 All ER 853; [1987] 2 WLR 133 …. 19.1, 19.7, 19.10 Gompertz v Bartlett (1853) 2 E & B 849 …. 22.15 Goodridge v Macquarie Bank Limited (2010) 265 ALR 170 …. 3.7 Goodwin’s of Newton Pty Ltd v Gurry [1959] SASR 295 …. 3.15 Gordon v Macgregor (1909) 8 CLR 316; [1909] HCA 26 …. 11.15 Gordon-Cumming v Houldsworth [1910] AC 537 …. 11.17 Goss v Lord Nugent [1833] 110 ER 713 …. 11.14 Gough & Gilmour Holdings Pty Ltd v Peter Campbell Earthmoving Pty Ltd [2009] NSWCA 37 …. 11.18 Gould v Gould [1970] 1 QB 275 …. 7.14 — v Vaggelas (1984) 157 CLR 215; 56 ALR 31 …. 9.18, 16.20, 16.22, 16.26 Governor & c of the Poor of Kingston-upon-Hull v Petch [1854] EngR 995; (1854) 10 156 ER 583; Exch 610 …. 7.20 GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 …. 7.21 Grace v Grace [2012] NSWSC 976 …. 19.10 Grainger & Son v Gough [1896] AC 325 …. 3.9, 3.12 Gramotnev v Queensland University of Technology (2015) 251 IR 448; [2015] QCA 127 …. 13.5 Graves v Legg [1854] EngR 497; (1854) 9 Ex 709; 23 LJ (EX) 228; 156 ER 304 …. 24.4 — v Northern NY Pub Co 260 AD 900, 22 NYS2d 537 (1940) …. 3.13

Greasley v Cooke [1980] 1 WLR 1306 …. 9.18 Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679; [2002] EWCA Civ 1407 …. 22.20, 22.22 Green v Sevin (1879) 13 ChD 589 …. 24.15, 24.16 Greenwood Shopping Plaza Ltd v Beattie (1980) 111 DLR (3d) 257 …. 14.18 Griffiths v Knight [1960] SR (NSW) 353 …. 5.15 Grime v Bartholomew [1972] 2 NSWLR 827 …. 8.10, 10.8, 10.12 Grist v Bailey [1967] Ch 532 …. 22.21 Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190 …. 13.5, 13.6 Grummitt v Natalisio [1968] VR 156 …. 10.11, 10.24 Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641; [1937] HCA 58 …. 9.2, 9.3, 9.5, 9.8, 9.13, 9.16, 9.26

H Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 …. 2.19, 25.6, 25.7, 25.13, 25.16, 25.17, 25.18, 25.19, 25.21, 25.25 Hahndorf Golf Club Inc v John Nitschke Nominees Pty Ltd (2003) 86 SASR 221 …. 8.3 Haines v Bendall (1991) 172 CLR 60; 99 ALR 385 …. 25.2 Hall v Busst (1960) 104 CLR 206; [1961] ALR 508 …. 8.2, 8.14 Halloran v Firth (1926) 26 SR (NSW) 183 …. 15.36 Hamer v Sidway 124 NY 538 (1891) …. 5.3, 9.2 Hamlyn & Co v Wood & Co (1891) 2 QB 488 …. 13.7 Hammersley v De Biel (1845) 12 Cl & Fin 45; 8 ER 1312; [1845] EngR 592 …. 9.6, 9.8 Handbury v Nolan (1977) 13 ALR 339 …. 11.15

Harbottle Brown & Co Pty Ltd v Halstead [1968] 3 NSWR 493 …. 7.17 Harcourt Brace Jovanovich Inc v Sun Bank National Association, No 87-3985 (Fla Cir Ct June 25, 1987) …. 2.5 Harling v Eddy [1951] 2 KB 739 …. 11.19 Harris v Jenkins [1922] SASR 59 …. 4.4 — v Nickerson (1873) LR 8 QB 286 …. 3.16 — v Smith (2008) 14 BPR 26,223 …. 22.28, 22.31 Harrison v West of Scotland Kart Club [2004] SCotCS 80 …. 6.15 Harrison & Jones Ltd v Bunten & Lancaster Ltd [1953] 1 QB 646 …. 22.16 Harse v Pearl Life Insurance Co [1904] 1 KB 558 …. 16.11 Hart v MacDonald (1910) 10 CLR 417; 16 ALR 585 …. 13.2, 13.3 — v Swaine (1877) 7 ChD 42 …. 16.11 Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810 …. 18.17, 19.14, 19.15 Hartley v Ponsonby (1857) 119 ER 1471 …. 5.21 Hartog v Colin & Shields [1939] 3 All ER 566 …. 22.1, 22.8, 22.33 Harvela Investment Ltd v Royal Trust Co of Canada (CI) Ltd [1986] AC 207 …. 3.17, 4.7 Harvey v Edwards Dunlop & Co Ltd (1927) 39 CLR 302; [1927] ALR 189 …. 10.8, 10.12, 10.14, 10.15 — v Facey [1893] AC 552 …. 3.1, 3.8 Haskew v Equity Trustees, Executors and Agency Co Ltd (1919) 27 CLR 231; 25 ALR 350 …. 19.17, 19.18 Hawick v Flegg (1958) 75 WN (NSW) 255 …. 7.17 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 …. 9.15, 20.9, 20.17

Hawkins v Clayton (1988) 164 CLR 539; 78 ALR 69 …. 11.13, 13.3, 13.10 — v Price [1947] Ch 645; [1947] 1 All ER 689 …. 10.8 Hawthorn Football Club Ltd v Harding [1988] VR 49 …. 8.8 Haydon v McLeod (1901) 27 VLR 395 …. 10.7 Head v Kelk [1962] NSWR 1363; [1963] SR (NSW) 340 …. 10.19 Heale v Phillips [1959] Qd R 489 …. 7.17 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 …. 16.18, 16.19 Heilbut, Symons and Co v Buckleton [1913] AC 30 …. 11.19 Heinmann v Commonwealth (1938) 38 SR (NSW) 691 …. 13.2, 13.5, 13.7 Henderson v Kane and Pioneer Club [1924] NZLR 1073 …. 7.19 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546; 79 ALR 83 …. 17.3, 17.14 Hennessey v Architectus Group Holdings Pty Ltd [2010] NSWSC 1390 …. 5.26 Henningsen v Bloomfield Motors Inc 32 NJ 358; 161 A2d 69 (NJ 1960) …. 2.4 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 …. 11.11, 11.13 Henthorn v Fraser [1892] 2 Ch 27 …. 4.15, 4.16, 4.19, 4.21 Heppingstone v Stewart (1910) 12 CLR 126 …. 10.7 Hercules Motors Pty Ltd v Schubert (1953) 53 SR (NSW) 301 …. 5.13 Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683 …. 15.25 Hewitt v Gardner [2009] NSWSC 1107 …. 19.11 Heyman v Darwins Ltd [1942] AC 356 …. 24.9, 24.14

HG & R Securities Pty Ltd v Sayer (2009) 14 BPR 27,045; [2009] NSWSC 427 …. 3.20 Higgons v Burton (1857) 26 LJ Ex 342 …. 22.3 Highway Properties Ltd v Kelly, Douglas & Co Ltd (1971) 17 DLR (3d) 710 …. 15.36 Hill v Rose [1990] VR 129 …. 16.15 — v Terry [1993] 2 Qd R 640 …. 10.2 Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] All ER Rep 494; (1932) 147 LT 503 …. 5.9, 8.2, 8.7, 8.12, 8.17, 8.18, 13.21 Hirachand Punamchand v Temple [1911] 2 KB 330 …. 5.25 Hirji Mulji v Cheong Yue SS Co Ltd [1926] AC 497 …. 15.18, 15.37 Hirsch v Zinc Corp Ltd (1917) 24 CLR 34; 23 ALR 388 …. 15.37 Hoad v Swan (1920) 28 CLR 258 …. 24.8 Hoare v Rennie [1859] EngR 983; (1859) 5 H & N 19; 157 ER 1083 …. 24.4 Holland v Wiltshire (1954) 90 CLR 409; [1954] ALR 822; [1954] HCA 42 …. 24.16, 24.18 Hollis v Edwards (1683) 1 Vern 159 …. 10.22 Holmes v Jones (1907) 4 CLR 1692; 14 ALR 89 …. 16.24, 16.25 — v Keyes [1959] Ch 199 …. 7.19 Holt v United Security Life Ins and Trust Co (1909) 72 Atlantic Reporter 301 …. 25.8 Holwell Securities Ltd v Hughes [1974] 1 All ER 161; [1974] 1 WLR 155 …. 4.16, 4.17 Home Insurance Co v Adminsitratia Asigurarilor de Stat [1983] 2 Lloyd’s Rep 674 …. 7.8 Homestake Australia Ltd v Metana Minerals NL (1991) 11 WAR 435 …. 11.17

Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd [1962] 2 QB 26; [1961] EWCA Civ 7 …. 15.5, 15.8, 15.11, 24.2, 24.6, 24.9 Honner v Ashton (1979) 1 BPR 9478 …. 24.9 Hood v Anchor Line (Henderson Brothers) Ltd [1918] UKHL 2; [1918] AC 837 …. 3.18 Hooker Town Development Pty Ltd v Director of War Service Homes (1973) 47 ALJR 320 …. 8.4 Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348; [1937] HCA 90 …. 11.15, 11.17 Horlock v Beal [1916] 1 AC 486 …. 15.17 Horsey v Graham (1862) LR 5 CP 9 …. 10.4 Horton v Jones (1935) 53 CLR 475; [1935] ALR 177 …. 7.5 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; 55 ALR 417 …. 11.18, 13.3, 13.5, 13.22, 16.15 Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) 4 Ex D 216 …. 4.16, 4.18, 4.21 Howard v Currie (1879) 5 VLR (E) 87 …. 6.8 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68; 14 ALR 169; [1907] HCA 38 …. 4.14, 7.21, 10.7 Howe v Teefy [1927] NSWStRp 41; (1927) 27 SR (NSW) 301; 44 WN (NSW) 102 …. 25.6 Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133; 26 ALR 21; [1919] HCA 64 …. 9.11, 11.15, 11.17, 13.11 Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 273 …. 22.24 Hughes v Liverpool Legal Society [1916] 2 KB 482 …. 16.11 — v Metropolitan Railway Co (1877) 2 App Cas 439 …. 9.7, 9.8, 24.20 — v St Barbara Ltd [2011] WASCA 234 …. 5.5

Hughes Aircraft System International v Airservices Australia (1997) 47 ALD 12 …. 7.16 — v — (1997) 76 FCR 151; 146 ALR 1 …. 3.17, 4.7, 13.17, 16.14 Huguenin v Baseley (1807) 14 Ves 273; 33 ER 526; [1807] EngR 397 …. 19.8, 19.13, 19.15, 19.18 Humzy-Hancock, Re [2007] QSC 34 …. 1.11 Hyde v Wrench [1840] 49 ER 132 …. 4.4 Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd (2002) 18 BCL 122; [2001] NSWCA 313 …. 11.11

I Iacullo v Remly Pty Ltd [2012] NSWSC 190 …. 5.5 ICTA Investments Pty Ltd t/a Jolly Roger v GE Commercial Corp (Australia) Pty Ltd (2006) Aust Contract R 90-244; [2006] NSWCA 290 …. 4.11 Idameneo (No 123) Pty Ltd v Ashraf [2015] VSC 317 …. 15.21 Idoport Pty Ltd v National Australia Bank [1999] NSWSC 828 …. 13.22 Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; 112 ALR 609 …. 24.18 Imperial Land Co of Marseilles, Re; Harris’ Case (1872) LR 7 Ch App 587 …. 4.15, 4.21 Imperial Loan Co v Stone [1892] 1 QB 599 …. 6.4, 6.5 Inche Noriah v Shaik Allie Bin Omar [1929] AC 127 …. 19.8, 19.17, 19.18 Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525 …. 15.23 Industrial Rollformers Pty Ltd v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111 …. 3.3 Ingram v Little [1961] 1 QB 31 …. 22.5

Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710 …. 13.18 Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 …. 3.1, 3.3 Integrated Lighting & Ceilings Pty Ltd v Philips Electrical Pty Ltd (1969) 90 WN (Pt 1) (NSW) 693 …. 10.16 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1988) 1 All ER 348 …. 21.4 International Advisor Systems Pty Ltd v XYYX Pty Ltd [2008] NSWSC 2 …. 22.19, 22.28, 22.31 International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151; [2008] HCA 3 …. 12.3, 12.5 Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 …. 12.3, 12.8 Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239 …. 5.10 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433 …. 11.6, 11.12

J J C Williamson Ltd v Lukey (1931) 45 CLR 282; [1931] ALR 157 …. 10.20, 10.22, 10.24 J E Verrault and Fils Ltee v Attorney-General (Quebec) (1976) 57 DLR (3d) 403 …. 6.19 J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 2 All ER 930; [1976] 1 WLR 1078 …. 11.15 J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1989] EWCA Civ 6; [1990] 1 Lloyd’s Rep 1 …. 15.8, 15.11, 15.14, 15.18, 15.37 J Spurling Ltd v Bradshaw [1956] 2 All ER 121; [1956] 1 WLR 461 …. 11.9

J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539; 61 FLR 108 …. 20.9, 20.20 Jackson v Horizon Holidays Ltd [1974] EWCA Civ 12; [1975] 3 All ER 92; [1975] 1 WLR 1468 …. 14.11, 14.12, 14.17 Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377 …. 25.18 — v Union Marine Insurance Co Ltd (1874) LR 10 CP 125 …. 15.3, 15.13, 15.21, 15.30, 15.39 Jakobkiewicz v Dickson Catering Pty Ltd [2002] ACTSC 107 …. 7.14 James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland (2015) 248 IR 377; [2015] NSWSC 243 …. 3.7, 3.14 James Shaffer Ltd v Findlay Durham & Brodie [1953] 1 WLR 106 …. 24.11 JB & BL Nominees Pty Ltd v McCormack [1982] WAR 258 …. 10.16 JB MacEwan & Co v Ashwin [1916] NZLR 1028 …. 6.24 Jennings v Zihali-Kiss, Zilahi-Kiss and M K Tremaine & Co Pty Ltd (1972) 2 SASR 493 …. 16.13 Jennings & Chapman Ltd v Woodman, Matthews & Co [1952] 2 TLR 409 …. 15.24 Jenyns v Public Curator (Qld) (1953) 90 CLR 113; [1953] HCA 2 …. 19.7, 19.15, 19.18 Jessop v McInteer [2003] QCA 170 …. 11.15 Jillcy Film Enterprises 593 F Supp 515 (1984) …. 8.18 Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 …. 12.5 JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435; [1971] ALR 92 …. 11.19 John v Rees [1970] Ch 345 …. 7.17 John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR

656 …. 16.17 Johnson v Agnew [1980] AC 367 …. 14.14, 24.9 — v Buttress (1936) 56 CLR 113; [1936] ALR 390; [1936] HCA 41 …. 18.11, 19.1, 19.2, 19.4, 19.6, 19.7, 19.8, 19.11, 19.15, 19.16, 19.17, 19.18 — v Humphrey [1946] 1 All ER 460 …. 10.8 — v Smith [2010] NSWCA 306 …. 18.6 Johnson (by her tutor Smith) v Johnson [2009] NSWSC 503 …. 6.6 Johnston v Arnaboldi [1990] 2 Qd R 138 …. 22.27 Jones v Baker (2002) 10 BPR 19,115; [2002] NSWSC 89 …. 10.20 — v Canavan (1972) 2 NSWLR 236 …. 13.11 — v Dumbrell [1981] VR 199 …. 16.14 — v Padavatton [1969] 2 All ER 616 …. 7.2 — v Peters [1948] VLR 331; [1948] 2 ALR 439 …. 10.11 Jones (AE) v Jones (FW) (1977) 1 WLR 438 …. 9.5 Jorden v Money (1854) 5 HL Cas 185; 10 ER 868 …. 9.3, 9.5, 9.6, 9.8, 9.18 Joscelyne v Nissen [1970] 2 QB 86 …. 22.27, 22.29 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 …. 15.11, 15.12, 15.13, 15.14, 15.18, 15.32

K Kai Nam v Ma Kam Chan [1956] AC 358 …. 16.11 Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392; 298 ALR 35 …. 18.7, 18.8, 18.13 Kalnenas v Kovacevich [1961] WAR 188 …. 10.11, 10.12, 10.24 Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 …. 24.18

Katz v Oak Indus Inc 508 A 2d 873, 880 (Del Ch 1986) …. 2.5 Kaufman v Gerson [1904] 1 KB 591 …. 20.20 Keays v Great Southern Railway Co [1941] IR 534 …. 6.2 Kelen v Vitamin Pty Ltd [2010] NSWSC 328 …. 5.26 Kelly v Mina [2014] NSWCA 9 …. 7.14 — v Webster (1852) 12 CB 283 …. 10.3, 10.4 Kelner v Baxter (1866) LR 2 CP 174 …. 6.12 Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) LR 2 QB 580 …. 16.26 — v Vercoe (1960) 105 CLR 521; [1960] HCA 64 …. 8.15 Keppel v Wheeler (1927) 1 KB 577 …. 7.20 Kettlewell v Refuge Assurance Co [1908] 1 KB 545 …. 16.11 Khan v Khan (2004) 62 NSWLR 229 …. 19.14, 19.15, 19.16 Kilmer v British Columbia Orchard Lands Ltd [1913] AC 319 …. 24.19 King v Cornell (1932) 50 WN (NSW) 50 …. 10.8 — v Grimwood (1891) 17 VLR 253 …. 10.8, 10.11 King’s Norton Metal Co Ltd v Edridge Merrett & Co (1897) 14 TLR 98 …. 22.4, 22.5 Kish v Taylor [1912] AC 604 …. 24.2 Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 All ER 785; [1989] 1 WLR 379 …. 7.6, 7.12 Knight’s Case (1588) 5 Co Rep 54b …. 15.36 Knowles v Anglican Church Property Trust, Diocese of Bathurst (1999) 89 IR 47 …. 7.17 Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (‘The Evia’) (No 2) [1983] 1 AC 736 …. 15.29 Kolmar Group AG v Traxpo Enterprises Pty Ltd [2010] 2 Lloyd’s Rep

653 …. 20.24 Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 …. 12.5 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; 241 ALR 88 …. 24.2, 24.6, 24.7 Kovan Engineering (Aust) Pty Ltd v Gold Peg International Pty Ltd (2006) 234 ALR 241; [2006] FCAFC 117 …. 7.14 Kowalski v Lochlee Pty Ltd (2003) 226 LSJS 382; [2003] SASC 95 …. 8.3 KPMG v Network Rail Infrastructure Ltd [2006] EWHC 67 (Ch); [2006] 2 P & CR 7 …. 22.32 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1 …. 9.10, 16.12, 16.13, 16.17 Krell v Henry [1903] 2 KB 740 …. 15.3, 15.6, 15.13, 15.23, 15.24, 15.25

L L Albert and Son v Armstrong Rubber Co (1949) 178 F 2d 182 …. 25.7, 25.8 L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 …. 12.8 L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225; 36 ALR 385 …. 16.19 Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44 …. 7.21 Lake v Simmons [1927] AC 487 …. 22.3 Lalor v Winfield [1925] VLR 306 …. 10.8 Lampleigh v Braithwait (1616) 80 ER 255 …. 5.10, 5.11 Lancashire Loans Ltd v Black [1934] 1 KB 380 …. 19.8, 19.9, 19.18 Land and Homes (WA) Ltd v Roe (1936) 39 WALR 27 …. 6.3 Langford v Reddy [2012] NSWSC 289 …. 19.12

Larking v Great Western (Nepean) Gravel Ltd (in liq) (1940) 64 CLR 221; [1940] HCA 37 …. 24.11, 24.19 Larner v George Weston Foods Ltd [2014] VSCA 62 …. 25.21 Latec Finance Pty Ltd v Knight [1969] 2 NSWR 79 …. 4.11 Laurence v Lexcourt Holdings Ltd [1978] 2 All ER 810; [1978] 1 WLR 1128 …. 22.21 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; 85 ALR 183; 63 ALJR 372; [1989] HCA 23 …. 24.7, 24.8, 24.10, 24.13, 24.14, 24.16, 24.17 Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57; [1974] HCA 49 …. 8.11 Leaf v International Galleries [1950] 2 KB 86 …. 22.15 Lee v Ah Gee [1920] VLR 278; (1920) 26 ALR 179 …. 18.8 — v GEC Plessey Telecommunications [1993] IRLR 383 …. 5.23 — v Showmen’s Guild of Great Britain [1952] 2 QB 329 …. 7.17 Leeman v Stock [1951] Ch 941 …. 10.11 Lefkowitz v Great Minneapolis Surplus Store 251 Minn 188, 86 NW 2d 689 (1957) …. 3.10, 3.12, 3.13 Legione v Hateley (1983) 152 CLR 406; 46 ALR 1; [1983] HCA 11 …. 9.5, 9.6, 9.7, 9.8, 9.10, 9.21, 15.33, 24.20, 25.24 Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1 …. 22.33, 22.35 Leif Investments Pty Ltd v ConAgra International Fertiliser Co (NSW CA, Sheller JA, 16 July 1998, unreported) …. 22.7 Leitch’s Will, Re (1896) 13 WN (NSW) 58 …. 6.26 Leitz Leeholme Stud Pty Ltd v Robinson [1977] 2 NSWLR 544 …. 15.36 Leon Holdings Pty Ltd v O’Donnell (2009) 25 VR 569 …. 5.20 Leonard v Pepsico Inc 88 F Supp 2d (SDNY 1999) …. 3.13

Les Affreteurs Reunis Societe Anonyme v Leopold Walford (London), Ltd [1919] AC 801 …. 14.17 Leslie Leithead Pty Ltd v Barber (1965) 65 SR (NSW) 172 …. 16.21 L’Estrange v F Graucob Ltd [1934] 2 KB 394 …. 11.2, 11.3, 11.4, 11.5, 11.19, 22.7 Lever Bros Ltd v Bell [1931] 1 KB 557 …. 22.10 Lewandowski v Mead Carney-BCA Pty Ltd [1973] 2 NSWLR 640 …. 5.9 Lewis v Averay [1972] 1 QB 198 …. 22.3, 22.5 — v Heffer [1978] 1 WLR 1061 …. 7.17 Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60; 31 ALR 206; [1925] HCA 18 …. 8.5, 22.16 Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 …. 9.16 Lister v Romford Ice and Cold Storage Co Ltd [1956] UKHL 6; [1957] AC 555 …. 13.11, 15.6 Little Co Ltd v Peters [2007] NSWSC 833 …. 20.21 Littman v Aspen Oil (Broking) Ltd [2005] EWHCA Civ 1579 …. 22.33 Liverpool City Council v Irwin [1976] UKHL 1; [1977] AC 239 …. 11.15, 13.2, 13.7, 13.11, 13.13, 15.6, 25.18 LJ Korbetis v Transgrain Shipping BV [2005] EWHC 1345 …. 4.18 Lloyd’s v Harper (1880) 16 Ch D 290 …. 14.11, 14.14, 14.17, 14.19 Loan Investment Corporation of Australasia v Bonner (1970) NZLR 724 …. 14.17 Lockhart v Osman [1981] VR 57 …. 16.14 L’Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486 …. 5.11 London and Westminster Loan and Discount Co Ltd v Bilton (1911) 27 TLR 184 …. 19.7

Long v Lloyd [1958] 2 All ER 402; 1 WLR 753 …. 16.27 Lonsdale v Whittaker (1915) 17 WALR 111 …. 10.5, 10.8 Lopwell Pty Ltd v Clarke [2009] NSWCA 165 …. 18.7 Lott v Collins (1869) 8 SCR (NSW) 104 …. 10.8 Louinder v Leis (1982) 149 CLR 509; 41 ALR 187 …. 24.15, 24.16 Louth v Diprose (1992) 175 CLR 621; 110 ALR 1 …. 18.1, 18.3, 18.5, 18.6, 18.9, 18.11, 18.15, 18.16, 18.17, 18.20, 19.5 Low v Bouverie [1891] 3 Ch 82 …. 9.11, 11.5, 24.20 Lucas v Dixon (1889) 22 QBD 357 …. 10.7 Lucy v The Commonwealth (1923) 33 CLR 229 …. 25.20 Lukacs v Wood (1978) 19 SASR 520 …. 22.23 Luong v Du [2013] VSC 723 …. 18.4 Lynch v DPP for Northern Ireland [1975] UKHL 5; [1975] AC 653 …. 20.6, 20.17 Lyon v Home (1868) LR 6 Eq 655 …. 19.14

M Mabo v Queensland (No 2) (1992) 175 CLR 1; 107 ALR 1 …. 1.5 Mabon v Conference of the Methodist Church of New Zealand [1998] 3 NZLR 513 …. 7.13 Macaura v Northern Assurance Co Ltd [1925] AC 619 …. 7.19 Macbeath v Haldimand (1786) 1 TR 172 …. 6.19 MacCormac v Bradford [1927] SASR 152 …. 10.8 MacDonald v Australian Wool Innovation Ltd [2005] FCA 105 …. 7.14 Macdonald v Longbottom [1859] EngR 635; (1859) 1 E & E 977; 120 ER 1177 …. 11.17 Mace v Mace [2015] NSWSC 1659 …. 19.11, 19.12

Mackay v Dick (1881) 6 App Cas 251 …. 13.14, 13.22 Mackener v Feldia AG [1967] 2 QB 590 …. 16.16 Mackenzie v Coulson (1869) LR 8 Eq 368 …. 22.17, 22.26 — v Royal Bank of Canada [1934] AC 468 …. 16.10 Mackintosh v Johnson (2013) 37 VR 301 …. 18.11, 18.12 MacMillan v Mumby (2007) Aust Contract R 90-252 …. 3.5 Macquarie Generation v CNA Resources Ltd [2001] NSWSC 1040 …. 3.20 MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125; 8 ALR 131; [1975] HCA 55 …. 3.3, 3.18, 3.19 Maddison v Alderson (1883) 8 App Cas 467 …. 9.8, 10.23, 10.24 Magennis v Fallon (1828) 2 LR Ir 167 …. 16.5 Maggs v Marsh [2006] BLR 395; [2006] EWCA Civ 1058 …. 11.15 Magill v Magill (2006) 226 CLR 551; [2006] HCA 51 …. 3.3 Maguire v Makaronis (1997) 188 CLR 449; 144 ALR 729 …. 16.15, 16.27 — v Simpson (1977) 139 CLR 362; 18 ALR 469 …. 6.18 Maher v Honeysett and Maher Electrical Contractors Pty Ltd (2007) Aust Contract R 90-249; [2007] NSWSC 12 …. 20.21 Mahkutai, The [1996] 2 Lloyd’s Rep 1 …. 14.20 Mahoney, Re [2015] VSC 600 …. 9.23 Mainline Investments Pty Ltd v Davlon Pty Ltd [1969] 2 NSWR 392 …. 10.4 Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113; [2014] NSWCA 184 …. 12.5 Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd (1973) 129 CLR 48; [1973] HCA 22 …. 13.11

Malmesbury (Earl) v Malmesbury (Countess) (1862) 31 Beav 407 …. 22.26 Manby v Scott (1663) 1 Sid 120; 1 Lev 4; 1 Mod 128 …. 6.26 Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1969] 3 All ER 1593; [1970] 1 WLR 241 …. 4.14 Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749 …. 12.8 Manning Motel Pty Ltd v DH MB Pty Ltd [2013] NSWSC 1582 …. 11.19 Manufacturers’ Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cases 60-853 …. 12.3 Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 KB 148 …. 24.8, 24.14 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; 1 ALR 169 …. 22.29 Marginson v Ian Potter & Co (1976) 136 CLR 161; 11 ALR 64 …. 10.2 Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 …. 15.11, 15.24 Maritime Union of Australia v Geraldton Port Authority (1999) 93 FCR 34; 165 ALR 67 …. 20.12 Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd (2015) 327 ALR 45; 115 IPR 202 …. 13.19, 13.22 Marsh v Mackay [1948] St R Qd 113 …. 10.22 Martech International Pty Ltd v Energy World Corp Ltd (2006) 234 ALR 265 …. 5.24, 5.26 — v — (2007) 248 ALR 353 …. 5.26 Martyn v Glennan [1979] 2 NSWLR 234 …. 10.8 Marzo v Land and Homes (WA) Ltd (1931) 34 WALR 62 …. 10.8

Maskell v Horner [1915] 3 KB 106 …. 20.9, 20.15 Massey v Crown Life Insurance Co [1978] 2 All ER 576; (1978) 1 WLR 676 …. 3.12 Masterman-Lister v Brutton & Co [2003] 3 All ER 162; [2002] EWCA Civ 1889 …. 6.6 Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72 …. 7.15, 7.20, 7.21, 9.21 Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234 …. 11.15 Matthews v Smallwood [1910] 1 Ch 777 …. 24.18 Matthey v Curling [1922] 2 AC 180 …. 15.32, 15.36 Maxitherm Boilers Pty Ltd v Pacific Dunlop Insurances Pte Ltd [1998] 4 VR 559 …. 11.11 May v Brahmbhatt [2013] NSWCA 309 …. 20.21 May & Butcher Ltd v R [1934] 2 KB 17 …. 8.13, 8.14 Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507; [1953] HCA 89 …. 11.15, 22.7 Maynard v Goode (1926) 37 CLR 529; [1926] HCA 4 …. 23.5, 24.16 MBF Investments Pty Ltd v Nolan [2011] VSCA 114 …. 12.3 McBride v Sandland (1918) 25 CLR 69; [1918] HCA 32 …. 10.5, 10.23, 10.24 McCaul v Clark [1929] VLR 233; (1929) 35 ALR 196 …. 10.7 McCourt v Cranston [2012] WASCA 60 …. 12.3 McCulloch v Fern [2001] NSWSC 406 …. 19.14 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 …. 11.9 McDermott v Black (1940) 63 CLR 161 …. 5.13, 5.16, 8.1 McDowell v Meader (1891) 13 ALT 116 …. 10.8

McFarlane v Daniell (1938) 38 SR (NSW) 337 …. 15.39 McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) (2011) 81 NSWLR 690; [2011] NSWCA 315 …. 12.5 McGregor v McGregor (1888) 21 QBD 424 …. 7.4 McKay v National Australia Bank Ltd [1998] 4 VR 677 …. 20.10, 20.11 McKinnon v Grogan [1974] 1 NSWLR 295 …. 7.17 McLarnon v McLarnon (1968) 112 Sol Jo 419 …. 20.8 McLaughlin v Daily Telegraph Newspaper Co Ltd (No 2) (1904) 1 CLR 243; 10 ALR (CN) 32 …. 6.4, 6.7 McMahon v Gilberd & Co Ltd [1955] NZLR 1206 …. 3.12 McNab v Auburn Soccer Sports Club Ltd [1975] 1 NSWLR 54 …. 7.19 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] ALR 771 …. 22.9, 22.10, 22.13, 22.15, 22.19, 22.20, 25.6, 25.7, 25.8 Meates v Attorney-General [1983] NZLR 308 …. 3.3 Medcalf v Crimeguard International Security Systems Sydney Pty Ltd [2011] FCA 963 …. 5.26 Meehan v Jones (1982) 149 CLR 571; 42 ALR 463; [1982] HCA 52 …. 7.15, 8.2, 8.6, 8.9, 8.10, 8.11, 8.18, 10.8, 23.5 Memery v Trilogy Funds Management Ltd [2012] QCA 160 …. 8.16 Mendelssohn v Normand Ltd [1970] 1 QB 177; [1969] 2 All ER 1215 …. 10.2, 11.9 Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671; 10 ALR 296 …. 15.35 Merman Pty Ltd v Cockburn Cement Ltd (1988) 84 ALR 521; ATPR 40-915 …. 17.7 Mesaros v United States 845 F2d 1576 (Fed Cir 1988) …. 3.13 Metropolitan Knitting and Hosiery Co Ltd (in liq) v Thomas Burnely

& Sons Ltd (1924) 35 CLR 232 …. 10.17 Metropolitan Water Board v Dick Kerr & Co Ltd [1917] 2 KB 1 …. 15.8 — v — [1918] AC 119 …. 15.3, 15.7, 15.8, 15.26, 15.27 M’Ewan v Dynon (1877) 3 VLR (L) 271 …. 10.12 Microsoft Corp v Harmony Computers & Electronics, Inc 846 F Supp 208 (ED NY 1994) …. 3.19 Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd (2006) Aust Contract R 90-238; [2006] VSC 42 …. 3.5, 3.6 Mildura Office Equipment and Supplies Pty Ltd v Canon Finance Australia Ltd [2007] VSCA 112 …. 3.6 Miles v New Zealand Alford Estate Co (1886) 32 Ch D 266 …. 5.13, 10.19 Millett v Regent [1975] 1 NSWLR 62 …. 10.23, 10.24 Minister of State for the Army v Dalziel (1944) 68 CLR 261 …. 15.36 Mishara Construction Co Inc v Transit-Mixed Concrete Corporation 310 NE 2d 363 (1974) …. 15.26 Misiaris v Saydels Pty Ltd (1989) NSW ConvR 55-474 …. 22.17, 22.19 Mitchell v Pacific Dawn Pty Ltd [2006] QSC 198 …. 20.22 — v — [2007] QCA 74 …. 20.21 Mitchell v Valherie (2005) 93 SASR 76 …. 16.5 Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 …. 14.16 M’Levy v Matthews (1863) 2 W & W (L) 63 …. 10.12 Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475; 153 ALR 198 …. 3.21, 9.9, 9.21 Mogg v Lord Raglan & St Arnaud Gold Mining Co (NL) (1878) 4 VLR (E) 138 …. 10.8 Molton v Camroux (1848) 2 Ex 487; 154 ER 584 …. 6.4

—v — (1849) 4 Ex 17; 154 ER 1107 …. 6.4 Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351; 177 ALR 390 …. 10.2 Moorcock, The (1889) 14 PD 64 …. 13.5, 13.7 Moore v Garwood [1849] EngR 1122 …. 11.15 Morley v Loughnan [1893] 1 Ch 736 …. 19.14 Motor Oil Hellas (Corinth) Refineries v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 …. 24.18 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 325 ALR 188; 89 ALJR 990 …. 12.6 Mount Gambier Co-operative Milling Society Ltd v Williams [1921] SASR 185 …. 16.21 Mountford v Scott [1933] 3 WLR 884 …. 8.17 Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111 …. 8.2 MP Investments Nominees Pty Ltd v Bank of Western Australia Ltd [2012] VSC 43 …. 5.23, 5.26 Mrocki v Mountview Prestige Homes Pty Ltd [2010] VSC 624 …. 8.2 Muirhead v Commonwealth Bank of Australia [1997] 1 Qd R 567; (1996) 139 ALR 561 …. 10.11 Murphy v Doman [2003] NSWCA 249 …. 6.6 — v — (2001) 112 FCR 182; 182 ALR 138 …. 9.21 — v — (2004) 216 CLR 388; 204 ALR 26 …. 9.21 — v Timms [1987] 2 Qd R 550 …. 5.16 Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 …. 3.1, 3.3, 4.3, 4.13, 8.13 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723; (1995) Aust Contract R 90-050 …. 5.17, 5.20, 5.21, 5.23, 10.2

Mutual Finance Ltd v John Whetton and Sons Ltd [1937] 2 KB 389 …. 20.8 Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1970) 122 CLR 628; [1971] ALR 235 …. 16.18, 16.19

N N Ray v Deputy Commissioner of Taxation [2005] FMCA 1893 …. 5.26 Nagy v Masters Dairy Ltd (1996) 150 ALR 273; (1997) ATPR (Digest) 46-164 …. 17.14 Nash v Dix (1898) 78 LT 445 …. 22.3 — v Inman [1908] 2 KB 1 …. 6.3 National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365 …. 22.35 — v Garcia (1996) 39 NSWLR 577; 21 ACSR 309 …. 19.20 — v Nobile (1988) 100 ALR 227; ASC 55-657 …. 16.2 National Bank of Sharjah v Dellborg (9 July 1997, unreported) …. 12.8 National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675; [1981] 1 All ER 161 …. 15.4, 15.7, 15.8, 15.15, 15.30, 15.33, 15.36 National Mutual Life Association of Australasia Ltd v Walsh (1987) 8 NSWLR 585 …. 22.24 National Westminster Bank plc v Morgan [1985] UKHL 2; [1985] AC 686 …. 19.1, 19.10 NAV Canada v Greater Fredericton Airport Authority Inc (2008) 290 DLR (4th) 405 …. 5.23 NBTY Europe Ltd (formerly Holland & Barrett Europe Ltd) v Nutricia International BV [2005] 2 Lloyd’s Rep 350 …. 22.9 Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286; [1974] HCA 18 …. 24.15, 24.16 Neill v Hewens (1952) 53 SR (NSW) 113 …. 10.10

— v — (1953) 89 CLR 1 …. 10.7, 10.10, 10.11 Nelson v Dahl (1879) 12 ChD 568 …. 13.11 Nemeth (by her tutor) v Australian Litigation Funders Pty Ltd [2013] NSWSC 529 …. 18.3 New England Reinsurance Corp v Messoghios Insurance Co SA [1992] 2 Lloyd’s Rep 251 …. 10.2 New South Wales v Bardolph (1934) 52 CLR 455; [1935] ALR 22 …. 6.18, 6.19 New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68 …. 11.15 New South Wales Lotteries Corp Pty Ltd v Kuzmanovski (2011) 195 FCR 234 …. 11.10 New South Wales Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 …. 22.29, 22.30 New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 …. 3.2, 5.19, 14.4, 14.20 Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 …. 9.18 Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45; [1953] 1 All ER 708 …. 6.12 Newey v Westpac Banking Corporation [2014] NSWCA 319 …. 12.5 News Ltd v Australian Rugby League Football Ltd (1996) 64 FCR 410; 139 ALR 193 …. 20.10 Newton v State Government Insurance Office (Qld) [1986] 1 Qd R 431 …. 5.16 Nguyen v Taylor (1992) 27 NSWLR 48 …. 10.10, 10.11 Nicholas v Thompson [1924] VLR 554; (1924) 30 ALR 359 …. 16.11, 16.26 Nicholl Holdings Pty Ltd v Maharaj [2008] QSC 99 …. 5.8

Nicholson and Venn v Smith Marriott (1947) 177 LT 189 …. 22.10 Nicolazzo v Harb [2009] VSCA 79 …. 11.15 Nicolene Ltd v Simmonds (1953) 1 QB 543 …. 8.5 Niesmann v Collingridge (1921) 29 CLR 177; [1921] HCA 19 …. 7.20 Nile Co for Exports of Agricultural Crops v H & J N Bennett (Commodities) Ltd [1986] 1 Lloyd’s Rep 555 …. 15.26 Nissho Iwai Australia Ltd v Malaysian International Shipping Corp (1989) 167 CLR 219; 86 ALR 375 …. 12.9 NLA Group Ltd v Bowers [1999] 1 Lloyd’s Rep 109 …. 12.8 Nobleza v Lampl (1986) 85 FLR 147 …. 10.22 North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd [2016] VSC 1 …. 13.21 North Ganalanja Aboriginal Corporation v The State of Queensland (1996) 185 CLR 595; [1996] HCA 2 …. 12.3 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] QB 705; [1979] 3 All ER 1170; [1979] 3 WLR 419 …. 5.22, 20.6, 20.10, 20.11, 20.14, 20.24, 20.25 Northrop Corp v Litronic Industries 29 F3d 1173 (7th Cir 1994) …. 3.19 Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739 …. 7.19 Northumberland and Durham District Banking Co, Re; Ex parte Bigge (1858) 28 LJ (Ch) 50 …. 16.23 Northumbria, The [1906] P 292 …. 15.13 Norwest Beef Industries Ltd v Peninsular and Oriental Steam Navigation Co (1987) 8 NSWLR 568 …. 11.15 Notcutt v Universal Equipment Ltd [1981] 1 WLR 641 …. 15.9 Nottidge v Prince (1860) 66 ER 103 …. 19.14 Nullagine Investments Pty Ltd v Western Australian Club Inc (1993)

177 CLR 635; 116 ALR 26 …. 13.22 Nunan v Southern Railway Co [1923] 2 KB 703 …. 3.18 Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74 …. 4.17

O O’Brien v ANZ Bank Ltd (1971) 5 SASR 347 …. 18.17 — v Dawson (1942) 66 CLR 18; [1942] HCA 8 …. 7.20, 8.13 Occidental Worldwide Investment Corp v Skibs A/S Avanti (‘The Siboen’ and ‘The Sibotre’) [1976] 1 Lloyd’s Rep 293 …. 20.1, 20.6, 20.9, 20.19 Ocean Tramp Tankers Corp v V/O Sovfracht (‘The Eugenia’) [1964] 2 QB 226 …. 15.8, 15.11, 15.14, 15.22, 15.24, 15.26 Oceanic Sun Line Special Shipping Company Inc v Fay (1988) 165 CLR 197; 79 ALR 9 …. 11.3, 11.6, 11.7, 11.8, 11.9, 11.11 O’Connor v SP Bray Ltd (1936) 36 SR (NSW) 248; [1936] NSWStRp 14; …. 24.18 Official Trustee in Bankruptcy v Lopatinsky (2003) 129 FCR 234; 30 Fam LR 499 …. 5.16 Ogilvie v Ryan [1976] 2 NSWLR 504 …. 10.23 Oldershaw v King [1857] EngR 695; (1857) 157 ER 213 …. 5.16 Oldham v Litchford (1705) 2 Freeman 285 …. 10.22 Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4) (2009) 255 ALR 632; [2009] FCA 522 …. 4.20 Olley v Marlborough Court Ltd [1949] 1 KB 532 …. 11.5, 11.6, 11.7, 11.9 Olsson v Dyson (1969) 120 CLR 365; [1969] ALR 443 …. 14.16, 14.17 Ormwave Pty Ltd v Smith [2007] NSWCA 210 …. 3.3

O’Rorke v Bolingbroke (1877) 2 App Cas 814 …. 18.10, 18.11 O’Rourke v Hoeven [1974] 1 NSWLR 622 …. 10.20 Oscar Chess Ltd v Williams [1957] 1 All ER 325; [1957] 1 WLR 370 …. 11.18, 11.19 Oudaille v Lawson [1922] NZLR 259 …. 16.8, 16.11 Outer Suburban Property Ltd v Clarke [1933] SASR 221 …. 4.4 Overlook Management BV v Foxtel Management Pty Ltd (2002) Aust Contracts R 90-143; [2002] NSWSC 17 …. 13.15, 13.17, 13.20

P Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; 208 ALR 213; [2004] HCA 35 …. 4.3, 7.21, 11.3, 12.3, 12.5 Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553; 87 ALR 14 …. 17.17 Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584; [2015] FCAFC 50 …. 13.21, 18.19 Pacol Ltd v Trade Lines Ltd (1982) 1 Lloyd’s Rep 456 …. 9.8 Page v Horne (1848) 50 ER 804 …. 18.11 Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 …. 8.1 Pall Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854 …. 5.11 Palmco Shipping Inc v Continental Ore Corp (‘The Captain George K’) [1970] 2 Lloyd’s Rep 21 …. 15.26 Palmer v Bank of NSW (1975) 133 CLR 150; 7 ALR 671 …. 7.5 — v Hutchinson (1881) 6 App Cas 619 …. 6.19 — v Lark [1945] Ch 182 …. 24.14 Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579; 74 ALJR 791 …. 23.2

Pankhania v London Borough of Hackney [2002] EWHC 2441 (Ch) …. 16.10 Panoutsos v Raymond Hadley Corporation of New York [1917] 2 KB 473 …. 24.11 Pao On v Lau Yiu Long [1979] UKPC 2; [1980] AC 614 …. 5.19, 5.22, 20.6, 20.10, 20.15, 20.17 Paradine v Jane (1647) Aleyn 26; 82 ER 897 …. 15.15, 15.32, 15.36 Parbury Henty & Co Pty Ltd v General Engineering & Agencies Pty Ltd (1973) 47 ALJR 336 …. 10.16 Park v Brothers (2005) 80 ALJR 317; [2005] HCA 73 …. 12.5 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; 42 ALR 1 …. 17.11 Parker v Barnett (1889) 16 VLR 214 …. 10.8 — v British Airways Board [1982] 1 All ER 834 …. 1.5 — v Manessis [1974] WAR 54 …. 10.11 — v South Eastern Railway Co (1877) 2 CPD 416 …. 3.18, 11.2, 11.3, 11.6, 11.9 — v South Eastern Railway Co [1874–80] All ER Rep 166 …. 11.12 Parkin v Thorold (1852) 16 Beav 59; 51 ER 698 …. 24.19 Parland Pty Ltd v Mariposa (1995) 5 Tas R 121 …. 4.2 Partridge v Crittenden [1968] 2 All ER 421 …. 3.9 Pascoe v Turner [1978] EWCA Civ 2; [1979] 2 All ER 945; [1979] 1 WLR 431 …. 9.8, 9.24 Pattinson v Mann (1975) 13 SASR 34 …. 3.9 P’Auer AG v Polybuild Technologies International Pty Ltd [2015] VSCA 42 …. 4.13 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; 69 ALR 577 …. 10.2, 22.27

Payne v Cave (1789) 3 TR 148; 100 ER 502 …. 3.16, 3.20 Peckham v Moore [1975] 1 NSWLR 353 …. 6.16, 6.17 Peek v Gurney (1873) LR 6 HL 377 …. 16.21 Peeters v State 154 Wis 111, 142 NW 181 (1913) …. 3.19 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd (2004) 12 BPR 22,879 …. 12.7 Permanent Mortgages Pty Ltd v Vandenbergh [2010] WASC 10 …. 18.4, 18.7, 18.8 Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146; [1931] ALR 89 …. 10.5, 10.19 Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234 …. 18.7, 18.8 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; 41 ALR 441 …. 23.5 Petelin v Cullen (1975) 132 CLR 355; 6 ALR 129 …. 11.3, 11.4 Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235; [1954] HCA 25 …. 15.41, 24.14 Peters v Fleming (1840) 6 M & W 42 …. 6.2 Peters American Delicacy Co Ltd v Champion (1928) 41 CLR 316; [1928] ALR 317 …. 13.4 Petrie v Dwyer (1954) 91 CLR 99; [1954] HCA 75 …. 24.19 Petromec v Petroleo Brasileiro SA Petrobas [2005] All ER (D) 209; [2005] EWCA Civ 891 …. 8.20 PGA v R [2012] HCA 21 …. 5.26 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795 …. 3.4, 3.9 — v — [1953] 1 QB 401 …. 3.15 — v Dickson [1970] AC 403 …. 7.17 Pharmacy Care Systems Ltd v Attorney-General (2004) 2 NZCCLR 187

…. 20.2 Pharmanet Group Ltd v Primeland Pty Ltd [2015] FCA 208 …. 5.3, 5.4, 5.5 Phillip Segal v Max Christopher Donnelly [2012] NSWSC 833 …. 3.16 Phillips v Brooks Ltd [1919] 2 KB 243 …. 22.5 — v Rafiq [2007] EWCA Civ 74; [2007] 1 WLR 1351 …. 12.8 — v Royal London Insurance Co Ltd (1911) 105 LT 136 …. 16.11 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 …. 12.9 Pigott v Thompson (1802) 3 Bos & Pul 147; 127 ER 80; [1802] EngR 202 …. 14.2, 14.17 Pinnel’s Case; Penny v Core (1602) 5 Co Rep 117a …. 5.24, 5.26 Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724 …. 15.7, 15.26, 15.30, 15.37 Pirie v Saunders (1961) 104 CLR 149 …. 10.5, 10.7, 10.8, 10.10, 10.11 Pirt Biotechnologies Pty Ltd v Pirtferm Ltd [2001] WASCA 96 …. 7.11 Pitt v PHH Asset Management Ltd [1994] 4 All ER 961; [1994] 1 WLR 327 …. 5.9 Placer Development Ltd v Commonwealth (1969) 121 CLR 353; [1969] ALR 801; [1969] HCA 29 …. 5.9, 7.21, 8.11 Plomley, Re (dec’d) (1923) 24 SR (NSW) 115 …. 6.26 Plumor Pty Ltd v Handley (1996) 41 NSWLR 30; 7 BPR 14,735 …. 15.13 Popiw v Popiw [1959] Vic Rep 32; [1959] VR 197 …. 5.18, 7.15, 10.7, 10.19 Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The New York Star) (1980) 144 CLR 300; 30 ALR 588 …. 14.4, 14.20 — v — (1978) 139 CLR 231; 18 ALR 333 …. 14.4, 14.20 Powell v Jones [1968] SASR 394 …. 8.18

— v Lee (1908) 99 LT 284 …. 4.10 — v Powell [1900] 1 Ch 243 …. 19.7, 19.13 — v Smith (1872) LR 14 Eq 85 …. 22.19 Power v Butcher [1829] EngR 162; (1829) 10 B & C 329; 109 ER 472 …. 13.11 Powercell v Cuzeno (2003) 11 BPR 21,385; [2003] NSWSC 600 …. 10.4 Pratt v Rush (1879) 5 VLR (L) 421 …. 10.16 Prenn v Simmonds [1971] 3 All ER 237; [1971] 1 WLR 1381 …. 11.17, 12.3, 12.6, 12.8, 22.1 President of the Methodist Conference v Parfitt [1984] QB 368 …. 7.17 Price v Easton (1833) 4 B & Ad 433; 110 ER 518; [1833] EngR 334 …. 14.2, 14.17 Prince Blücher, Re; Ex parte Debtor [1931] 2 Ch 70 …. 10.11 Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 …. 15.15 Prior v Payne [1950] ALR 10; (1949) 23 ALJR 298 …. 8.8 Probert v Ericson [2014] QSC 4 …. 20.16 ProCD, Inc v Zeidenberg 86 F3d 1447 (1996) …. 3.2, 3.19 Produce Brokers Company Ltd v Olympia Oil and Cake Company Ltd (1916) 1 AC 314 …. 13.11 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; 57 ALR 609; [1985] HCA 14 …. 15.33, 15.36, 24.8, 24.9, 24.11, 24.16 Prole v Allen [1950] 1 All ER 476 …. 6.15 Prometheus, The (1949) 82 LR 859 …. 6.19 Psaltis v Schultz (1948) 76 CLR 547; [1948] 2 ALR 502 …. 22.15 Public Service Credit Union Co-operative Ltd v Campion (1984) 56 ACTR 39; 75 FLR 131 …. 20.8, 20.20

Public Trustee as Administrator of the Estate of Williams (dec’d) v Wadley (1997) 7 Tas R 35 …. 9.15 Public Trustee v Bussell (1993) 30 NSWLR 111 …. 7.1 Pukallus v Cameron (1982) 180 CLR 447; 43 ALR 243 …. 22.26, 22.28, 22.29, 22.30

Q Qantas Airways Ltd v Dillingham Corp Ltd (NSWSC, Rogers J, 8 April 1987, unreported) …. 13.19 Quadling v Robinson (1976) 137 CLR 192; 10 ALR 319 …. 4.1 Quarante Pty Ltd v Owners Strata Plan No 67212 [2008] NSWCA 258 …. 7.21 Quek v Beggs (1990) 5 BPR 11,761 …. 19.10, 19.11, 19.14, 19.15 Quenerduaine v Cole (1883) 32 WR 185 …. 4.14

R R v Brislan (1935) 54 CLR 262; [1936] ALR 45 …. 7.19 — v Clarke (1927) 40 CLR 227; [1928] ALR 97 …. 4.8, 4.9, 5.5 — v Donald; Ex parte Attorney-General of Queensland [1993] QCA 152 …. 5.23 — v Judges of the Federal Court of Australia; Ex parte WA National Football League (Inc) (1979) 143 CLR 190; 23 ALR 439 …. 7.19 — v Moore; Ex parte Myers (1884) 10 VLR (L) 322 …. 10.11 — v Transworld Shipping Ltd (1975) 61 DLR (3d) 304 …. 6.19 — v Weaver (1931) 45 CLR 321; [1931] ALR 249 …. 16.5 R W Cameron & Co v L Slutzkin Pty Ltd (1923) 32 CLR 81; 29 ALR 261 …. 22.16 Raatz, Re [1897] 2 QB 80 …. 6.23

RACV Investment Co Pty Ltd v Silbury Pty Ltd (1986) 13 ACLR 555 …. 22.29 Raffaele v Raffaele [1962] WAR 29 …. 7.4, 10.24 Raffles v Wichelhaus (1864) 2 H & C 906; 159 ER 375 …. 22.1, 22.9 Rail Corp of New South Wales v Fluor Australia Pty Ltd [2008] NSWSC 1348 …. 14.15, 14.17 Raineri v Miles [1981] AC 1050 …. 24.15 Ralli Bros v Walford Lines (1922) 10 Lloyd’s Law Reports 451 …. 5.9 Ramsden v Dyson (1866) LR 1 HL 129 …. 9.5, 9.8, 9.23, 9.28 Ratto v Trifid Pty Ltd [1987] WAR 237 …. 7.1 Ravinder Rohini Pty Ltd v Krizaic (1991) 105 ALR 593 …. 8.12 Rawson v Hobbs (1961) 107 CLR 466 …. 24.12 Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 …. 12.3, 12.8 Rederiaktiebolaget Amphitrite v R [1921] 3 KB 500 …. 6.19 Redgrave v Hurd (1881) 20 Ch D 1 …. 16.9, 16.11, 16.24 Redowood Pty Ltd v Mongoose Pty Ltd [2005] NSWCA 32 …. 4.1, 4.5 Reese Bros Plastics Ltd v Hamon-Sobelco Aust Pty Ltd (1988) 5 BPR 11,106 …. 4.6 — v — (1988) 5 BPR 97325 …. 4.21 Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 …. 25.13, 25.14 Regent v Millet (1976) 133 CLR 679; 10 ALR 496; [1976] HCA 40 …. 10.23, 10.24 Regulski v State of Victoria [2015] FCA 206 …. 13.22 Reid v Zoanetti [1943] SASR 92 …. 10.5, 10.24 Reigate v Union Manufacturing Co (Ramsbottom) (1918) 1 KB 592 ….

13.7 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 …. 13.12, 13.15, 13.16, 13.20, 13.21, 23.5 Rhodes, Re (1890) 44 Ch D 94 …. 6.9 Rhodes Pty Ltd v Galati [1961] WAR 180 …. 10.8, 10.11 Riches v Hogben [1985] 2 Qd R 292 …. 7.5, 9.5, 9.18, 9.23, 9.30 Ridgeway Coal Co 616 F Supp 404 (1985) …. 8.18 Ridgway v Wharton (1857) 6 HLC 238 …. 10.15 Riley v Melrose Advertisers (1915) 17 WALR 127 …. 10.12 — v Osborne [1986] VR 193 …. 10.24 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; 222 ALR 306 …. 25.22, 25.23, 25.25 Ringstad v Gollin & Co Pty Ltd (1924) 35 CLR 303; (1925) 31 ALR 221 …. 15.29 Riverlate Properties Ltd v Paul [1975] Ch 133 …. 22.17, 22.19, 22.26, 22.31, 22.35, 22.36 RJT Consulting Engineers Ltd v D M Engineering (Northern Ireland) Ltd [2002] All ER (D) 108; [2002] 1 WLR 2344 …. 10.2 Robert A Munro & Co Ltd v Meyer [1930] 2 KB 312 …. 22.15, 24.11 Roberts v Security Company Ltd [1897] 1 QB 111 …. 24.20 Robertson v Robertson [1930] QWN 41 …. 20.8 — v Wait (1853) 8 Ex 299; 155 ER 1360; [1853] EngR 77 …. 14.17 — v Wilson (1958) 75 WN (NSW) 503 …. 15.36 Robertson and Moffatt v Belson [1905] VLR 555; (1905) 11 ALR 299 …. 16.14 Robinson v Davison (1871) LR 6 Ex 269 …. 15.21 — v Harman (1848) 1 Exch 850; 154 ER 363 …. 25.2, 25.4, 25.7

Robophone Facilities v Blank [1966] 3 All ER 128; [1966] 1 WLR 1428 …. 25.19 Rocla Pty Ltd v Plastream Pipe Technologies Pty Ltd [2011] SASC 80 …. 14.5 Rodrick v City Mutual Life Assurance Society Ltd (1897) 18 LR (NSW) Eq 128 …. 10.8 Roscorla v Thomas (1842) 3 QB 234 …. 5.10 Rose & Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261 …. 7.1, 7.6, 7.8, 7.10 — v — [1925] AC 445 …. 7.8 Rosenhain v Commonwealth Bank of Australia (1922) 31 CLR 46; [1922] HCA 41 …. 11.17, 13.11 Ross T Smyth & Co Ltd v T D Bailey, Son & Co [1940] 3 All ER 60 …. 24.9 Rosser v Austral Wine and Spirit Co Pty Ltd [1980] VR 313 …. 10.8 Rossiter v Miller (1878) 3 App Cas 1124 …. 7.20 Roufos v Brewster (1971) 2 SASR 218 …. 7.2 Rowallan Group Ltd v Edgehill Portfolio No 1 Ltd [2007] EWHC 32 …. 22.33 Royal Bank of Scotland Plc v Etridge (No 2) [2002] 2 AC 773 …. 19.1 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; 186 ALR 289; 76 ALJR 436; [2002] HCA 5 …. 7.21, 12.3, 12.6 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] UKPC 4; [1995] 2 AC 378 …. 19.16 Royal Exchange Assurance v Hope (1928) Ch 179 …. 14.15 Rushton (SA) Pty Ltd v Holzberger [2003] ANZ ConvR 316; [2003] QCA 106 …. 4.14

Russell v Slater [1912] St R Qd 237 …. 10.11 RW Cameron & Co v L Slutzkin Pty Ltd (1923) 32 CLR 81; [1923] HCA 20 …. 11.17 Ryan v King’s Cross RSL Club Ltd [1972] ACLC 27; [1972] 2 NSWLR 79 …. 7.19 — v R (2001) 75 ALJR 815; [2001] HCA 21 …. 19.15 Ryder v Wombwell (1868) LR 4 Ex 32 …. 6.2 Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65 …. 7.21 Ryrie v Cruickshank (1896) 13 WN (NSW) 41 …. 10.8

S S & E Promotions Pty Ltd v Tobin Brothers Pty Ltd (1994) 122 ALR 637 …. 9.12 Saad v TWT Ltd [1998] NSWCA 199 …. 11.15 Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149 …. 7.21 Said v Butt [1920] 3 KB 497 …. 22.3 Saleh v Romanous (2010) 79 NSWLR 453; 15 BPR 29,505 …. 9.28 Sandar Aung v Parkway Hospitals Singapore Pte Ltd [2007] 2 SLR 891 …. 12.8 Santa Fe Land Co Ltd v Forestal Land etc Ltd (1910) 26 TLR 534 …. 7.20 Sapwell v Bass [1910] 2 KB 486 …. 25.6 Sargent v ASL Developments Ltd (1974) 131 CLR 634; 4 ALR 257 …. 16.2, 24.18 SAS Realty Developments Pty Ltd v Kerr [2013] NSWCA 56 …. 5.20, 5.25

Saunders v Anglia Building Society [1971] AC 1004 …. 11.4 Scally v Southern Health and Social Services Board [1992] 1 AC 294 …. 13.13 Scandrett v Dowling (1992) 27 NSWLR 483 …. 7.17 Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169; [1943] ALR 54; [1943] HCA 43 …. 15.3, 15.11, 15.14, 15.22, 15.27, 15.32, 15.34, 15.37 Scarf v Jardine (1882) 7 App Cas 345 …. 24.18, 24.19 Schaefer v Schuhmann [1972] AC 572; [1972] 1 All ER 621 …. 7.5, 10.7 Schebsman, Re (1944) Ch 83 …. 14.17 Schib Packaging Srl v Emrich Industries Pty Ltd (2005) 12 VR 268; [2005] VSCA 236 …. 4.21 Schultz v Bank of Queensland Ltd [2015] QCA 208 …. 19.21 Schwartz v Hadid [2013] NSWCA 89 …. 5.23 Scott v Bradley [1971] Ch 850; [1971] 1 All ER 583 …. 10.9 Scottish Halls Ltd v The Minister (1915) 15 SR (NSW) 81 …. 15.22 Scriven Bros & Co v Hindley & Co [1913] 3 KB 564 …. 22.9 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446; [1962] 1 All ER 1 …. 2.2, 14.1, 14.3, 14.4, 14.14, 14.20 Scuderi v Morris (2001) 4 VR 125 …. 5.25 Sea-Land Service Inc v Cheong Fook Chee Vincent [1994] 3 SLR 631 …. 5.23 Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596; 26 ALR 567 …. 13.3, 13.12, 13.14, 13.22 Seivewright v Brennan (2005) 12 BPR 22,979; [2005] NSWSC 216 …. 3.16 Selectmove Ltd, Re [1995] 1 WLR 474 …. 5.23 Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43 …. 12.2

Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84; 117 ALR 393 …. 13.17 Seven Cable Television Pty Ltd v Telstra Corp Ltd (2000) 171 ALR 89; [2000] FCA 350 …. 8.1 Shadwell v Shadwell [1860] 142 ER 62 …. 5.19 Shahid v The Australasian College of Dermatologists (2007) 72 IPR 555; [2007] FCA 693 …. 7.14 Shaker v Vistajet Group Holding SA [2012] 2 All ER (Comm) 1010; [2012] EWHC 1329 …. 8.20 Sharp v Anderson [1995] ANZ ConvR 501 …. 7.3 — v Batt (1930) 25 Tas LR 33 …. 15.12, 15.37 — v Thomson (1915) 20 CLR 137 …. 22.9, 22.16 Shaw v Bindaree Beef Pty Ltd [2007] NSWCA 125 …. 7.21 Sheahan v Workers Rehabilitation and Compensation Corp (1991) 58 SASR 119; 6 ACSR 11 …. 5.18 Shell UK Ltd v Lostock Garage Ltd [1977] 1 All ER 481; [1976] 1 WLR 1187 …. 13.8, 13.11 Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359; [1931] ALR 194 …. 24.12 Shepparton Projects Pty Ltd v Cave Investments Pty Ltd [2013] VSCA 152 …. 5.26 Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305; [1982] HCA 47 …. 24.3, 24.9, 24.16 Shiel v Colonial Bank of Australia (1870) 1 VR (E) 40 …. 10.10 Shiell v Symons [1951] SASR 82 …. 15.36 Shiels v Drysdale (1880) 6 VLR (E) 126 …. 7.2 Shipley Urban District Council v Bradford Corporation [1936] Ch 375 …. 22.27

Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 …. 13.6, 13.7 Shogun Finance Ltd v Hudson [2002] QB 834 …. 22.6 — v — [2004] 1 AC 919 …. 12.8, 22.4 Shuey, Executor v United States 92 US 73 (1876) …. 3.4, 3.20 Sidhu v Van Dyke (2014) 251 CLR 505; 308 ALR 232 …. 9.1, 9.18, 9.26, 9.28, 9.31 Silver v Dome Resources NL (2007) 62 ACSR 539; [2007] NSWSC 455 …. 5.23 Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358 …. 15.3, 15.21, 15.26 Simms v Habich (1879) 13 SALR 89 …. 10.12 Sims v Robertson (1921) 21 SR (NSW) 246 …. 10.8 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310; [1929] ALR 336; [1929] HCA 34 …. 7.20, 7.21, 10.8 Sindel v Georgiou (1984) 154 CLR 661; 55 ALR 1 …. 10.7 Singh v Singh (1913) 30 TLR 138 …. 19.17 Sion v NSW Trustee & Guardian [2013] NSWCA 337 …. 7.14, 7.15, 9.23 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 …. 14.19 Skeate v Beale (1840) 113 ER 688 …. 20.9 Skyrise Consultants Pty Ltd v Metrolands Funds Management Ltd [2011] NSWCA 406 …. 11.15 Slee v Warke (1949) 86 CLR 271 …. 22.27 Slipper v Berry Buddle Wilkins Lawyers [2015] NSWSC 810 …. 5.20, 5.23 Smidt v Tiden (1874) LR 9 QB 446 …. 22.9 Smith v Allwright USSC 108 [1944]; 321 US 6491 (1944) …. 14.18

— v Chadwick (1884) 9 App Cas 187 …. 9.18 — v Hamilton [1951] Ch 174 …. 24.15 — v Hartshorn (1959) 60 SR (NSW) 391 …. 10.19 — v Hughes (1871) LR 6 QB 597 …. 4.1, 4.2, 16.12, 22.7, 22.33 — v Land & House Property Corp (1884) 28 Ch D 7 …. 16.5, 16.8 — v Lush (1952) 52 SR (NSW) 207 …. 10.8, 10.10 — v River Douglas Catchment Board [1949] 2 KB 500; [1949] 2 All ER 179 …. 14.2, 14.4, 14.13 — v William Charlick Ltd (1924) 34 CLR 38; 30 ALR 246 …. 20.10, 20.11, 20.13 — v Yarnold [1969] 2 NSWR 410 …. 6.15, 6.16 Smythe v Thomas (2007) 71 NSWLR 537 …. 11.19 Société Franco Tunisienne d’Armement v Sidermar SpA [1961] 2 QB 278 …. 15.15 Softplay Pty Ltd v Perpetual Trustees (WA) Pty Ltd [2002] NSWSC 1059 …. 13.17 Solle v Butcher [1950] 1 KB 671 …. 22.1, 22.9, 22.19, 22.20, 22.21, 22.22 Sopov v Kane Constructions Pty Ltd (2007) 20 VR 127 …. 24.12, 24.13 South Australia v The Commonwealth (1962) 108 CLR 130; [1962] HCA 10 …. 7.21 South Launceston Football Club Inc v Tasmanian Football League Ltd (1995) 4 Tas R 342 …. 7.19 South Suburban Land and Finance Co Ltd v Hughes (1889) 15 VLR 751 …. 10.8 South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 …. 13.20 Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691 …. 5.13

Spiro v Glencrown Properties Ltd [1991] Ch 537; [1991] 1 All ER 600; [1991] 2 WLR 931 …. 10.5 Spong v Spong (1914) 18 CLR 544; [1914] HCA 52 …. 19.8, 19.11, 19.18 Spottiswoode Ballantyne & Co Ltd v Doreen Appliances Ltd (1942) 2 KB 32 …. 7.20 Spurling v Bradshaw Ltd [1956] 2 All ER 121; [1956] 1 WLR 461 …. 21.4 St George Football Association Inc v Soccer NSW Ltd [2005] NSWSC 1196 …. 7.14 Standard Chartered Bank Aust Ltd v Bank of China (1991) 23 NSWLR 164 …. 9.11 Stapleton, Re (1879) 10b Ch D 586 …. 6.20 State Government Insurance Corp v Government Insurance Office of NSW (1991) 28 FCR 511; 101 ALR 259 …. 17.3, 17.4 State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503 …. 13.17 State Rail Authority (NSW) v Health Outdoor Pty Ltd (1986) 7 NSWLR 170 …. 11.15 Steadman v Steadman [1976] AC 536 …. 10.2, 10.23, 10.24 Steedman v Drinkle [1916] 1 AC 275 …. 24.19 Steel-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398 …. 6.5 Steiner v Strang [2016] NSWSC 9 …. 9.1 Step-Saver Data Systems, Inc v Wyse Technology 939 F2d 91 (3d Cir 1991) …. 3.19 Steria Ltd v Hutchinson [2007] ICR 445 …. 9.2 Stickney v Keeble [1915] AC 386 …. 24.11 Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168 …. 5.17, 5.20, 5.21, 5.22, 5.23

Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294; 10 ACSR 615 …. 7.19 Stivactas v Michelatos (No 2) [1994] ANZ ConvR 252; (1993) NSW ConvR 55-683 …. 19.11, 19.16 Stocznia Gdanska SA v Latvian Shipping Company (No 3) [2002] 2 Lloyd’s Rep 436 …. 24.18 Stokes v Whicher [1920] 1 Ch 411 …. 10.12, 10.13, 10.14 Storer v Manchester City Council [1974] 3 All ER 824; [1974] 1 WLR 1403 …. 3.5 Straits Exploration (Australia) Pty Ltd v Murchison United NL (2005) 31 WAR 187; [2005] WASCA 241 …. 8.14 Stratton Finance Pty Ltd v Webb (Stratton Finance) [2014] FCAFC 110 …. 12.5 Strickland v Turner (1852) 7 Exch 208 …. 22.11 Sturesteps v Khoury [2015] NSWSC 1041 …. 20.16 Sturt v McInnes [1974] 1 NZLR 729 …. 10.11 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 …. 8.16, 8.17, 8.18, 13.20 Subdivisions Ltd v Payne [1934] SASR 214 …. 10.12, 22.16 Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444 …. 8.14, 8.15 Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 …. 24.3, 24.9 Sullivan v Della Bosca [1999] NSWSC 136 …. 7.17 — v Sullivan (2006) 13 BPR 24,755 …. 9.11 Summergreene v Parker (1950) 80 CLR 304; [1950] HCA 13 …. 7.20 Summers v The Commonwealth (1918) 25 CLR 144; [1918] HCA 33 …. 13.11 Sunbay Projects Pty Ltd v Naughton [2010] QCA 247 …. 8.3

Sunny Metal & Engineering Pte Ltd v Ng Khim Ming Eric [2007] 1 SLR 853 …. 5.23 Sunshine Vacation Villas Ltd v The Bay (1984) 13 DLR (4th) 93 …. 25.8 Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd [2015] QSC 290 …. 11.11 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 …. 10.2, 23.5 Svanosio v McNamara (1956) 96 CLR 186; [1956] ALR 961 …. 22.14, 22.19, 22.20, 22.23 Swain v The Law Society [1983] 1 AC 598 …. 14.3, 14.17 Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560 …. 22.27 Swaisland v Dearsley (1861) 29 Beav 430 …. 22.25 Sweet and Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 …. 8.18, 24.13 Swift v Jewsbury (1874) LR 9 QB 301; [1874–80] All ER Rep Ext 2009 …. 10.10, 10.11 Swindells v State of Victoria [2015] VSC 19 …. 13.15

T TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1956) SR (NSW) 323 …. 20.10, 20.11, 20.13 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; 253 ALR 1 …. 25.4, 25.9, 25.10, 25.12 Tabtill Pty Ltd v Creswick; Creswick v Creswick [2011] QCA 381 …. 3.20 Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177; ATPR 40-303 …. 17.3, 17.9, 17.11 Tadrous v Tadrous [2012] NSWCA 16 …. 9.23, 9.25 Take Harvest Ltd v Liu [1993] AC 552; [1993] 2 All ER 459 …. 10.2,

10.19 Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93; 64 ALR (CN) 1198b …. 3.4, 4.1, 4.16, 23.3 Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 …. 24.21 Tasita Pty Ltd v Sovereign State of Papua New Guinea (1991) 34 NSWLR 691; 5 BPR 11,467 …. 6.19 Tasman Capital Pty Ltd v Sinclair (2008) 75 NSWLR 1; [2008] NSWCA 248 …. 7.21, 25.20 Tate v Williamson (1866) LR 2 Ch 55 …. 19.7 Taylor v Brown [1839] EngR 1058; (1839) 2 Beav 180; 48 ER 1149 …. 24.11 — v Caldwell (1863) 3 B & S 826 …. 15.2, 15.13, 15.15, 15.17, 15.32 — v Johnson (1983) 151 CLR 422; 45 ALR 265 …. 4.1, 4.2, 4.3, 11.3, 22.17, 22.19, 22.20, 22.23, 22.26, 22.31, 22.33 Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd (1982) QB 133 …. 9.8 TCN Channel 9 v Hayden Enterprises (1989) 16 NSWLR 130 …. 25.7 Technomin Australia Pty Ltd v Xstrata Niickel Australasia Operations Pty Ltd [2014] WASCA 164 …. 11.17 Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 545 …. 14.19 Teller Home Furnishers Pty Ltd (in liq), Re; Electronic Industries v Horsburgh [1967] VR 313 …. 10.11 Tennants (Lancashire) Ltd v C S Wilson & Co Ltd [1917] AC 495 …. 15.40 Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 …. 7.21 Terrex Resources NL v Magnet Petroleum Pty Ltd [1988] 1 WAR 144 …. 10.2

Territorial and Auxiliary Forces Association of the County of London v Nichols [1949] 1 KB 35 …. 16.11 The City of Gosford v Marim Pty Ltd (1990) 6 BPR 13,871 …. 5.13 The Tychy (No 2) [2001] 2 Lloyd’s Rep 403 …. 12.8 Thearle v Keeley (1958) 76 WN (NSW) 48 …. 15.36 Thirkell v Cambi [1919] 2 KB 590 …. 10.11 Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1980] EWCA Civ 3; [1981] 1 All ER 1077; [1981] 1 WLR 505 …. 22.19, 22.26, 22.27, 22.31, 22.32 Thomas Butcher v Stapely and Richard Butcher (1686) 1 Vern 363 …. 10.22 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353; [1967] ALR 3 …. 12.9 Thomas v Thomas (1842) 2 QB 851; 114 ER 330 …. 5.2, 5.5, 5.8 Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41 …. 3.18, 11.9 — v Palmer (1933) 49 CLR 507; [1933] HCA 61 …. 9.2, 9.3, 9.5, 9.8, 9.13, 9.14, 9.15, 9.16, 9.26, 24.20 — v White (2007) NSW ConvR 56-171; [2006] NSWCA 350 …. 3.3 Thomson v McInnes (1911) 12 CLR 562 …. 10.11, 10.12, 10.13, 10.14, 10.15 Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] 1 Lloyd’s Rep 547 …. 22.31, 22.35 Thorby v Goldberg (1964) 112 CLR 597 …. 8.1 Thorne v Motor Trade Association [1937] AC 797 …. 20.15, 20.20 Thorner v Major [2009] All ER (D) 257; [2009] 1 WLR 776 …. 9.24, 9.28 Thornley v Tilley (1925) 36 CLR 1; [1925] HCA 13 …. 13.11 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 …. 3.2, 3.18, 11.6,

11.9, 11.12, 21.4 Tillett v Charing Cross Bridge Co [1859] EngR 421; (1859) 26 Beav 419; 53 ER 959 …. 8.15 Timmins v Moreland Street Property Co Ltd [1958] Ch 110; [1957] 3 All ER 265 …. 10.12, 10.13, 10.15 Tinn v Hoffman & Co (1873) 29 LT 271 …. 4.10 Tinyow v Lee [2006] NSWCA 80 …. 5.23 Tipperary Developments Pty Ltd v Western Australia (2009) WASCA 126 …. 7.14 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 …. 5.6 Todd v Nicol [1957] SASR 72 …. 7.2, 7.5 Tofts v Pearl Life Assurance Co Ltd [1915] 1 KB 189 …. 16.11 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342; [2004] HCA 52 …. 4.2, 4.3, 7.21, 11.2, 11.3, 11.4, 11.19, 12.3, 12.5, 13.20, 14.20 Tomlinson Bros & Co v Daniels (1930) 31 WALR 101 …. 10.12 Tonitto v Bassal (1992) 28 NSWLR 564 …. 10.5, 10.12 Tonto Home Loans Australia Pty Ltd v Tavares (2011) 15 BPR 29,699; [2011] NSWCA 389 …. 18.19 Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 2 All ER 657; [1955] 1 WLR 761 …. 9.7 Tooth & Co Ltd v Bryen (No 2) (1922) 22 SR (NSW) 541 …. 10.8, 10.12 Torbett v Faulkner [1952] 2 TLR 659 …. 11.15 Torrance v Bolton (1872) LR 8 Ch App 118 …. 22.17, 22.19 Total Oil v Thompson Garages [1972] 1 QB 318 …. 24.9 Toyota Motor Corp Australia Ltd v Ken Morgan Motors Pty Ltd [1994] VicRp 55; [1994] 2 VR 106 …. 7.1, 8.6, 8.13

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632; 55 WN (NSW) 228 …. 24.3, 24.4, 24.6, 24.16 Transfield Shipping Inc v Mercator Shipping Inc [2007] 1 Lloyd’s Rep 19 …. 25.18 — v — [2009] 1 AC 61 …. 25.18 Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia [2007] 2 Lloyd’s Rep 555 …. 25.18 Transworld Oil Ltd v North Bay Shipping Corp (The Rio Claro) [1987] 2 Lloyd’s Rep 173 …. 25.18 Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd t/as Uncle Bens of Australia (1992) 27 NSWLR 326 …. 8.4 Trident v McNiece (1988) 165 CLR 107; 80 ALR 574 …. 1.6 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 …. 14.1, 14.4, 14.12, 14.15, 14.16, 14.17, 14.18, 14.19, 14.20 Tropical Traders Ltd v Goonan (1964) 111 CLR 41; [1964] ALR 585 …. 24.19 Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSC 228 …. 5.23, 5.26 Trustees of the Roman Catholic Church v Ellis (2007) 70 NSWLR 565; 63 ACSR 346 …. 3.5 Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 …. 15.20, 15.38 TSB Developments Pty Ltd v HCH and K Fisheries Pty Ltd [2003] TASSC 136 …. 8.11 Tulk v Moxhay (1848) 41 ER 1143 …. 14.13 Tulloch (dec’d) v Braybon (No 2) [2010] NSWSC 650 …. 19.7 Turner v Forwood [1951] 1 All ER 746 …. 11.15 Turner, Kempson & Co Pty Ltd v Camm [1922] VLR 498 …. 4.2, 4.4,

4.6 Tweddle v Atkinson (1861) I B & S 393; 121 ER 762; [1861] EngR 690 …. 14.1, 14.2, 14.5, 14.8, 14.13, 14.16, 14.17, 14.18

U Underwood v Gerard (1894) 15 LR (NSW) Eq 155 …. 6.26 Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573 …. 19.17 United Australia Ltd v Barclays Bank Ltd [1941] AC 1 …. 24.18 United Group Rail Services Ltd v Rail Corp (NSW) (2009) 74 NSWLR 618 …. 8.1, 8.16, 8.17, 8.18, 8.20, 13.20, 13.21 United States v Braunstein 75 F Supp. 137, 139 (SDNY 1947) …. 3.13 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; 154 ALR 361 …. 15.13 Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 …. 15.30, 24.2 Universal Guarantee Pty Ltd v Carlile [1957] VR 68 …. 4.5 Universal Music Australia Pty Ltd v Pavlovic [2015] NSWSC 791 …. 3.3 Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (The Universe Sentinel) [1981] ICR 129 …. 20.15 — v — [1983] 1 AC 366 …. 20.1, 20.2, 20.6, 20.10, 20.11, 20.15, 20.17, 20.20, 20.21, 20.25 Universo Insurance Company of Milan v Merchants Marine Insurance Company (1897) 2 QB 93 …. 13.11 Unley Democratic Association, Re [1936] SASR 473 …. 15.3 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429; [1968] HCA 8 …. 7.15, 8.1, 8.2, 8.3, 8.7, 8.8, 8.10

Urusoglu v MSU Management Pty Ltd [2011] NSWSC 54 …. 15.14 Utica City National Bank v Gunn (1918) 118 NE 607 …. 11.17

V Van den Esschert v Chappell [1960] WAR 114 …. 11.19 Van Dyke v Sidhu (2013) 301 ALR 769; 17 BPR 32,545 …. 9.28 Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 …. 14.1, 14.17 Vanhergen v St Edmunds Properties Ltd [1933] 1 KB 345 …. 5.25 Vantage Systems Pty Ltd v Priolo Corp Pty Ltd (2015) 47 WAR 547 …. 7.21 Vass v Commonwealth (2000) 96 FCR 272; 169 ALR 486 …. 7.16 Vaswani v Italian Motors (Sales and Services) Ltd [1996] 1 WLR 270 …. 24.12, 24.13 Vault Corp v Quaid Software Ltd 847 F2d 255, 268–70 (5th Cir 1988) …. 3.19 Veivers v Cordingley [1989] 2 Qd R 278 …. 3.21 Vella v Ayshan (2008) ANZ ConvR ¶8-013; [2008] NSWSC 84 …. 5.23 Verrall v Hackney London Borough Council [1983] Qd R 561 …. 6.16 Versus (Aus) Pty Ltd v ANH Nominees Pty Ltd [2015] VSC 515 …. 24.10 Vickery v Woods (1952) 85 CLR 336 …. 6.12 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 …. 25.18 Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143 …. 18.20 Vimar Seguros y Reaseguros, SA v M/V Sky Reefer 132 L Ed 2d 462, 115 S Ct 2322 (1995) …. 3.19

Vitol SA v Norelf Ltd [1996] AC 800 …. 24.18 Vitosh v Brisbane City Council (1960) 5 LGRA 342 …. 16.11 Vodafone Pacific Ltd v Mobile Innovation Ltd [2004] NSWCA 15 …. 13.18 Von Hatzfeldt-Wildenburg v Alexander (1912) 1 Ch 284 …. 7.20 Vroon BV v Foster’s Brewing Group Ltd [1994] VicRp 53; [1994] 2 VR 32 …. 3.3, 7.15, 13.3

W W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 …. 16.12 W & K Holdings (NSW) Pty Ltd v Mayo [2013] NSWSC 1063 …. 5.23 W & R Pty Ltd v Birdseye (2008) 102 SASR 477 …. 24.20 Waddell v Waddell (2012) 292 ALR 788 …. 9.23 Wakeling v Ripley (1951) 51 SR (NSW) 183 …. 7.2, 7.5, 8.3, 8.12 Walford v Miles [1992] 2 AC 128 …. 8.1, 8.16, 8.19, 8.20 Walker v Walker (1740) 2 Atk 98 …. 10.21 Wall v Niagara Mining and Smelting Co of Idaho 20 Utah 474; 59 P 399 (1899) …. 6.13 Wallace v Brodribb (1985) 55 ALR 737; ASC 55-391 …. 3.15 Wallace-Smith v Theiss Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; 23 ACLC 630 …. 23.1, 23.3, 24.18 Walter v Everard [1891] 2 QB 369 …. 6.2 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 …. 2.2, 3.2, 5.4, 9.2, 9.5, 9.6, 9.7, 9.8, 9.9, 9.11, 9.12, 9.13, 9.15, 9.19, 9.32 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513; [1988] HCA 7 …. 10.2, 10.5, 10.21, 10.22, 10.24, 24.20 Ward v Byham [1956] 2 All ER 318; [1956] 1 WLR 496 …. 5.18, 5.22

— v Eltherington [1982] Qd R 561 …. 6.15, 6.16 — v Ward [2011] NSWSC 107 …. 18.7 Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107 …. 4.19 Waring v SJ Brentnall Ltd [1975] 2 NZLR 401 …. 22.21 Waterman v Gerling Australia Insurance Company Pty Ltd (2005) 65 NSWLR 300 …. 24.20 Watkins v Combes (1922) 30 CLR 180; [1922] HCA 3 …. 18.11, 19.11, 19.16, 19.18 — v Rymill (1883) 10 QBD 178 …. 3.18, 11.9 Watson v Delaney (1991) 22 NSWLR 358 …. 10.2, 10.24 — v Issell (1890) 16 VLR 607 …. 10.8 — v Phipps (1985) 63 ALR 321; 60 ALJR 1 …. 8.2, 8.3 Watts, Watts & Co Ltd v Mitsui & Co Ltd [1917] AC 227 …. 15.30 Webster, Re (1975) 132 CLR 270; 6 ALR 65 …. 3.8 Weimann (as trustee for Weimann Family Trust (No 3)) v Allphones Retail Pty Ltd (No 2) (2009) 261 ALR 343; [2009] FCA 1230 …. 7.14 Wenham v Ella (1972) 127 CLR 454; [1972–73] ALR 353 …. 25.17 West London Commercial Bank v Kitson (1884) 13 QBD 360 …. 16.10, 16.11 Western Australian Insurance Company Ltd v Dayton (1924) 35 CLR 355; [1924] HCA 58 …. 24.20 Westpac Banking Corp v Billgate Pty Ltd [2013] NSWSC 1304 …. 20.21 — v Dawson (1990) 19 NSWLR 614; 2 ACSR 316 …. 22.3 — v Cockerill (1998) 152 ALR 267 …. 20.17 Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604; 86 ALJR 1; [2011] HCA 45 …. 12.3, 12.4, 12.5, 12.6

Westmelton (Vic) Pty Ltd v Archer and Schulman [1982] VicRp 29; [1982] VR 305 …. 19.7, 19.17, 19.18 Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361 …. 15.41 Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 …. 9.28 Whereat v Duff [1972] 2 NSWLR 147 …. 19.7, 19.10, 19.18 Whim Well Copper Mines Ltd v Pratt (1910) 12 WALR 166 …. 15.21 White v Australian & New Zealand Theatres Ltd (1943) 67 CLR 266; [1943] HCA 6 …. 11.17 — v Bluett (1853) 23 LJ Ex 36 …. 5.5, 5.8, 5.9 — v Neaylon (1886) 11 App Cas 171 …. 10.24 — v Wills [2014] NSWSC 1160 …. 19.18 White Rose Flour Milling Co Pty Ltd v Australian Wheat Board (1944) 18 ALJR 324 …. 20.10, 20.11 White Trucks Pty Ltd v Riley (1948) 66 WN (NSW) 101 …. 4.12 Whitely Partners Ltd, Re (1886) 32 Ch D 337 …. 10.11 Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243 …. 8.3, 8.4, 8.5, 8.6, 8.8, 8.11, 8.12, 8.18 Whittaker v Unisys Australia Pty Ltd (2010) 26 VR 668 …. 24.8 Wigan v Edwards (1973) 1 ALR 497; 47 ALJR 586 …. 5.12, 5.13, 5.14, 5.20, 5.26 Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280 …. 10.7 Wilcher v Steain [1962] NSWR 1136 …. 16.20, 16.25 Wilding v Sanderson [1897] 2 Ch 534 …. 22.19 Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 …. 12.3 Wilkie v London Passenger Transport Board [1947] 1 All ER 258 ….

3.18 William Sindall Plc v Cambridgeshire County Council [1994] 3 All ER 932; [1994] 1 WLR 1016 …. 22.14 Williams v Baltic Insurance Association of London, Ltd (1924) 2 KB 282 …. 14.17 — v Bayley (1866) LR 1 HL 200 …. 19.5, 19.6 — v Bulat [1992] 2 Qd R 566 …. 22.3 — v Cawardine [1833] EWHC KB J44; (1833) 110 ER 590 …. 4.8 — v Johnson [1937] 4 All ER 34 …. 19.7 — v Maalouf [2005] VSC 346 …. 18.11, 18.12 — v Mason (1873) 37 JP 264; 28 LT 232 …. 10.10, 10.11 — v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 …. 5.17, 5.18, 5.20, 5.21, 5.22, 5.23, 5.26, 5.27, 20.5 — v Williams [1957] 1 All ER 305; [1957] 1 WLR 148 …. 5.18, 5.22 Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43; [1956] ALR 311; [1956] HCA 8 …. 14.15, 14.18, 14.20 Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407 …. 9.29 Wilson & Sons v Pike [1949] 1 KB 176; [1948] 2 All ER 267 …. 10.16 Wilton v Farnsworth (1948) 76 CLR 646; [1948] 2 ALR 445 …. 11.2, 11.3, 18.15 Wilton & Cumberland v Coal & Allied Operations Pty Ltd [2007] FCA 725 …. 7.14 Winchcombe Carson Trustee Co v Ball-Rand (1974) 1 NSWLR 477 …. 24.15 Winks v WH Heck & Sons Pty Ltd [1986] 1 Qd R 226 …. 22.30 Winn v Bull (1877) 7 Ch D 29 …. 7.20 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101

ALR 363 …. 14.4, 14.16 Wire TV Ltd v CableTel (UK) Ltd [1998] CLC 244 …. 12.8 Wisconsin Real Estate Investment Trust v Weinstein 781 F 2d 589, 593 (7th Cir 1986) …. 2.5 With v O’Flanagan [1936] Ch 575 …. 16.14 Withers v General Theatre Corporation [1933] 2 KB 536 …. 25.7 WJ Tatem Ltd v Gamboa [1939] 1 KB 132 …. 15.26 Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212 …. 10.12, 10.13, 10.14 Wolfe v Permanent Custodians Ltd [2012] VSC 275 …. 5.23, 5.26 — v — [2013] VSCA 331 …. 13.22 Wong Fook Heng v Amixco Asia Pte Ltd [1992] 2 SLR 342 …. 5.23 Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 Build LR 81 …. 15.3, 15.7, 15.34 Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571; [1980] 1 WLR 277 …. 14.3, 14.12, 14.14, 14.16, 14.17, 24.13 Woodhouse A C Israel Cocoa Ltd SA v Nigerian Produce Manufacturing Co Ltd [1971] 2 QB 23 …. 24.20 Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431 …. 5.3, 5.7, 5.8 Wright v Madden [1992] 1 Qd R 343 …. 10.4 Wright v TNT Management Pty Ltd (1989) 15 NSWLR 679; 85 ALR 442 …. 13.3, 17.7 WRN Ltd v Ayris [2008] EWHC 1080 …. 5.23

X Xenos v Wickham (1867) LR 2 HL 296 …. 13.11

Xu v Lin [2005] NSWSC 569 …. 18.11

Y Yaxley v Gotts [2000] Ch 162 …. 10.20 Yerkey v Jones (1939) 63 CLR 649; [1939] ALR 62 …. 19.1, 19.20, 19.21 York Air Conditioning & Refrigeration (A/sia) Pty Ltd v Commonwealth (1949) 80 CLR 11; [1949] HCA 23 …. 8.2, 8.7 York Glass Co v Jubb (1925) 134 LT 36 …. 6.4, 6.7 Young v Bristol Aeroplane Co Ltd [1946] AC 163 …. 24.18 — v Smith (2015) 18 BPR 35,101; [2015] NSWSC 400 …. 5.5, 5.9, 5.20 — v Tockassie (1905) 2 CLR 470; [1905] HCA 17 …. 13.11

Z Zhu v Treasurer (NSW) (2004) 218 CLR 530; [2004] HCA 56 …. 12.5 Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] SGCA 27 …. 12.8

Table of Statutes References are to paragraph numbers

Australia — Uniform Legislation Fair Trading Acts …. 21.2 Sale of Goods Acts …. 21.2

Commonwealth Acts Interpretation Act 1901 s 13 …. 17.7 Australian Consumer Law see Competition and Consumer Act 2010 Australian Securities and Investments Commission Act 2001 …. 18.19 Bankruptcy Act 1966 …. 6.21 s 5 …. 6.21 s 58(1) …. 6.21 s 116 …. 6.21 s 126(1) …. 6.24 s 126(2) …. 6.25 s 132 …. 6.21 s 133 …. 6.22 s 133(6) …. 6.22 s 133(6)(b) …. 6.22 s 133(7) …. 6.22, 6.23 s 133(8) …. 6.22

s 133(12) …. 6.22 s 269 …. 6.24 Bills of Exchange Act 1909 s 8(1) …. 10.2 Competition and Consumer Act 2010 …. 16.1, 16.12, 17.1, 18.18, 19.5, 21.2, 21.5 Sch 2 …. 11.9, 13.12, 17.1, 17.2, 17.5, 18.18, 20.4, 21.1, 21.2, 21.4, 21.5, 21.7, 21.11, 21.12 Ch 2 Pt 2.1 …. 21.2 Ch 2 Pt 2.2 …. 21.2 Ch 2 Pt 2.3 …. 21.6, 21.7 Div 1 …. 21.2 s 2 …. 17.5 s 3 …. 21.7 s 18 …. 11.10, 17.1, 17.2, 17.3, 17.4, 17.5, 17.6, 17.7, 17.8, 17.9, 17.11, 17.12, 17.16, 17.17 s 20 …. 18.1, 18.14, 18.18, 20.4 s 21 …. 18.1, 18.18, 20.4 s 22 …. 18.1, 18.18, 20.4, 21.2 ss 23–28 …. 21.1, 21.6 s 23(1) …. 21.6, 21.10, 21.12 s 23(3) …. 21.6, 21.7, 21.12 s 24 …. 21.9, 21.11, 21.12 ss 24–25 …. 21.6 s 24(1) …. 21.10, 21.12 s 24(1)(a) …. 21.10, 21.12

s 24(1)(b) …. 21.10 s 24(1)(c) …. 21.10, 21.12 s 24(2) …. 21.9, 21.10 s 24(3) …. 21.9, 21.10 s 24(4) …. 21.9, 21.10, 21.12 s 25 …. 21.11 s 25(1) …. 21.6, 21.11, 21.12 s 25(1)(c) …. 21.10 s 27 …. 21.6, 21.8, 21.12 s 27(1) …. 21.6, 21.10 s 27(2) …. 21.6, 21.8, 21.10 ss 39–43 …. 4.12 s 41 …. 4.12 s 131 …. 17.1 s 232(3) …. 21.12 s 236 …. 21.12 s 237 …. 21.12 s 250 …. 21.12 Competition and Consumer Legislation Amendment Act 2011 …. 18.18 Constitution …. 21.2, 14.18 s 51(i) …. 17.7 Corporations Act 2001 s 57A …. 6.10 s 124 …. 6.11

s 126 …. 6.12 s 127 …. 6.12 s 131(1) …. 6.13 s 131(2) …. 6.13 s 131(3) …. 6.13 s 131(4) …. 6.13 s 132(1) …. 6.13 s 132(2) …. 6.13 s 140 …. 7.19 s 140(1) …. 7.18 s 140(2) …. 7.18 Electronic Transactions Act 1999 …. 4.22 Family Law Act 1975 s 119 …. 6.26 Insurance Contracts Act 1984 …. 14.17, 14.20 s 50 …. 15.34 Judiciary Act 1903 Pt IX …. 6.18 Pt IXA …. 6.18 Trade Practices Act 1974 …. 16.1, 16.12, 17.1, 17.2, 18.18, 21.2, 21.3, 21.4, 21.5 Pt V …. 17.7 s 6(2) …. 17.7 s 51AA …. 18.14, 18.18, 20.21 s 51AB …. 18.18, 20.21

s 51AC …. 18.18, 18.19, 20.21 s 52 …. 16.12, 17.1, 17.2, 17.3, 17.5, 17.7, 17.9, 17.11, 17.14, 17.17 s 52(1) …. 17.7, 17.9 s 52(2) …. 17.7 Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 …. 17.5, 21.7

Australian Capital Territory Civil Law (Property) Act 2006 s 204(1) …. 10.5 Crown Proceedings Act 1992 …. 6.18, 6.19 Electronic Transactions Act 2001 …. 4.22 Sale of Goods Act 1954 s 3 …. 10.6 s 7 …. 6.9 s 11 …. 22.12

New South Wales Contracts Review Act 1980 …. 20.17 s 9(2)(a) …. 20.21 Conveyancing Act 1919 …. 24.6 s 13 …. 24.6 s 54A …. 10.11 s 54A(1) …. 10.5 s 66K …. 15.34 Crown Proceedings Act 1988 …. 6.18, 6.19

Electronic Transactions Act 2000 …. 4.22 Fair Trading Amendment (Unfair Contract Terms) Act 2010 …. 21.5 Frustrated Contracts Act 1978 s 13 …. 15.41 Guardianship Act 1987 s 57 …. 6.6 Married Persons (Equality of Status) Act 1996 s 10 …. 6.26 Minors (Property and Contracts) Act 1970 …. 6.3 s 6(1) …. 6.3 s 8 …. 6.3 s 17 …. 6.3 s 19 …. 6.3 s 20 …. 6.3 s 21 …. 6.3 s 22 …. 6.3 s 23 …. 6.3 s 26 …. 6.3 s 26(3) …. 6.3 s 26(4) …. 6.3 s 27 …. 6.3 s 27(5)(a) …. 6.3 s 27(5)(b) …. 6.3 s 28(2) …. 6.3 s 29(2) …. 6.3

s 30 …. 6.3 s 30(1)(a) …. 6.3 s 30(1)(b) …. 6.3 s 30(1)(c) …. 6.3 s 30(2) …. 6.3 s 30(3) …. 6.3 s 30(4) …. 6.3 s 30(5) …. 6.3 s 31 …. 6.3 s 33 …. 6.3 s 34 …. 6.3 s 35 …. 6.3 s 36 …. 6.3 s 37 …. 6.3 s 38 …. 6.3 Public Lotteries Act 1996 …. 11.10 Retail Leases Act 1994 s 62B …. 18.19 Sale of Goods Act 1896 s 5 …. 6.9 Sale of Goods Act 1923 s 11 …. 22.12 s 54(3) …. 25.4 Sale of Goods (Amendment) Act 1988 s 3 …. 10.6

Sch 1, cl 2 …. 10.6

Northern Territory Crown Proceedings Act 1993 …. 6.18, 6.19 Electronic Transactions Act 2000 …. 4.22 Law of Property Act 2000 s 56 …. 14.19 s 58(2) …. 10.8 s 62 …. 10.5 Married Persons (Equality of Status) Act 1989 s 3 …. 6.26 Sale of Goods Act 1972 s 9(3) …. 10.17 s 10 …. 22.12 Sale of Goods Amendment Act 1999 s 2 …. 10.6

Queensland Crown Proceedings Act 1980 …. 6.18, 6.19 Electronic Transactions Act 2001 …. 4.22 Law Reform Act 1995 s 18 …. 6.26 Property Law Act 1974 …. 10.6 s 55 …. 14.19 s 56(2) …. 10.8 s 59 …. 10.5

Sale of Goods Act 1936 s 9 …. 22.12 Statute of Frauds 1972 s 3 …. 10.6

South Australia Crown Proceedings Act 1992 …. 6.18, 6.19 Early Closing Act 1926 …. 3.15 Electronic Transactions Act 2000 …. 4.22 Frustrated Contracts Act 1988 s 7 …. 15.41 Law of Property Act 1936 s 26(1) …. 10.5 Minors Contracts (Miscellaneous Provisions) Act 1979 …. 6.3 s 4 …. 6.3 s 6(2) …. 6.3 Sale of Goods Act 1895 s 2 …. 6.9 s 6 …. 22.12 Statutes Amendment (Enforcement of Contracts) Act 1982 s 4 …. 10.6

Tasmania Conveyancing and Law of Property Act 1884 s 36(1) …. 10.5 s 45 …. 6.26

Crown Proceedings Act 1993 …. 6.18, 6.19 Electronic Transactions Act 2000 …. 4.22 Mercantile Law Act 1935 s 12 …. 10.8 Sale of Goods Act 1896 s 7 …. 6.9 s 9 …. 10.17, 10.18 s 11 …. 22.12

Victoria Crown Proceedings Act 1958 …. 6.18, 6.19 Electronic Transactions (Victoria) Act 2000 …. 4.22 Fair Trading Act 1999 …. 21.2 Pt 2B …. 21.5 Fair Trading Amendment (Unfair Contract Terms) Act 2010 …. 21.5 Goods Act 1928 s 55(2) …. 25.6 Goods Act 1958 …. 6.9 s 11 …. 22.12 Instruments Act 1958 …. 10.8 s 126 …. 10.5, 10.11 s 129 …. 10.8 Limitations of Actions Act 1958 s 5 …. 9.5 Marriage Act 1958 s 157 …. 6.26

Police Regulation Act 1958 s 123 …. 13.21 Sale of Goods (Vienna Convention) Act 1987 s 8 …. 10.5, 10.11 s 9 …. 10.6 Sale of Land Act 1962 s 32 …. 16.13 Supreme Court Act 1986 s 29 …. 9.5 Town and Country Planning Act 1961 …. 16.11

Western Australia Crown Suits Act 1947 …. 6.18, 6.19 Electronics Transactions Act 2011 …. 4.22 Fair Trading Act 1987 s 10 …. 17.3 Landlord and Tenant Act 1912 s 3 …. 24.19 Law Reform (Statute of Frauds) Act 1962 s 2 …. 10.5 Property Law Act 1969 s 11 …. 14.19 s 31 …. 6.26 s 34(1) …. 10.11 Sale of Goods Act 1895 s 2 …. 6.9

s 4 …. 10.18 s 4(3) …. 10.17 s 6 …. 22.12

Imperial Statute of Frauds 1677 …. 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.10, 10.11, 10.18, 10.19, 10.20, 10.24 s 4 …. 10.3, 10.5, 10.22 s 5 …. 10.11 s 17 …. 10.3, 10.17 Statute of Frauds Amendment Act 1828 s 6 …. 10.10

India Evidence Act 1872 …. 12.8

Singapore Evidence Act 1997 …. 12.8 s 93 …. 12.8 s 94 …. 12.8

United Kingdom Contracts (Right of Third Parties) Act 1999 …. 14.3 Copyright Act 1956 …. 5.8 Hire Purchase Act 1964 s 27 …. 22.6 Increase of Rent and Mortgage Interest (Restrictions) Act 1920 ….

22.20 Judicature Act 1873 s 25(7) …. 24.6 Law of Property Act 1925 …. 14.13 s 56 …. 14.13 Law of Property (Miscellaneous Provisions) Act 1989 s 2 …. 10.20 Law Reform (Married Women and Tortfeasors) Act 1935 …. 6.26 Married Women (Restraint Upon Anticipation) Act 1949 …. 6.26 Married Women’s Property Act 1870 …. 6.26 Mercantile Law Amendment Act 1856 s 3 …. 10.8 National Assistance Act 1948 s 42 …. 5.22 Occupiers’ Liability Act 1957 …. 11.12 Purchase Tax Act 1963 …. 7.10 Rent and Mortgage Interest Restrictions Act 1923 …. 22.20 Rent Restrictions (Notices of Increase) Act 1923 …. 22.20 Sale of Goods Act 1893 …. 24.2 Stamp Act …. 3.18 Trade Union and Labour Relations Act 1974 s 13(1) …. 20.15, 20.20

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

Art 29(2) …. 10.2

Contents Preface Table of Cases Table of Statutes Chapter 1

An Introduction to Law School

Chapter 2

Theories of Contract Law

Chapter 3

Offer

Chapter 4

Acceptance

Chapter 5

Consideration

Chapter 6

Capacity to Contract

Chapter 7

Intention to Create Legal Relations

Chapter 8

Certainty and Completeness

Chapter 9

Estoppel

Chapter 10

Formalities

Chapter 11

Express Terms

Chapter 12

Construction of Contracts

Chapter 13

Implied Terms

Chapter 14

Privity of Contract

Chapter 15

The Doctrine of Frustration

Chapter 16

Misrepresentation

Chapter 17

Misleading or Deceptive Conduct

Chapter 18

Unconscionable Conduct

Chapter 19

Undue Influence

Chapter 20

Duress

Chapter 21

Unfair Contract Terms

Chapter 22

Mistake

Chapter 23

Termination and Discharge

Chapter 24

Termination for Breach

Chapter 25

Remedies for Breach of Contract

Index

[page 1]

CHAPTER 1 An Introduction to Law School CHAPTER OVERVIEW 1.1 1.2

1.15

Commencing as a first-year law student Tips for studying at law school 1.2 Understand what law is 1.3 Work effectively 1.4 Practise the core legal skills 1.5 The common law method 1.6 Case law analysis 1.7 Legal problem solving 1.8 Statutory interpretation 1.9 Legal writing 1.10 Research 1.11 Reputation matters 1.12 Be seen at law school 1.13 Read widely 1.14 Law is a skills profession Conclusion

Commencing as a first-year law student 1.1

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, studying law can be a very positive experience. However, with little advice — or advice 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 [page 2] 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; 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.

Tips for studying at law school Understand what law is 1.2

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 few 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 may be debatable. Moreover, some questions of law are new and unsettled. The law is concerned with how societies organise themselves and how they regulate the interactions among their members. Leaving aside the question of whether the law is settled or not, there is the more fundamental question of what the law is and what purpose it serves. The law is concerned with how societies organise themselves and how they regulate interactions among their members. Essentially, the law is concerned with: setting the parameters of lawful behaviour in society; providing the infrastructure for myriad lawful pursuits; and providing a system of dispute resolution. [page 3] 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 nondiscrimination (for example, human rights law). In short, the law serves the purpose of influencing social, political and commercial behaviours in society. It is also worth pointing out that many 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 rulebased 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.

Work effectively 1.3

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 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: reading the assigned textbook readings, relevant cases and statutes, and accepting that you might have to do those readings several times over. It may 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. Nonetheless, for most of us, the reality is that it can take some time for complex concepts to sink in and become a part [page 4] of our thinking. There is also an art to reading judgments and statutes that your lecturers will address in class; allocating sufficient time for study. Think about it this way: if a group of builders were building a house that you were going to live in for the next 30 years, would you want them to work on it intermittently, and 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 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. While allocating sufficient time for study can be a difficult task when you have to balance part-time employment, family, sports, hobbies and social commitments, you need to work out for yourself what the right balance is during term time; and 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 apply it to a set of problem questions in assignments and exams. 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 thinking and engaging 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 5 hours of lectures and tutorials per subject per week, this works out at a cost of about $16 per hour for your degree. Would you pay $16 per hour to surf Facebook? Class should be, to some degree, a social space. The friends that you make in law school may 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 to others. It effectively forces the 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 lectures and tutorials. It is almost akin to standing outside a lecture theatre and stopping somebody from entering. If you would not consider doing that, then why would you do something that essentially has the same effect? There should be a balance between the classroom as a social and an intellectual space.

[page 5]

Practise the core legal skills 1.4

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 have a forum in which you can apply it on a regular basis. The core legal skills are: 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 to other areas of professional endeavour, and will feature heavily in your professional life as a lawyer.

The common law method 1.5

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, this is not a straightforward proposition. In Parker v British Airways Board1 Donaldson LJ 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 that 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

[page 6] if its application to the immediate facts of a case could result in some injustice. As Lord Denning stated in The Discipline of Law:4 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.

Case law analysis 1.6

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 General Insurance Co Ltd v McNiece Bros Pty Ltd.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 JJ 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 1.7

Legal problem solving requires the ability to: identify how a specific set of facts gives rise to a series of legal questions; determine essential and non-essential facts; know which specific facts trigger the application of a particular set of legal rules; and apply those rules to the facts and, through a reasoning process, come up with an advice. [page 7]

Statutory interpretation 1.8

Statutory interpretation requires the ability to read a statute and apply it as a form of law. It involves an understanding of: 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; and 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 that, 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 such a problem.6 Clearly, this phrase can be interpreted as meaning either the chicken is ready to eat something or 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 1.9

Legal writing requires the ability to convey a legal analysis in a professional and persuasive manner. It takes some time 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:7 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

[page 8] 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.

Research

1.10

Research requires the ability to acquire knowledge. In the online environment this might relate to your ability to search databases and procure information. In a more practical sense, it might involve the ability to find law reports and books in a library, or simply knowing who to ask about a particular problem. The six skills discussed above are at the core of the legal profession. While it will take a few years for you to develop them to a high level, it is worth committing to doing so. Our advice would be to keep track of your skills development and seek feedback from your lecturers and tutors as you go along.

Reputation matters 1.11

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, 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 potentially has 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’.9 In contrast, in [page 9] Re AJG,10 the Queensland Court of Appeal took a stricter line. De Jersey CJ stated:11 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.

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 may do the same as lawyers, 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 that 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. 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 public life in several ways. The main method of engagement is through research publications. An academic should be actively engaged in research and be developing a reputation within their field and the profession

for their research work. This may 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 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 strive to give a good impression to visitors to the law school such as judges, practitioners from law firms and other academics. Finally, at law school you will come into contact with people from a broad cross-section of the community. Some matters that attract action under [page 10] 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 arise — and they are quite rare — be compassionate but proactive in seeking a resolution.

Be seen at law school

1.12

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 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 that 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 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:12 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.

On a practical level, it is almost impossible for any lecturer to impart every tip, trick or piece of knowledge on a subject in a 2hour lecture. Some of these pieces of information can be quite useful and the best way to get them is to have a brief face-toface conversation with your lecturer or tutor. Email can be useful, but it is limited and likely only to garner answers to specific questions. Discussion boards on course websites can be helpful, and certainly are more time efficient for staff and students than email, but can be slightly formal as well. The more 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 and is also quite difficult to do in lectures. It requires open and honest face-to-face discussion. [page 11] On a student-to-student level, it is worth forming study groups and getting involved in revising subject matter and preparing law summaries together.

Read widely 1.13

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 in trade of the lawyer, so verbal fluency is an aid to academic and professional success.

Law is a skills profession 1.14

While the specific core legal skills were identified above, it bears repeating that law is a skills profession. You will get hired on the basis of your ability to acquire information and 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 simply memorise and repeat facts. There are particular skills and techniques that are involved in legal analysis, which 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 preprepared or memorised answer that may not even fit the question.

Conclusion 1.15

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 your studies in the law broaden both your mind and horizons; and that your law studies are as enjoyable as possible.

_________________ 1

[1982] 1 All ER 834.

2

[1982] 1 All ER 834 at 836.

3

(1992) 175 CLR 1; 107 ALR 1.

4

Lord Denning, The Discipline of Law, Butterworths, London, 1979, p 414.

5

(1988) 165 CLR 107; 80 ALR 574.

6

Hon JJ Spigelman AC, ‘The Intolerable Wrestle: Developments in Statutory Interpretation’ (2010) 84 ALJ 822 at 824.

7

Lord Denning, above n 4, p 5.

8

[2007] QSC 34 (McMurdo J, 26 February 2007, unreported).

9

[2007] QSC 34 at [30].

10

[2004] QCA 88 (de Jersey CJ, Jerrard JA and Philippides J, 15 March 2004, unreported).

11

[2004] QCA 88 at [4].

12

Sir Garfield Barwick, A Radical Tory: Garfield Barwick’s Reflections and Recollections, Federation Press, Sydney, 1995, p 274.

[page 13]

CHAPTER 2 Theories of Contract Law CHAPTER OVERVIEW 2.1 2.2

2.13 2.17

Introduction The contract as bargain 2.2 History 2.3 Theory 2.4 Standard form contracts 2.5 Ambiguity 2.6 Language and contract 2.10 Hypothetical and actual consent The contract as promise The contract as property 2.19 Property and the reliance theory of contract 2.20 Remedial action 2.21 The harm principle 2.22 The corrective justice principle

Introduction 2.1

The law of contract has been influenced by numerous disparate sources and lacks a thorough philosophical or theoretical foundation. Summers, reflecting on the state of the institution of contract, said: ‘It would seem a reasonable guess, in fact, that the principles common to the whole range of contractual transactions are relatively few and of such generality and competing character that they should not be stated as legal rules at all.’1 Rather, the law of contract 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 who are reliant on promised advantages and holding [page 14] people to what they have led others to expect, and fashioning remedies on the basis of these expectations.2 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:3 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.

Still other critics suggest that the jurisprudential basis of contract theory is vanishingly thin, and that the institution of contract and the agreement it is said to enshrine and protect is guarded only by social and cultural mores and practices, as opposed to being sustained by any logically defensible theorem;4 and that it is the cultural persuasiveness of the rule of law rather than any doctrinal basis that supports the bargain struck by the parties.5

The contract as bargain History

2.2

The bargain theory of contract arose in the 19th 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. [page 15] As Langdell stated:6 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.

The 19th century bargain theory rested on a reconceptualisation of consideration.7 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.8 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.’9 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 §71): (1) To constitute consideration, a performance or a return promise must be bargained for.

[page 16] (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.10 The bargain theory of contract was adopted in Waltons Stores (Interstate) Ltd v Maher,11 where Mason CJ and Wilson J stated that it ‘had not been expressly adopted in Australia or England’.12 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.13 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.14

Theory 2.3

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. Contract theory assumes that the parties to the contract are able to, and do, translate their subjective desires into objective language, with seemingly little or insufficient regard for the complexities of such efforts to objectify desires into a coherent, complete and logical text that can then be interpreted in accordance with an appropriate theory. In other words, the gap between contract theory and the practice of negotiating and executing agreements is a functional consideration for [page 17] the interpretation of contracts.15 It has been said, for example, that ‘there are large gaps between the law school law of contract, what happens in courts, and what practicing lawyers do.’16 Llewellyn has described the contract as a ‘framework’ that ‘almost never accurately described real working relations, but … [that affords] rough indication around which such relations vary, an occasional guide in case of doubt, and a norm of ultimate appeal when the relations cease in fact to work.’17 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’.18 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.19

Standard form contracts 2.4

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.20 Today, therefore, the most common contracts are not characterised by individualised negotiation over prices and terms, but offer set terms and characteristics that 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 that 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’.21 Nevertheless, in some jurisdictions (originally [page 18] 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 their purchases

after reading the contract, and even fewer 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 selfinterest.22

Ambiguity 2.5

Contracts are made in complex situations, which include the bounded rationality of the parties, the divergent interests of the parties, including their interest in acting opportunistically rather than cooperatively, the parties’ differential access to information, and the general conditions of uncertainty that prevail and the difficulty (if not impossibility) of calculating outcomes. Under such conditions, perfect agreement is unlikely and contracts will therefore tend to remain incomplete. The general contingency of contractual reduction has given rise to numerous interpretive approaches to attempt to minimise uncertainty and contentiousness. 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:23 [page 19] … 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.

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. One of the premises guiding what parties would have contracted for had they negotiated under perfect conditions is that the parties would have agreed to maximise the joint surplus of the agreement,24 because, while the opportunism that motivates economic individualism suggests that each party is interested primarily in their own surplus, they are also aware that they benefit directly from an enhanced joint surplus.25 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.26 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; that is, the rules the parties would probably have chosen, the rules that perfectly rational and completely informed parties would have chosen, and the rules that parties would in general choose to govern the situation.27

Language and contract 2.6

Attempts to solve contractual conflicts by interpreting the language of the instrument or by reference to the intention evidenced by the contract suggest a rational and more or less direct relationship between [page 20] the documented words and what the parties have promised to do. Some theorists have dismissed this relationship as a myth, or at least questioned whether it is proper to assume that the

language to which the agreement has been reduced is not calculated to allow for manipulation and even distortion.28 However, taking advantage of the language of the instrument is not a post hoc event but possible because the uncertainty of language itself is unmasked in the process. 2.7

Lipshaw refers to Wittgenstein’s argument that there can be no entirely private language, because language is an essentially shared medium in which content is provided through conventional usage.29 Even the most intensely subjective experience must be expressed in a language that can potentially be conveyed to another within a public framework able to endorse the parties’ interpretation of the statements and phrases they employ. The conventionality of language enables and ensures that proforma contracts and boilerplate clauses provide for broad and basic agreement between the parties, and are, on most occasions when simple contracts are entered into, sufficient to record the intentions of the parties. Nevertheless, the very unreflectiveness of the employment of language in general represents the imminent danger of contract inherent in the translation of individual intention into fixed points of reference between the parties. That danger is not triggered merely by the need to fashion an enforceable agreement, but much earlier when the party brings to conscious expression their own desires, and objectives, and the actions they expect to take before they even begin to consider their expectations of another party. A consideration of the linguistic philosophy of Grice raises questions regarding the implications in which conversational language abounds. It therefore follows that a reference to settled conventional meaning and publicly explicable intention does not convey the entirety of the meaning of any conversation. Nevertheless, conversational rectitude is assured by conversationalists drawing on necessary shared protocols

and principles. While legal theorists have drawn attention to the significant distinction between the conversational analysis to which Grice specifically refers, and legal documents,30 Lipshaw pointedly observes that the analysis retains pertinence to contract analysis which [page 21] retains ad idem, or a meeting of the minds of the parties, as a requirement of formation.31 2.8

While Lipshaw does not reject a correspondence theory of language altogether, he does reject ‘isomorphic’ correspondence. While the correspondence theory of language posits language as a medium that maps directly onto reality such that language reveals a direct and unique connection between the truth of the contents of its statements and objects, phenomena, and relations in the external world, Lipshaw suggests that the relationship of language to reality is neither direct nor unique. Consequently, he disparages the naiveté of the theoretical construct of a complete contract.32 Most contracts are by nature ‘elliptical’ in the sense that they suggest without expressly stating everything that has to be done, on the basis of the parties shared assumptions and understanding. The correspondence theory exceeds what is actually achieved by contracts in practice, by papering over a real gap between the parties’ knowledge and their expression. Problematically, the more complex the contract the more inadequate the economy of language and the greater the exploitable gap appears between the terms and their agreed meaning.33 The correspondence theory manifests a further inadequacy. In being a theory of the relationship between language and reality it is still not a theory of the reality to which it refers. Correspondence theory does not describe or examine the

reality that language supposedly projects onto. Schwartz and Scott argue that the formalistic analysis of contracts that this divorce of the contractual device from content of the bargain supports is preferable to contractual interpretations that stress the objective content of the agreement.34 They argue that this approach simplifies the court’s interpretation but at the same time maintain that the court’s task is to relate the language of the contract to the parties’ intentions and thereby introduce correspondence by the back door.35 While correspondence theory attempts to finally anchor the language of the contract to identifiable and unmistakable realities, more sophisticated theories of language recognise that ambiguity is an intractable problem. Correspondence theories require there to be a relationship between a proposition and the truth of that proposition as guaranteed by the conditions of the objective world. However, language [page 22] cannot be disambiguated by any elaboration of the terms or by any further iterations of elaborations, because:36 Each elaboration introduced to meet one problem of interpretation imports with it new problems of interpretation. Replacing one bundle of legal words with another bundle of legal words does not extinguish debate; it only shifts the terms in which the debate is conducted.

2.9

Patterson, on the other hand, seeks to escape the hall of mirrors in which language explains still more language in an attempt to better correspond to a given reality.37 He argues that the truth of a legal proposition is guaranteed not by the inescapable gravity that draws the propositional content of a contract to a set of conditions in the external world but by its adjudication as a competent and justifiable legal assertion.38 In other words, the legal institution supported by the cultural system that it serves

is structured in such a way that legal truth is manufactured by an authoritative endorsement of a legal proposition uttered by a competent speaker — the cultural and institutional practice of making convincing legal arguments that raise truthful propositions by operating persuasively within the context of other acceptable legal truths.

Hypothetical and actual consent 2.10

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 optimises the allocation of risk through the contract mechanism, and minimises 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 [page 23] 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 of the contracting parties (so that the actual understanding of the contract participants can be

pragmatically community.

addressed)

and

the

interpretive

legal

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’.39 For Barnett,40 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’ selfinterest. 2.11

A number of economic rationalist theories, of which Coase’s41 is the most famous, argue that individual bargaining is an act capable (when the individual bargaining events are added 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.42 Rational bargaining therefore attempts to ‘mimic the market’.43 Coase’s theory is in the tradition of 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 efficiencies44 and as an abstract method for discovering the actual intentions of the contracting parties. [page 24]

For Becker, social benefit is maximised by reference to an aggregate of transactions constituted by the same individual bargaining exchanges.45 Bargaining, in Becker’s view, occurs in a market situation that 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, 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. 2.12

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.46 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.47 They are a form of socially endorsed and marketbacked private legislation between parties, providing specialised terms for the particular transaction. As Farnsworth says, in [page 25] 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’.48

The contract as promise 2.13

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 deontological morality are concerned to explain how the actions and processes the law undertakes can be justified, on the basis of their understanding of the foundation of the contract.

Theories of contract law based on deontological morality are concerned to explain how the actions and processes the law undertakes can be justified, on the basis of their understanding of the foundation of the contract. Arguments that base contract law on the social role and power of morality must show how contract law enforces the rights and responsibilities inherent in making a promise. If contract law differs significantly from the morality of making a promise, it is unjustified on that basis. 2.14

The theory that the contract is a type of promise has had numerous exponents and adherents,49 but was expounded in greatest detail by Fried.50 The theory 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 that 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, self-imposed obligations. [page 26] Scholars have objected to Fried’s analysis of enforcement as based on the immoral divergence from the promise.51 Fried recognised that ‘interpretation may fail to locate a core of agreement, and so at some point we must admit that the contract gives out,’52 and that the resolution of disputes may require not the proper interpretation of the contract but moral values such as ‘sharing and altruism’, observing:53 If drastic consequences hang the balance for one or the other party and we are reaching the edges of the actual agreement (and who says the boundary must always be a sharp one — the formalists, whoever they may be), inevitably there will be pressure to avoid pushing language and one’s contractual partner to the wall. This is the principle of civility, which permits the smooth functioning not only of private but of civil institutions: Dubious advantages are not pressed to their limit, lest the

willingness to cooperate be undermined and the necessary limitations of language and goodwill be overreached.

The arguments of Fried’s critics are based on a correspondence view of the contract. The justification of the promise-affirming theory of contract is based on the assumption that the ex ante agreement was clear enough to have moral force in the first place. 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. 2.15

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.54 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 [page 27] 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.55

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 that identifies the foundation of the contract as a self-imposed moral responsibility56 — 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 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.57 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 visà-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. 2.16

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 nonperformance 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, [page 28] which they do by exercising their free will in the decision to enter contractual relations.58 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 that 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.59

The contract as property 2.17

Spooner strongly criticised elevating the promise above other considerations in providing a grounding to the law of contract:60 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. 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.

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 [page 29] frequently distinguished, a number of legal scholars have recently considered their similarities and the benefits of thinking of the contract in terms of property.61 Kant saw property titles rather than promises as the basis of contracts, and contracts as instruments by which alienable goods are assigned or transferred.62 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. 2.18

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.63 Gold has argued that ‘a contract is best understood as a special type of property — property in a promisor’s future actions’.64 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;65 that is, individual ownership cannot impede and must include the capacity to assign ownership of one’s future actions to another person.66 [page 30] Indeed, self-ownership is radical because it precedes and is the basis for all other property rights that may be created by physical or intellectual labour.67 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.68 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 the property approach to contractual obligation. 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 the consent of, and is taken possession of by, the transferee.69 The promise is then enforceable by means of these corresponding duties and rights arising from the mutual

consent of both parties: the consent of the promisor to the alienation of their right, and the consent of the promisee to the appropriation of that right.70

Property and the reliance theory of contract 2.19

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 that centralises the promisee’s reliance on the promise. Such reliance can be used to explain both [page 31] the nature of the obligation and the justification for the contract’s enforcement.71 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 justice.72 These in turn are anchored in, and show the contract to reflect, social understandings and norms that inform the courts approach to the central question: ‘Is this a promise that should be enforced?’.73 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.74 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 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.75 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.76 One party’s reliance on terms cannot simpliciter impose obligations on another without their corresponding consent to be bound by those same obligations. [page 32]

Remedial action 2.20

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 2.21

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 that 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 extent77 — are debatable and can be defined from numerous (often conflicting) perspectives.78 However, from the perspective of the contract and the application of 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 2.22

The application of corrective justice to contract situations will depend on the existence of corresponding rights and liabilities.79 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 [page 33]

the contract, concentrating instead on the secondary duty to repair.80 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.

Key Points for Revision The contract as a bargain is an objective theory of contract that 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 selfimposed 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.

_________________ 1

C W Summers, ‘Collective Agreements and the Law of Contracts’ (1969) 78 Yale Law Journal 525 at 568.

2

A Smith, Lectures on Justice, Police, Revenue and Arms (Cannan ed), 1890, p 7; J L Austin, Lectures on Jurisprudence, 4th ed, J Murray, London, 1873, Vol 1, pp 326–7. This theory, which has its origins in the medieval action of assumpsit, is probably ascendant: see E Jenks, The History of the Doctrine of Consideration in English Law, C J Clay & Sons, London, 1892, pp 115–18; M Ferson, The

Rational Basis of Contracts, Foundation Press, Brooklyn, 1949, p 121. 3

R Pound, ‘Individual Interests of Substance — Promised Advantages’ (1945) 59 Harvard Law Review 1 at 1–2, 162–3.

4

J M Lipshaw, ‘Lexical Opportunism and the Limits of Contract Theory’ (2015) 84 University of Cincinnati Law Review 1 at 11, 13 (‘the only real check on opportunism is non-opportunistic behaviour, whatever its source in culture, morality, or self-control’).

5

Lipshaw, above n 4, at 13.

6

C C Langdell, Summary of the Law of Contracts, Little, Brown and Company, Boston, 1880, p 244. P S Atiyah expresses this in virtually identical terms in An Introduction to the Law of Contract, Oxford University Press, NY, 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.’

7

See Chapter 5.

8

See Langdell, above n 6, pp 78–9; see also P Kelley, ‘A Critical Analysis of Holmes’ Theory of Contract’ (2000) 75 Notre Dame Law Review 1722 at 1757.

9

F E Pollock, Pollock’s Principles of Contract, 8th ed, Stephens & Sons, London, 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 at 855. Despite Pollock’s expression and its clear adoption by the House of Lords, 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, Oxford, 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.

10

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.

11

(1988) 164 CLR 387; 76 ALR 513.

12

At ALR 522.

13

At ALR 522.

14

Beaton v McDivitt (1987) 13 NSWLR 162 at 182 per McHugh JA.

15

See N Oman, ‘Consent to Retaliation: A Civil Recourse Theory of Contractual Liability’ (2011) 96 Iowa Law Review 529.

16

S Macauley et al, Contracts: Law in Action, 3rd ed, 2010, LexisNexis Butterworths, p 15.

17

K N Llewellyn, ‘What Price Contract? An Essay in Perspective’ (1931) 40 Yale Law Journal 704 at 737.

18

Commonwealth Bank of Australia v Poynten (1996) Aust Contract R 90-065 at 90,384 per Young J.

19

See J Coleman, Risks and Wrongs, Oxford University Press, NY, 2002, p 272.

20

F Kessler, ‘Contracts of Adhesion — Some Thoughts about Freedom of Contract’ (1943) 43 Columbia Law Review 629.

21

Kessler, above n 20, at 632. G L Priest, ‘A Theory of the Consumer Product Warranty’ (1981) 90 Yale Law Journal 1297 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.’ 22

See Coleman, above n 19, p 272.

23

Harcourt Brace Jovanovich Inc v Sun Bank National Association, No 87-3985 (Fla Cir Ct June 25, 1987).

24

For this law and economics approach to the resolution of incomplete contracts see J P Kostritsky, ‘Plain Meaning v Broad Interpretation: How the Risk of Opportunism Defeats a Unitary Default Rule for Interpretation’ (2006) 96 Kentucky Law Journal 43 at 46; R A Posner, ‘The Law and Economics of Contract Interpretation’ (2005) 83 Texas Law Review 1581; E A Posner, ‘Economic Analysis of Contract Law After Three Decades: Success or Failure?’ (2003) 112 Yale Law Journal 829 at 839–42; A Schwartz and R E Scott, ‘Contract Theory and the Limits of Contract Law’ (2003) 113 Yale Law Journal 541.

25

R A Posner, Economic Analysis of Law, 6th ed, Aspen, 2003, p 96.

26

See, for example, Katz v Oak Indus Inc 508 A 2d 873, 880 (Del Ch 1986) per Chancellor Allen; Wisconsin Real Estate Investment Trust v Weinstein 781 F 2d 589, 593 (7th Cir 1986).

27

See D Charny, ‘Hypothetical Bargains: The Normative Structure of Contract Interpretation’ (1990–91) 89 Michigan Law Review 1815 at 1821.

28

M Gulati and R Scott, The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design, University of Chicago Press, Chicago, 2013. This work is based on interpretive problems in sovereign debt contracts containing pari passu clauses.

29

Lipshaw, above n 4 at 24–7.

30

D Hellman, ‘Unintended Implications’ (2015) 101 Virginia Law Review 1105, critiquing J Mikhail, ‘The Constitution and the Philosophy of Language: Entailment, Implicature and Implied Powers’ (2015) 101 Virginia Law Review 1063, both cited in Lipshaw, above n 4, at 27.

31

Lipshaw, above n 4, at 27.

32

Lipshaw, above n 4, at 30.

33

Lipshaw, above n 4, at 31.

34

Schwartz and Scott, above n 24, at 570.

35

Lipshaw, above n 4, at 32.

36

B Manning, ‘Hyperlexis and the Law of the Conservation of Ambiguity: Thoughts on Section 385’

(1982) 36 Tax Law 9 at 21; see also B Manning ‘Hyperlexis: Our National Disease’ (1977) 71 Northwestern University Law Review 767; A Stumpff, ‘The Law is a Fractal: The Attempt to Anticipate Everything’ (2013) 44 Loyola University Chicago Law Journal 649. 37

D Paterson, Law and Truth, Oxford University Press, NY, 1996, p 162: ‘The idea of language “corresponding” with something outside language can never be cashed out because all talk of language is still use of language: no part of language can be torn apart from the whole and valorised as “metalanguage”, a superlangauge or “language about language.”’

38

Paterson, above n 37.

39

See R E Barnett, ‘The Sound of Silence: Default Rules and Contractual Consent’ (1992) 78 Vanderbilt Law Review 821; see also R Craswell, ‘Contract Law, Default Rules, and the Philosophy of Promising’ (1989) 88 Michigan Law Review 489 at 516–28.

40

See Barnett, above n 39.

41

R H Coase, ‘The Problem of Social Cost’ (1960) 3 Law & Economics 1.

42

See Coase, above n 41; see also A Schwartz and L L Wilde, ‘Imperfect Information in Markets for Contract Terms: The Example of Warranties and Security Interests’ (1983) 69 VA L Rev 1387, 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.

43

See, for example, R E Barnett, ‘Contract Remedies and Inalienable Rights’ (1986) 4 Social Philosophy and Policy 179; see also Barnett (1992), above n 39, at 859–73.

44

A Smith, The Wealth of Nations, Modern Library, 1937, pp 500–1.

45

G Becker, ‘Irrational Behaviour and Economic Theory’ (1962) 70(1) Journal of Political Economy at 1–13. For an opposing view, see J F Muth, ‘Rational Expectations and the Theory of Price Movements’ (1961) 29 Econometrics at 315–35; G L S Sheckle, Epistemics and Economics, Cambridge University Press, England, 1972, pp 15–16, 132, 135–6; H Wolozin (ed), The Economics of Pollution, General Learning Press, NJ, 1974, p 12.

46

See, for example, E A Farnsworth, ‘Legal Remedies for Breach of Contract’ (1970) 70(7) Columbia Law Review at 1145–216; E J Mishan, ‘The Economics of Disamenity’ (1974) 14(1) Natural Resources Journal at 55–86; B Ward, What’s Wrong with Economics?, Basic Books, Inc, NY, 1972, pp 199ff.

47

See I R Macneil, ‘Restatement (Second) of Contracts and Presentation’ (1974) 60 Virginia Law Review at 589–610.

48

E A Farnsworth, ‘The Past of Promise: An Historical Introduction to Contract’ (1969) 69 Columbia Law Review at 576–607, 599.

49

See, for example, Pound, above n 3, at 1–2.

50

C Fried, Contract as Promise: A Theory of Contractual Obligation, Harvard University Press, 1988, p 40.

51

D Kimmel, From Promise to Contract: Toward a Liberal Theory of Contract, Oxford University Press, 2003; S Shiffrin, ‘The Divergence of Contract and Promise’ (2007) 120 Harvard Law Review 708. For a response to Shiffrin, see J M Lipshaw, (2008) 21 Canadian Journal of Law and Jurisprudence 399; M G Pratt, ‘Contract: Not Promise’ (2008) 35 Florida State University Law Review 801.

52

Fried, above n 50, p 89.

53

Fried, above n 50, pp 89–90.

54

O Wendell Holmes Jr, The Common Law, Little, Brown and Company, Boston, 1963, p 301.

55

Shiffrin (2007), above n 51, at 718–19.

56

Feinberg calls this ‘personal sovereignty’: see J Feinberg, Harm to Self: The Moral Limits of Criminal Law, Oxford University Press, 1986, Vol 3, p 52; see also J Raz, The Morality of Freedom, Oxford University Press, 1986, pp 369–70.

57

M Pratt, ‘Promises, Contracts and Voluntary Obligations’ (2007) 26 Law and Philosophy 531 at 533; J 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.

58

H L A Hart, Essays on Bentham, Oxford University Press, 1982, p 255.

59

J S Krauss, ‘The Correspondence of Contract and Promise’ (2009) 109(7) Columbia Law Review 1603 at 1623.

60

The Collected Works of Lysander Spooner, M & S Press, Weston, Mass, 1971, pp 110–11.

61

Those scholars having expressed scepticism about the coherence of the comparison and the view include J Waldron, The Right to Private Property, Clarendon Press, Oxford, 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); T W Merrill and H E Smith, ‘The Property/Contract Interface’ (2001) 101 Columbia Law Review 773 at 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 that operates on and between named parties); J E Penner, The Idea of Property in Law, Clarendon Press, Oxford, 1997. Those scholars who have entertained the prospect but emphasised the negative include S A Smith, Contract Theory, Oxford University Press, 2004, p 72; S A Smith, ‘Towards a Theory of Contract’ in J Horder (ed), Oxford Essays in Jurisprudence: Fourth Series, Oxford University Press, 2000, pp 107–29 at 123; E J Weinrib, ‘Punishment and Disgorgement as Contract Remedies’ (2003) 78 Chicago-Kent Law Review 55; P Benson, ‘The Unity of Contract Law’ in P Benson (ed), The Theory of Contract Law: New Essays, Cambridge University Press, 2001, p 118.

62

I Kant, The Philosophy of Law: An Exposition of the Fundamental Principles of Jurisprudence as the Science of Right, T & T Clark, 1887.

63

J Rousseau (J R Masters (tr), R Masters (ed)), On the Social Contract, with the Geneva Manuscript and Political Economy, St Martin’s Press, NY, 1978, Book 1, Ch 4; J S Mill (G Himmelfarb (ed)), On Liberty, Penguin, 1859, Ch 5.

64

A S Gold, ‘A Property Theory of Contract’ (2009) Northwestern University Law Review 103:1 1 at 3.

65

Gold, above n 64, at 4, building on the theories of J Locke, ‘The Second Treatise of Government’ in J 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.

66

Gold, above n 64, at 4–5.

67

See C Valcke, ‘Locke on Property: A Deontological Interpretation’ (1989) 12 Harvard Journal of Law and Public Policy 941 at 983, referring to s 27 of the Second Treatise of Government.

68

That right is discussed by W Blackstone, Blackstone’s Commentaries on the Laws of England (facsimile edition) with introductions by S 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 K Olivecrona, Law as Fact, 2nd ed, Stevens & Sons,

London, 1971, p 290. 69

P Benson, ‘The Idea of a Public Basis for Justification for Contract’ 33(2) Osgoode Hall Law Journal 273 at 296.

70

See Benson, above n 61, p 129.

71

For a discussion of the historical vicissitudes of reliance theories, see R E Barnett, ‘The Death of Reliance’ (1996) 46 Journal of Legal Education 518; for a substantive consideration of reliance theories, see P S Atiyah, Promises, Morals and Law, Oxford University Press, 1983; G Gilmore, The Death of Contract, Ohio State University Press, Colombus, OH, 1974.

72

See Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 at 151, which limited the extent of promissory liability for consequentialist damages to those that are foreseeable.

73

Barnett (1986), above n 43.

74

Raz (1986), above n 56, pp 369–70.

75

Fried, above n 50, p 10.

76

See I Berlin, ‘Two Concepts of Liberty’ in I Berlin, Four Essays on Liberty, Clarendon Press, 1969 for the classic formulation of this concept; see also Barnett (1992), above n 39, at 828.

77

See D Kimel, ‘Remedial Rights and Substantive Rights in Contract Law’ (2002) 8 Legal Theory 313 at 332.

78

See Smith (2000), above n 61, pp 107–29, 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 104–9.

79

E J Weinrib, ‘Punishment and Disgorgement as Contract Remedies’ (2003) 78 Chicago-Kent Law Review 55 at 59–60.

80

Smith (2004), above n 61, p 147.

[page 35]

CHAPTER 3 Offer CHAPTER OVERVIEW 3.1 3.2 3.3 3.4 3.5

3.10 3.13 3.14

3.20

Introduction The traditional model and alternative views The global view of contract formation Offer and acceptance Offers 3.6 Is there an offer? 3.8 The existence of a definite promise Invitations to treat 3.12 A framework for invitations to treat Mere puffery Different types of contracts 3.14 Unilateral and bilateral contracts 3.15 Shop sales 3.16 Auctions 3.17 Tenders 3.18 Ticket cases Termination of offers 3.21 Revoking a unilateral contract

Introduction 3.1

A contract is an agreement between two parties that creates legally binding obligations that are incumbent upon both parties.1 There are six essential elements that are required by the common law for the formation of a contract: offer;

acceptance; [page 36] 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 thereunder, these doctrines of formation are essential and their requirements must be satisfied in order for a binding contract to exist.

The traditional model and alternative views 3.2

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 significant

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 party, 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 permitted to overshadow the legal importance of those activities that take place prior to a bargain being struck. For example, a contract procured through undue influence will be liable [page 37] to be set aside at the petition of the affected party. There are well-established doctrines relating to estoppel, undue influence, misleading or deceptive conduct, misrepresentation, duress and unconscionable dealings that 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 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

The global view of contract formation 3.3

There are alternative views to the traditional model of contract formation.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.

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.11 However, despite the challenges that it faces, the traditional notion of contract formation still retains its primacy within the common law.12 [page 38] The reasoning of Lord Justice Denning MR in Gibson was rejected on appeal by the House of Lords in Gibson v Manchester City Council,13 where Lord Diplock stated: My Lords, there may be certain types of contract, though I think they are exceptional, which do not fit easily into the normal analysis of a contract as being constituted by offer and acceptance; but a contract alleged to have been made by an exchange of correspondence between the parties in which the successive communications other than the first are in reply to one another, is not one of these. I can see no reason in the instant case for departing from the conventional approach of looking at the handful of documents relied upon as constituting the contract sued upon and seeing whether upon their true construction there is to be found in them a contractual offer by the corporation to sell the house to Mr Gibson and an acceptance of that offer by Mr Gibson. I venture to think that it was by departing from this conventional approach that the majority of the Court of Appeal was led into error.14

Quite crucially, the global view has not displaced the traditional model of contract formation. Nevertheless, this doctrinal idea has been persistent at the margins of disputes

over contract formation. In the extract below from the New South Wales Court of Appeal’s decision in Ormwave Pty Ltd v Smith,15 Beazley JA sets out some key obiter remarks that have been made in Australian cases on the global view.

Ormwave Pty Ltd v Smith [2007] NSWCA 210 New South Wales Court of Appeal Beazley J: [68] The appellants then submitted that there was no identifiable offer of employment in the discussions between the parties that constituted an offer of employment. It is not necessary, in determining whether a contract has been formed, to identify either a precise offer or a precise acceptance, nor a precise time at which an offer or acceptance could be identified. As Stephen J explained in MacRobertson Miller Airline Services v Commissioner of State Taxation (Western Australia) (1975) 133 CLR 125 at 136; [1975] HCA 55: This doctrine, of the formation of contracts by offer and acceptance, encounters difficulties when sought to be applied, outside the realms of [page 39] commerce and conveyancing, to the everyday contractual situations which are a feature of life in modern urban communities. [69] In Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 Heydon JA (as his Honour then was) also observed that ‘[o]ffer and acceptance analysis does not work well in various circumstances’. He referred to the decision of MacRobertson Miller

Airline Services v Commissioner of State Taxation (Western Australia) at 136– 140 by way of example. Heydon JA then undertook a detailed analysis of the authorities: see [71]–[80] of his Honour’s judgment. [70] It is not necessary for present purposes to review all the authorities to which his Honour referred. However, the comments of McHugh JA (Hope and Mahoney JJA concurring) in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117–11,118, are particularly apt. His Honour said: It is often difficult to fit a commercial arrangement into the common lawyers’ analysis of a contractual arrangement. Commercial discussions are often too unrefined to fit easily into the slots of ‘offer’, ‘acceptance’, ‘consideration’ and ‘intention to create a legal relationship’ which are the benchmarks of the contract of classical theory. In classical theory, the typical contract is a bilateral one and consists of an exchange of promises by means of an offer and its acceptance together with an intention to create a binding legal relationship … it is an error ‘to suppose that merely because something has been done then there is therefore some contract in existence which has thereby been executed’. Nevertheless, a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words. The question in this class of case is whether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract. … Moreover, in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties’ subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial

relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed. (Citations omitted) [page 40] [71] This approach to the formation of contract is not new. Heydon JA also referred to Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 at 682 where it was recognised that: … although there has been no formal recognition of the agreement in terms by the one side, yet the course of dealing and conduct of the party to whom the agreement was propounded has been such as legitimately to lead to the inference that those with whom they were dealing were made aware by that course of dealing, [and] that the contract which they had propounded had been in fact accepted by the persons who so dealt with them. See also Thompson v White & Ors (2007) NSW ConvR 56-171; [2006] NSWCA 350 at [99]; Brooker v Friend & Brooker Pty Ltd & Anor [2006] NSWCA 385 per McColl JA at [135]ff; Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111 at [137] per Giles JA. [72] The sometimes artificiality of precise analysis of contract formation in terms of offer and acceptance was recognised by Heydon J in Magill v Magill (2006) 226 CLR 551; [2006] HCA 51, where his Honour again observed at [210] that: The law often develops doctrines which are useful tools of analysis in standard instances, even though they are difficult to employ in other instances. An illustration is the doctrine of offer and acceptance in relation to contract formation. That works in many factual circumstances. The fact that it does not work well, and can only be applied with some artificiality, in

other sets of circumstances, has not been seen as a reason for its wholesale abandonment. [73] The last reference in this passage from Magill was to the comments of Ormiston J in Vroon BV v Foster’s Brewing Group Ltd [1994] VicRp 53; [1994] 2 VR 32 at 82–83. In that case, Ormiston J cited with approval the comments of McHugh JA in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd. He also cited with approval the statement of Cooke J in Meates v Attorney-General [1983] NZLR 308 at 377: … I would not treat difficulties in analysing the dealings into a strict classification of offer and acceptance as necessarily decisive in this field, although any difficulty on that head is a factor telling against a contract. The acid test in the case like the present is whether, viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain. [74] Ormiston J then said at 81: … I am prepared to accept … that agreement and thus a contract can be extracted from circumstances where no acceptance of an offer can be established or inferred and where the most that can be said is that a [page 41] manifestation of mutual assent must be implied from the circumstances. In the language of para 22(2) of the Second Restatement on Contracts: ‘A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined’. [75] The effect of these and similar authorities was summarised in

Anson’s Law of Contract (27th ed, 1998, at 28) (referred to by Heydon JA in Brambles Holdings Limited v Bathurst City Council at [73]): … It would be a mistake to think that all contracts can thus be analysed into the form of offer and acceptance or that, in determining whether an exchange does give rise to a contract, the sole issue is whether the communications match and are identical. The analysis is, however, a working method which, more often than not, enables us, in a doubtful case, to ascertain whether a contract has in truth been concluded, and as such may usefully be retained. [76] The question presently under consideration is whether there was evidence to support the finding that an offer of employment had been made. Recent decisions of the New South Wales Supreme Court of Appeal have made it clear that the global view of contract formation has majority support. For example, in Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd,16 Sackville AJA stated: ‘[I]t is not necessary, in determining whether a contract has been formed, to identify a precise offer or acceptance; nor is it necessary to identify a precise time at which an offer or acceptance can be identified.’ At the very least, the global model of contract formation sits alongside the classical model as a plausible alternative.

Offer and acceptance 3.4

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. [page 42] 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 the terms of a bargain. However, the demarcation line between an offer and an invitation to treat (see 3.10) is not always clear. In addition, there may be a question under the law as to when an offer can be made.17 Our traditional model suggests that one party makes the offer and the other party accepts, and it is the acceptance of that offer that leads to the formation of a contract between the parties.18 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.19 Put simply, an offer sets out the terms of a bargain. Offer and acceptance are important for our purposes because their occurrence signals that there is a meeting of the minds and that mutually binding obligations have been formed.

Offers 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.

3.5

An offer is essentially a statement of the terms on which the offeror is prepared to be contractually bound.20 Normally, an offer will be constituted by a person offering to do something or to refrain from doing something. Yet, 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 [page 43] obligation by the act of acceptance.21 Both the offeror and offeree must have legal personality.22 Consider the following scenario: Jacek promises to hire Dennis as a sales assistant on 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.

Is there an offer? 3.6

The existence of the offer itself may be in dispute under certain circumstances. For example, in Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd,23 it was claimed that statements made during a comical presentation amounted to a contractual offer. During a conference presentation, Canon Australia dealers performed a skit in which they suggested they would sell certain photocopiers for only $1. DoddsStreeton J found that the relevant statements did not constitute an offer. The tone and context of the statements did not support the contention that they were an offer. Her Honour stated: ‘If a statement is not sufficiently detailed and comprehensive to

achieve the requisite level of certainty in relation to essential matters and contingencies, it will not constitute “a legally enforceable offer of a promise”, even where language of unequivocal commitment is employed.’24 3.7

In Australian Woollen Mills Pty Ltd v Commonwealth,25 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. [page 44]

Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453 High Court of Australia Dixon CJ, Williams, Webb, Fullagar and Kitto JJ at CLR 456–7: 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

[page 45] 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’. In Australian Woollen Mills the High Court held that there was no contract.26 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.27 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: ‘[I]t is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty’.28 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: ‘[I]n 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”’.29 In determining whether the relevant statement is in fact an offer, regard must be had to all the surrounding circumstances.30 In James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland,31 McDougall JA stated that it is ‘necessary to find some express or implied promise in the offer that is made, so that there may be found an acceptance, by conduct, referable to that promise.’

The existence of a definite promise 3.8

The High Court’s decision in Australian Woollen Mills Pty Ltd v

Commonwealth32 demonstrates that under the common law an offer requires that there must be a firm promise to do something or not to do something. For example, an offer is a different concept to that of [page 46] the mere supply of information. Consider the case of Harvey v Facey.33 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 this case, the putative offeree, Harvey, sent a telegraph to the vendor, Facey, which read: ‘Will you sell us Bumper Hall Pen?’. Facey responded with: ‘Lowest price for Bumper Hall Pen, £900.’ Harvey 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. In Re Webster,34 Barwick CJ stated: There is a radical distinction drawn in the law of contracts between the mere quotation of a price and an offer to sell and deliver. If a person merely inquires of a man what price he is either selling or willing to sell a commodity and the inquisitor is informed of that price, this quotation may not, and in general will not, constitute an offer which is capable of acceptance so as to form a binding contract upon the person making the quotation to sell and deliver, or upon the inquisitor to accept what is delivered. The quotation will be no more than an offer to treat.

REVIEW QUESTIONS 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?

3.9

In Pattinson v Mann35 it was suggested that there may 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.36 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 situations there is merely an invitation to treat.37 The offer is made by the customer [page 47] when they approach the counter and offer to pay for the goods.38 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 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.39 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 & Son v Gough,40 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. If it did, then the merchant would soon be unable to satisfy a number of binding contracts.41

Invitations to treat 3.10

Clearly, intention is of paramount importance. The offeror must intend that what they are putting forward can be converted into a binding obligation.42 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.43 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 that would then be capable of acceptance by the first party. An invitation to treat is, therefore, a mere approach to others that instigates the dealing process.44 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 [page 48] prospective trade. However, it would be too onerous to require them to frame every such approach as a contractual offer or to hold them to those terms when they are merely seeking to gauge interest. As such, the rule has the capacity to facilitate the normal economic and commercial life of a society. It would be difficult for commerce to operate without this rule. An invitation to treat is a mere approach to others that instigates the dealing process. It might ultimately lead to an offer and an acceptance, but it is not the offer itself. Yet, what may appear to be an invitation to treat can be an offer if it is specific enough and it shows the intention to be an offer;45 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 and will instead be considered to be an offer. 3.11

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.46 The Carbolic Smoke Ball Co manufactured an anti-cold and flu preparation known as a carbolic smoke ball. It advertised a £100 reward for anyone who contracted a cold or flu after taking its smoke ball according to the printed directions. The advertisement stated that the company had deposited £1000 with a bank to show that it was 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 the company 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 — only 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 it have deposited the £1000? [page 49]

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

England and Wales Court of Appeal, Civil Division Lindley LJ at 261–3: 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 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 [page 50] 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 1.

What was the offer in Carlill?

2.

How was the offer made?

3.

Why was direct notification of acceptance not required?

4.

How is Carlill different from other offer and acceptance scenarios?

5.

How do we read Carlill together with Australian Woollen Mills? Are the two judgments

in fact contradictory? Can an advertisement be mere puffery? 6.

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 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?

A framework for invitations to treat 3.12

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: the terminology used by the offeror; any limitation imposed on who can accept; and 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,47 which could remove ambiguity. [page 51] 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 & Son v Gough,48 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.49 In Lefkowitz a man tried to purchase a woman’s mink coat from a

clothing store, which had advertised a coat sale. 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,50 despite the absence of express words of limitation, it was held that an offer was limited to when the stock offered ran out.

Mere puffery 3.13

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 that do not of themselves constitute binding offers. These are statements that are so farfetched that no reasonable person would believe them. In this context it is useful to consider the case of Leonard v Pepsico Inc.51 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 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.52 There was also the small matter of where the plaintiff was proposing to park the jet. Regrettably, the District Court neglected to address this salient point!

[page 52]

By puffery, we mean statements that induce a contract but that 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 116 (SDNY 1999) United States District Court for the Southern District of New York K Wood [District Judge] at 117–28: 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 sundappled 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 ‘TSHIRT 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, [page 53] ‘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 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 (FedCir 1988), 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 ‘wellestablished’ 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, [page 54] ‘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 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 …

[page 55] 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’.53 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 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 homemade 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?

Different types of contracts Unilateral and bilateral contracts 3.14

A unilateral contract is one that the offeree accepts by

performing their side of the bargain. The High Court in Australian Woollen Mills Pty Ltd v Commonwealth54 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. Yet, 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 who is under an obligation to perform. Indeed, in Gippsreal Ltd v Registrar of Titles & Kurek Investments Pty Ltd,55 Kellam JA stated: In Australian Woollen Mills Pty Ltd v Commonwealth the High Court said that the expression ‘unilateral contract’ was misleading, because a contract must necessarily have at least two parties. It is, however, convenient to use that expression to describe the type of contract which comes into existence when one party promises to do something in return for acts performed by the other party, with the intention of being contractually bound if those acts are performed,

[page 56] and the other party accepts that promise by performing his or her side of the bargain.56

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.

Shop sales 3.15

The display of goods in a shop is an invitation to treat, not an offer. In Fisher v Bell57 it was held that the display of a flickknife 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 Chemists (Southern) Ltd58 the issue in dispute was whether Boots, a self-service pharmacy, had contravened legislation that provided that certain drugs could be sold to the public only under the supervision of a pharmacist.

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 England and Wales Court of Appeal, Civil Division 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 [page 57] 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 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 Gurry,59 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 that 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 Brodribb,60 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.

Auctions

3.16

An auction will usually be characterised as an invitation to treat.61 In an auction the auctioneer invites offers and can accept a bid. What is [page 58] 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.62 Furthermore, though this is a more contentious point, the auctioneer does not have to sell to the highest bidder.63 In AGC (Advances) Ltd v McWhirter,64 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.65 In McWhirter, Holland J stated: An auction remains, in my opinion, an invitation to treat. If the fact that there is a reserve price is notified, it indicates to the bidders that an offer below the reserve price will or may not be considered. If the sale is advertised as being without reserve or to the highest bidder, it means that the highest bid is an offer that is liable to be accepted and, if accepted, will make a contract but the vendor remains free to withdraw the property from sale or decline to accept any bid.66

Note, however, that there is a difference between the Australian and United Kingdom approaches to auctions without a reserve. In Barry v Davies,67 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 McWhirter.

Tenders 3.17

A contract can be formed through a tender process.68 An invitation to tender is an invitation to treat; however, the terms

of the tender process can form a binding contract. In Harvela Investment Ltd v Royal Trust Co of Canada (CI) Ltd,69 a letter regarding the purchase of shares was sent 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 that could be [page 59] accepted by the highest bidder. The tenders were not ‘offers’ in terms of contract law; they were potential acceptances. In Hughes Aircraft Systems International v Airservices Australia,70 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. 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.

Ticket cases 3.18

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),71 can be applied to and contrasted with many modern ticketing situations and scenarios, and provides us with an idea of how a modern Australian court might interpret

recent phenomena 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 that 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 QUESTIONS Read the following extracts from the decisions of Barwick CJ and Stephen J in MacRobertson Miller Airline Services v Commissioner of State Taxation (WA). How do they arrive at their respective decisions? In what ways do their decisions differ or correspond?

[page 60]

MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125; 8 ALR 131 High Court of Australia Barwick CJ at 132–5: 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. 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 [page 61] 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 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. 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. 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 [page 62] 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 135–9: … 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 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. … 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).

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 [page 63] 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 longdistance 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 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. 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, [page 64] 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. 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. … 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.

[page 65] The court in MacRobertson Miller held that the issue of the ticket was an offer that 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. 3.19

At issue in ProCD, Inc v Zeidenberg72 was the validity of a clickwrap 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 (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, Inc v Zeidenberg (1996) 86 F3d 1447 United States Court of Appeals for the Seventh Circuit 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 [page 66] 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 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. [page 67]

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 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-and-buggy 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 StepSaver 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. StepSaver 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 [page 68] (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 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.’ [page 69] 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 QUESTIONS Compare the reasoning and findings in ProCD with that in MacRobertson Miller. What are the similarities and differences?

Termination of offers An offer can be revoked at any time before it is accepted. 3.20

An offer can be revoked at any time before it is accepted.73 The exception is if the offeree has paid to keep the offer open by option, as was held in Goldsbrough Mort & Co Ltd v Quinn.74 Where options are concerned, a promise to hold an offer open is binding if consideration has been made

[page 70] for that promise.75 In Goldsbrough 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. However, the revocation does not necessarily need to be communicated by the offeror.76 In Dickinson v Dodds,77 a revocation was effective despite being communicated by a third party. 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 Tienhoven,78 the defendants made an offer to the plaintiffs. Having not heard from the plaintiffs for a few days, the defendants 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 States79 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 making 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.80 On the other hand, a mere enquiry is neither a counter-offer, a rejection or 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 [page 71] upon the context in which the offer is made. In Fong v Cilli,81 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.

Revoking a unilateral contract 3.21

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 Ltd v Wellcome International Pty Ltd,82 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. Wilcox J 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 Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475; 153 ALR 198 Federal Court of Australia Full Court at FCR 500–5: 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 [page 72] 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. … 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 [page 73] 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; (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 [page 74] 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.

Key Points for Revision 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.

_________________

1

Clarke v Dunraven [1897] AC 59; Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453; Harvey v Facey [1893] AC 552; Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11; Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1.

2

E Mensch, ‘Freedom of Contract as Ideology’ (1981) 33 Stanford Law Review 753 at 760.

3

N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, LexisNexis Butterworths, Sydney, 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; 76 ALR 513.

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) QUTLJJ 444. An electronic version of this paper can be accessed at .

7

Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163; New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154.

8

ProCD, Inc v Zeidenberg (1996) 86 F3d 1447.

9

See Chapter 2.

10

[1978] 2 All ER 583; [1978] 1 WLR 520 at 523.

11

Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32.

12

Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 at 79–83.

13

[1979] 1 All ER 972; [1979] 1 WLR 294 at 297.

14

See also Campbell v University of Adelaide (2006) 150 IR 225; [2006] SASC 92 at [57] per Debelle J.

15

[2007] NSWCA 210.

16

[2015] NSWCA 1 at [60]. See also Universal Music Australia Pty Ltd v Pavlovic [2015] NSWSC 791.

17

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.

18

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; 64 ALR (CN) 1198b.

19

Shuey, Executor v United States 92 US 73 (1875).

20

See Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd (2006) Aust Contract R 90-238.

21

Gibson v Manchester City Council [1978] 2 All ER 583; [1978] 1 WLR 520; Storer v Manchester City Council [1974] 3 All ER 824; [1974] 1 WLR 1403.

22

MacMillan v Mumby (2007) Aust Contract R 90-252; Trustees of the Roman Catholic Church v Ellis (2007) 70 NSWLR 565; 63 ACSR 346.

23

(2006) Aust Contract R 90-238; Mildura Office Equipment and Supplies Pty Ltd v Canon Finance Australia Ltd [2007] VSCA 112.

24

[2006] VSC 42 at [157].

25

(1954) 93 CLR 424; [1954] ALR 453.

26

(1954) 92 CLR 424 at 460; [1954] ALR 453.

27

(1954) 92 CLR 424 at 461; [1954] ALR 453.

28

(1954) 92 CLR 424, 457; [1954] ALR 453. See also Goodridge v Macquarie Bank Limited (2010) 265 ALR 170; James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland (2015) 248 IR 377; [2015] NSWSC 243.

29

(1954) 92 CLR 424 at 457; [1954] ALR 453.

30

Druin Pty Ltd atf Druin No 3 Trust t/as Harvey Norman Commercial Division v Corbin [2014] NSWSC 510. See also DH MB Pty Ltd v Manning Motel Pty Ltd [2014] NSWCA 396.

31

(2015) 248 IR 377; [2015] NSWSC 243 at [433].

32

(1954) 92 CLR 424; [1954] ALR 453.

33

[1893] AC 552. See further Re Webster (1975) 132 CLR 270; 6 ALR 65.

34

(1975) 132 CLR 270 at 282; 6 ALR 65.

35

(1975) 13 SASR 34. See also DA Starke Pty Ltd v Yard (2012) 279 LSJS 101; [2012] SASC 19.

36

(1975) 13 SASR 34 at 37.

37

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; see also Australian Competition and Consumer Commission v Jewellery Group Pty Ltd (2012) 293 ALR 335; [2012] FCA 848.

38

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795; see also Fisher v Bell [1961] 1 QB 394.

39

Such an outcome would self-evidently be absurd.

40

[1896] AC 325 at 334. See also Partridge v Crittenden [1968] 2 All ER 421.

41

[1896] AC 325 at 334.

42

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

43

See Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453.

44

Lefkowitz v Great Minneapolis Surplus Store 86 NW 2d 689 (Minn 1957).

45

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

46

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

47

Massey v Crown Life Insurance Co [1978] 2 All ER 576; [1978] 1 WLR 676.

48

[1896] AC 325, discussed above.

49

86 NW 2d 689 (Minn 1957).

50

[1955] NZLR 1206.

51

88 F Supp 2d 116 (SDNY 1999).

52

88 F Supp 2d 116 (SDNY 1999) at 126.

53

88 F Supp 2d 116 (SDNY 1999) at 691.

54

Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 456; [1954] ALR 453.

55

(2007) 20 VR 157 at [42].

56

See also James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland (2015) 248 IR 377; [2015] NSWSC 243 at [433] where McDougall J stated: ‘[I]f an offer to all the world, or to a class of offerees, is intended, on acceptance, to give rise to a legally binding contract, it is necessary to show that the offer was propounded as consideration for the doing of an act, and that the act was done in consideration of the offer.’

57

[1961] 1 QB 394.

58

[1953] 1 QB 401. See also Cottee v Franklins Self-Serve Pty Ltd [1997] 1 Qd R 469; (1995) Aust Contract R 90-060.

59

[1959] SASR 295.

60

(1985) 58 ALR 737; ASC 55-391.

61

British Car Auctions Ltd v Wright [1972] 1 WLR 1519.

62

Harris v Nickerson (1873) LR 8 QB 286.

63

AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454.

64

(1977) 1 BPR 9454.

65

AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454; see also Payne v Cave (1789) 3 TR 148.

66

(1977) 1 BPR 9454 at 9458. See also Phillip Segal v Max Christopher Donnelly [2012] NSWSC 833 at [58] per Bergin CJ. Also Seivewright v Brennan (2005) 12 BPR 22,979; [2005] NSWSC 216.

67

[2001] 1 All ER 944; [2000] 1 WLR 1962.

68

Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; 146 ALR 1.

69

[1986] AC 207. See also 161 Castlereagh Street Pty Ltd v Citadel Property Group (2001) 10 BPR 19,041; [2002] ANZ ConvR 155.

70

(1997) 76 FCR 151; 146 ALR 1.

71

(1975) 133 CLR 125; 8 ALR 131.

72

(1996) 86 F3d 1447.

73

Payne v Cave (1789) 100 ER 502.

74

(1910) 10 CLR 674; 17 ALR 42.

75

Goldsbrough Mort & Co Ltd v Quinn (1910) 10 CLR 674; 17 ALR 42.

76

Dickinson v Dodds (1876) 2 Ch D 463. See also HG & R Securities Pty Ltd v Sayer (2009) 14 BPR 27,045; [2009] NSWSC 427; Tabtill Pty Ltd v Creswick; Creswick v Creswick [2011] QCA 381; Macquarie Generation v CNA Resources Ltd [2001] NSWSC 1040.

77

(1876) 2 Ch D 463.

78

(1880) LR 5 CPD 344.

79

92 US 73 (1875).

80

See further 4.2; see also FTV Holdings Cairns Pty Ltd v Smith [2014] QCA 217 at [22]–[23] per Fraser JA.

81

(1968) 11 FLR 495.

82

(1998) 81 FCR 475; 153 ALR 198.

[page 75]

CHAPTER 4 Acceptance CHAPTER OVERVIEW 4.1 4.2

4.10

4.14

Introduction Acceptance 4.2 ‘A meeting of minds’ 4.3 The objective approach 4.4 Counter-offers 4.6 The battle of the forms 4.7 Tenders 4.8 Consciousness of the offer Communication of the acceptance 4.12 Silence as acceptance 4.13 Acceptance by conduct prescribed mode of acceptance 4.15 The postal rule 4.20 Instantaneous methods of communication

Introduction 4.1

Under the traditional model of contract formation, an offeror makes an offer to contract to an offeree. The offeree then 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 [page 76]

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 post will be subject to the postal rule,4 which dictates that an acceptance is effective from the moment 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 seems 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 This chapter will examine the doctrinal rules pertaining to acceptance. The chapter will first analyse acceptance as a legal concept and then consider the different modes of communicating acceptance. This includes acceptance by conduct, the postal rule and instantaneous methods of communication.

Acceptance ‘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 expressed as the requirement that there must be ‘a meeting of minds’.

4.2

For a contract to come into existence between two parties there must be mutual assent to the terms of the bargain.9 In the absence of an offer there [page 77] can be no acceptance. Further, the acceptance must be communicated in some way. The communication of the acceptance can arise though an express or implied form of assent.10 Signing a contract is a common method of communicating assent.11 The manifestation of mutual assent to the terms of the contract is commonly referred to as ‘a meeting of the 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.12 The acceptance must correspond to the offer and must clearly constitute an assent by the offeree to the terms set out in the offer.13 Note also that as a contract can arise through conduct, it follows that an acceptance may be communicated by conduct.14 Further, the acceptance may only be given by the party to whom the offer was made or by their agent.15 There may be limited circumstances under which the estate of an offeree can accept an offer made prior to his or her death.16 Where an offer has been made to an offeree on terms that include him or his ‘nominee or assignee’, the latter can accept the offer.17 Once the acceptance is made, it cannot be revoked unless the offeror agrees to release the other party from their contractual obligations.

The objective approach 4.3

The common law has adopted an objective approach to determining the existence of a contract.18 This objective approach has effect in the legal rules on the acceptance of

contractual offers. In Taylor v Johnson19 the High Court stipulated 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 (FGCT) Pty Ltd v Alphapharm Pty Ltd,20 the High Court stated: ‘It is not the subjective [page 78] 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.’ In APT SEA Gas Holdings Pty Ltd v ANP SEA Gas Holdings Pty Ltd,21 Brereton J stated: A purported acceptance will be construed objectively, by reference to what a reasonable recipient would have understood the document to mean, and the subjective intentions of the purported ‘acceptor’ are irrelevant.

Counter-offers 4.4

If the purported acceptance contains qualifications or proposes any changes to the transaction, then it cannot be considered to be an acceptance, but is instead a counter-offer.22 The effect of a counter-offer is that it amounts to a rejection of the offer.23 However, the rejection of the offer by the offeree will not necessarily terminate the offer itself. In Brambles Holdings Ltd v Bathurst City Council,24 Heydon JA stated: A rejected offer could remain operative if it were repeated, or otherwise revived, or if in the circumstances it should for some other reason be treated, despite its

rejection, as remaining on foot, available for acceptance, or for adoption as the basis of mutual assent manifested by conduct.

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,25 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,26 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. [page 79] In CJ Bova Pty Ltd v Geoffrey Needham Pty Ltd,27 the use of the term ‘subject to confirmation’ was held to be a rejection rather than an acceptance, because it clearly implied that further action would be needed before the offer could be regarded as having been accepted. In CJ Bova, a settlement offer was made by the plaintiff. The defendant’s solicitors responded with terms that were subject to the confirmation of the defendant. The plaintiff suggested that this was not an acceptance and sought to reject the defendant’s counter-offer. The defendants argued that there had been an acceptance. In finding for the plaintiff, Forster J stated of the defendant’s letter and the phrase ‘subject to confirmation’: … the term calls for a response by way of confirmation of the matters raised in that

letter. It is not an acceptance unless and until such a confirmation is received. Yet on the facts no such confirmation was received.28

4.5

A distinction must be drawn between a bona fide counter-offer and a mere error made during the act of acceptance in restating the terms of the offer; that is, an error made by the offeree in giving their acceptance will not necessarily amount to a counter-offer.29 In Carter v Hyde,30 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.31 In Redowood Pty Ltd v Mongoose Pty Ltd,32 Spigelman CJ stated: Commonly, offer and acceptance fail to correspond where the offeree in purporting to accept the offer … fails to reflect accurately what was originally offered. Unless it can be reasonably established that the offeror ignored any such restatement as a misdescription, the failure to accept exactly what was offered results in the purported offer being cast as a counter-offer and there is no acceptance of the offer. However, where an offeree in error misdescribes what is being offered, the misdescription is not fatal if it is clear that the offeree really intended to accept the terms and conditions contained in the offer.

In assessing the issue of misdescription, an element of reasonableness must be applied.33 It follows that if the reasonable recipient of the acceptance would have regarded the errors as inconsequential, then no actual counter-offer has been made. [page 80]

The battle of the forms 4.6

It is possible that those business who enjoy some knowledge of the rules of offer and acceptance may attempt to engage in a ‘battle of the forms’. Many businesses will have their own standard terms upon which they would prefer to rely.

Accordingly, some businesses may seek to manipulate the rules around acceptance in order to bind the other party to their terms. Where a battle of the forms situation does occur, a court will need to examine whether a contract has formed and on whose terms it has been made.34 In Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd,35 a seller suggested a price and terms to the buyer. The buyer then sent the seller an order form that contained the buyer’s own terms. The seller then accepted the order and used the order form. The seller subsequently attempted to enforce a clause contained in its own set of terms. However, the court held that the contract had been formed on the buyer’s terms. Lord Denning MR stated: … it will be found that in most cases when there is a ‘battle of forms’, there is a contract as soon as the last of the forms is sent and received without objection being taken to it. That is well observed in Benjamin’s Sale of Goods, 9th ed (1974), p 84. The difficulty is to decide which form, or which part of which form, is a term or condition of the contract. In some cases the battle is won by the man who fires the last shot. He is the man who puts forward the latest terms and conditions: and, if they are not objected to by the other party, he may be taken to have agreed to them. … In some cases the battle is won by the man who gets the blow in first. If he offers to sell at a named price on the terms and conditions stated on the back: and the buyer orders the goods purporting to accept the offer — on an order form with his own different terms and conditions on the back — then if the difference is so material that it would affect the price, the buyer ought not to be allowed to take advantage of the difference unless he draws it specifically to the attention of the seller. There are yet other cases where the battle depends on the shots fired on both sides. There is a concluded contract but the forms vary. The terms and conditions of both parties are to be construed together. If they can be reconciled so as to give a harmonious result, all well and good. If differences are irreconcilable — so that they are mutually contradictory — then the conflicting terms may have to be scrapped and replaced by a reasonable implication.36

Lord Denning’s remarks illustrate the difficulties that arise in this area of the law. Each of the rules on acceptance cannot be read in isolation, as they form part of a coherent and interrelated set of rules, though the relationship has not been fully mapped out in the common. Suffice to say, the battle of the forms approach to acceptance can skirt [page 81]

the boundaries of both counter-offer and acceptance by conduct. That is, the contract can form from the way in which the parties conduct themselves, and, as Lord Denning notes, the terms of that agreement can be drawn from both forms. Nonetheless, it is also possible that no contract may form at all, as the parties are not in agreement on the terms of the contract.37 As a degree of subterfuge is involved in the battle of the forms, it is likely that many businesses will try to avoid this approach for fear of the reputational harm it can cause.

Tenders 4.7

Identifying whether an acceptance has occurred in the context of a request for tenders can prove surprisingly difficult. Under a tendering process, each tenderer puts in a bid for work with the party that initiated the call for tenders. The request for tenders is best classified as an invitation to treat.38 Similarly, the tender itself is an offer.39 The terms of the tender request may well condition the manner in which the tender can be accepted.40 However, it is likely that most requests for tender will include a term providing that tenders can be accepted or rejected at the complete discretion of the offeree.

Consciousness of the offer 4.8

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 it, 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 that would otherwise have constituted valid acceptance, but that was performed in ignorance of the offer, cannot therefore be a valid acceptance.41 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 [page 82] aware of the offer, this will not constitute acceptance.42 Motive for acceptance is immaterial, provided that the offer was present in the offeree’s mind.43 4.9

The case of R v Clarke44 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 that 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.45

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; [1928] ALR 97 High Court of Australia Isaacs ACJ at 231–5: 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 proclamation, but exclusively in order to clear himself from a false charge of murder. In other [page 83] 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 quasi-contracts — 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.

[page 84]

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

4.10

An acceptance will be effective only when it has been communicated to the offeror.46 If the offeror is not aware of the acceptance, neither the offeree nor the offeror will be bound in contract. 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.47 The one exception to this rule is the postal rule: see 4.15. The acceptance must be communicated by the person who received the offer, or by their agent. In the case of Powell v Lee,48 the plaintiff applied for a position as a headmaster. 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 Co49 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

[page 85] 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?50

4.11

The situation is somewhat different where bilateral contracts are concerned. In Latec Finance Pty Ltd v Knight,51 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 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 Court of Appeal held that no contract had come into existence between the parties as the acceptance had not been communicated. In ICTA Investments Pty Ltd t/a Jolly Roger v GE Commercial Corp (Australia) Pty Ltd,52 a company sought finance in order to upgrade the lighting at a nightclub it owned. The approval was provided by the financier and the lighting equipment was subsequently installed. A director of the company that owned the nightclub then signed a rental agreement for the lighting equipment. However, the signed agreement was different to that which had initially been agreed. The financier paid for the equipment, but the company sought to withdraw from the agreement. As the parties had not actually agreed to the same terms and their conduct did not indicate otherwise, the New

South Wales Court of Appeal held that the parties were not bound by any agreement.

Silence as acceptance 4.12

An offeror cannot unilaterally impose a condition upon an offeree that their silence will constitute consent53 — a contract cannot come into existence simply because the offeree has failed to reply to the offeror. This principle has become quite crucial in consumer contracts as unscrupulous merchants have sought to entrap consumers into sales contracts by sending them unsolicited goods.54 The Australian Consumer Law contains a specific protection to guard against this practice.55 To [page 86] allow a contract to form without the demonstrated consent of the offeree would be contrary to the bargain theory of contract56 and the settled principles of contract law. A contract cannot come into existence simply because the offeree has failed to reply to the offeror. The case of Felthouse v Bindley57 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.’58 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.59 In Re The Black Stump Enterprises Pty Ltd and Associated Companies,60 Young CJ in his analysis of Felthouse noted that the proposition that the case had developed flows throughout the law. Young CJ noted: If one looks at the law of consent generally … one can see that generally there is a big difference between obtaining a consent and coming to the situation where a person makes no objection. Consent is something more than mere acquiescence. It implies an agreement to that which but for the consent could not exist and for which the party consenting has the right to forbid.61

Acceptance by conduct 4.13

The principle that silence cannot be imposed as the method of contractual acceptance is not unlimited.62 Even though silence, without [page 87] 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 Bindley63 is that in Felthouse, the uncle was unaware of the actions of his nephew.64 Nonetheless, an acceptance by conduct can occur if the offeror has waived the communication of the acceptance.65 In Brogden v Metropolitan Railway Co,66 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 Pty Ltd v Machon Paull Partners Pty Ltd,67 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.68 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’.69 The contract was left unsigned. The architects wrote to Empirnall and stated that they would be proceeding on the basis that the contract had been accepted. The architects continued to 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

[page 88] 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.70

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. The global view of contract formation clearly overlaps with acceptance by conduct. An acceptance by conduct will not necessarily have an easily identifiable point at which the acceptance has taken place. In Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd,71 Sackville JA stated: ‘[I]t is not necessary, in determining whether a contract has been formed, to identify a precise offer or acceptance; nor is it necessary to identify a precise time at which an offer or acceptance can be identified.’ Similarly, in P’Auer AG v Polybuild Technologies International Pty Ltd,72 Whelan JA considered the law in relation to acceptance by conduct. His Honour noted the proposition developed in Felthouse, but affirmed that it could be displaced by conduct.

P’Auer AG v Polybuild Technologies International Pty Ltd [2015] VSCA 42 Supreme Court of Victoria, Court of Appeal Whelan JA: [8] The relevant starting point in a case of this kind is the principle that a contractual obligation cannot be imposed by an offeror upon an offeree merely by reason of a failure to reject an offer made. Silence, in itself, cannot constitute acceptance. [9] Nevertheless, leaving to one side cases of estoppel, cases where there is an historic relevant course of dealing, and cases where the

events are so obscure or so far in the past that direct evidence is not available, there are circumstances [page 89] where acceptance of an offer can be inferred in the absence of express consent. This will be the case if an objective bystander would conclude from the offeree’s conduct, including his silence, that the offeree has accepted the offer and has signalled that acceptance to the offeror. [10] Further, and more generally, it is now accepted that the existence of a contract can be established or inferred where a manifestation of mutual assent must be implied from the circumstances. [11] It is important to emphasise that the circumstances in which a contract will be inferred, otherwise than by the traditional analysis of offer and acceptance, will be rare. It seems to me that the position was well summarised by Sundberg J in Adnunat Pty Ltd v ITW Construction Systems Australia Pty Ltd [2009] FCA 499, [39] when he said: A contract may in certain circumstances be inferred from conduct, even where no offer and acceptance can be identified … However the existence or otherwise of an enforceable agreement depends ultimately on the manifest intention of the parties, objectively ascertained … where mutual promises are sought to be inferred, the conduct relied upon must, on an objective assessment, evince a tacit agreement with sufficiently clear terms. It is not enough that the conduct is consistent with what are alleged to be the terms of a binding agreement. The evidence must positively indicate that both parties considered themselves bound by that agreement … [12] In determining if an agreement has been made in this way regard must be had to the entirety of the relevant conduct. The precise point in time at which the agreement comes into existence may not be clear, and the relationship between the parties themselves may be dynamic in

such a way that the terms of the agreement might be added to or superseded over time. In this context the absence of non-essential terms, or a lack of agreement on non-essential terms, will not invalidate the existence or effective operation of a binding contract.

REVIEW QUESTIONS 1.

What is the principle established in Felthouse v Bindley?

2.

How do the facts in 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?

[page 90]

Prescribed mode of acceptance 4.14

It is open to the offeror to prescribe the mode of acceptance that they require,73 and different rules of acceptance apply depending on the prescribed mode of acceptance. For example, if the mode of acceptance that is agreed is post, then the postal rule will apply,74 but if the mode is that of instantaneous communication then the general rule will apply.75 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,76 although the offeror may still waive this requirement.77 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 method of acceptance or as an acceptance of a counter-offer.78 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.79 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.80 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.81 In George Hudson Holdings Ltd v Rudder,82 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. [page 91] 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’.83

The postal rule 4.15

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 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,84 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.

[page 92] However, in Re Imperial Land Co of Marseilles; Harris’ Case,85 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.

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.86 The application of the postal rule depends upon the parties contemplating that the acceptance will be by post. In Henthorn v Fraser,87 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.

4.16

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 there may have been serious disagreements, such that an agreement cannot 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.88 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 that the defendant had made in a previous letter. The High Court held that the 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.89

[page 93] The postal rule will also not apply where its application would cause great inconvenience, or render the application of the rule an absurdity.90 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 Co v Colson,91 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.

The postal rule will not apply where its application would cause great inconvenience, or render the application of the rule an absurdity. 4.17

The postal rule can also be negated either expressly or by implication. The offeror may state quite clearly to the offeree that ‘for your acceptance to be effective it must be received’, or the offeror can simply state, ‘acceptance must be received’. In Holwell Securities Ltd v Hughes,92 the defendant granted the plaintiff a 6-month option to purchase a property. The option was exercisable in writing within a 6-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 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,93 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.94 [page 94] In Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd,95 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.96 As the postal rule had been excluded, the general rule of acceptance applied and this meant that actual communication was required.97 4.18

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.98 In Household Fire and Carriage Accident Insurance Co (Ltd) v Grant,99 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, the postal rule may not apply.100 In LJ Korbetis v Transgrain Shipping BV,101 Toulson J quoted with approval the following comment from Chitty: A letter of acceptance may be lost or delayed because it bears a wrong or an incomplete address, or because it is not properly stamped. Normally such defects would be due to the carelessness of the offeree, and although there is no English authority precisely on point, it is submitted that the postal rule should not apply to such cases. Although an offeror may have to take the risk of accidents in the post, it would be unreasonable to impose on him the further risk of the acceptor’s carelessness. These arguments do not apply where the misdirection is due to the fault of the offeror, e.g. where his own address is incompletely or illegibly given in the offer itself. In such a case, the offeror shall not be allowed to rely on the fact that the acceptance was misdirected, except perhaps where his error in stating his own address was obvious to the offeree, for in such a case the offeror’s fault would not be the effective cause of the misdirection of the acceptance. It is submitted that a misdirected acceptance should take effect, if at all, at the time which is least favourable to the party responsible for the misdirection.

[page 95] However, if the letter is misdirected because the offeror supplies the wrong address, then the offeror will likely be bound by the acceptance. 4.19

The postal rule is confined to contract formation and does not create a general rule that is transferable to the governance of contractual relations. The following extract from the judgment of Campbell JA in Wardle v Agricultural and Rural Finance Pty Ltd102 clarifies this position and also offers a useful critique of the purposes behind the postal rule. In Wardle a debtor unsuccessfully attempted to argue that the postal rule applied

to repayments.

Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107 New South Wales Court of Appeal Campbell JA: [145] There is widespread acceptance among commentators that it is hard to find an explanation for the postal acceptance rule, other than the pragmatic necessity of having a rule of some sort, and that rule being no worse than any alternative. The relevance of this for the present case is that if no more satisfactory explanation for the postal acceptance rule is available than that a rule of some sort is needed to enable there to be certainty about when and how a contract may be formed by people communicating at a distance, that does not provide a very promising basis for arguing that there is a general rule of law whereby, if the parties envisaged that the post will be used, posting a document has the same effect as handing it to the intended recipient. [146] Further, it is not as though, even concerning contract formation, there is a rule that in all circumstances when the parties envisage communication by post, putting a document into the post has the same effect as handing the document to the intended recipient. That is because for an offeror to withdraw the offer it is not enough to put the letter of withdrawal in the post — the withdrawal must actually be communicated to the offeree before it is effective: Henthorn v Fraser. [147] Even if one accepts that there is a pragmatic justification for the postal acceptance rule, that does not mean that there is also a pragmatic justification for a ‘postal rule’ concerning payment of a debt. The pragmatic circumstances that attend the payment of a debt by a debtor to a creditor who is not in the creditor’s immediate vicinity are different to those that attend the entering of a contract between people who are not in each others’ immediate presence. The contract is the start of a

legal relationship between the parties, while payment of a debt is performance of an existing legal obligation. In particular, the debt [page 96] already has a known date when it is due, while the contract does not exist until there is acceptance. The means that are available for payment of a debt are different to those that are available for entering a contract. It is always possible to pay a debt before its due date, but there is no analogous concept concerning entering a contract.

Instantaneous methods of communication 4.20

The postal rule, which applies to mail and telegrams, is illequipped 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.103 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 and 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.104 In the case of Entores Ltd v Miles Far East Corp,105 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. 4.21

In Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH,106 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 [page 97] 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 Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 United Kingdom House of Lords Lord Wilberforce at 40–2: 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. 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.

[page 98] 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 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.

[page 99] Brinkibon now represents the position in Australia on instantaneous communication. Notably, Brinkibon and Entores have also been followed at a Supreme Court level in Reese Bros Plastics v Hamon-Sobelco Australia107 and Egis Consulting Australia Pty Ltd v First Dynasty Mines Ltd.108 4.22

Increasingly, email and other electronic communications are governed by statute. The Electronic Transaction Acts have uniform application in Australia.109 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. A system can only be regarded as having been designated to receive acceptances if it has been expressly created for that purpose. The mere availability of an email address on a website or other document does not amount to an express designation that the system is

designed to receive an acceptance of a contractual offer. 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 rules of offer and acceptance apply.

Key Points for Revision 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.

_________________ 1

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; Smith v Hughes (1871) LR 6 QB 597 at 607; Taylor v Johnson (1983) 151 CLR 422 at 428; 45 ALR 265. See also Quadling v Robinson (1976) 137 CLR 192; 10 ALR 319; Ballas v Theophilos (No 2) (1957) 98 CLR 193.

2

Dunlop v Higgins (1848) 9 ER 805; Carter v Hyde (1923) 33 CLR 115; 29 ALR 430; Redowood Pty Ltd v Mongoose Pty Ltd [2005] NSWCA 32.

3

Adams v Lindsell (1818) 1 B & Ald 681; Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93; 64 ALR (CN) 1198b; Bressan v Squires [1974] 2 NSWLR 460.

4

Adams v Lindsell (1818) 1 B & Ald 681; Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93; 64 ALR (CN) 1198b.

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

Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523; Farmer’s Mercantile Union and Chaff Mills Ltd v Coade (1921) 30 CLR 113; 28 ALR 17.

9

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; Smith v Hughes (1871) LR 6 QB 597 at 607; Taylor v Johnson (1983) 151 CLR 422 at 428; 45 ALR 265.

10

Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523.

11

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342.

12

Turner, Kempson & Co Pty Ltd v Camm [1922] VLR 498.

13

Turner, Kempson & Co Pty Ltd v Camm [1922] VLR 498; Dunlop v Higgins (1848) 9 ER 805.

14

See 4.13; see also Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523.

15

Boulton v Jones (1857) 157 ER 232.

16

Carter v Hyde (1923) 33 CLR 115; 29 ALR 430.

17

Parland Pty Ltd v Mariposa (1995) 5 Tas R 121.

18

Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640 at [35]; 306 ALR 25 per French CJ, Crennan, Hayne and Kiefel JJ; Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 at [59] per Sackville JA; Macfarlan and Gleeson JJA agreeing; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; 208 ALR 213 per the Full Court; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]–[41]; 211 ALR 342 per the Full Court.

19

(1983) 151 CLR 422; 45 ALR 265.

20

(2004) 219 CLR 165 at 179; 211 ALR 342.

21

[2010] NSWSC 1221 at [21].

22

APT SEA Gas Holdings Pty Ltd v ANP SEA Gas Holdings Pty Ltd [2010] NSWSC 1221. See also Outer Suburban Property Ltd v Clarke [1933] SASR 221.

23

Hyde v Wrench [1840] 49 ER 132; Fletcher v Minister for the Environment and Heritage (1999) 73 SASR 474; [1999] SASC 223 at [30] per Bleby J; Harris v Jenkins [1922] SASR 59. See also 3.20.

24

[2001] NSWCA 61 at [80].

25

[1922] VLR 498.

26

(1848) 9 ER 805.

27

[2009] NSWSC 1353.

28

[2009] NSWSC 1353 at [32].

29

Redowood Pty Ltd v Mongoose Pty Ltd [2005] NSWCA 32. See also Universal Guarantee Pty Ltd v Carlile [1957] VR 68.

30

(1923) 33 CLR 115; 29 ALR 430.

31

(1923) 33 CLR 115 at 126, 128; 29 ALR 430.

32

[2005] NSWCA 32 at [66].

33

Redowood Pty Ltd v Mongoose Pty Ltd [2005] NSWCA 32 at [66] per Tobias JA.

34

See, for example, Reese Bros Plastics Ltd v Hamon-Sobelco (Aust) Pty Ltd (1988) 5 BPR 11,106.

35

[1979] 1 All ER 965; [1979] 1 WLR 401.

36

[1979] 1 All ER 965; [1979] 1 WLR 401 at 404–5.

37

Turner, Kempson & Co Pty Ltd v Camm [1922] VLR 498; Bastard v McCallum [1924] VLR 9.

38

Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; 146 ALR 1.

39

Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; 146 ALR 1.

40

Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1986] AC 207.

41

Fitch v Snedaker 38 NY 248 (1886).

42

R v Clarke (1927) 40 CLR 227; [1928] ALR 97.

43

Williams v Cawardine [1833] EWHC KB J44; (1833) 110 ER 590.

44

(1927) 40 CLR 227; [1928] ALR 97.

45

(1927) 40 CLR 227 at 241; [1928] ALR 97.

46

Tinn v Hoffman & Co (1873) 29 LT 271 at 278.

47

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

48

(1908) 99 LT 284.

49

[1893] 1 QB 256.

50

[1893] 1 QB 256 at 269–70.

51

[1969] 2 NSWR 79.

52

(2006) Aust Contract R 90-244; [2006] NSWCA 290.

53

Felthouse v Bindley (1862) 142 ER 1037; White Trucks Pty Ltd v Riley (1948) 66 WN (NSW) 101. See also Re The Black Stump Enterprises Pty Ltd and Associated Companies (2005) 228 ALR 591.

54

Australian Consumer Law ss 39–43.

55

Australian Consumer Law s 41.

56

See Chapter 2.

57

(1862) 142 ER 1037.

58

(1862) 142 ER 1037 at 1040.

59

Greig and Davis suggest 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 Butterworths, Sydney, 2008, p 137.

60

(2005) 228 ALR 591 at [21].

61

(2005) 228 ALR 591 at [22].

62

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; 28 ALR 17.

63

(1862) 142 ER 1037.

64

Seddon and Ellinghaus, above n 59, p 137.

65

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

66

(1877) 2 App Cas 666.

67

(1988) 14 NSWLR 523.

68

(1988) 14 NSWLR 523 at 527.

69

(1988) 14 NSWLR 523 at 526.

70

(1988) 14 NSWLR 523 at 535.

71

[2015] NSWCA 1 at [60].

72

[2015] VSCA 42. See also Apple & Pear Australia Ltd v Pink Lady America LLC [2015] VSC 617.

73

Quenerduaine v Cole (1883) 32 WR 185; Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68; 14 ALR 169.

74

Adams v Lindsell (1818) 106 ER 250.

75

Entores Ltd v Miles Far East Corp [1955] 2 QB 327.

76

Diakogiannis v Johnson (1989) NSW ConvR ¶55-472; Rushton (SA) Pty Ltd v Holzberger [2003] ANZ ConvR 316; [2003] QCA 106.

77

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 [1969] 3 All ER 1593; [1970] 1 WLR 241.

78

Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR (NSW) 122.

79

George Hudson Holdings Ltd v Rudder (1973) 128 CLR 387.

80

Seddon and Ellinghaus, above n 59, p 140.

81

Quenerduaine v Cole (1883) 32 WR 185.

82

(1973) 128 CLR 387.

83

(1973) 128 CLR 387 at 394–5.

84

(1818) 106 ER 250.

85

(1872) LR 7 Ch App 587 at 594.

86

Greig and Davis, above n 59, p 310.

87

[1892] 2 Ch 27 at 33.

88

(1957) 98 CLR 93; 64 ALR (CN) 1198b.

89

(1957) 98 CLR 93 at 111; 64 ALR (CN) 1198b.

90

Holwell Securities Ltd v Hughes [1974] 1 All ER 161; [1974] 1 WLR 155.

91

(1871) LR 6 Exch 108 at 119.

92

[1974] 1 All ER 161; [1974] 1 WLR 155.

93

[1994] 1 VR 74.

94

A similar decision was made in Bressan v Squires [1974] 2 NSWLR 460.

95

(1994) 63 SASR 235.

96

(1994) 63 SASR 235 at 238.

97

(1994) 63 SASR 235 at 238.

98

Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) LR 4 Ex D 216.

99

(1879) LR 4 Ex D 216.

100 Getreide-Import GmbH v Contimar SA Compania Industrial, Comercial y Maritima [1953] 1 WLR 207. 101 [2005] EWHC 1345 at [15]. 102 [2012] NSWCA 107.

103 See Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4) (2009) 255 ALR 632; [2009] FCA 522 at [25] per Logan J. 104 See Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34. 105 [1955] 2 QB 327. 106 [1983] 2 AC 34. 107 (1988) 5 BPR 97325. 108 [2001] WASC 22. See also Schib Packaging Srl v Emrich Industries Pty Ltd (2005) 12 VR 268; [2005] VSCA 236; Fujitsu Australia Ltd v Dewar Electronics Pty Ltd & Adda Corp [2001] VSC 222. 109 See Electronic Transactions Act 1999 (Cth); 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); Electronics Transactions Act 2011 (WA).

[page 101]

CHAPTER 5 Consideration CHAPTER OVERVIEW 5.1 5.2

5.6 5.7

5.9 5.10 5.12

5.17

5.24 5.27

Introduction Defining consideration 5.3 The benefit/detriment requirement 5.4 The bargain requirement Consideration must move from the promisee Consideration need not be adequate but must be sufficient 5.7 Adequacy 5.8 Sufficiency Illusory consideration Past consideration is not adequate consideration Compromise and forbearance to sue as consideration 5.13 Compromise 5.14 Forbearance Existing duties 5.18 Existing public duty imposed by law 5.19 Promise to perform duty to a third party 5.20 Existing duty imposed by a contract in which the promisee is already bound Promises to pay lesser sums Deeds do not require consideration

Introduction 5.1

Consideration is one of the essential elements required for the formation of a contract.1 It is consideration that makes a promise 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, [page 102] 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. The primary purpose of the doctrine of consideration is to serve a channelling function within the law. That is, within contract law the doctrine of consideration serves a demarcation function by separating out those promises that are legally enforceable from those that are not. As Phang JA noted in Gay Choon Ing v Loh Sze Ti Terence Peter:2 ‘[P]ut simply, the “modern” purpose of the doctrine of consideration is to put some legal limits on the enforceability of agreements, even where they would otherwise be legally binding.’ Similarly, Atiyah has stated: ‘Since it is unthinkable that any legal system could enforce all promises it has always been necessary for the courts to decide which promises they would enforce.’3 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 wellsettled doctrine of contract law.

Defining consideration 5.2

As stated above, consideration makes a promise enforceable. As such, the modern doctrine of consideration is a creation of the bargain theory of contract.4 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.5 This may be a promise, money or some other act. In AttorneyGeneral for England and Wales v R,6 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.’ The doctrine of consideration came to be firmly established in English law in the case of Eastwood v Kenyon.7 In that case, a girl named Sarah [page 103] 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 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 on 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?

The benefit/detriment requirement 5.3

Consideration can also be defined in terms of benefit and detriment. In Currie v Misa,8 Lush J 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 …

As Carter has pointed out, this definition suffers 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 However, the definition does 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.11 As Isaacs ACJ stated in Crown v Clarke,12 consideration entails a ‘reciprocal conventional inducement, each for the other, between consideration and promise’. [page 104] 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 of age. 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 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 Phillott,17 the benefit that the plaintiff, Ballantyne, suggested that she had conferred upon the defendant, Phillott, was found to be non-existent. Phillott 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 Phillott for defamation and for another debt. Neither of her claims had any basis in fact. However, Phillott agreed to drop his claim in exchange for Ballantyne agreeing to make no claims against him. When Phillott later sought to sue Ballantyne, she invoked this contract. The High Court held by a majority that Ballantyne had provided no consideration for Phillott’s promise as she knew that she had no claim.

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. 5.4

The bargain requirement of consideration reflects the notion of quid pro quo that is inherent in the operation of the doctrine.18 In other [page 105]

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 Controls Pty Ltd (in liq) v Newtronics Pty Ltd (recs and mgrs appt’d),21 Warren CJ, Nettle and Mandie JJA 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.

Similarly, in Pharmanet Group Ltd v Primeland Pty Ltd,22 the plaintiff unsuccessfully attempted to argue that its continuing solvency was consideration for the defendant’s forbearance to sue in relation to a right of payment. Crucially, the defendant’s promise had not been linked to the solvency of the plaintiff. At best, the plaintiff’s solvency was an incidental consequence of the defendant’s forbearance, but one did not share any direct relationship with the other.23 The case of Australian Woollen Mills Pty Ltd v Commonwealth24 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. [page 106]

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 on 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.25 5.5

The case of Beaton v McDivitt26 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.27 This decision represented a reworking of the doctrine of consideration along the lines of Dillwyn v Llewelyn,28 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’.29 In the New South Wales 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 JJA 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. The judgments of Kirby P and McHugh J in Beaton v McDivitt are extracted below. [page 107]

Beaton v McDivitt (1987) 13 NSWLR 162 New South Wales Court of Appeal Kirby P at 168–70: The ‘contract’ between the parties: It is convenient to start with the alleged contract. The appellant said that the conversation between Mr McDivitt and him in July 1977 amounted to an offer to convey title to the relevant block of land in the event of a rezoning and in the meantime the appellant could come and work the land. This ‘offer’ was accepted on 26 December 1977. The ‘consideration’ for the contract was said to be the appellant’s promise to maintain the private road, which promise he gave on New Year’s Eve 1977. The respondents urged that there was a total lack of consideration flowing from the appellant for any promise made by the respondents to convey title to the block of land upon rezoning. In these circumstances the proper classification of the conversation was an unenforceable conditional gift which the respondents were entitled to revoke. By our law, consideration is an essential requirement for an enforceable contract. Without consideration, a promise is unenforceable at law. The modern theory of consideration has arisen from the notion that a

contract is a bargain struck between the parties by an exchange. By that modern theory, consideration must be satisfied in the form of a price in return for the promisor’s promise or a quid pro quo. The price can be in the form of an act, forbearance or promise. … The triumph of the bargain theory of consideration necessary for a contract amounts to a rejection of the theory of contractual obligation based upon reliance. This shift may have come about as a result of the mercantile attitudes and the requirements of England in the eighteenth and nineteenth centuries. It may reflect the consequent final subordination of Roman Law doctrines, founded ultimately in notions of relationships and morality … Whatever the origins and explanations for this shift (to the extent that they can now be known given that such disputes were typically resolved by jury verdicts) it was necessary, thereafter, to have resort to courts of equity for the enforcement of claims based on relationships. For in the courts of law, duties arising from bargains entered between free parties were to be enforced, not duties deriving from suggested moral obligations such as those deriving from relationships. The High Court of Australia doctrine of consideration. In Commonwealth (1954) 92 CLR Williams, Webb, Fullagar and arrangement:

has accepted this ‘modern’ or bargain Australian Woollen Mills Pty Ltd v The 424 at 456–457, the Court (Dixon CJ, Kitto JJ) said, relevant to the present

[page 108] 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. Young J (rightly in my opinion) was unable to find consideration in this sense in the facts of the present case. It is just not possible, however indulgently one approaches those facts with sympathy to the appellant, to classify the promises he made as a quid pro quo for the suggested promise of the respondent, in certain circumstances, to transfer title in the land to him. At the time, the appellant was having difficulties with his landlord. Therefore, a right to occupy and use the respondents’ land rent free was of considerable benefit to him. What other possible benefit did the respondents derive of the kind which the High Court said in the Australian Woollen Mills case was necessary for an enforceable contract? True it is they would have somebody living on the land. True also they might hope that such person would be a congenial neighbour, sharing with them their peculiar ideas about horticulture. But these scarcely amount to a quid pro quo for such a substantial promise as the passing of title and the taking of steps to that end. … In my opinion the expenditures and actions of the appellant are more properly to be categorised as entirely for his own benefit and that of his family. The element of congeniality and of having on the land a neighbour of like horticultural practices is not valuable consideration. It is more akin to domestic and social arrangements and the natural love and affection which have long been held not to amount to consideration sufficient to establish a binding contract. Such a contract cannot be constituted relevant unless there is a voluntary assumption of legally enforceable obligations by the parties. … There is a policy behind the law’s insistence upon consideration of the kind explained. People make foolish and ill-considered promises to confer gifts and other benefits on others. Especially do they do so, one might say, in the festive atmosphere of the Christmas and New Year season. In the cold light of the dawns that follow, disputes require courts to decide whether these promises will be enforced. Leaving aside

equitable relief occasioned by the dealings between the parties, why should the law hold a party to such a promise of a gift unless it can be demonstrated that, in return for such a promise, the promisor received some bargain from the promisee by way of quid pro quo? … [page 109] McHugh JA at 181–4: Historically, the doctrine of consideration was nearly identical with the motive for making a promise. Before it could be decided whether the promise was binding, a court had to know why the promise was made: Simpson, A History of the Common Law of Contract (1975) at 321. Historically, there was little difference between the common law conception of consideration and the Roman idea of ‘causa’. But in the nineteenth century, the basis of consideration moved from motive and reliance to bargain. By 1842 Patteson J could say in Thomas v Thomas (1842) 2 QB 851 at 859; 114 ER 330 at 333–334: It would be giving to causa too large a construction if we were to adopt the view urged by the defendant: it would be confounding consideration with motive. Motive is not the same thing with consideration. Consideration means something which is of some value in the eye of the law, moving from the plaintiff: it may be of some benefit to the plaintiff or some detriment to the defendant; but at all events it must be moving from the plaintiff. In Currie v Misa (1875) LR 10 Exch 153 at 162, Lush J, in the course of giving the judgment of Keating, Quain and Archibald JJ and himself, gave the now classic definition: A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to one party, or some forebearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other. The element of bargain is inherent in this definition. In the United States,

O W Holmes Jnr was a strong proponent of the bargain theory. In The Common Law (De Wolfe Howe ed), he said (at 230): The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise. This sentence was quoted with evident approval by Isaacs ACJ in R v Clarke (1927) 40 CLR 227 at 236. By the beginning of the twentieth century, Pollock was able to say that an ‘act or forebearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable’: Pollock on Contracts, 8th ed (1911) at 175. Pollock’s definition was adopted by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 at 855. … The ratio decidendi of Australian Woollen Mills Pty Ltd v The Commonwealth is that the expenditure of money in reliance on an announcement by the Government that it would pay a subsidy to a manufacturer on wool purchased and used for local manufacture is not itself sufficient to create a contract to pay the subsidy. … [page 110] The contract: When a person promises or offers to transfer property to another person, care must be taken to distinguish between three situations. The first concerns a promise to transfer property subject to the occurrence of an event or condition. The promise will not be enforceable even if the event or condition occurs. An example is a bare promise to pay X $100 if a certain team wins a football match. The second situation concerns a promise to transfer property after which the promisor allows the promisee to act to his detriment in reliance on the promise.

In this situation, depending on the circumstances, equity may prevent the promisor insisting on his strict rights and may enforce the promise. The third situation is where the promise contains an express or implied request by the promisor to do an act or fulfil a condition. In that situation the doing of the act or the fulfilling of the condition by the promisee in reliance on the promise will usually constitute consideration and create a binding contract. … In Australian Woollen Mills Pty Ltd v The Commonwealth, it was the absence of any request or invitation to purchase the wool which caused the High Court to hold that the purchases of wool by the plaintiff were not a quid pro quo for the subsidy. … In the present case, I think that the promise made by Mr McDivitt was an offer which was intended to give rise to an obligation on the part of himself and his wife upon the plaintiff coming and working on the land. Mr McDivitt was concerned that the land would be rezoned, that the rates would go up, and that he would not be able to pay them when he went on the pension. Accordingly, he decided to subdivide the land. Upon the transfer of three of the blocks after subdivision, he would obtain a benefit because his rates would be reduced. This motivated him to offer the block in return for a person coming and working the block by means of organic farming. Thus the consideration for the transfer of the block was the act of the plaintiff in coming and working the block by means of organic farming at the request of the McDivitts. Once the plaintiff went on to the land and commenced to work the block, it was not open to the McDivitts to withdraw their offer. In Errington v Errington [1952] 1 KB 290, the deceased bought a house and borrowed part of the money on a mortgage from a building society. He promised his son and daughter-in-law that, if they continued in occupation of the home and paid the instalments, he would transfer the property to them. Up to the time of the father’s death, the son and his wife had occupied the home and paid the instalments. The English Court of Appeal held that the son and his wife were licensees entitled under a personal contract to occupy the home for so long as they paid the

instalments to the building society. The question whether the son and daughter-in-law were entitled [page 111] to a conveyance of the property when the instalments had been fully paid was left open. Denning LJ said (at 295): The parties did not discuss what was to happen if the couple failed to pay the instalments to the building society, but I should have thought it clear that, if they did fail to pay the instalments, the father B would not be bound to transfer the house to them. The father’s promise was a unilateral contract — a promise of the house in return for their act of paying the instalments. It could not be revoked by him once the couple entered on performance of the act, but it would cease to bind him if they left it incomplete and unperformed, which they have not done. By entering onto lot B and performing work, the plaintiff has suffered sufficient detriment to constitute consideration even though he was obliged to work the land until the time of subdivision before he was entitled to the transfer of lot B. The reasoning in Beaton v McDivitt has been accepted and applied in a number of cases.30 Nonetheless, the judgments of Kirby P and McHugh J demonstrate that the notion of ‘the bargain’ is open to competing interpretations. It is notable that Kirby P did not find congeniality and having a like-minded neighbour on the land as consideration.31 His Honour noted that it is well-established that natural love and affection does not amount to sufficient consideration.32 However, that is not to say that consideration cannot exist in the arrangements made within either a family or a friendship.33

Consideration must move from the promisee 5.6

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, consideration need not be given directly to the promisor.34 The consideration requirement is still satisfied if the promisee confers a benefit upon a third party at the behest of the promisor. [page 112] 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,35 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’.36 These principles were sharply demonstrated in the case of Coulls v Bagot’s Executors and Trustee Co Ltd.37 Mr Coulls contracted with a company on behalf of himself and his wife. 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 General Insurance Co Ltd v McNiece Bros Pty Ltd.38 However, the High Court ultimately reasoned that both

doctrines were too well established to be removed from contract law.

Consideration need not be adequate but must be sufficient Adequacy 5.7

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 do not view the inadequacy of what is offered as consideration in a personal or commercial sense as a barrier to finding that valuable consideration has been provided in a legal sense.39 Accordingly, a peppercorn may constitute good consideration, provided that the promisee deems it to be of value. In AttorneyGeneral for England and Wales v R,40 it was stated that ‘consideration does not have to be commercially adequate to be sufficient in law’. In Woolworths Ltd v Kelly,41 Kirby P set out three reasons as to why courts do not assess the adequacy of [page 113] 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 that 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. The peppercorn principle is limited by the rule in Foakes v Beer42: that is, one sum of money, being a lesser amount, cannot be consideration for a promise to repay another sum of money. Similarly, the inadequacy of consideration might be a relevant factor in assessing the applicability of the vitiating factors doctrines. While consideration need not be adequate, it must be legally sufficient; consideration must have value as far as the law is concerned.

Sufficiency 5.8

While consideration need not be adequate, it must be legally sufficient;43 that is, consideration must have value as far as the law is concerned. The distinction between consideration that must be ‘sufficient’ but that need not be ‘adequate’ is apt to confuse. There is quite a significant difference between something that is commercially adequate and something that is legally sufficient. This is best understood with regard to those matters that 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 be. As a question of law, the issue of whether consideration is legally sufficient is simply concerned with whether it has a value. Putting it another way, the difference might be stated as being the difference between whether consideration has a value as opposed to the quantum of that value.

[page 114] The peppercorn principle allows parties to provide nominal consideration in exchange for a lucrative promise. In Thomas v Thomas,44 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 Dunton,45 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 Bluett,46 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,47 chocolate wrappers were held to be sufficient consideration. Nestle had promised to send a record to anybody who sent into the company a small sum of money, 1s 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 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.48 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 smashhit recordings’. They are so described in the record itself — ‘all you have to do to get each NEW STARS record is to 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.49

[page 115]

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. 5.9

Where the promisor has an unfettered discretion with respect of the performance of a promise, the consideration is illusory and any agreement is unenforceable.50 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 Commonwealth,51 a written agreement that 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: [T]he 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.52

[page 116] In the case of British Empire Films Pty Ltd v Oxford Theatres Pty Ltd,53 there was an agreement between British Empire Films and Oxford Theatres whereby the latter agreed to only display films provided to it by the former for a period of 5 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.54 However, there were other clauses in the contract that did establish consideration and British Empire Films succeeded in obtaining an injunction. White v Bluett55 is also a case that illustrates the concept of illusory consideration. In White, Pollock CB noted that the son never had any right to challenge his father’s proposed distribution of his assets. Accordingly, the son’s promise to not bother his father with complaints about the matter was meaningless as he was never entitled to complain. Pollock CB stated: The plea is clearly bad. By the argument a principle is pressed to an absurdity, as a bubble is blown until it bursts. Looking at the words merely, there is some

foundation for the argument, and following the words only, the conclusion may be arrived at. It is said, the son had a right to an equal distribution of his father’s property, and did complain to his father because he had not an equal share, and said to him, I will cease to complain if you will not sue upon this note. Whereupon the father said, If you will promise me not to complain, I will give up the note. If such a plea as this could be supported, the following would be a binding promise: A man might complain that another person used the public highway more than he ought to do, and that other might say, do not complain, and I will give you five pounds. It is ridiculous to suppose that such promises could be binding.56

The motivation lying behind the reasoning of Pollock CB is to preclude vexatious claims or other acts of nuisance being proffered as consideration. This is a laudable aim; however, it is not without its limits. In Ralli Bros v Walford Lines,57 Scrutton LJ noted the reasoning of Pollock CB in White, but noted that the ‘language, if strictly applied, would shut out compromised claims, though honestly made but in fact [page 117] ill-founded.’58 Scrutton LJ made the observation that he did not think that Pollock CB intended his comments to be strictly applied.59 In Gippsreal Ltd v Registrar of Titles & Kurek Investments Pty Ltd,60 a lender proffered its standard form contract to a borrower. The contract sought to impose a number of obligations on the borrower. The borrower signed the contract, but later sought to withdraw from the transaction. The lender, Gippsreal, sued, claiming that there was a binding loans contract. However, the court noted that the standard form contract provided that no contract would exist until the loan was made. Accordingly, there was no promise by Gippsreal to do anything, and the consideration was illusory. This finding was upheld on appeal.61

Past consideration is not adequate consideration 5.10

It is a general rule in the doctrine of consideration that past consideration does not amount to adequate consideration under the law.62 Consideration is concerned with a promise made in exchange for another promise. Where something has already been done, it cannot serve as consideration for a later promise. For example, if I mow your lawn without first having sought any reward and you then promise to pay me $15, I cannot use my act 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. Consideration is concerned with a promise made in exchange for another promise. Where something has already been done, it cannot serve as consideration for a later promise. In the case of Roscorla v Thomas,63 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’.64 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 [page 118] no consideration for it.65 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.

5.11

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,66 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 at play in Lampleigh v Braithwait was later restated in Re Casey’s Patents; Stewart v Casey,67 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.

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 United Kingdom 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.68

Compromise and forbearance to sue as consideration 5.12

Where a dispute arises between two parties and a promise is made by one party to settle that dispute, which is then accepted by the other party, the question arises as to whether the promise to settle is good consideration.69 There are two basic

types of situation that may emerge [page 119] here. In the first situation, a party may have committed some wrong or may have an actionable claim but offers a compromise.70 In the second, a party may have an actionable claim but will offer forbearance from suing in exchange for some other promise.71

Compromise 5.13

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.72 In Wigan v Edwards,73 Mason J stated: A promise to do precisely what the promisor is already bound to do is a sufficient consideration, when it is given by way of a bona fide compromise of a disputed claim, the promisor having asserted that he is not bound to perform the obligation under the pre-existing contract or that he has a cause of action under that contract.

For example, in Ballantyne v Phillott,74 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,75 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.

The principle espoused in Miles v New Zealand Alford Estate Co is illustrated in the case of Hercules Motors Pty Ltd v Schubert.76 In Hercules Motors, the defendant purchased a car from the plaintiff, but later discovered that the paintwork was faulty. After the defendant made [page 120] 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. While the party making the claim must be bona fide in their belief that it is valid, it is permissible for the claim to be without merit.77 Nor does it matter that the promisee is aware of the deficiencies in the promisor’s claims. If the promisor genuinely believes that he has a meritorious claim and makes a genuine offer to settle, then this will serve as valuable consideration. As Carter has noted: ‘[I]t would be intolerable that it would be open to a party to undo a compromise by showing that after all the other party’s claim could not have succeeded.’78 Moreover, where steps have been taken to litigate a bona fide claim, such that proceedings have commenced, a partial or whole settlement will be valuable consideration.79 The same principles apply with respect of acts of forbearance.

Forbearance 5.14

The leading case on forbearance in Australia is Wigan v Edwards.80 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, who 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. [page 121] 5.15

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.81 In Edlin v Williams, McMurdo P and Thomas JA stated that ‘it is not necessary for the forbearance to be for any definite or particular time.’82 In Butler v Fairclough,83 Isaacs J stated that a promise not to sue for a limited period, definite or indefinite, was valuable consideration provided that the substantive claim to which it attached was one that might likely render the other party liable.84 In Brehm v Wright,85 Gzell J stated: … where, as here, the forbearance is simple actual forbearance, there is no need to imply forbearance for a reasonable period. Some degree of forbearance is sufficient.

5.16

The mere act of forbearance itself is not sufficient; the undertaking to forbear must correspond to a request by the other party.86 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;87 that is, a request for forbearance to sue may be implied from the circumstances.88 In Crears v Hunter,89 Lord

Esher MR stated: It is quite clear on the other hand that a binding promise to forbear would be a good consideration for a guarantee. The question is whether, if the guarantor requests the creditor to forbear from suing and the creditor on such request, although he does not at the time bind himself to forbear, does in fact afterwards forbear to sue, there is a good consideration for the guarantee. It seems to me that it was laid down in Oldershaw v King [[1857] EngR 695; (1857) 157 ER 213] that there would in such a case be a good consideration. … if at the request of the guarantor the creditor does in fact forbear, there is a sufficient consideration to bind the guarantor, who has promised to pay the debt. It was argued that the request to forbear must be express. But it seems to me that the question whether the request is express or is to be inferred from the circumstances is a

[page 122] mere question of evidence. If a request is to be implied from the circumstances, it is the same as if there were an express request.90

In McDermott v Black,91 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.92 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.

Existing duties 5.17

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.93 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 a

contractual duty exists and is owed to a third person. The third is where the existing duty is imposed by a contract in which the promisee is already bound.

Existing public duty imposed by law 5.18

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.94 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. The position might seem cut and dried, but this is rather deceptive. Indeed, as Martin CJ noted in Ailakis v Olivero (No 2),95 there are authorities that suggest that ‘a promise to perform pre-existing duties, imposed by either statute or the general law, which have a public character can nevertheless constitute good consideration.’96 [page 123] In Ward v Byham,97 a man who separated from his de facto partner promised to pay her £1 per week if she would maintain their child. Seven months later the woman married and the man stopped paying her the £1 per week. She sued and he responded that she was doing no more than her lawful duty. The Court of Appeal found in her favour. Morris and Parker LJJ held that she had agreed to more than maintain the child in that she had undertaken to prove to the father that the child would be happy in her care. However, Lord Denning directly attacked the existing duty rule. Lord Denning stated: I have always thought that a promise to perform an existing duty, or the performance of it, should be regarded as good consideration, because it is a benefit to the person to whom it is given. Take this very case. It is as much a benefit for the father to have the child looked after by the mother as by a neighbour. If he gets the

benefit for which he stipulated, he ought to honour his promise, and he ought not to avoid it by saying that the mother was herself under a duty to maintain the child.98

In Williams v Williams,99 Lord Denning would later state: ‘[A] promise to perform an existing duty is, I think, sufficient consideration to support a promise, so long as there is nothing in the transaction which is contrary to the public interest.’ Suffice to say, the reasoning of Lord Denning should be treated with some caution.100 His Lordship was not supported in Ward by his brother judges. However, in Williams v Roffey Brothers & Nicholls (Contractors) Ltd,101 Glidewell LJ did suggest that Ward was a case where the man obtained a ‘practical benefit’ from the care of his child. In Collins v Godefroy,102 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.103 [page 124] 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. The basis for that qualification arises where a person who is under a duty imposed by the law agrees to do something which falls outside the scope of that duty, then they may validly claim further compensation. In the case of Glasbrook Bros Ltd v Glamorgan County Council,104 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.

Promise to perform duty to a third party 5.19

Where A owes a duty to B under contract and C promises to pay a sum of money to A in exchange for performing his duties under the contract with B, the agreement of A to do so is consideration for the promise given by C. In effect, this also means that C can compel A to perform his obligations to B. In Ailakis v Olivero (No 2),105 Martin CJ noted: … it is clear that a promise to perform an existing contractual duty made to a third party provides good consideration to the party to whom the promise is given, who would otherwise have no means of enforcing the performance of the contract.

In New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd (The Eurymedon),106 the Privy Council considered whether a firm of stevedores could enforce a contract that had been made with the owners of goods concerning the unloading of those goods from a vessel, in circumstances where the stevedores already owed a contractual duty to the carriers of the goods to unload them. The Privy Council held: An agreement to do an act which the promisor is under an existing obligation to a third party to do, may quite well amount to valid consideration and does so in the present case: the promisee obtains the benefit of a direct obligation which he can enforce.107

Similarly, in Pao On v Lau Yiu Long,108 the parties to a contract with a company refused to perform their obligations unless the shareholders of the company provided them with a guarantee against the losses that

[page 125] could potentially arise from the contract. The consideration for the guarantee was a promise to perform the existing contractual obligation owed to the company. A majority of the Privy Council held that this was good consideration: Their Lordships do not doubt that a promise to perform, or the performance of, a pre-existing contractual obligation to a third party can be valid consideration.109

In Shadwell v Shadwell,110 an uncle promised the annual sum of £150 to his nephew, who had recently become engaged. The implication in the promise was that the sum would be paid if the marriage went ahead. The nephew proceeded with the marriage, but the monies were never paid. After his uncle’s death the nephew sought to recover the monies that he felt were owed to him. The uncle’s estate pointed out that at the time of the promise the nephew was already bound to marry his fiancée. In effect, the nephew had simply promised his uncle that in return for £150 per annum he would do that which he had already agreed pursuant to his engagement. The majority of the court found that there was consideration. The majority found detriment in the form of material changes that the nephew may have made to his financial position on the basis of the promise and the embarrassment that would have resulted from its denial. The majority found a benefit to the uncle in the sense that he had an interest in seeing that his nephew was married.

Existing duty imposed by a contract in which the promisee is already bound 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. 5.20

The traditional rule is that where an existing duty is imposed by a contract to which the promisor is already bound, a promise to perform that act cannot be good consideration for some other promise.111 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 1 later plead some difficulty but promise to keep working on the house project in exchange for receiving an extra $5000 from you, the existing duty rule arises. In reality, all [page 126] that I would be doing in this example is promising to do work that 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 and where a practical benefit can be gained from continued performance.112 The existing duty rule has often been illustrated in shipping cases. In Stilk v Myrick,113 Stilk agreed to crew a ship on a voyage from London to the Baltic. In the course of the voyage, two 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.

5.21

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,114 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 Ponsonby supports the established qualification on that rule. The general rule has been further qualified by two leading cases, Williams v Roffey Bros & Nicholls (Contractors) Ltd115 and Musumeci v Winadell Pty Ltd,116 both of which are discussed below. 5.22

In the United Kingdom case of Williams v Roffey Bros, a contractor, Roffey Bros, entered into a contract to renovate 27 flats and subcontracted the [page 127] 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.

Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 England and Wales Court of Appeal, Civil Division Glidewell LJ at 15–16: Mr Evans relies on the principle of law which, traditionally, is based on the decision in Stilk v Myrick (1809) 2 Camp 317. That was a decision at first instance of Lord Ellenborough CJ On a voyage to the Baltic, two seamen deserted. The captain agreed with the rest of the crew that if they worked the ship back to London without the two seamen being replaced, he would divide between them the pay which would have been due to the two deserters. On arrival at London this extra pay was refused, and the plaintiff’s action to recover his extra pay was dismissed. … In North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB

705 Mocatta J regarded the general principle of the decision in Stilk v Myrick as still being good law. He referred to two earlier decisions of this court, dealing with wholly different subjects, in which Denning LJ, as he then was, sought to escape from the confines of the rule, but was not accompanied in his attempt by the other members of the court. [page 128] In Ward v Byham [1956] 1 WLR. 496 the plaintiff and the defendant lived together unmarried for five years, during which time the plaintiff bore their child. After the parties ended their relationship, the defendant promised to pay the plaintiff £1 per week to maintain the child, provided that she was well looked after and happy. The defendant paid this sum for some months, but ceased to pay when the plaintiff married another man. On her suing for the amount due at £1 per week, he pleaded that there was no consideration for his agreement to pay for the plaintiff to maintain her child, since she was obliged by law to do so — see section 42 of the National Assistance Act 1948. The county court judge upheld the plaintiff mother’s claim, and this court dismissed the defendant’s appeal. Denning LJ said at page 498: I approach the case, therefore, on the footing that the mother, in looking after the child, is only doing what she is legally bound to do. Even so, I think that there was sufficient consideration to support the promise. I have always thought that a promise to perform an existing duty, or the performance of it, should be regarded as good consideration, because it is a benefit to the person to whom it is given. Take this very case. It is as much a benefit for the father to have the child looked after by the mother as by a neighbour. If he gets the benefit for which he stipulated, he ought to honour his promise; and he ought not to avoid it by saying that the mother was herself under a duty to maintain the child.

… However, Morris LJ put it rather differently. He said: … It seems to me, therefore, that the father was saying, in effect: Irrespective of what may be the strict legal position, what I am asking is that you shall prove that Carol will be well looked after and happy, and also that you must agree that Carol is to be allowed to decide for herself whether or not she wishes to come and live with you. If those conditions were fulfilled the father was agreeable to pay. … Parker LJ agreed. As I read the judgment of Morris LJ, he and Parker LJ held that, though in maintaining the child the plaintiff was doing no more than she was obliged to do by law, nevertheless her promise that the child would be well looked after and happy was a practical benefit to the father which amounted to consideration for his promise. In Williams v Williams [1957] 1 WLR 148, a wife left her husband, and he promised to make her a weekly payment for her maintenance. On his failing to honour his promise, the wife claimed the arrears of payment, but her husband pleaded that, since the wife was guilty of desertion she was bound to maintain herself, and thus there was no consideration for his promise. Denning LJ (at page 151) reiterated his view that [page 129] a promise to perform an existing duty is, I think, sufficient consideration to support a promise, so long as there is nothing in the transaction which is contrary to the public interest. … It was suggested to us in argument that, since the development of the doctrine of promissory estoppel, it may well be possible for a person to whom a promise has been made, on which he has relied, to make an additional payment for services which he is in any event bound to

render under an existing contract or by operation of law, to show that the promisor is estopped from claiming that there was no consideration for his promise. However, the application of the doctrine of promissory estoppel to facts such as those of the present case has not yet been fully developed. … There is, however, another legal concept of relatively recent development which is relevant, namely, that of economic duress. Clearly if a sub-contractor has agreed to undertake work at a fixed price, and before he has completed the work declines to continue with it unless the contractor agrees to pay an increased price, the subcontractor may be held guilty of securing the contractor’s promise by taking unfair advantage of the difficulties he will cause if he does not complete the work. In such a case an agreement to pay an increased price may well be voidable because it was entered into under duress. Thus this concept may provide another answer in law to the question of policy which has troubled the courts since before Stilk v Myrick, and no doubt led at the date of that decision to a rigid adherence to the doctrine of consideration. This possible application of the concept of economic duress was referred to by Lord Scarman, delivering the judgment of the Judicial Committee of the Privy Council in Pao On v Lau Yiu Long [1989] AC 614. … Accordingly, following the view of the majority in Ward v Byham and of the whole court in Williams v Williams and that of the Privy Council in Pao On 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 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. [page 130] As I have said, Mr Evans accepts that in the present case by promising to pay the extra £10,300 his client 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 e.g. 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. As a subsidiary argument, Mr Evans submits that on the facts of the present case the consideration, even if otherwise good, did not ‘move from the promisee’. … In this respect I would adopt the following passage from Chitty on Contracts, 25th edition, paragraph 173, and refer to the authorities there cited: The requirement that consideration must move from the promisee is most generally satisfied where some detriment is suffered by him e.g. where he parts with money or goods, or renders services, in exchange for the promise. But the

requirement may be equally well satisfied where the promisee confers a benefit on the promisor without in fact suffering any detriment. That is the situation in this case. 5.23

There has been a cautious acceptance of Williams v Roffey Bros by many academic commentators.117 One of the main objections to Williams v Roffey Bros is that it casts doubt on Stilk v Myrick.118 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 Stilk had signed. However, in Williams v Roffey Bros, Williams faced severe financial hardship that would have meant that he could not perform the work. [page 131] 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,119 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.120 However, the court also rejected the approach to ‘practical benefits’ outlined in Williams v 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.121 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.122 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.123 In applying the practical [page 132] benefits test, Santow J added 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. (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.124

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;125 while in Canada it has been applied in NAV Canada v Greater Fredericton Airport Authority Inc.126 Similarly, in the United Kingdom, Williams v Roffey Bros has been followed in Anangel Atlas Compania Naviera v Ishikawajima-Harima Heavy Industries Co Ltd (No 2),127 Lee v GEC [page 133] Plessey Telecommunications128 and WRN Ltd v Ayris.129 In Re Selectmove Ltd,130 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,131 discussed below. Williams v Roffey continues to be applied in Australia. In W & K Holdings (NSW) Pty Ltd v Laureen Margaret Mayo,132 Sackar J held that the defendant’s continuing ability to be able to provide credit conferred a practical benefit on a debtor and was consideration for certain contract variations. Similarly, in Foyle Enterprises Pty Ltd v Steve Parcell Building Services Pty Ltd,133 Sheridan DCJ found that a practical benefit existed for the plaintiff in retaining his job. One of the main criticisms of Williams is that it undermines the doctrine of consideration because it is all too easy to find that a practical benefit exists.134 In Sunny Metal & Engineering Pte Ltd v Ng Khim Ming Eric,135 the Singapore Supreme Court noted: More importantly, perhaps, the combined effect of Williams v Roffey Bros & Nicholls (Contractors) Ltd (to the effect that a factual, as opposed to a legal, benefit or detriment is sufficient consideration) and the well-established proposition that consideration must be sufficient but need not be adequate (see, for example, the Singapore Court of Appeal decision of Wong Fook Heng v Amixco Asia Pte Ltd [1992] 2 SLR 342 at 348, [23]) is that (as Rajah JC had pointed out in Digilandmall (see [28] above)) it will, absent exceptional circumstances, be all too easy to locate some element of consideration between contracting parties. This would render the requirement of consideration otiose or redundant, at least for the most part.

For all the protestations to the contrary, it must be conceded that Williams v Roffey more or less obliterates Stilk v Myrick, because factual benefit reduces much of the well-established rules of consideration to a ‘practical redundancy’.136 There have only been a few cases to which one can point and say that a practical benefit was found not to exist. For example, in Schwartz v Hadid,137 a specious argument about a loan [page 134]

variation failed because the alleged practical benefit would have arisen from actions that were not directly connected to the original contract.138 Similarly in Slipper v Berry Buddle Wilkins Lawyers,139 Harrison AsJ noted that an offer of potential future work made to a solicitor was not a practical benefit given in exchange for a deferred costs agreement that was made after the time for payment that was due. The court stated: When the promisee is already contractually bound to the promisor, the general rule is that performance of an existing contractual obligation will not be good consideration unless some additional benefit is conferred. I do not accept that the provision of further instructions with ‘the opportunity to do work for which you will be paid fees by the Commonwealth on an ongoing basis’ is an additional benefit amounting to consideration. … A benefit may exist if performance of the existing duty avoids problems that are associated with non-performance, as in Williams v Roffey. But here, the legal work has been performed and invoiced. … the agreement was simply a ‘gratuitous offer to wait’ that was not binding on the parties as there was no fresh consideration.140

Leaving aside the arguments in Hadid and Slipper, the redundancy of consideration will almost always exist in the context of renegotiations because promises to pay more are inherently one-sided. As such, the objections of those who do not support Williams will likely remain the same; that is, the promisor will receive no more than his or her original entitlement, but the promisee in cases like Williams, through his or her lack of attention to detail or poor planning in a business context, effectively gets a reprieve in the form of the extra payment. In turn, the extra payment only comes about due to the situational vulnerability of the promisor.

Promises to pay lesser sums 5.24

The rule on promises to pay lesser sums is related to the existing legal duty rule. The rule was first developed in Pinnel’s Case.141 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 from suing to obtain the

remainder of the amount owing.142 In Foakes v Beer,143 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 [page 135] 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 already owed by him under the law. 5.25

The rule in Foakes v Beer is subject to a number of exceptions. For example, the rule may be displaced by a deed,144 payment by a third party,145 an agreement among multiple creditors,146 or early repayment,147 or at a location other than that which was originally designated.148 A wholly new agreement may also avoid the rule.149 Alternately, the rule might be evaded by some other consideration.150 Indeed, in Couldery v Bartrun,151 the Court expanded on the exception noted by Lord Blackburn in Foakes with the observation that a creditor: … might take a horse, or a canary, or a tomtit if he chose, and that was accord and satisfaction [since the obligor was under no pre-existing duty to deliver the horse, canary, or tomtit]; but by a most extraordinary peculiarity of the English Common Law, he could not take 19s. 6d. in the pound; that was nudum pactum.152

As Carter has noted, the ‘absurdity of this is patent.’153 The existence of so many well defined exceptions to the rule, should be sufficient to suggest that the rule itself requires a rethink. 5.26

The rule in Foakes is well-established in Australian case law.154 Nevertheless, there is a need for a reconsideration of the

relationship between the rule in Williams and the rule in Foakes. This has arisen due to a small series of Australian cases in which different courts have suggested that there may be some circumstances under which a promise [page 136] to repay a substantial part of the amount owing coupled with some other practical benefit may amount to good consideration, thereby making a promise to accept less binding upon the creditor.155 This represents a slight weakening of the position in Amos v Citibank Ltd,156 where the Queensland Court of Appeal held that the reasoning in Williams v Roffey did not extend to the principle in Foakes and Pinnel’s Case. Crucially, in Amos the court drew a pointed distinction between contracts of debt and other contracts. The Queensland Court of Appeal stated: In circumstances in which a contract of that character remains at least to some extent executory on both sides, it is not difficult to identify as the consideration the commercial benefit which results from having performance in fact carried out, or, conversely, the detriment likely to be suffered if it is not. … But it is a different matter where, as here, the subject matter of agreement is not a contractual obligation which is still to be performed, but simply a debt which has arisen, become due, and is payable forthwith by one party to the other.

In Amos the Court of Appeal concluded that the debtor was not proposing to do anything more than that for which he had already contracted. Accordingly, the existing duty rule and the principle in Foakes v Beer proved an insurmountable obstacle.157 With recent jurisprudence in mind, the best that can be said is that the firm position in Amos has now begun to falter, without necessarily having completely fallen apart. In MP Investments Nominees v Bank of WA Ltd,158 Judd J stated: I accept that there are cases in which a benefit may be obvious even though there are existing contractual obligations and entitlements. The case of a contractor offered an inducement to continue to perform his contract so as to avoid a greater

loss is but one example. I also accept that in the case of banker and customer, circumstances may arise in which a bank may compromise its position in order to secure certainty of payment and avoid cost, inconvenience and perhaps loss associated with recovery action. There remains, however, a question of principle involving the requirement that there be consideration moving from the promisee.

However, Judd J found that the plaintiff had not adduced sufficient evidence to suggest that a practical benefit existed. As such the balance between Williams and Foakes was left untested. That said, Judd J suggested that if it was proposed that most of the debt would be repaid, then the question of a practical benefit would have arisen.159 [page 137] Notably, in Wolfe v Permanent Custodians Ltd,160 her Honour Zammit AsJ in the Supreme Court of Victoria found sufficient new consideration existed in relation to the payment of a lesser sum.161 At issue in Wolfe was whether the plaintiff had given adequate consideration for the creditor’s promise to stay the enforcement of a judgment against him. In Wolfe, Zammit AsJ could see no immediate barrier to extending the rule in Williams to cases concerning the payment of debts. Moreover, Zammit AsJ agreed that Wolfe had conferred a practical benefit upon Permanent Custodians: I consider, given the nature of the 1 December 2009 Agreement, the benefit to Permanent was avoiding the inconvenience of having to sell the Property. Even though I accept that as a professional lender, Permanent may have to sell property as part of its business, that does not mean that the avoidance of such a step does not amount to some, albeit small, consideration.162

Even though Wolfe, which was overturned by the Victorian Court of Appeal, is a precedent of dubious value, it is still worth noting for its exploration of the relationship between Foakes and Williams. Similarly, Gardiner AsJ in Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd,163 outlined the steps associated with selling the disputed property and suggested

that there might have been an argument, albeit a faint one, to be made that receiving $1.6 million sooner and avoiding burdens of a forced sale represented good consideration. It is notable that in Troutfarms the court made no mention at all of Wolfe, though it was clearly decided after the latter decision had been handed down. Whether that omission was deliberate or accidental is a matter for conjecture. The decision at first instance in Wolfe represents a bold step against established principle. It certainly sits at odds with the remarks of Bell J in PGA v R,164 where her Honour noted that through relative antiquity the rule in Foakes was well established in Australian law despite lacking majority support at an appellate level.165 More to the point, most other state Supreme Courts have baulked at the prospect of extending Williams to Foakes v Beer situations. [page 138]

Deeds do not require consideration 5.27

Consideration is not required for deeds as these are promises made under seal. There is a difference between promises made under seal and ordinary contracts. As Carter notes: ‘[C]onsideration is an essential element of “simple”, “parol” or “informal” contracts.’166 In certain areas of the law, mostly in relation to land transactions, statutes require that certain undertakings be given by a deed. Where such statutory requirements exist, the common law is displaced.

Key Points for Revision 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. 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.

_________________ 1

The essential elements being: offer, acceptance, consideration, intention to create legal relations, capacity, certainty and completeness.

2

[2009] SGCA 3 at [98].

3

P S Atiyah, Essays on Contract, Clarendon Press, Oxford, 1986, p 181.

4

Eastwood v Kenyon (1840) 113 ER 482; see also Chapter 2.

5

Thomas v Thomas (1842) 2 QB 851.

6

[2002] 2 NZLR 91 at 106.

7

(1840) 113 ER 482.

8

(1875) LR 10 Ex 153 at 162.

9

J Carter, E Peden and G Tolhurst, Contract Law in Australia, LexisNexis Butterworths, Sydney, 2007, p 108; see also Beaton v McDivitt (1987) 13 NSWLR 162 at 181.

10

Balfour v Balfour [1919] 2 KB 571.

11

Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 452; Beaton v McDivitt (1987) 13 NSWLR 162; Eastwood v Kenyon (1840) 113 ER 482; see also Pharmanet Group Ltd v Primeland Pty Ltd [2015] FCA 208.

12

(1927) 40 CLR 227 at 236; [1928] ALR 97.

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 Butterworths, Sydney, 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 that only the latter could understand.

15

In Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431, Kirby P 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. See 5.7.

16

See N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed, LexisNexis

Butterworths, Sydney, 2008, pp 176–7. 17

(1961) 105 CLR 379; [1962] ALR 22.

18

Beaton v McDivitt (1987) 13 NSWLR 162.

19

Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453; 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; [1954] ALR 453. Professor Hamson has stated: ‘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 at 234.

21

(2009) 25 VR 411 at [62].

22

[2015] FCA 208.

23

[2015] FCA 208 at [37] per McKerracher J.

24

(1954) 92 CLR 424; [1954] ALR 453.

25

See Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513.

26

(1988) 13 NSWLR 162. See also Pharmanet Group Ltd v Primeland Pty Ltd [2015] FCA 208; Hughes v St Barbara Ltd [2011] WASCA 234.

27

Beaton v McDivitt (1985) 13 NSWLR 134.

28

(1862) 4 De G F & J 517; 45 ER 1285.

29

Beaton v McDivitt (1987) 13 NSWLR 162 at 170.

30

See, for example, Pharmanet Group Ltd v Primeland Pty Ltd [2015] FCA 208; Hughes v St Barbara Ltd [2011] WASCA 234; Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (recs and mgrs appt’d) (2009) 25 VR 411; Iacullo v Remly Pty Ltd [2012] NSWSC 190; Galaxidis v Galaxidis [2001] NSWSC 1123.

31

This seems in line with White v Bluett (1853) 23 LJ (Exch) 36, but rather contrary to the peppercorn principle. With respect to the question of why the common law does not regard natural love and affection and similar matters as sufficient consideration, Seddon et al have stated that the ‘law draws the line at some things which, perhaps somewhat arbitrarily, it regards as ephemeral.’ See Seddon, Bigwood and Ellinghaus, Cheshire & Fifoot Law of Contract, 10th ed, LexisNexis Butterworths, Sydney, 2012, p 181.

32

See Bret v JS (1600) 78 ER 987.

33

Young v Smith (2015) 18 BPR 35,101; [2015] NSWSC 400 at [45] per Sackar J.

34

Bolton v Madden (1873) LQ 9 QB 55.

35

[1915] AC 847.

36

[1915] AC 847 at 853.

37

(1967) 119 CLR 460; [1967] ALR 385.

38

(1988) 165 CLR 107; 80 ALR 574.

39

Alexander v Rayson [1936] 1 KB 169; Barba v Gas & Fuel Corp of Victoria (1976) 136 CLR 120; 12 ALR 649. See also Director of Public Prosecutions for Victoria v Le (2007) 232 CLR 562; 240 ALR 204.

40

[2002] 2 NZLR 91 at 107.

41

(1991) 22 NSWLR 189; 4 ACSR 431.

42

(1884) 9 App Cas 605.

43

Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431; Director of Public Prosecutions for Victoria v Le (2007) 232 CLR 562; 240 ALR 204 at [115].

44

(1842) 2 QB 851.

45

(1892) 18 VLR 114.

46

(1853) 23 LJ Ex 36. See also Nicholl Holdings Pty Ltd v Maharaj [2008] QSC 99.

47

[1960] AC 87.

48

[1960] AC 87 at 103, 108, 114.

49

[1960] AC 87 at 114–15.

50

Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 151 per McHugh J; Young v Smith (2015) 18 BPR 35,101; [2015] NSWSC 400. See also Lewandowski v Mead Carney-BCA Pty Ltd [1973] 2 NSWLR 640.

51

(1969) 121 CLR 353; [1969] ALR 801.

52

(1969) 121 CLR 353; [1969] ALR 801 at [517].

53

[1943] VLR 163; [1943] ALR 383. See also Gippsreal Ltd v Registrar of Titles & Kurek Investments Pty Ltd (2007) 20 VR 157.

54

[1943] VLR 163 at 167; [1943] ALR 383.

55

(1853) 23 LJ Ex 36.

56

(1853) 23 LJ Ex 36 at 37.

57

(1922) 10 Lloyd’s Law Reports 451.

58

(1922) 10 Lloyd’s Law Reports 451 at 455. See also Pitt v PHH Asset Management Ltd [1993] 4 All ER 961; [1994] 1 WLR 327.

59

(1922) 10 Lloyd’s Law Reports 451 at 455.

60

(2007) 20 VR 157.

61

Gippsreal Ltd v Registrar of Titles & Kurek Investments Pty Ltd (2007) 20 VR 157.

62

Roscorla v Thomas (1842) 3 QB 234; Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239; Lampleigh v Braithwait (1615) 80 ER 255.

63

(1842) 3 QB 234.

64

(1842) 3 QB 234 at 236.

65

(1842) 3 QB 234 at 237.

66

(1615) 80 ER 255.

67

[1892] 1 Ch 104 at 115–16.

68

[1892] 1 Ch 104 at 108.

69

Ballantyne v Phillott (1961) 105 CLR 379; [1962] ALR 22.

70

Wigan v Edwards (1973) 1 ALR 497; 47 ALJR 586.

71

Brehm v Wright (2008) Aust Contract R ¶90-282; [2007] NSWSC 1101.

72

Miles v New Zealand Alford Estate Co (1886) 32 Ch D 266; McDermott v Black (1940) 63 CLR 161; Wigan v Edwards (1973) 1 ALR 497; 47 ALJR 586.

73

(1973) 1 ALR 497 at 505; 47 ALJR 586.

74

(1961) 105 CLR 379; [1962] ALR 22.

75

(1886) 32 Ch D 266 at 291.

76

(1953) 53 SR (NSW) 301.

77

Callisher v Bischoffheim (1870) LR 5 QB 449; Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691 at 698 per Handley JA. In Spies, Handley JA noted with approval the reasoning of Cockburn CJ in Callisher wherein the latter suggested that knowingly pursuing an unfounded claim would be fraudulent. Handley JA suggested that such conduct would be fraudulent in the sense that it would satisfy the tort of deceit. See also Wigan v Edwards (1973) 1 ALR 497; 47 ALJR 586.

78

J W Carter, Contract Law in Australia, LexisNexis Butterworths, Sydney, 2013, p 142.

79

Butler v Fairclough (1917) 23 CLR 78; 23 ALR 62.

80

(1973) 1 ALR 497; 47 ALJR 586.

81

Griffiths v Knight [1960] SR (NSW) 353.

82

[1998] QCA 439 at [43].

83

(1917) 23 CLR 78 at 96; 23 ALR 62.

84

Brehm v Wright (2008) Aust Contract R ¶90-282; [2007] NSWSC 1101; Combis, Trustee of the Property of Peter Jensen (Bankrupt) v Jensen (No 2) (2009) 112 ALD 301; [2009] FCA 1383.

85

(2008) Aust Contract R ¶90-282; [2007] NSWSC 1101 at [29].

86

Murphy v Timms [1987] 2 Qd R 550 at 551. See also Edlin v Williams [1998] QCA 439.

87

Official Trustee in Bankruptcy v Lopatinsky (2003) 129 FCR 234; 30 Fam LR 499 at [103]; Brehm v Wright (2008) Aust Contract R ¶90-282; [2007] NSWSC 1101; The Alliance Bank (Ltd) v Broom (1864) 2 DR & SM 289.

88

Crears v Hunter (1887) 19 QBD 341. See also Newton v State Government Insurance Office (Qld) [1986] 1 Qd R 431 at 444.

89

(1887) 19 QBD 341 at 344.

90

See also Edlin v Williams [1998] QCA 439.

91

(1940) 63 CLR 161.

92

(1940) 63 CLR 161 at 172–3.

93

See Stilk v Myrick (1809) 170 ER 1168; Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1; Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723; (1995) Aust Contract R 90-050.

94

Ward v Byham [1956] 2 All ER 318; [1956] 1 WLR 496.

95

(2014) 100 ACSR 524; [2014] WASCA 127.

96

(2014) 100 ACSR 524; [2014] WASCA 127 at [101] (Buss JA agreeing). See also Ward v Byham [1956] 2 All ER 318; Williams v Williams [1957] 1 All ER 305; Popiw v Popiw [1959] VR 197; Airways Corp of New Zealand Ltd v Geyserland Airways Ltd [1996] 1 NZLR 116.

97

[1956] 2 All ER 318; [1956] 1 WLR 496.

98

[1956] 2 All ER 318 at 319; [1956] 1 WLR 496. This might be taken as yet another attempt by Lord Denning to restate the rules of contract law to suit his particular philosophy. However, it was followed by Hudson J in Popiw v Popiw [1959] VR 197 at 199. See also Sheahan v Workers Rehabilitation and Compensation Corp (1991) 58 SASR 119 at 124, where Matheson J, though broadly sympathetic with the aims behind Lord Denning’s reasoning in Ward, noted that there was no basis in law for the way in which his Lordship had sought to extend the law on this point.

99

[1957] 1 All ER 305; [1957] 1 WLR 148 at 151.

100 See Sheahan v Workers Rehabilitation and Compensation Corp (1991) 58 SASR 119 at 124; 6 ACSR 11 per Matheson J. 101 [1991] 1 QB 1. 102 (1831) 109 ER 1040. 103 (1831) 109 ER 1040 at 1042. 104 [1925] AC 270. 105 (2014) 100 ACSR 524; [2014] WASCA 127 at [106] (Buss JA agreeing). 106 [1975] AC 154. 107 [1975] AC 154 at 168. 108 [1980] AC 614. 109 [1980] AC 614 at 632. 110 [1860] 142 ER 62. 111 Wigan v Edwards (1973) 1 ALR 497; 47 ALJR 586. See also Leon Holdings Pty Ltd v O’Donnell (2009) 25 VR 569; Slipper v Berry Buddle Wilkins Lawyers [2015] NSWSC 810; Young v Smith (2015) 18 BPR 35,101; [2015] NSWSC 400. See further SAS Realty Developments Pty Ltd v Kerr [2013] NSWCA 56 at [70] per Ward JA. 112 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1; Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723; (1995) Aust Contract R 90-050. 113 (1809) 170 ER 1168. 114 (1857) 119 ER 1471. 115 [1991] 1 QB 1. 116 (1994) 34 NSWLR 723; (1995) Aust Contract R 90-050. 117 See, for example, A Phang, ‘Consideration at Crossroads’ (1991) 107 Law Quarterly Review 21. 118 See M Ogilvie, ‘Of What Practical Benefit is Practical Benefit to Consideration?’ (2011) 62 University of New Brunswick Law Journal 131. 119 [2003] 2 NZLR 23. 120 [2003] 2 NZLR 23 at 45–6. 121 J Carter, A Phang and J Poole, ‘Reactions to Williams v Roffey’ (1995) 8(3) Journal of Contract Law 248. 122 (1994) 34 NSWLR 723; (1995) Aust Contract R 90-050. See also R v Donald; Ex parte AttorneyGeneral of Queensland [1993] QCA 152; Dynevor Pty Ltd v Proprietors, Centrepoint Building Units [1995] QCA 166. See further Vella v Ayshan (2008) ANZ ConvR ¶8-013; [2008] NSWSC 84; Cohen v iSoft Group Pty Ltd [2012] FCA 1071; Apple & Pear Australia Ltd v Pink Lady America LLC

[2015] VSC 617. 123 Other Australian cases have considered or applied Williams v Roffey. See further Wolfe v Permanent Custodians Ltd [2012] VSC 275; Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSC 228; MP Investments Nominees Pty Ltd v Bank of Western Australia Ltd [2012] VSC 43; Amos v Citibank Ltd [1996] QCA 129; Silver v Dome Resources NL (2007) 62 ACSR 539; [2007] NSWSC 455; Foyle Enterprises Pty Ltd v Steve Parcell Building Services Pty Ltd [2015] QDC 225; Tinyow v Lee [2006] NSWCA 80; W & K Holdings (NSW) Pty Ltd v Laureen Margaret Mayo [2013] NSWSC 1063; Ailakis v Olivero (No 2) (2014) 100 ACSR 524; [2014] WASCA 127. 124 (1994) 34 NSWLR 723 at 747; (1995) Aust Contract R 90-050. 125 [1994] 3 SLR 631. 126 (2008) 290 DLR (4th) 405 (NBCA). 127 [1990] 2 Lloyd’s Rep 526. 128 [1993] IRLR 383. 129 [2008] EWHC 1080 (QB). 130 [1995] 1 WLR 474. 131 (1883) 9 App Cas 605. 132 [2013] NSWSC 1063 at [166]. 133 [2015] QDC 225 at [73]. 134 See, for example, M Chen-Wishart, ‘Consideration: Practical Benefit and the Emperor’s New Clothes’ in J Beatson and D Friedman, Good Faith and Fault in Contract Law, Oxford University Press, Oxford, 1995. See also Foyle Enterprises Pty Ltd v Steve Parcell Building Services Pty Ltd [2015] QDC 225. 135 [2007] 1 SLR 853 at [30]. 136 Gay Choon Ing v Loh Sze Ti Terence Peter [2009] 2 SLR 332 at [101] per Phang JA. 137 [2013] NSWCA 89. 138 [2013] NSWCA 89 at [119]. 139 [2015] NSWSC 810. 140 [2015] NSWSC 810 at [44]–[46]. 141 (1602) 5 Co Rep 117a. 142 Martech International Pty Ltd v Energy World Corp Ltd (2006) 234 ALR 265. 143 (1884) 9 App Cas 605. 144 Carter, above n 78, pp 146–7. 145 Hirachand Punamchand v Temple [1911] 2 KB 330. 146 Scuderi v Morris (2001) 4 VR 125 at [58]–[70] per Chernov JA. See also E T Fisher & Co Pty Ltd v English Scottish & Australian Bank Ltd (1940) 64 CLR 84; [1941] ALR 1. 147 Seddon, Bigwood and Ellinghaus, above n 31, p 216. See also SAS Realty Developments Pty Ltd v Kerr [2013] NSWCA 56 at [65] per Ward JA. 148 Seddon, Bigwood and Ellinghaus, above n 31, p 216. See also SAS Realty Developments Pty Ltd v Kerr [2013] NSWCA 56 at [65] per Ward JA.

149 CMA Corp Ltd v SNL Group Pty Ltd [2012] NSWCA 138. 150 Vanhergen v St Edmunds Properties Ltd [1933] 1 KB 345. 151 (1880, CA) LR 19 Ch D 394. 152 (1880, CA) LR 19 Ch D 394 at 399. 153 Carter, above n 78, p 142. 154 See Shepparton Projects Pty Ltd v Cave Investments Pty Ltd [2013] VSCA 152; Medcalf v Crimeguard International Security Systems Sydney Pty Ltd [2011] FCA 963; Kelen v Vitamin Pty Ltd [2010] NSWSC 328; Amos v Monsour Pty Ltd [2010] FCA 741; Hennessey v Architectus Group Holdings Pty Ltd [2010] NSWSC 1390; Martech International Pty Ltd v Energy World Corp Ltd (2006) 234 ALR 265; (2007) 248 ALR 353; N Ray v Deputy Commissioner of Taxation [2005] FMCA 1893; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194. 155 MP Investments Nominees Pty Ltd v Bank of Western Australia Ltd [2012] VSC 43; Wolfe v Permanent Custodians Ltd [2012] VSC 275; Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSC 228. 156 [1996] QCA 129. 157 See Wigan v Edwards (1973) 1 ALR 497 at 512; 47 ALJR 586. 158 [2012] VSC 43 at [112]. 159 [2012] VSC 43 at [114]. 160 [2012] VSC 275. 161 [2012] VSC 275 at [109]–[127]. 162 [2012] VSC 275 at [127]. 163 [2013] VSC 228. 164 [2012] HCA 21 at [222]. 165 See further, Sir John Smith, ‘Rape of wife — can husband be convicted as a principal or is he exempt?’ (1991) Criminal Law Review 61 at 63. Sir John stated: ‘In a matter of common law the absence of binding decisions will not necessarily undermine the binding nature of a rule which has always been accepted as law by the legal profession. Cf Foakes v Beer (1884) 9 App Cas 605 where the House of Lords held that it was bound to follow the rule in Pinnel’s case (1601) though they disliked it and there was no case in the House of Lords or even the Exchequer Chamber in which it had been applied. It had been accepted as law for nearly 300 years so it was the law.’ 166 Carter, above n 78, p 116.

[page 139]

CHAPTER 6 Capacity to Contract CHAPTER OVERVIEW 6.1 6.2

6.4 6.10

6.14 6.18 6.20

6.26

Introduction Minors 6.2 The position under the common law 6.3 Statutory amendments to the common law Mentally disabled and intoxicated persons 6.6 AvN Corporations 6.10 What is a corporation? 6.11 Legal capacity to contract 6.12 Contracts preceding incorporation Unincorporated associations 6.15 Liability of committees The Crown Bankrupts 6.21 vesting and transfer of property on bankruptcy 6.22 Disclaiming onerous property 6.23 Rights and responsibilities following bankruptcy Married women

Introduction 6.1

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 [page 140] 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.

Minors The position under the common law 6.2

In general at common law, minors lack contractual capacity. However, the absoluteness of the common law ban was modified in the 19th 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

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 Co,7 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 [page 141] Also, if the minor was already well supplied with the goods that 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 contexts, where the reluctance of contracting parties also prevented minors wanting to enter commercial arrangements

either through the purchase or lease of goods, real estate or other commodities, or through forming commercial partnerships with others. The primary concern is to strike a balance between protecting minors from unscrupulous dealings, and providing genuine traders with certainty for their binding agreements. The primary concern is to strike a balance between protecting minors from unscrupulous dealings, and providing genuine traders with certainty for their binding agreements.

Statutory amendments to the common law 6.3

Several common law jurisdictions have by statute amended the common law with respect to minors’ contractual capacity. 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, 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. [page 142] 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 that 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). [page 143] 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)). 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 that 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 that 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 [page 144] 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.

Mentally disabled and intoxicated persons 6.4

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. 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 19th 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 [page 145] 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 known of it.15 Precisely what constitutes the mental capacity from which the disabled person deviates is without firm foundation or clear definition, but generally refers to the presence of an effective understanding of the nature, purpose and effect of the agreement being entered into. 6.5

Precisely what constitutes the mental capacity from which the disabled person deviates is without firm foundation or clear definition, but generally refers to the presence of an effective understanding of the nature, purpose and effect of the agreement being entered into.16 The question of the participant’s understanding is not a general one, but rather is subject to a double relativity: it is, on the one hand, trained on

their mental capacity at the time of entering into the agreement; and, on 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 [page 146]

AvN 6.6

The case of A v N20 illustrates many of the issues around mental incapacity. In A v N, a man, denoted only as ‘E’ in the judgment, his second wife, ‘A’, and his daughter from his first marriage, ‘N’, entered into a Deed of Settlement and Release on 28 March 2008 (the March Deed) pursuant to disputes between E and N.21 Ultimately, N challenged the March Deed on the grounds that E did not have the mental capacity to enter into it. The March Deed contained a number of agreements regarding the disposition of property interests and other matters. It effected the severance of joint tenancies and the transfer of a number of properties to A so that she could seek an order that N specifically perform the March Deed to execute and register the transfers severing joint tenancies over various properties held jointly with N.22 The court found that though E’s capacity had been in progressive decline, there were sharp variations in

his mental capacity, such that he was not adversely affected in signing the March Deed. The decision of Ward J is extracted below.

AvN [2012] NSWSC 354 Supreme Court of New South Wales Ward J: Capacity [389] Turning then to whether N has established that as at 28 March 2008 E lacked capacity to enter into the transactions contemplated or provided for by that deed, reliance is placed by Mr Ahmed on the adoption by Forster J in Johnson (by her tutor Smith) v Johnson [2009] NSWSC 503 of what had been said in Gibbons v Wright [1954] HCA 17; (1954) 91 CLR 423 at 438. Forster J at [88] said: … the mental capacity required by the law in respect of any instrument is relative to the particular transaction which is being effected by means of the instrument, and may be described as the capacity to understand the nature of the transaction when it is explained. As Hodson LJ remarked in the last-mentioned case, ‘one cannot consider soundness of mind in the air, so to speak, but only in relation to the facts and the [page 147] subject-matter of the particular case’. Ordinarily the nature of the transaction means in this connection the broad operation, the ‘general purport’ of the instrument; but in some cases it may mean the effect of a wider transaction which the instrument is a means of carrying out. (my emphasis)

[390] The test for capacity is ‘issue specific’ (Masterman-Lister v Brutton & Co [2002] EWCA Civ 1889; [2003] 3 All ER 162 and see Dalle-Molle (by his next friend Public Trustee) v Manos BC-200402709). Capacity is to be tested by reference to the particular transaction or conduct in which the person proposes to engage. In Gibbons v Wright, the principle was expressed as follows: The law does not prescribe any fixed standard of sanity as requisite for the validity of all transactions. It requires, in relation to each particular matter or piece of business transacted, that each party shall have such soundness of mind as to be capable of understanding the general nature of what he is doing by his participation. … any test of the requisite capacity … whether the person concerned is capable of understanding what he did by executing the deed when its general purport was explained to him. The principle … appears to us to be that the mental capacity required by the law in respect of any instrument is relative to the particular transaction which is being effected by means of the instrument, and may be described as the capacity to understand the nature of that transaction when it is explained. (my emphasis) [391] Thus, had the question of capacity in the present dispute related to the conduct of litigation (as would have been the case when considering whether E was capable of giving instructions in the proceedings before Windeyer J or whether a tutor should have been appointed), there would be a different test from that applicable to the question whether E had testamentary capacity (even though the answer might have been the same). So also is there a different test where the question is as to the capacity to enter into the transactions contemplated by the March Deed. [392] Hence, Debelle J, in Dalle-Molle, noted that the question whether a person has the capacity to give sufficient instructions in a litigious matter does not turn on whether or not the person has the requisite mental capacity to make some other legally effective decision.

[393] Insofar as Professor Dickson had opined as to the capacity of E in September 2007 and December 2007 in the context of E being a party to litigation, the relevant test to be satisfied would have been that in Dalle-Molle, namely whether E was able to give sufficient instructions to take, defend or compromise legal proceedings (the latter being precisely what was in issue when the matter was the subject of mediation — namely, the giving of sufficient instructions to compromise the proceedings). As to what was meant by the [page 148] qualification ‘sufficient’ in that context his Honour considered it meant instructions of a quantity, extent or scope adequate for the purpose or object of those instructions. His Honour said: When qualifying the noun ‘instructions’ it is signifying that a person is able, once an appropriate explanation has been given, to understand the essential elements of the action and is able then to decide whether to proceed with the litigation or, if it is a question to agreeing to a compromise of the proceedings, to decide whether or not to compromise. (my emphasis) [394] his honour did not agree in absolute terms with the comments of Chadwick LJ in Masterman-Lister to the effect that: … a person should not be held unable to understand the information relevant to a decision if he can understand the explanation of that information in broad terms and simple language; and that he should not be regarded as unable to make a rational decision merely because the decisions which he does, in fact, make is a decision which would not be made by a person of ordinary prudence. [395] Rather, Debelle J considered evidence of the capacity to make other decisions which have legal consequences and to conduct ordinary day to day affairs would be relevant but must be weighed with other

evidence as adduced; and, secondly, that even if the condition suffered by the person was one which rendered him or her vulnerable to exploitation or at risk of making rash or irresponsible decisions, it did not necessarily follow that he or she was unable to give sufficient instructions: The fact that the person is vulnerable to exploitation or prone to rash or irresponsible decisions may be relevant to a determination of the question whether he is able to give sufficient instructions but it must be considered with other relevant evidence. [396] His Honour noted that the question whether the person has the capacity to give sufficient instructions must be examined against the facts and subject matter of the particular litigation and the issues involved in that litigation. Accordingly, in a complex matter it may be necessary for careful advice and explanation to be given and for there to be time for consideration by the litigant. … [397] According to his honour, the level of understanding of legal proceedings involves an ability ‘to understand the nature of the litigation, its purpose, its possible outcomes, and the risks in costs which is of course but one of the possible outcomes.’ (In Murphy v Doman [2003] NSWCA 249, Handley JA considered that the test of capacity for a litigant in person would be higher than that for a litigant retaining a solicitor, the latter being the situation that would [page 149] have applied in relation to E.) This is of some relevance when it is appreciated that the March Deed was a document setting out the basis on which the parties agreed to compromise the proceedings then on foot. [398] By contrast, the test for determining testamentary capacity is that set out in Banks v Goodfellow (1870) LR QB 549 at 565 by Cockburn CJ

(which Mr Ahmed notes was applied recently in Frizzo & Anor v Frizzo [2011] QSC 107 at [21]). [399] In Bull v Fulton [1942] HCA 13; (1942) 66 CLR 295 at 341–2, Williams J noted that ‘A sound and disposing mind is one which is able to reflect upon the claims of the several persons who, by nature, or through other circumstances, may be supposed to have claims on the testator’s bounty and the power of considering the several claims, and of determining in what proportions the property shall be divided between the claimants (Burdett v Thompson)’. Myers J (writing extrajudicially in the Australian Bar Gazette 1967 Vol 2 p 3) adumbrated the three ‘R’s’ in the context of considering testamentary capacity, those being the need for the testator to have the capacity to remember, to reflect and to reason: He must be able to remember, so that he can call to mind the property at his disposal and those who may have claims upon him, to reflect so that he can consult within himself on the relative weight of their claims, and to reason so that he can judge, having regard to his assets, how far, if at all, he should give effect to them. … It is to be observed that it is not necessary for the testator to do any of those things. All that is required is that he should be able to do them and, if he can, his will will be valid no matter how unreasonable or capricious it may be. Testamentary dispositions are always relevant to the question of testamentary capacity, but I have never known a case in which they have done more than create suspicion on the one hand, or served to confirm capacity on the other. [400] The relevant principles that a Court must consider, when determining whether a person has testamentary capacity (and as to which Professor Dickson and Mr Ward were both disposed to agree that E had as at December 2007), are therefore whether the testator is aware, and appreciates the significance, of the act in the law upon which the testator is about to embark; whether the testator is aware ‘at least

in general terms’ of the nature, extent and value of the estate over which the testator has a disposing power; and whether the testator is aware of those who may reasonably be thought to have a claim upon his or her testamentary bounty, and the basis for, and nature of, the claims of such persons; and the ability to evaluate, and discriminate between, the respective strengths of the claims of such persons. [page 150] [401] What is in issue in the present case, of course, is not E’s testamentary capacity but whether E had the mental capacity to enter into the March Deed, containing as it did various agreements as to the disposition of property interests held by him and by N as well as other matters. … Conclusion as to capacity [445] I accept that the critical question is whether E had capacity to enter into the transactions provided for in the March Deed (not whether he had general capacity or testamentary capacity at that time). That capacity is measured by whether E would have understood the nature and effect of the transactions then being contemplated had such an explanation been given to him. By analogy with the authorities in relation to testamentary capacity, the question as to capacity is not whether he in fact understood … or whether he acted in a rational manner in making the decisions that he did, but whether he was capable of understanding had an appropriate explanation been given. [446] There is no doubt (and both experts accept this) that E had a progressive dementing disorder. … [447] The significance of this seems to me that over the period (and particularly over the period from December 2007 to March 2008) it must be accepted that there are likely to have been times when E’s state was such that he may not have had capacity to understand the nature of the transactions contemplated in the March Deed and others when he

may well have had such capacity (even if he would have needed a careful explanation to be given to him for him in fact to have understood what was there being done). … [464] In the circumstances, while I consider that there are doubts as to what precisely was E’s mental capacity as at 28 March 2008, I am not satisfied that N has discharged the onus of proving on the balance of probabilities that he lacked the mental competence on that date to understand, if the transactions contemplated under the March Deed had been carefully explained to him, what was provided for under that deed and to enter into it. Accordingly, I cannot find that E lacked the mental capacity to enter into the March Deed. Ward J concluded that the medical evidence, in the form of the joint expert report, established that as at 28 March, E did not lack the capacity to understand the transactions contained in the March Deed as they were explained to him.23 Ward J found that E had sufficient capacity to be able to understand the March Deed as it was explained to him, in particular the nature and consequences of the property rights inherent in survivorship consequent upon joint tenancy and the transferences [page 151] required to be effected to avoid those consequences.24 Accordingly, N had not, on the balance of probabilities, proved that E lacked the mental competence on 28 March 2008 to enter the March Deed, because N had not discharged the onus of demonstrating that, had the transactions contemplated under the March Deed been carefully explained to E, he would be incapable of understanding what the deed provided and to competently enter into it. 6.7

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.25 In McLaughlin v Daily Telegraph Newspaper Co Ltd (No 2),26 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. 6.8

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.27 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.28

6.9

Where a mentally disabled person has been provided with necessary goods or rendered necessary services, they must pay reasonable recompense29 limited by the extent of the disabled person’s property.30 [page 152]

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 Goods Act 1958 (Vic), 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.31

Corporations What is a corporation? 6.10

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. 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.

Legal capacity to contract 6.11

The legal capacity and powers of a corporation are defined at s

124 of the Corporations Act, which provides: [page 153] 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 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. 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.

[page 154]

Contracts preceding incorporation 6.12

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 19th-century case of Kelner v Baxter32 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.33 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.34 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’35 except through the power of its directors36 or authorised agents.37

6.13

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.38 [page 155] 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 post-ratification 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.

[page 156] At s 132(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.

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.

Unincorporated associations 6.14

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

Liability of committees 6.15

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’.39 It is arguable whether committee members are liable by reason of personal involvement in the making of a contract,40 or by virtue of their being committee members.41 [page 157] In Smith v Yarnold,42 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.

It was explained in Prole v Allen43 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.44

6.16

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.45 A theory of ‘committee liability’ in Australian jurisprudence on unincorporated associations has therefore arisen,46 and is widely accepted in circumstances where the committee enters into a contract on behalf of the entire membership of the association,47 although the exact legal principles on which such liability would be based have remained rather obscure.48 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 of the contract. Carlton Cricket Football Social Club v Joseph49 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

[page 158] 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.50 6.17

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,51 Peckham signed a contract of employment with Moore in 1970, who was acting on behalf of Canterbury-Bankstown 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.52

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

The Crown 6.18

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’.53 [page 159] External government contracts are enforceable at private law — contract law is able to conceive of the government as a legal person for the purpose of applying the law. According to Hogg and Monahan, the Crown is a common law corporation.54 In order to construct the Crown as a juristic person subject to law, legislation has had to remove government’s traditional common law immunity.55 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 that enters the contract may be treated as the same government in breach.56 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.57 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.58 Parliament may limit through the enactment of statute the contracts that the government may enter, or by the same mechanism override the obligations it has assumed. [page 160] 6.19

The Crown is liable for non-performance of commercial contracts subject to the availability of funds.59 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.60 Government officers may enter contracts binding the Crown on the basis of actual, implied and ostensible authority, the ordinary laws of agency applying.61 It is more likely that ostensible authority will be recognised where the subject matter of the contract is necessary to an established function or activity of government.62 Government officials who, in the course of their employment, make contracts that bind the Crown do not impliedly warrant thereby that they possess the authority to do so.63 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.64

Government officials who, in the course of their employment, make contracts that 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.

Bankrupts 6.20

Bankrupts have a limited power to contract. At common law the situation of bankruptcy itself will not suffice to terminate a contract,65 although a contract may contain a termination clause providing for a party to [page 161] terminate the contract should the other party become a bankrupt.66 In some cases, the bankruptcy has been held to either breach or frustrate the contract.67 All of the contracts the bankrupt has entered into are reviewed by a trustee in bankruptcy.

Vesting and transfer of property on bankruptcy 6.21

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 that 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 that vests in the trustee is that dating to the ‘commencement of the bankruptcy’. 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.

[page 162] (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 that 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.

Disclaiming onerous property 6.22

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)). [page 163] 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)).68

Rights and responsibilities following bankruptcy 6.23

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. 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.69 In Re Raatz70 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’. Wright J held that the creditor was entitled to ‘treat the bill as dishonoured’ by virtue of the repudiation.71

6.24

Section 269 of the Bankruptcy Act prevents a bankrupt from entering transactions without disclosing their insolvency:

[page 164] 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

(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.

[page 165] Parties contracting with bankrupts who are in breach of this section may rescind the contract, and the bankrupt may not seek to enforce it.72 Section 126(1) 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.

6.25

A contract entered into with a bankrupt after they have become bankrupt and that is 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. Section 126(2) states: (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 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.

Married women 6.26

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.73 Upon being married, all property and rights of the woman by law became the sole right and property of her husband.74 Equity recognised married women’s right to a separate estate, but nevertheless required the husband to hold the legal interest of any [page 166] 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’.75 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’.76 The Married Women’s Property Act 1870 (UK) 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;77 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. 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 [page 167] commencement of this legislation, existing restraints remain operative.78 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.79

Key Points for Revision 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 that 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.

_________________ 1

Bruton v London & Quadrant Housing Trust [2000] 1 AC 406 at 417 per Lord Hobhouse; Australian Broadcasting Corp v Redmore Pty Ltd (1989) 166 CLR 454; 84 ALR 199.

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

E Coke, A Commentary Upon Littleton, 16th ed (revised and corrected by F Hargrave and C Butler), Luke Hansard and Sons, 1809, p 172A.

5

Peters v Fleming (1840) 6 M & W 42 (Ex) at 46 per Parke B.

6

Ryder v Wombwell (1868) LR 4 Ex 32.

7

[1894] 2 QB 65.

8

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.

9

See Nash v Inman [1908] 2 KB 1.

10

Land and Homes (WA) Ltd v Roe (1936) 39 WALR 27.

11

Gibbons v Wright (1954) 91 CLR 423 at 442; [1954] ALR 383.

12

McLaughlin v Daily Telegraph Newspaper Co Ltd (No 2) (1904) 1 CLR 243 at 273–4; 10 ALR (CN) 32.

13

York Glass Co v Jubb (1925) 134 LT 36 at 39.

14

W Blackstone, Blackstone’s Commentaries on the Laws of England, 1891 (facsimile edition with introductions by S N Katz), University of Chicago, 1979, Book 2, [291].

15

Molton v Camroux (1848) 2 Exch 487 at 501; 154 ER 584 at 589 per Pollock CB (affirmed (1849) 4 Exch 17; 154 ER 1107); Imperial Loan Co v Stone [1892] 1 QB 599 at 602–3 per Lopes LJ; approved Gibbons v Wright (1954) 91 CLR 423 at 441; [1954] ALR 383.

16

Imperial Loan Co v Stone [1892] 1 QB 599 at 601 (the person must be ‘capable of understanding what he was about’); Boughton v Knight (1873) LR 3 PD 64 at 72 (understanding the nature of the transaction at hand); Gibbons v Wright (1954) 91 CLR 423 at 437–8; [1954] ALR 383 (understanding the nature and effect of the contract).

17

In the Estate of Daniel Doull (1881) 7 VLR (IP & M) 70; Gibbons v Wright (1954) 91 CLR 423 at 437–9; [1954] ALR 383.

18

[2005] NSWSC 398 (Palmer J, 28 April 2005, unreported).

19

[2005] NSWSC 398 (Palmer J, 28 April 2005, unreported) at [78].

20

[2012] NSWSC 354.

21

Identification of the parties was suppressed by s 57 of the Guardianship Act 1987 (NSW), which prohibits the publication of the name of a person under guardianship, as E was.

22

[2012] NSWSC 354 at [15].

23

[2012] NSWSC 354 at [299]. It also further found that E did not lack testamentary capacity.

24

[2012] NSWSC 354 at [407].

25

York Glass Co v Jubb (1925) 134 LT 36.

26

(1904) 1 CLR 243; 10 ALR (CN) 32.

27

Boughton v Knight (1873) LR 3 PD 64 at 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 295; [1942] ALR 221.

28

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; 16 ALR 353; see also Crago v McIntyre [1976] 1 NSWLR 729.

29

Re Rhodes (1890) 44 Ch D 94 at 105 per Cotton LJ (CA); Re Brooks (1903) 21 WN (NSW) 4 per A H Simpson J.

30

Re Rhodes (1890) 44 Ch D 94 at 105 per Cotton LJ (CA).

31

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.

32

(1866) LR 2 CP 174.

33

See also Vickery v Woods (1952) 85 CLR 336.

34

Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45; [1953] 1 All ER 708; Vickery v Woods (1952) 85 CLR 336 at 343 per Dixon J (Kitto J agreeing), 348 per Williams J (Dixon and Kitto JJ agreeing).

35

W E Patterson and H H Ednie, Australian Company Law, 2nd ed, Butterworths, Sydney, 1971, Vol 1, p 1478.

36

Corporations Act 2001 (Cth) s 126.

37

Corporations Act 2001 (Cth) s 127.

38

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).

39

Harrison v West of Scotland Kart Club [2004] SCotCS 80 at [25].

40

Smith v Yarnold [1969] 2 NSWR 410.

41

Ward v Eltherington [1982] Qd R 561.

42

[1969] 2 NSWR 410 at 414.

43

[1950] 1 All ER 476.

44

[1950] 1 All ER 476 at 477–8.

45

L S Sealy, ‘Fiduciary Relationships’ (1962) CLJ 69–81; P Finn, Fiduciary Obligations, Law Book Company, Sydney, 1977; J R F Lehane, ‘Fiduciaries in a Commercial Context’ in P Finn (ed), Essays in Equity, Law Book Company, Sydney, 1985.

46

K L Fletcher, The Law Relating to Non-Profit Associations in Australia and New Zealand, Law Book Company, Sydney, 1986, pp 113–32.

47

Smith v Yarnold [1969] 2 NSWR 410; City of Gosnells v Roberts (1994) 12 WAR 437; Verrall v Hackney London Borough Council [1983] Qd R 561.

48

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 Eltherington [1982] Qd R 561.

49

[1970] VR 487.

50

(1970) VR 487 at 499.

51

[1975] 1 NSWLR 353.

52

[1975] 1 NSWLR 353 at 362.

53

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.

54

P Hogg and P Monahan, The Liability of the Crown, 3rd ed, Carswell, Ontario, 2000, p 219.

55

Judiciary Act 1903 (Cth) Pts IX, 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).

56

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, London, 1959, p 11.

57

New South Wales v Bardolph (1934) 52 CLR 455 at 496 per Rich J; 502–3 per Starke J; 508 and 514 per Dixon J; [1935] ALR 22; Commonwealth v Ling (1993) 44 FCR 397 at 430–1; 118 ALR 309.

58

Maguire v Simpson (1977) 139 CLR 362 at 388; 18 ALR 469, referring to the rule in Auckland Harbour Board v R [1924] AC 318; Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567; 54 FLR 439 at 453.

59

New South Wales v Bardolph (1934) 52 CLR 455; [1935] ALR 22; Tasita Pty Ltd v Sovereign State of Papua New Guinea (1991) 34 NSWLR 691 at 698–9 per Young J; 5 BPR 11,467.

60

For the liability of the Crown for damages on contracts, whether they be commercial or for the provision of public welfare services, see Rederiaktiebolaget Amphitrite v R [1921] 3 KB 500 at 503 per Rowlatt J; Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 74 per Mason J; 17 ALR 513.

61

JE Verrault and Fils Ltee v Attorney-General (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.

62

New South Wales v Bardolph (1934) 52 CLR 455 at 496 per Rich J; 503 per Starke J; 507 per Dixon J; [1935] ALR 22.

63

Collen v Wright (1857) 8 El & Bl 647; Dunn v McDonald [1897] 1 QB 555; The Prometheus (1949) 82 LR 859.

64

Macbeath v Haldimand (1786) 1 TR 172; Gidley v Lord Palmerston (1822) 3 B & B 275; Palmer v Hutchinson (1881) 6 App Cas 619.

65

Brooke v Hewitt (1796) 3 Ves Jr 253; Re Stapleton (1879) 10b Ch D 586.

66

Such clauses are common in lease contracts: see, for example, Cadogan Estates Ltd v McMahon [2001] 1 AC 378.

67

Ex parte Chalmers (1873) LR 8 Ch App 289.

68

The Insolvency and Trustee Services Australia (ITSA) website explains: ‘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’: .

69

Ex parte Chalmers (1873) LR 8 Ch App 289.

70

[1897] 2 QB 80 at 82.

71

[1897] 2 QB 80 at 82.

72

De Choisy v Hynes [1937] 4 All ER 54; JB MacEwan & Co Ltd v Ashwin [1916] NZLR 1028.

73

Manby v Scott (1663) 1 Sid 120; 1 Lev 4; 1 Mod 128.

74

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.

75

A v Dicey, Lectures on the Relationship between Law and Public Opinion in England During the Nineteenth Century, Macmillan, London, 1905, p 362.

76

Dicey, above n 75, p 395.

77

Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 422 per Kirby J; 155 ALR 614; see also Family Law Act 1975 (Cth) s 119.

78

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 Law Reform (Married Women and Tortfeasors) Act 1935 (UK); but all restraints upon anticipation — irrespective of when they were made — were removed by the Married Women (Restraint Upon Anticipation) Act 1949 (UK). 79

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 at 117.

[page 169]

CHAPTER 7 Intention to Create Legal Relations CHAPTER OVERVIEW 7.1 7.2 7.6

7.16

7.20

Introduction Domestic arrangements 7.3 From presumption to construction Commercial arrangements 7.7 Express exclusions 7.9 Mere representations and puffery 7.11 From presumption to construction 7.13 Ermogenous v Greek Orthodox Community of SA Inc Particular situations 7.16 Government schemes and agreements 7.17 Voluntary associations 7.18 Registered companies Preliminary agreements

Introduction 7.1

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 that

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 [page 170] ‘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 that best defines the relationship between the parties: domestic or commercial.

Domestic arrangements 7.2

Rebuttable presumptions regarding domestic and commercial arrangements once defined an important aspect of the approach to the [page 171] 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 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

‘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.’ In Jones v Padavatton11 the court extended the principle beyond spouses to close relations. Salmon LJ, reflecting the majority view, said: ‘[A]s 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 [page 172] 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 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 that acts as consideration for the promise, and that the presumption is thereby rebuttable.16

From presumption to construction 7.3

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

7.4

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 [page 173] required to make promised payments and provide indemnification to his wife, who had in consideration abandoned certain causes of action against him. In the case of

promises exchanged between parents and children, in Raffaele v Raffaele23 the court enforced a promise of land to a son who had commenced building a house on it. Evidence of an intention to be legally bound within domestic arrangements has been held to defeat the presumption. 7.5

Promises exchanged between family members where burdensome obligations have been significantly performed — for example, where parties have relocated to another country — have been held to be 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 consideration for the giving of life savings, or the transfer of title or property, to the elderly person’s carer.27

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’. 7.6

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 Ltd30 the court

observed that when parties enter [page 174] agreements regulating business relationships, ‘it … follows almost as a matter of course that the parties intend legal consequences to follow’.31

Express exclusions 7.7

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 Ltd,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 Ltd33 as sufficient to negative the intention in the contract to make remunerative payment.

7.8

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 Ltd34 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

This was found to provide for the arrangement between the parties as expressed, which did not therefore constitute a binding contract.36 [page 175] Scrutton LJ, commenting on the negative presumption in domestic and family arrangements, saw: … no 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

Mere representations and puffery 7.9

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 Co,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 £1000 into an account as a provision against claims was evidence of its intention to be legally bound.

7.10

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 [page 176] 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 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; [1976] 1 WLR 1 House of Lords, United Kingdom Lord Simon of Glaisdale at All ER 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

[page 177] 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. 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.

From presumption to construction 7.11

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 Ltd42 the court referred to the judgment in Edwards v Skyways Ltd43 and the great burden adopted by a party intending to argue against the presumption that arm’s-length commercial dealings between parties evinces the intention to be legally bound.44 Murray J then expressed the view that the existence of the contract and the intention has to be established by the party asserting it, and the inference will be drawn not because [page 178] of an unrebutted presumption, but because a positive onus has been discharged.45 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.

7.12

Where a party raises a question as to whether a contractual term amounts to a promise or is instead a warranty, this is answered as a matter of construction. The case of Kleinwort Benson Ltd v Malaysia Mining Corp Berhad46 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 the light of changing circumstances’ after the letter was provided. The court agreed. By contrast, the court in Banque Brussels Lambert SA v Australian National Industries Ltd47 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 7.13

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 [page 179] 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 noncommercial 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 of contract. Intention must be the result of ‘an objective assessment of the state of affairs between the parties’. Unquestioned assumptions would undermine the requirement of objective assessment in the identification of the requisite intention. The reasons the High Court gave were that intention must be the result of ‘an objective assessment of the state of affairs between the parties’,51 and that unquestioned assumptions would undermine the requirement of objective assessment in the identification of the requisite intention. The presumptionled analysis of the existence of an intention to create legally binding 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 between the parties, and (absent a deed) real consideration. The objective intention [page 180] 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 7.14

After Ermogenous, the test for the existence of an intention to create legal relations discarded presumptions altogether.53 However, in Sion v NSW Trustee & Guardian54 Bergin CJ said, addressing directly the first ground of appeal that the primary judge had erred in not finding that the presumption against the intention to form contractual relations had been rebutted, that the rebuttable presumption continued to be applicable albeit ‘with diminishing force the more remote the familial connection’.55 His Honour the Chief Justice then set out the conditions under which such a rebuttal would succeed: the vaguer and more informal the language and the setting of the discussions,56 and the more proximate the familial connection,57 the more likely the presumption would be sustained. Brereton J in Ashton v Pratt read Bergin CJ’s remarks as intending to suggest that the presumption against the intention to form contractual obligations among family members offered practical guidance. Indeed, Bergin CJ prefaces his discussion of the operative presumption with the observation ‘[a]s a matter of human experience, when family members make a promise to each other it is unlikely that they intend it to be legally binding’58 and suggests that the law formalised the improbability of those obligations arising as a

presumption. Nevertheless, the Chief Justice’s view as expressed in this case sits inconsistently with the development of the law. In Dowdell v Knispel Fruit Juices Pty Ltd (t/as Nippys)59 Selway J stated that ‘the issue is not to be resolved simply by applying presumptions’, 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’.60 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.61 Einstein J referred to Banque Brussels Lambert SA v Australian National Industries Ltd62 — in which Rogers CJ had discussed the heavy [page 181] 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’.63 In Shahid v The Australasian College of Dermatologists64 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’.65 In doing so, it referred to Cameron v Hogan,66 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.

In Tipperary Developments Pty Ltd v Western Australia67 the court

followed Ermogenous in identifying the test for intention as involving ‘an objective assessment of the state of affairs’.68 The subjective intentions of the parties is not the relevant consideration in establishing whether the parties intended to enter a legally enforceable contract. Rather, it is a determination for the court to make based on an examination of the parties’ language and actions in all the circumstances and the context of the situation in which the relevant discussions and conduct occurred. The test is whether a reasonable person in the circumstances would regard themselves as formally bound to a contract by the arrangements the parties had made.69 In MacDonald v Australian Wool Innovation Ltd70 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 assessment by the courts. A party who on reasonable grounds supposes that he or she has entered

[page 182] 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.

It is not possible to prescribe the circumstances that the court might take into account to determine the parties’ objective intention.71 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.72 The court does not, however, consider the subjective intentions of the parties.73 The intention is what is objectively communicated. In FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd74 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.75 However, in Kovan Engineering (Aust) Pty Ltd v Gold Peg International Pty Ltd76 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.

An objective assessment of contractual formation means that the relevant discussions and conduct of the parties are those prior to and contemporaneous with the purported binding agreement. The language or actions of the parties subsequent to purported formation are inconsequential for an assessment of whether they are performing or in breach of a pre-existing contract. Parties may not argue that they intended an arrangement to give rise to enforceable obligations simply because their subsequent actions are consistent with such an obligation; [page 183] just as actions that deviate from a binding provision do not prove that the parties had never intended to be bound by it.77 7.15

In Ashton v Pratt,78 the plaintiff, Ashton, sued the first respondent, Pratt, for the benefits of the mistresses’ position in a contract purportedly entered by Ashton, and the first respondent’s husband, Mr Pratt, in which, Ashton submitted,

Mr Pratt would provide Ashton with money, a property or paid rental accommodation, and establish trusts for the benefit of her two children, and Ashton would assume the then vacant position of Mr Pratt’s mistress. At trial and on appeal the question whether Ashton and Mr Pratt had, as a result of their conversation, entered into a legally enforceable agreement turned on a consideration of two further issues: first, whether the parties intended to be so bound; and, second, whether the conversation constituted the sufficiently certain terms of a binding contract.79 The trial judge determined that the parties had not entered into a formal contract. The decision was affirmed by the Court of Appeal, which also took the opportunity to review the principles applicable to contractual formation in the light of the trial judge’s reasoning. On appeal, the appellant submitted that the primary judge erred in basing his decision on the principle that there exists a rebuttable presumption that promises made in social and familial contexts do not produce enforceable contracts,80 and that the conversations which, the plaintiff argued, provided the foundations for the existence of an oral contract — while the judge accepted that they occurred and in the form, substance and setting submitted — constituted a social discourse and not an enforceable contract.81 That social arrangements are presumptively not intended to give rise to binding contractual arrangements is inconsistent with the High Court’s decision in Ermogenous v Greek Orthodox Community of SA Inc.82 The appellant argued that, even if a man was in a social relation with his mistress, the existence or otherwise of an intention to enter an enforceable contract was to be ascertained objectively from the state of affairs in the circumstances in which the arrangements were made, and not from any conclusion to be drawn from the nature of those circumstances, such as whether they were familial, or social. Ashton, the appellant, argued that her relationship with Mr

Pratt, in which she would perform the role of his mistress, and, further, not [page 184] return to work in the escort industry, in exchange for certain benefits, was a commercial arrangement indicating that the parties intended to be contractually bound. The agreement, she argued, created clear, complete and specific obligations for her to provide Pratt with sexual services, and he would in return provide her and her children with financial benefits. The appellant relied on the authority of Popiw v Popiw83 in which the wife agreed to return to live in the matrimonial home with the husband in exchange for her being registered on title as joint owner of the house. The Court of Appeal applied the decision of the High Court in Ermogenous in rejecting the use of a presumption to assess the intention of the parties to form a legally binding contract, which was instead to be based on evidence derived from an objective assessment of the facts and circumstances of the case.84 The relevance of whether the discussions said to constitute the contract took place in a familial or social context is that those circumstances form part of the facts of the case to be considered as a relevant factor in objectively assessing the existence or otherwise of an intention to enter a legally enforceable agreement. The court concluded that in this case the relevant conversations said to constitute the alleged contract did not evince an intention to be contractually bound. On the court’s reconstruction of the import of the conversations there was no quid pro quo, because neither Pratt’s promise of money to Ashton to support her business, nor his promise to establish a trust, were in exchange for any performance on her part, but, at

best, to relieve her from having to continue working as an escort.85 The discussions of monetary amounts to be paid to Ashton,86 and what Pratt required of Ashton87 in exchange, that followed were conditioned by that context and therefore were not evidence of the parties’ intentions to assume contractual obligations.88 [page 185] The following extract from Ashton v Pratt sets out the reasoning of the New South Wales Court of Appeal. It is worth noting how the lack of certainty and completeness in the dealings between the parties was factored in by Bathurst CJ, with whom McColl and Meagher JJA agreed, in reasoning that there was no intention to create legal relations.

Ashton v Pratt (2015) 88 NSWLR 281; 318 ALR 260 New South Wales Court of Appeal Bathurst CJ: … [69] In Ermogenous, the High Court held at [25] that whether the parties intended to create legal relations required an objective assessment of the state of affairs between them. [70] In that case, the High Court doubted at [26]–[27] the validity of the use of a presumption that ‘family arrangements’ were not intended to give rise to legal obligations. Subsequently, the Full Court of the Federal Court in Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2012] FCAFC 81; (2012) 289 ALR 237 concluded at [12]–[13] that the High Court had rejected the

use of presumptions as a basis of determining whether parties had entered into contractual relations. [71] By contrast, in Sion v NSW Trustee & Guardian [2013] NSWCA 337 (Sion), Emmett JA, with whom Basten and Barrett JJA agreed, stated at [40]–[41] that as a matter of known experience, when family members make a promise to each other it is unlikely they intend it to be legally binding and the vaguer the language of the arrangement and the greater its informality, the more difficult it will be to rebut the presumption. [72] Ms Ashton contended that the primary judge erred in applying the presumption. It is correct that his Honour accepted the presumption applied, but he stated that in any event he was satisfied that the parties did not intend to make a contract: primary judgment at [36]. For the reasons which follow, he was correct in reaching that conclusion. [73] Notwithstanding what was said by this Court in Sion, in my opinion the effect of the decision of the High Court in Ermogenous was that in considering the issue recourse should not be had to any presumption concerning the contractual or non-contractual effects of family arrangements. That does not mean that the relationship of the parties and the circumstances in which the arrangement was entered into are irrelevant to the question. To the contrary, these factors form part of the surrounding circumstances from which it will be determined whether or not a contract came into existence. [page 186] [74] In the present case, the conversations took place after Ms Ashton and Mr Pratt had resumed sexual relations and Mr Pratt had already offered to support her in her business and paid her money (see pars [6]–[7] above). [75] The conversations said to give rise to legal relations started with a request by Mr Pratt for Ms Ashton to spend more money on haute couture. Thereafter, when Ms Ashton said she was thinking about going back to the escort business, he said he was prepared to financially

support her so she did not need to. In that context, he offered to establish the trust. [76] It should be noted that at least this portion of the conversations was not framed in terms of ‘if you agree not to go back into the escort business I will establish the trust’. Rather, the thrust of the conversation was ‘I’ll help you by establishing the trust so you do not have to go back into the escort business’. Even ignoring the informality, this does not seem to me to be the language of a legally binding contract. [77] The conversations then proceeded with Mr Pratt asking Ms Ashton to forget about the escort business and offering to help her in her business venture. Once again it was not framed in terms of ‘I will support the business venture if you agree not to return to the escort business’. [78] The conversations then continued with Mr Pratt inquiring as to the amount of money Ms Ashton would need to support herself. Ms Ashton responded that she would need income if she did not go into the escort business. In that context the offer of $500,000 was made. [79] As part of that conversation Mr Pratt said ‘I don’t want you to work in that industry ever again. I want you to only concentrate on my needs and wants’, and Ms Ashton replied ‘That’s fine I wouldn’t complain’. This is the closest the conversations came to the language of contract. [80] Undoubtedly it is correct that formal language of offer and acceptance is not necessary to constitute a contract: see the discussion by Ormiston J in Vroon BV v Foster’s Brewing Group Ltd [1994] VR 32 at 79. However, it is relevant that with the exception of that portion of the conversation to which I have referred in par [79], the language was not cast in the language of obligation. [81] The obligations of Ms Ashton in the contract, as pleaded, were that she would cease providing escort services to other individuals and become Mr Pratt’s mistress. The nature of these promises tells against them having contractual effect. The conversations themselves made no reference to Ms Ashton becoming Mr Pratt’s mistress as distinct from requesting her to concentrate on his needs and wants.

[82] Although it may be readily inferred from the context in which the conversations took place that it was intended that Ms Ashton would occupy a position which could be described as Mr Pratt’s mistress, apart from concentrating on Mr Pratt’s needs and wants there is no delineation of the [page 187] extent of Ms Ashton’s obligations. There was no evidence to suggest that the position of mistress imposes any particular obligation on a person occupying that position. Reasonable persons would not expect that question to be determined by a court. [83] The difficulty is highlighted by the debate which took place at the hearing as to whether Ms Ashton was to provide sexual services to Mr Pratt on an exclusive basis. The November conversations are silent on that issue. However, in cross-examination Ms Ashton gave the following answers: ‘Q. Can we just go back to this relationship of mistress. He didn’t want you sleeping with anybody else, did he? A. No, he was, he liked an open style arrangement. Q. What do you mean by that? A. In regard to sexually multiple partners. Q. Although he was paying you to be his mistress he didn’t mind you sleeping with anybody else, is that what you are saying? A. Umm, no, he liked that I would have variety. Q. I see. You see, I haven’t seen that discussed in terms of your mistress arrangement in the affidavits. You say that he liked for you to have variety, yes? A. Yes. Q. So that you would be free to sleep with anyone you chose, yes? A. Yes. Q. So you were going to be his mistress but you could be the mistress of two or three other people, yes?

A. I have no idea about that.’ [84] This passage highlights the difficulties of ascertaining what the obligations to be undertaken by Ms Ashton were. [85] Similarly, it is difficult to see how these obligations could be enforced. The parties accepted the remedy of specific performance or injunction would not be available and it was not suggested the measure of damages would be the expense involved in Mr Pratt obtaining a new mistress. At one stage damages for disappointment were suggested but no indication was given as to how such damages would be assessed. [86] The duration of the agreement is not specified. It was suggested in argument that this could be overcome by the implication of a reasonable time. However, there is no external standard by which a reasonable time could be measured: see Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 137 and 156. [87] Further, neither the terms of the trust nor the time at which it was to be created were spelt out. Whilst it is true that it could be implied that the trust was to be created within a reasonable time and some of the obligations of the trustee and his or her powers could be imposed by both the general law and by statute, the identity of the trustee, something crucial to the existence of the trust, was [page 188] not stated nor was the time at which the beneficiaries would be entitled to the trust funds. The statement ‘at a mature age’ may be able to be interpreted as upon reaching adulthood but even if it was, there is no basis to ascertain whether the interests of the children were contingent on them obtaining that age. If the agreement was intended to be enforced by a court it would have been expected that these matters would have been dealt with. [88] There is a more fundamental problem so far as the trust is concerned. The promise to create the trust was not said to be conditional on the performance by Ms Ashton of any services and

presumably it was envisaged as arising immediately upon the mistress relationship commencing. Objectively speaking it would be surprising if Mr Pratt intended to legally bind himself to expend $5 million in these circumstances. [89] Further, no attempt was made to document the transaction. Senior counsel for Ms Ashton said that it was consistent with an illicit transaction that the parties would not consult the family solicitor. So much may be accepted. However, no doubt there were many lawyers not associated with the Pratt family who would have been in a position to document the transaction. [90] I do not think that the events which took place after the November conversations provide much assistance in dealing with the matter. Whilst it is correct that there was no evidence that anything was done to set up the trust and the payments made did not conform to the terms of the agreement, Mr Pratt and Ms Ashton entered into (or at least continued) their relationship. Further, although Ms Ashton’s initial request for money was not on the basis that Mr Pratt had bound himself in the terms of the November conversations, she did make reference to at least some of the promises in her initial request as she did in the subsequent conversations with Mr Gray. [91] Having regard to the matters to which I have referred above, I do not think that the trial judge erred in concluding that the parties did not intend to create legal relations. In particular, the nature of the arrangement, it’s imprecision in the areas to which I have referred and the inherent improbability that a person in the position of Mr Pratt would bind himself to make significant payments in consideration of a promise that was essentially unenforceable, lead in my view to the conclusion reached by the primary judge. [92] Further, in my opinion, in the present case, if there was an intention to create legal relations, the contract was void for uncertainty. I recognise courts will strain to give effect to agreements reached between parties, particularly in circumstances where the obligations have been partly performed: The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Limited [1968] HCA 8; (1968) 118 CLR 429 at 436 and Meehan v Jones [1982] HCA 52; (1982) 149

CLR 571 at 589. However, in my opinion, the contract in the present case is uncertain or incomplete in a number of essential elements. I have referred above to the fact that the duties of Ms Ashton, as Mr Pratt’s mistress, are not specified, [page 189] the duration of the arrangement is uncertain and there is a failure to identify the trustee or the vesting date of the trust. These are not matters that can be resolved by a court implying terms of reasonableness. [93] It follows that no binding agreement of the nature of that pleaded was entered into. The parties’ intention to bind themselves contractually must be determined objectively. In determining whether the parties have so intended to be obligated the court assesses whether the language used by the parties has disclosed such an intention. The language of the parties is assessed in relation to the subject matter of their discussions, the context in which it is used, and the dealings that the parties may have had with each other over time.89

Particular situations Government schemes and agreements 7.16

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.90 There appears to be a clear historical distinction between

earlier91 and later cases, and currently maintaining that the government did not intend to assume contractual obligations in a commercial context is tenuous.92

Voluntary associations 7.17

A contract that incorporates the contractual relations between all members of an association would consist of numerous inter se contracts. [page 190] Such complexity in legal theory discourages viewing membership of associations as contractual.93 So too judicial policy has determined that ‘it is neither intrinsically desirable, nor expedient from the standpoint of despatch of [court] business’,94 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.95 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;96 namely, did the rules provide for ‘some civil right of a proprietary nature proper to be protected’?97 The property test, which is said to embody the judicial policy of non-intervention,98 inhibits causes of action in contract99 by means of a presumption that the constitution of an unincorporated association is not intended to be a contract.100 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’101 accompanied membership of the party so as to give substance to a contractually enforceable right. United Kingdom case law has developed more in the years since Cameron v Hogan was decided than has Australian law. United Kingdom courts [page 191] have recognised that industrial trade unions cannot be adequately characterised as voluntary associations, and have adopted the legal ‘fiction’102 that the rules of trade unions — being so all-encompassing and having such a powerful effect on their members — are contractually enforceable.103 Political parties are now treated similarly in the United Kingdom.104 While few Australian cases involving a threat to livelihood have followed United Kingdom precedents, the High Court in Buckley v Tutty105 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.106 In Hawick v Flegg107 the court determined that the act of joining a society that 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.108 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;109 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.110

Registered companies 7.18

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

[page 192] (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 be preferable to interpret the provision as purely contractual, given that the effect of the rule is dependent on each person ‘agreeing’.111 7.19

The courts approach a breach of the rules as potentially actionable112 in contract without the need to demonstrate a proprietary interest.113 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.114 Performance is obligated from each person to the extent that the rules apply to them.115 The legal obligations on each person provided in s 140 satisfy the requirement of contractual intention.116 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 [page 193] 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.117

Preliminary agreements 7.20

It is well established that the question of whether the parties intended to bind themselves to a contract is to be determined objectively, having regard to the intention disclosed by the language the parties have employed.118 Nevertheless,

preliminary agreements can cause some confusion with regard to the doctrine of intention. The High Court’s decision in Masters v Cameron119 established three categories of cases that can be applied to determine whether a binding agreement exists.

Masters v Cameron (1954) 91 CLR 353 High Court of Australia Dixon CJ, McTiernan and Kitto JJ: … [9] Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. [10] In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join

[page 194] (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common. Throughout the decisions on this branch of the law the proposition is insisted upon which Lord Blackburn expressed in Rossiter v Miller (1878) 3 App Cas 1124 when he said that the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties does not, by itself, show that they continue merely in negotiation. His Lordship proceeded: ‘… as soon as the fact is established of the final mutual assent of the parties so that those who draw up the formal agreement have not the power to vary the terms already settled, I think the contract is completed’ (1878) 3 App Cas, at p 1151: see also Sinclair, Scott & Co Ltd v Naughton [1929] HCA 34; (1929) 43 CLR 310, at p 317. A case of the second class came before this Court in Niesmann v Collingridge [1921] HCA 19; (1921) 29 CLR 177 where all the essential terms of a contract had been agreed upon, and the only reference to the execution of a further document was in the term as to price, which stipulated that payment should be made ‘on the signing of the contract’. Rich and Starke JJ. observed (1921) 29 CLR, at pp 184, 185 that this did not make the signing of a contract a condition of agreement, but made it a condition of the obligation to pay, and carried a necessary implication that each party would sign a contract in accordance with the terms of agreement. Their Honours, agreeing with Knox CJ, held that there was no difficulty in decreeing specific performance of the agreement, ‘and so compelling the performance of a stipulation of the agreement necessary to its carrying out and due completion’ (1921) 29 CLR, at p 185: see also O’Brien v Dawson [1942] HCA 8; (1942) 66 CLR 18, at p 31. [11] Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own: Governor & c of the Poor of Kingston-upon-Hull v Petch [1854] EngR 995; (1854) 10 Exch 610 (156 ER 583). The parties may have so provided either because they

have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summergreene v Parker [1950] HCA 13; (1950) 80 CLR 304 or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. These possibilities were both referred to in Rossiter v Miller (1878) 3 App Cas 1124. Lord O’Hagan said: ‘Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation, and a dissatisfied party may refuse to proceed. But when an agreement embracing all the particulars essential for finality and completeness, even though it may be desired to reduce it to shape by a solicitor, is such that those particulars must remain unchanged, it is not, in my mind, less coercive because of the technical formality which remains to be made’ (1878) 3 App Cas, at p 1149. And Lord Blackburn said: ‘parties often [page 195] do enter into a negotiation meaning that, when they have (or think they have) come to one mind, the result shall be put into formal shape, and then (if on seeing the result in that shape they find they are agreed) signed and made binding; but that each party is to reserve to himself the right to retire from the contract, if, on looking at the formal contract, he finds that though it may represent what he said, it does not represent what he meant to say. Whenever, on the true construction of the evidence, this appears to be the intention, I think that the parties ought not to be held bound till they have executed the formal agreement’ (1878) 3 App Cas, at p 1152. So, as Parker J said in Von HatzfeldtWildenburg v Alexander (1912) 1 Ch 284, at p 289 in such a case there is no enforceable contract, either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract. [12] The question depends upon the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding

upon the parties before the execution of their agreement in its ultimate shape: Farmer v Honan [1919] HCA 13; (1919) 26 CLR 183. Nor is any formula, such as ‘subject to contract’, so intractable as always and necessarily to produce that result: cf Filby v Hounsell (1896) 2 Ch 737. But the natural sense of such words was shown by the language of Lord Westbury when he said in Chinnock v Marchioness of Ely [1865] EngR 335; (1865) 4 De GJ & S 638 (46 ER 1066): ‘if to a proposal or offer an assent be given subject to a provision as to a contract, then the stipulation as to the contract is a term of the assent, and there is no agreement independent of that stipulation’ (1865) 4 De GJ & S 638, at p 646 (46 ER, at p 1069). Again, Sir George Jessel MR said in Crossley v Maycock (1874) LR 18 Eq 180: ‘if the agreement is made subject to certain conditions then specified or to be specified by the party making it, or by his solicitor, then, until those conditions are accepted, there is no final agreement such as the Court will enforce’ (1874) LR 18 Eq, at pp 181, 182. [13] This being the natural meaning of ‘subject to contract’, ‘subject to the preparation of a formal contract’, and expressions of similar import, it has been recognized throughout the cases on the topic that such words prima facie create an overriding condition, so that what has been agreed upon must be regarded as the intended basis for a future contract and not as constituting a contract. Indeed, Lord Greene MR remarked during the argument in Eccles v Bryant and Pollock (1948) Ch 93, at p 94 that when the expression ‘subject to contract’ was used he had never known a case in which it had been suggested, much less held, that this did not import that there was nothing binding till the exchange of parts of the formal contract was made. The effect of the early cases on the subject was stated by Sir George Jessel MR in Winn v Bull (1877) 7 Ch D 29 when he said in a passage which has become well-known: ‘It comes, therefore, to this, that where you have a proposal or agreement made in writing expressed to be subject to a formal contract being prepared, it means what it says; it is subject to and is dependent upon a formal contract being prepared. When it is not expressly stated to be subject to a formal contract it becomes a question of construction, [page 196]

whether the parties intended that the terms agreed on should merely be put into form, or whether they should be subject to a new agreement the terms of which are not expressed in detail’ (1877) 7 Ch D, at p 32. [14] The subsequent cases on the point have been numerous, and it will suffice to refer to two only in addition to those already cited. A case very like the present is Santa Fe Land Co Ltd v Forestal Land etc Ltd (1910) 26 TLR 534 in which an offer was made ‘subject to a formal contract to be approved by your solicitors and ourselves on acceptance of the offer, when any minor details can be settled’. The acceptance of this offer was held by Neville J not to constitute a concluded contract. The learned judge, following Winn v Bull (1877) 7 Ch D 29 said: ‘Now it is important not only in cases of the sale of land, but in all cases where letters pass with regard to the sale of any property which is being negotiated, that the parties should be able to protect themselves by some suitable words from being bound by the negotiation they are conducting. In the present case I think the words in question do impose the condition that if the offer is accepted a more formal contract is to be prepared by the solicitors which is to embody all the details’ (1910) 26 TLR, at pp 534– 535. The other case is Spottiswoode Ballantyne & Co Ltd v Doreen Appliances Ltd (1942) 2 KB 32. The Court of Appeal there had to consider an agreement for the letting of premises, expressed to be ‘subject to the terms of a formal agreement to be prepared by their (the owners’) solicitors’. The court construed this phrase as meaning that the formal agreement had to be not only prepared by the solicitors but executed by the parties. Lord Greene concluded that the language used was equivalent to the common and more concise phrase ‘subject to contract’, and added that ‘it is well settled that that phrase makes it clear that the intention of the parties is that neither of them is to be contractually bound until a contract is signed in the usual way’ (1942) 2 KB, at p 35. Goddard LJ repeated the observation of Bankes LJ in Keppel v Wheeler (1927) 1 KB 577: ‘I pause here to state plainly what is now well established, that where a person accepts an offer subject to contract, it means that the matter remains in negotiation until a formal contract is settled and the formal contracts are exchanged’ (1927) 1 KB, at p 584. [15] In the present case the context provides no reason for holding

that the case is outside the application of these authorities. The formal contract, it is true, is to be ‘on the above terms and conditions’, but it is to be acceptable to the vendor’s solicitors, and the meaning is sufficiently evident that the contract shall contain, not only the stated terms and conditions expressed in a form satisfactory to the solicitors, but also whatever else the solicitors may fairly consider appropriate to the case. Accordingly the first of the four questions which went to trial should have been answered by saying that no binding contract for the sale and purchase of the property mentioned in the document dated 6th December 1951 was made between the defendant Cameron (the respondent) and the defendants Masters (the appellants).

[page 197] 7.21

In Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd,120 McLelland J identified a fourth category of cases providing a test that can be applied to determine whether a binding agreement exists: … one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

This fourth category has been adopted in subsequent cases,121 though it has also been the subject of some academic criticism.122 In Vantage Systems Pty Ltd v Priolo Corp Pty Ltd,123 Buss JA, with whom McLure P and Newness JA agreed, commented on Baulkham Hills and the broader matter of intention.

Vantage Systems Pty Ltd v Priolo Corp Pty Ltd (2015) 47 WAR 547

Supreme Court of Western Australia, Court of Appeal Buss JA: … [87] Priolo’s contention is that the revised proposal, as accepted by Vantage, was within the so-called fourth class of case (additional to the three classes identified by Dixon CJ, McTiernan & Kitto JJ in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353, 360–362) which McLelland J formulated in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622, 628 on the basis of the High Court’s observations in Sinclair, Scott & Co Ltd v Naughton [1929] HCA 34; (1929) 43 CLR 310, 317. [88] In Sinclair, Scott & Co, Knox CJ, Rich and Dixon JJ said in essence that there would be an enforceable contract where ‘the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms’ (317). [89] McLelland J’s decision in Baulkham Hills was affirmed on appeal. See GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631. However, the Court of Appeal did not adopt the nomenclature of the so-called fourth class. McHugh JA (Kirby P & Glass JA agreeing) held that ‘the decisive [page 198] issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances’ (634). [90] The so-called fourth class has been recognised in a number of cases decided after Baulkham Hills. See, for example, Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486, 494–495 (Ipp J); Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27; (2000) 22 WAR 101

[24] (Ipp J, Pidgeon J agreeing); Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44 [86]–[88] (Handley AJA). [91] It has been suggested, however, that: (a) the Baulkham Hills case is in substance within the second class in Masters v Cameron, namely ‘a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document’ (360); and (b) the so-called fourth class does not cover any ground that is not covered by the first and second classes in Masters v Cameron. See Tolhurst GJ, Carter JW and Peden E, ‘Masters v Cameron — Again!’ (2011) 42 Victoria University Wellington Law Review 49, 53, 58. [92] In Godecke v Kirwan [1973] HCA 38; (1973) 129 CLR 629, Gibbs J examined the second class in Masters v Cameron and said: In these remarks the Court was not, in my opinion, intending to exclude from the class a case in which the formal document, when executed, would include terms additional to those already expressed, provided that the additional terms did not depend on further agreement between the parties (648). Those comments indicate that the second class includes cases where the contemplated formal document may contain additional terms. [93] In Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149 [118] and Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248 [26], Giles JA noticed the academic challenge to the existence of the so-called fourth class, but his Honour found it unnecessary to consider the point. [94] Similarly, in the present case, it is unnecessary to enter into the debate over the so-called fourth class.

[95] Vantage’s contention is that the revised proposal, as accepted by Vantage, was within the third class in Masters v Cameron, namely ‘one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract’ (360). [96] The fundamental question in the present case is whether the parties intended that, upon Vantage accepting the revised proposal, there should be [page 199] a concluded and binding agreement to lease the Premises and take a licence in respect of six car bays. In other words, did the parties intend that, upon Vantage accepting the revised proposal, they would be bound immediately and exclusively by the express and any implied terms of the revised proposal, while expecting to execute formal lease and licence agreements in substitution for the earlier agreement which would contain, by consensus and after negotiation, additional terms? This issue is not the same as, although in some cases it may be closely related to, whether the parties have reached agreement upon such terms as are, in the circumstances, essential as a matter of law to constitute a contract. See Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548 (Gleeson CJ, Hope & Mahoney JJA agreeing). The relevant intention is intention to contract, and not what the parties intended by the terms of the alleged concluded and binding agreement. See Anaconda Nickel [26]. As I have mentioned, in the present case the parties are agreed that, upon Vantage accepting the revised offer, they had reached agreement upon such terms as were legally necessary to form a contract. [97] There is no doubt that in Australia the objective theory of contract underpins the law relating to the formation, construction and interpretation of contracts. See Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 [4] (Allsop P) and the cases there cited. [98] In Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8;

(2002) 209 CLR 95, Gaudron, McHugh, Hayne and Callinan JJ emphasised: Because the search for the ‘intention to create contractual relations’ requires an objective assessment of the state of affairs between the parties (Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 362, per Dixon CJ, McTiernan and Kitto JJ; ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548–549, per Gleeson CJ) (as distinct from the identification of any uncommunicated subjective reservation or intention that either may harbour) the circumstances which might properly be taken into account in deciding whether there was the relevant intention are so varied as to preclude the formation of any prescriptive rules. Although the word ‘intention’ is used in this context, it is used in the same sense as it is used in other contractual contexts. It describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened (Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 348–353, per Mason J; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436; 186 ALR 289). It is not a search for the uncommunicated subjective motives or intentions of the parties [25]. [99] So, whether a completed and binding agreement has been made is to be assessed objectively, and the search for an intention to create contractual [page 200] relations is not a search for the uncommunicated subjective motives or intentions of the parties. In other words, ‘[i]t is not the subjective thing known as meeting of the minds, but the objective thing, manifestation of mutual assent, which is essential to the making of a contract’: Williston on Contracts, 3rd ed, vol 1, par 21. Those propositions accord with the

‘general test of objectivity [that] is of pervasive influence in the law of contract’: Commonwealth Games (549), cited with approval in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 [34] (Gleeson CJ, McHugh, Kirby, Hayne & Callinan JJ). [100] In Ermogenous, Gaudron, McHugh, Hayne and Callinan JJ stated in effect that the subject matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances may be taken into account in determining whether a completed and binding agreement has been made [24]–[25]. See also South Australia v The Commonwealth [1962] HCA 10; (1962) 108 CLR 130, 154 (Windeyer J); Placer Development Ltd v The Commonwealth [1969] HCA 29; (1969) 121 CLR 353, 367 (Windeyer J). [101] The surrounding circumstances, for this purpose, include the dealings and communications between the parties over a period of time and the commercial circumstances, known to the parties, surrounding those dealings and communications. See Commonwealth Games (550); Allen v Carbone [1975] HCA 14; (1975) 132 CLR 528, 531–532 (Stephen, Mason & Murphy JJ); Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251, 9255 (McLelland J). [102] It is the objective intention of the parties which must be ascertained even where they expressly contemplate, either in an informal document or in communications between them when the informal document is prepared, that a formal contract is to be executed. As McHugh JA noted in GR Securities: [T]he decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances: Godecke v Kirwan [1973] HCA 38; (1973) 129 CLR 629 at 638; Air Great Lakes Pty Ltd & Ors v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 332–334, 337. If the terms of a document indicate that the parties intended to be bound immediately, effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction.

Even when a document recording the terms of the parties’ agreement specifically refers to the execution of a formal contract, the parties may be immediately bound. Upon the proper construction of the document, it may sufficiently appear that ‘the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms’: Sinclair Scott & Co Ltd v Naughton at 317 (634). [page 201] [103] In Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603, Campbell JA (Mason P agreeing) said that, for the purpose of deciding whether parties have made a concluded and binding agreement, the ‘objective intention’ of the parties which the court seeks to ascertain is ‘the intention that a reasonable person, with the knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties have of the surrounding circumstances, would conclude that the parties had, concerning the subject matter of the alleged contract’ [262]. The authorities his Honour cited in support of that proposition included the decisions of the High Court in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 in relation to the proper construction of a contract. Similarly, in Quarante Pty Ltd v Owners Strata Plan No 67212 [2008] NSWCA 258, Sackville AJA (Campbell & Bell JJA agreeing) said the principles in Pacific Carriers and Toll concerning the proper construction of a contract apply also where the question is whether the parties intended to make a concluded and binding agreement [87]. Those observations in Ryledar and Quarante are consistent with the statement by Gaudron, McHugh, Hayne and Callinan JJ in Ermogenous that the word ‘intention’, in the context of an intention to create contractual relations, is used in the same sense as it is used in other contractual contexts, and describes ‘what it is that would objectively be

conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened (Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 348–353 per Mason J; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436; 186 ALR 289)’ [25]. [104] There are statements in some Australian cases, especially in New South Wales, to the effect that evidence of the actual or subjective intention of each party is, at least in some circumstances, relevant and admissible in determining whether the parties made a concluded and binding agreement. For example, in Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, Mahoney JA said: The proper view is, in my opinion, that the existence of a contract is a consequence which the law imposes upon, or sees as a result of, what the parties have said and done. Actual subjective intention to contract is a factor which the law takes into account in determining whether a contract exists but it is not, or not always, the determining factor (330). [105] In Commonwealth Games, Gleeson CJ, after explaining that whether a completed and binding agreement has been made involves an objective determination of the intention of the parties from a consideration of the communications exchanged by them in the context of their dealings over a period of time, including the commercial circumstances surrounding the [page 202] exchange of communications, noted in relation to the admissibility of other extrinsic evidence: The position is by no means so clear, however, in connection with internal memoranda, communications by one or other of the parties with some third party, or statements as to

subjective intention made by individuals in the course of giving evidence (550). [106] The statements in some Australian cases about the receipt of evidence of the actual or subjective intention of each party must be examined carefully in view of the clear and emphatic decisions of the High Court on the primacy of the objective theory of contract including, in particular, the observations in Ermogenous [24]–[25]. [107] However, there is undoubtedly a category of exceptional cases where evidence may be given as to actual or subjective intention in determining whether the parties intended to contract; for example, evidence that: (a) during the negotiations the parties or their representatives were jesting, joking, engaged in a dramatic performance or doing or saying things that were not intended to be taken at face value; (b) the ‘contract’ was a sham; or (c) the actual state of mind of one or more of the parties was materially affected by mistake, misrepresentation, duress or undue influence. See Film Bars (9255); Air Great Lakes (318–319) (Hope JA), (336–337) (McHugh JA); Commonwealth Games (550); Quarante [88]. [108] In Ryledar, Campbell JA suggested that this category of exceptional cases is ‘an application of the objective theory of contract, not an exception to it’: [A] subjective intention not to contract, not communicated in any way to the person with whom one is dealing, and not ascertainable from the context within which one is speaking or acting, is not sufficient to stop a contract being entered. Thus, the only reason why it can be said that the subjective intention of the person who is playacting or joking is taken into account is because a reasonable person, in the context in which the words in question are communicated, would realise that they were not to be taken at face value [266].

[109] It may be that the rationale for the category of exceptional cases is the prevention of the unconscientious reliance by a party upon a document or a manifestation of apparent agreement which does not represent or express the common intention of the parties. See, in the context of the remedy of rectification, the reasoning of Campbell JA in Ryledar [309]–[315]. See also Shaw v Bindaree Beef Pty Ltd [2007] NSWCA 125 [98] (Basten JA). [110] It is well-established that a court may take into account the dealings and communications between the parties after, as well as before, the formation of an alleged concluded and binding agreement, for the purpose of determining, [page 203] objectively, whether they intended to form such an agreement. See Commonwealth Games (547–548, 550); Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14,551 [14,562]– [14,563] (Kirby P); Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 [25] (Heydon JA). [111] As Giles JA (Hodgson & Campbell JJA agreeing) observed in Sagacious Procurement, the juridical basis on which subsequent dealings and communications between the parties bear upon their contractual intention may not be settled [102]. His Honour referred to comments by McLelland J in Film Bars (9255–9256), Gleeson CJ in Commonwealth Games (548) and Kirby P in Geebung Investments [14,569]. Giles JA then said: I respectfully suggest that subsequent communications are not simply aids to interpretation, or a source of information as to matters with which a concluded contract should deal. Their probative value may be more direct. To repeat, the objective intention of the parties is fact-based, and found in all the circumstances. That in their subsequent communications the parties have continued in negotiations, or have expressed the common understanding that they are not legally bound unless

and until a formal contract is executed, is of itself probative as to their contractual intention: see Howard Smith and Co Ltd v Varawa [[1907] HCA 38; (1907) 5 CLR 68], stating simply that any statements or conduct inconsistent with the existence of a concluded contract are relevant [105]. [112] It is unnecessary in the present case to pursue that issue. [113] Plainly, whether in a particular case it should be inferred, on an objective assessment, that parties intended to make a concluded and binding agreement must depend on the facts and circumstances of the case.

[page 204]

Key Points for Revision 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 that may affect one’s livelihood, may give rise to the intention to be legally bound.

_________________ 1

Rose and Franck Co v J R Crompton & Bros Ltd [1923] 2 KB 261 at 282 per Bankes LJ.

2

Australian Woollen Mills v Commonwealth (1954) 92 CLR 424 at 457; [1954] ALR 453.

3

Rose and Franck Co v J R Crompton & Bros Ltd [1923] 2 KB 261 at 293 per Atkin LJ.

4

Public Trustee v Bussell (1993) 30 NSWLR 111 at 115 per Colten J; see also W H E Jaeger (ed), Williston on Contracts, 3rd ed, Baker Voorhis and Co Inc, NY, 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 at 130–1.

7

Rose and Franck Co v J R Crompton & Bros Ltd [1923] 2 KB 261 at 293 per Atkin LJ.

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

[1919] 2 KB 571 at 578–9. 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

[1969] 2 All ER 616 at 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, also 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 at 579–80.

15

See, for example, Cohen v Cohen (1929) 42 CLR 91; [1929] ALR 204.

16

S Stoljar, ‘Enforcing Benevolent Promises’ (1989) 12 Sydney Law Review 17 at 19–20.

17

[1994] 1 NZLR 385.

18

[1994] 1 NZLR 385 at 389.

19

[1995] ANZ ConvR 501.

20

[1995] ANZ ConvR 501 at 503.

21

[1995] ANZ ConvR 501 at 504.

22

(1888) 21 QBD 424.

23

[1962] WAR 29.

24

Wakeling v Ripley (1951) 51 SR (NSW) 183.

25

Todd v Nicol [1957] SASR 72.

26

Riches v Hogben [1985] 2 Qd R 292.

27

See Horton v Jones (1935) 53 CLR 475; [1935] ALR 177; Schaefer v Schuhmann [1972] AC 572; Palmer v Bank of NSW (1975) 133 CLR 150; 7 ALR 671.

28

Edwards v Skyways Ltd [1964] 1 All ER 494; [1964] 1 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 Ltd (1989) 21 NSWLR 502.

30

[1923] 2 KB 261.

31

[1923] 2 KB 261 at 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; [1964] 1 WLR 349.

34

[1923] 2 KB 261.

35

[1923] 2 KB 261 at 293.

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 at 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; [1976] 1 WLR 1.

40

[1976] 1 All ER 117 at 118; [1976] 1 WLR 1.

41

[1976] 1 All ER 117 at 119; [1976] 1 WLR 1.

42

[2001] WASCA 96.

43

[1964] 1 All ER 494; [1964] 1 WLR 349.

44

[2001] WASCA 96 at [21].

45

[2001] WASCA 96 at [21].

46

[1989] 1 WLR 379; [1989] 1 All ER 785; followed in Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VR 510.

47

(1989) 21 NSWLR 502.

48

(2002) 209 CLR 95; 187 ALR 92.

49

(2002) 209 CLR 95 at 121 per Kirby J; 187 ALR 92.

50

In Mabon v Conference of the Methodist Church of New Zealand [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 at 105; 187 ALR 92.

52

(2002) 209 CLR 95 at 105; 187 ALR 92.

53

Jakobkiewicz v Dickson Catering Pty Ltd [2002] ACTSC 107.

54

[2013] NSWCA 337 (in Eq).

55

[2013] NSWCA 337 at [40].

56

[2013] NSWCA 337 at [41].

57

[2013] NSWCA 337 at [45].

58

[2013] NSWCA 337 at [40].

59

[2003] FCA 851 at [126].

60

[2003] FCA 851 at [127].

61

[2004] NSWSC 149.

62

(1989) 21 NSWLR 502.

63

[2004] NSWSC 149 at 213; see also Ashton v Australian Cruising Yacht Co Pty Ltd [2005] WASC 192.

64

(2007) 72 IPR 555; [2007] FCA 693.

65

(2007) 72 IPR 555; [2007] FCA 693 at [312].

66

(1934) 51 CLR 358; [1934] ALR 298.

67

[2009] WASCA 126.

68

[2009] WASCA 126 at [119].

69

Gould v Gould [1970] 1 QB 275 at 279.

70

[2005] FCA 105 at [182]–[183]; see also Wilton & Cumberland v Coal & Allied Operations Pty Ltd [2007] FCA 725 at [116].

71

Sion v NSW Trustee & Guardian [2013] NSWCA 337 at [38].

72

Sion v NSW Trustee & Guardian [2013] NSWCA 337 at [120].

73

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; 187 ALR 92 at [25].

74

[1993] 2 VR 343 at 351.

75

Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (recs and mgrs appt’d) (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 at [5]–[19] per Barrett J, cited in Weimann (as trustee for Weimann Family Trust (No 3)) v Allphones Retail Pty Ltd (No 2) (2009) 261 ALR 343; [2009] FCA 1230 at [84].

76

(2006) 234 ALR 241; [2006] FCAFC 117 at [105].

77

Kelly v Mina [2014] NSWCA 9 at [87]–[98].

78

(2015) 88 NSWLR 281; 318 ALR 260.

79

(2015) 88 NSWLR 281; 318 ALR 260 at [44].

80

Referring to Darmanin v Cowan [2010] NSWSC 1118.

81

(2015) 88 NSWLR 281; 318 ALR 260 at [26].

82

(2002) CLR 95; 187 ALR 92 at [27].

83

[1959] Vic Rep 32; [1959] VR 197.

84

(2015) 88 NSWLR 281; 318 ALR 260 at [69]–[73]. While it is well established that the question of whether the parties intended to bind themselves to a contract is to be determined objectively, having regard to the intention disclosed by the language the parties have employed: Masters v Cameron (1954) 91 CLR 353 at 362. The Court of Appeal reviewed the decisions of the Full Federal Court in Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237; [2012] FCAFC 81 (rejecting the use of the presumption), and of the New South Wales Court of Appeal in Sion v NSW Trustee & Guardian [2013] NSWCA 337 (preserving it as a practical guide if not as a foundational principle to be rebutted by evidence).

85

(2015) 88 NSWLR 281; 318 ALR 260 at [76]–[77], [88]

86

(2015) 88 NSWLR 281; 318 ALR 260 at [78].

87

(2015) 88 NSWLR 281; 318 ALR 260 at [79].

88

(2015) 88 NSWLR 281; 318 ALR 260 at [80].

89

Ashton v Pratt (2015) 88 NSWLR 281; 318 ALR 260 at [15] per Bathurst CJ; Masters v Cameron (1954) 91 CLR 353; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540; Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309.

90

Other grounds include not being able to fit the government scheme into a classical contract framework of offer and acceptance (Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 457; [1954] ALR 453); and no relevant consideration (Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453; Logan Downs Pty Ltd v Commissioner for Railways [1960] Qd R 191).

91

Administration of the Territory of Papua New Guinea v Leahy (1961) 105 CLR 6 at 11 per McTiernan J; [1961] ALR 691; see also Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453.

92

Hughes Aircraft System International v Airservices Australia (1997) 47 ALD 12; Vass v Commonwealth (2000) 96 FCR 272; 169 ALR 486.

93

Z Chafee, ‘The Internal Affairs of Associations Not for Profit’ (1930) 43 Harvard Law Review 993.

94

R Pound, ‘Equitable Relief against Defamation and Injuries to Personality’ (1915–16) 25 Harvard Law Review 640 at 650.

95

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] 1 NSWLR 295; see also D O’Connor, ‘Actions Against Voluntary Associations and the Legal System’ (1977) 4 Monash University Law Review 87.

96

(1934) 51 CLR 358; [1934] ALR 298.

97

(1934) 51 CLR 358 at 377; [1934] ALR 298 per Rich, Dixon, Evatt and McTiernan JJ.

98

Baldwin v Everingham [1993] 1 Qd R 10.

99

President of the Methodist Conference v Parfitt [1984] QB 368; Knowles v Anglican Church Property Trust, Diocese of Bathurst (1999) 89 IR 47.

100 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. 101 (1934) 51 CLR 358 at 378; [1934] ALR 298. 102 Enderby Town Football Club Ltd v Football Association Ltd [1971] Ch 591 at 606 per Denning LJ. 103 Lee v Showmen’s Guild of Great Britain [1952] 2 QB 329. 104 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; [1982] 1 WLR 522. 105 (1971) 125 CLR 353; [1972] ALR 370. 106 (1971) 125 CLR 353; [1972] ALR 370 at [17]. 107 (1958) 75 WN (NSW) 255 at 258–9 per McLelland J; compare Heale v Phillips [1959] Qd R 489. 108 See J R S Forbes, Justice in Tribunals, The Federation Press, Sydney, 2002, p 39. 109 [1978] 1 NSWLR 657. 110 (1992) 27 NSWLR 483 at 491 per Mahoney JA; but compare comments at 513, 562 and 564 per Priestly JA (Hope AJA agreeing). 111 See H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 10th ed, Butterworths, Sydney, 2001, p 185. 112 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. 113 Macaura v Northern Assurance Co Ltd [1925] AC 619; Henderson v Kane and Pioneer Club [1924] NZLR 1073. 114 Holmes v Keyes [1959] Ch 199 at 215; Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294; 10 ACSR 615; Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739 at 746. 115 Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739; Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294 at 300; 10 ACSR 615. 116 Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294 at 300; 10 ACSR 615; compare South Launceston Football Club Inc v Tasmanian Football League Ltd (1995) 4 Tas R 342 at 345. 117 R v Brislan (1935) 54 CLR 262; [1936] ALR 45; R v Judges of the Federal Court of Australia; Ex parte WA National Football League (Inc) (1979) 143 CLR 190; 23 ALR 439. 118 Masters v Cameron (1954) 91 CLR 353 at 362. 119 (1954) 91 CLR 353. 120 (1986) 40 NSWLR 622 at 628; 4 BPR 9315. 121 Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 at 494–5 per Ipp J; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101. 122 G J Tolhurst, J W Carter and E Peden, ‘Masters v Cameron — Again!’ (2011) 42 Victoria University Wellington Law Review 49, 53, 58. 123 (2015) 47 WAR 547.

[page 205]

CHAPTER 8 Certainty and Completeness CHAPTER OVERVIEW 8.1 8.3

8.11 8.12 8.16

Introduction Certainty 8.4 Severability 8.7 Clauses capable of more than one meaning 8.9 Discretion and ‘subject to finance’ clauses Illusory promises Completeness 8.15 Specific performance Agreements to negotiate in good faith

Introduction 8.1

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 An inquiry into the completeness of a contract looks not at the intent of the parties, but at the progress that they have made in settling their agreement.4 A further issue, related to both certainty and

completeness, [page 206] arises in the form of agreements to negotiate in good faith. Under certain circumstances, such agreements might be enforceable.5 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.6 In Australian Securities and Investments Commission v Fortescue Metals Group Ltd,7 Finkelstein J stated: If an arrangement is incomplete it may be impossible to find that a contract has come into existence notwithstanding the intention of the parties. For a contract to be valid the agreement must be sufficiently definite and explicit so that the parties’ intention can be ascertained with a reasonable degree of certainty. Put another way, a court cannot enforce a contract unless it can determine what the contract is, applying all applicable rules of formation and interpretation. Otherwise the court would be imposing its own perception of what the bargain is rather than implementing what has been agreed by the parties.

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.8 In Seven Cable Television Pty Ltd v Telstra Corp Ltd,9 Tamberlin J noted: The formation of a contract, in my view, involves more than a serial accumulation of separate and discrete agreed clauses. Consensus on several particular terms of an overall agreement normally will not give rise to a contract until all essential terms

have been formulated and agreed upon. A contract is more than the sum of its parts considered separately, just as a melody is different from the individual notes …

Accordingly, the question of whether a term is essential so as to bear upon completeness will depend in part on the nature of the agreement. 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 [page 207] 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.10 8.2

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 may 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 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:11

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.12

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 [page 208] 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.13 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.14

For the most part, the courts will do whatever they can in order to give effect to some bargain between the parties.15 Indeed, in Australia it seems clear that the courts will seek to preserve a bargain rather than to destroy it.16

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.

Certainty 8.3

The existence of vagueness and ambiguity may mean that a contractual term cannot be enforced by a court.17 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.18 Where some reasonable interpretation of the term is possible, the courts will follow that interpretation rather than strike down the bargain between the parties.19 Moreover, the fact that there might be competing interpretations of a contested contractual term does not mean that the term is without meaning.20 [page 209]

Severability 8.4

For the doctrine of certainty to become a relevant matter in a dispute, it is important that the uncertainty relate to an essential term of the contract. Where a non-essential term is uncertain, such a term might be severed from the contract.21 Note that the courts have the power to correct obvious errors;22 for example, where a word has obviously been erroneously left out of the agreement by the parties. Further, the courts may rely on the use of implied terms to cure uncertainty,23 and may rely on extrinsic evidence in order to establish the purpose of the contract and the intention of the parties. For the doctrine of certainty to become a relevant

matter in a dispute, it is important that the uncertainty relate to an essential term of the contract. Where a nonessential term is uncertain, such a term might be severed from the contract. In Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd t/as ‘Uncle Bens of Australia’,24 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.25 In the New South Wales Court of Appeal, Kirby P held the formula to be illusory26 and the contract void.27 However, both Samuels and Clarke JJA found that the cost could be ascertained.28 8.5

In Whitlock v Brew29 the appellant agreed to sell land to the respondent. The respondent paid £15,600, 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 special condition 5, the contract was void for uncertainty. A majority of the High Court held in [page 210] 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 to be void. The reasoning of three of the majority judges, Taylor, Menzies and Owen JJ, is extracted below.

Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243 High Court of Australia Taylor, Menzies and Owen JJ at CLR 460–1: 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) [page 211] 95 CLR 420, held that the condition was of such a quality that it could be ignored. But those cases and Nicolene Ltd v 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) 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. 8.6

Notwithstanding the outcome in Whitlock v Brew, courts will generally try hard to enforce an agreement where the intention of the parties can be identified in some manner.30 In Australian Goldfields NL (in liq) [page 212] v North Australian Diamonds NL,31 McLure JA stated: ‘Where, as in this case, contractual intention is proven, courts should be astute to adopt a construction which will preserve the validity of the contract.’32 However, there are limits to the willingness of the courts to preserve bargains. In particular, there is a crucial distinction between interpreting a contract and creating one for the parties.33 In particular, the courts will be reluctant to impose perceived standards of reasonableness or fairness upon the parties where this does not reflect the nature of the agreement. In Biotechnology Australia Pty Ltd v Pace,34 Kirby P stated:

Contracts are the agreements between parties. Generally, their terms must be those which reflect the will of the parties, objectively determined. Judges, by reason of their experience and knowledge, may not have the relevant expertise by which to clarify the ambiguous, elucidate the uncertain or give content to the illusory terms of a contract or suggested contract between the parties. To do so by reference to an imported standard of reasonableness may satisfy the lawyer’s desire for fairness. But the law of contract which underpins the economy, does not, even today, operate uniformly on a principle of fairness.

Clauses capable of more than one meaning A contract cannot be said to be uncertain simply because a disputed clause is capable of more than one meaning. 8.7

The case of Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd 35 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. In the contract, cl 5 stated: ‘[I]f the Supplier’s costs shall vary in other respects than has been hereinbefore provided the Supplier shall have the right to vary the maximum demand charge and energy charge …’. When the council attempted to increase its charges, Australian Chilling & Freezing alleged that cl 5 was 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.36 [page 213]

Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429

High Court of Australia Barwick CJ at 436–7: 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. [page 214] 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. 8.8

The problem facing the court in Upper Hunter County District was similar to that in Whitlock v Brew,37 in that it concerned the question of whether a machinery clause in an agreement was so uncertain as to void the contract.38 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.39 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.40 [page 215]

Discretion and ‘subject to finance’ clauses 8.9

In Meehan v Jones41 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 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 Thirtyfirst 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 illusory42 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. 8.10

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. [page 216]

Meehan v Jones (1982) 149 CLR 571; 42 ALR 463 High Court of Australia Gibbs CJ at CLR 575–9: 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. … The submission advanced on behalf of the vendors and the second respondent was that the inclusion of special condition I 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 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. … 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. 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 [page 217] 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. 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 contract, whereas if he does not think it satisfactory, usually he will not attempt to complete.

In any case, whether the purchaser is satisfied is simply a question of fact, because, 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. 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.

[page 218] Gibbs CJ then surveyed the different authorities in the United Kingdom 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.43 Though postagreement 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.44

REVIEW QUESTION In circumstances where questions of uncertainty have arisen, how have the courts approached the task of interpreting contracts? Discuss this with regard to the cases outlined above.

Illusory promises 8.11

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.45 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.46 Ordinarily the courts will try to uphold contracts, as they do in respect of matters where uncertainty arises, but the courts cannot write a promise into a contract.47 In Meehan v Jones, Gibbs CJ made the following findings in relation to illusory promises. [page 219]

Meehan v Jones (1982) 149 CLR 571; 42 ALR 463 High Court of Australia Gibbs CJ at CLR 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.

[page 220] In Biotechnology Australia Pty Ltd v Pace48 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 Commonwealth49 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 …50

REVIEW QUESTIONS 1.

What is an illusory promise? Under what circumstances might an illusory promise arise?

2.

How have the courts dealt with illusory promises?

Completeness 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.

[page 221] 8.12

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.51 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 HC and JG Ouston,52 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: ‘[T]he parties never in intention nor even in appearance reached an agreement’.53 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’.54 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.55 In Ashton v Pratt,56 the plaintiff, Ashton,

contended that she had a contract to serve as a mistress for the late Richard Pratt. However, Ashton was unable to demonstrate that the parties had agreed on the duration of the contract and the details of an alleged trust arrangement. While the New South Wales Court of Appeal recognised that the alleged contract had been partly performed, it was evident that the essential terms were uncertain. As such, no complete contract had formed. Logically, where an essential clause is uncertain the contract will also be incomplete.57 Where performance has occurred under an agreement, the courts will be most reluctant to hold that it is incomplete;58 in general, a finding of incompleteness is easier to make where performance under the agreement has not yet commenced.59 [page 222] 8.13

The following brief extract from the judgment of Sackville JA, with whom Macfarlan and Gleeson JJA agreed, in Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd,60 sets out many of the basic principles concerning completeness.

Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 New South Wales Court of Appeal Sackville JA: [61] … an agreement that is incomplete will not give rise to an enforceable contract. As was said in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53; 149 CLR 600 at 604 (Gibbs CJ, Murphy and Wilson JJ): 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. [62] An alleged contract will fail for incompleteness if, even though the parties have used clear language, a term which is regarded as essential as a matter of law has not been agreed: J W Carter, Carter on Contract (2014, LexisNexis) at [04-120]. The principle was stated by Viscount Dunedin in May and Butcher Ltd v The King [1934] 2 KB 17 n at 21: To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties. [63] If the parties have not agreed on all essential terms, for example because they have left one such term to be settled by future agreement, the contract is incomplete no matter what the parties themselves may think: G Scammell and Nephew Ltd v HC and JG Ouston [1941] AC 251 at 260 (Lord Russell of Killowen); O’Brien v Dawson [1942] HCA 8; 66 CLR 18 at 37 (Willams J, Rich J agreeing); Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] VicRp 55; [1994] 2 VR 106 at 170 (Tadgell J); Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; 190 FCR 364 at [123]–[124] (Keane CJ); at [212] (Emmett J); at [223]–[227] (Finkelstein J) (an appeal to the High Court was allowed, but not on this point: Forrest v Australian [page 223] Securities and Investments Commission [2012] HCA 39; 247 CLR 486). Moreover, if the parties have not reached consensus on the essential terms of the contract, there will be no binding contract notwithstanding that one of the parties has commenced work referable to the

agreement: British Steel Corp v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504 at 510 (Robert Goff J). Depending on the circumstances, non-contractual remedies, for example on restitutionary principles, may be available but the contract itself is incomplete and therefore unenforceable. [64] Fourthly, for an agreement for the supply and sale of goods to constitute an enforceable contract, the parties must agree as to price, although they may leave the price to be determined by a third person or by an agreed mechanism. Thus, if a contract for the supply or sale of goods expressly provides for the price to be agreed between the parties, there is no concluded contract: May and Butcher Ltd v The King at 21; Booker Industries v Wilson Parking at 604 (a lease providing for a rental to be agreed does not constitute an enforceable agreement); cf Godecke v Kirwan [1973] HCA 38; 129 CLR 629 at 645 (Gibbs J). 8.14

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.61 In Sudbrook, the House of Lords held that the court could determine the value of a purchase option under a lease in circumstances where the contractual mechanism for the assessment of the price could not operate due to a party’s default. There is some doubt as to whether Sudbrook is consistent with Hall v Busst.62 Moreover, if the court chooses not to intervene, then the agreement will be incomplete.63 It might be possible for a court to imply a term so as to cure a problem of incompleteness.64 However, the recent trend has been that where the parties have appointed an expert to operate the machinery clause, the courts will not find the clause to be incomplete. In Straits Exploration (Australia) Pty Ltd v Murchison United NL,65 Wheeler JA stated: The tendency of recent authority is clearly in favour of construing such contracts, where possible, in a way that will enable expert determination clauses to work

[page 224] as the parties appear to have intended, and to be relatively slow to declare such provisions void either for uncertainty or as an attempt to oust the jurisdiction of the court.

It is notable that recent authority has favoured this approach.66

Specific performance 8.15

In Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd 67 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; 43 ALR 68 High Court of Australia Gibbs CJ, Murphy and Wilson JJ at CLR 604–6: 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 — 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 [page 225] 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. 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 521, 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. 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 [1857] EngR 762; (1857) 4 Drew 134 (62 ER 52) and [page 226] 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.

Agreements to negotiate in good faith 8.16

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,68 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,69 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 Ltd v Rail Corp New

South Wales70 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,71 where Douglas J held that a dispute resolution clause requiring that [page 227] reasonable efforts in good faith be employed to resolve any dispute was not illusory and could be performed.72 Similarly, the West Australian Supreme Court in Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd73 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’.74 Given the judgments in United Group Rail, AMCI (IO) and 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. 8.17

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,75 which are unenforceable, and agreements to negotiate in good faith, which might be enforceable.76 With regard to the latter, a sharp difference of opinion appears to be in play between the courts of the United Kingdom and Australia. [page 228] In the United Kingdom case of Hillas & Co Ltd v Arcos Ltd,77 Lord Wright expressed the view that a contract to negotiate in good faith may be enforceable: 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.

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 United Kingdom case, Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd.78 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, 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.79

8.18

However, in the Australian High Court case of Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd,80 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. [page 229]

Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 New South Wales Court of Appeal Kirby P at 26–7: 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 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.

[page 230] 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.81 8.19

In Walford v Miles82 the House of Lords held that an agreement to negotiate in good faith was not enforceable.

Walford v Miles [1992] 2 AC 128 House of Lords, United Kingdom 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.

[page 231] 8.20

In more recent times, where agreements to negotiate in good faith have been subject to explicit time limits, the English courts have been more accommodating.83 In the case of United Group Rail Services,84 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.85

The difference between an agreement to agree and an agreement to negotiate in good faith is no small matter. The former is almost unenforceable per se whereas the latter has genuine substance and, subject to reasonable limits, it can be observed. Yet, there is an interrelationship of sorts. Even where the parties have not expressly consented to an agreement to negotiate in good faith, but have instead constructed an agreement to agree, there may be an obligation to at least attempt to negotiate. In Australian Securities and Investments Commission v Fortescue Metals Group Ltd,86 Fortescue entered into a series of framework agreements with its Chinese counterparts. These framework agreements were ultimately held to be little more than agreements to agree. Nevertheless, a majority of the Full Federal Court suggested that [page 232] under the circumstances there may have been an obligation to negotiate. Finkelstein J stated: Often the problem of incompleteness arises when the parties have left an aspect of their bargain for later agreement. In recent years some court[s] have, by a process of implication by law, supplied a term requiring parties to a commercial contract to exercise ‘good faith’ in the performance of their contractual rights and obligations. And there are cases which hold that when parties to a commercial contract have reached a preliminary agreement but have left a term of their contract open for future negotiation the parties are under an obligation to negotiate the open issues in good faith in an attempt to reach agreement on the open terms. This obligation does not mean that a final agreement will be reached. Good faith negotiations will not necessarily bridge all gaps that stand in the way of a concluded agreement. The obligation does, however, bar a party from walking away from the preliminary agreement without a legitimate attempt at negotiation.87

REVIEW QUESTIONS 1.

Compare and contrast the approaches of Australian and United Kingdom 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?

Key Points for Revision 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 may 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. 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 to the particular facts of a dispute.

_________________ 1

Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429.

2

Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429; G Scammell & Nephew Ltd v HC & JG Ouston [1941] AC 251; McDermott v Black (1940) 63 CLR 161.

3

Thorby v Goldberg (1964) 112 CLR 597.

4

Australian Broadcasting Commission v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548 per Gleeson CJ.

5

See Walford v Miles [1992] 2 AC 128; United Group Rail Services Ltd v Rail Corp of New South Wales (2009) 74 NSWLR 618; Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; see also J Paterson, ‘The Contract to Negotiate’ (1996) 10 Journal of Contract Law 120; J Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 Law Quarterly Review 433.

6

Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429.

7

(2011) 190 FCR 364; 274 ALR 731 at [223].

8

Ellul & Ellul v Oakes (1972) 3 SASR 377; Thorby v Goldberg (1964) 112 CLR 597.

9

(2000) 171 ALR 89; [2000] FCA 350 at [94].

10

Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601.

11

(1932) 147 LT 503 at 514.

12

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; Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111.

13

Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 27 per Kirby P. Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582.

14

D W Greig and J L R Davis, The Law of Contract, Law Book Co, 1987, p 355.

15

Hall v Busst (1960) 104 CLR 206 at 239; [1961] ALR 508; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 616–17; 43 ALR 68; Watson v Phipps (1985) 63 ALR 321; 60 ALJR 1; Hillas & Co Ltd v Arcos Ltd [1932] All ER 494.

16

Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429; Meehan v Jones (1982) 149 CLR 571; 42 ALR 463.

17

Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243; Brown v Gould [1972] Ch 53.

18

Wakeling v Ripley (1951) 51 SR (NSW) 183.

19

Watson v Phipps (1985) 63 ALR 321; 60 ALJR 1; 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) 226 LSJS 382; [2003] SASC 95; Sunbay Projects Pty Ltd v Naughton [2010] QCA 247.

20

Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101.

21

Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243.

22

Hooker Town Developments Pty Ltd v Director of War Service Homes (1973) 47 ALJR 320.

23

G Scammell & Nephew Ltd v HC & JG Ouston [1941] AC 251 at 272–3; Re Galaxy Media Pty Ltd (2001) 39 ACSR 483; 167 FLR 149; Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 38.

24

(1992) 27 NSWLR 326.

25

(1992) 27 NSWLR 326 at 331.

26

See 8.11.

27

(1992) 27 NSWLR 326 at 334.

28

(1992) 27 NSWLR 326 at 343.

29

(1968) 118 CLR 445; [1969] ALR 243.

30

Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27. See also Toyota Motor Corp Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106.

31

[2009] WASCA 98 at [7].

32

See also Meehan v Jones (1982) 149 CLR 571; 42 ALR 463.

33

Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27; Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49.

34

(1988) 15 NSWLR 130 at 132.

35

(1968) 118 CLR 429.

36

(1968) 118 CLR 429 at 436.

37

(1968) 118 CLR 445; [1969] ALR 243.

38

(1968) 118 CLR 429 at 435; [1969] ALR 243.

39

See Prior v Payne [1950] ALR 10; (1949) 23 ALJR 298; see also Hawthorn Football Club Ltd v Harding [1988] VR 49.

40

(1968) 118 CLR 429 at 436–7; [1969] ALR 243.

41

(1982) 149 CLR 571; 42 ALR 463.

42

See 8.11.

43

(1982) 149 CLR 571 at 582; 42 ALR 463.

44

Re Galaxy Media Pty Ltd (2001) 39 ACSR 483; 167 FLR 149; Farmer v Honan (1919) 26 CLR 183.

45

Godecke v Kirwan (1973) 129 CLR 629; 1 ALR 457; Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243.

46

Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582.

47

Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 27; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582; TSB Developments Pty Ltd v HCH and K Fisheries Pty Ltd [2003] TASSC 136.

48

(1988) 15 NSWLR 130.

49

(1969) 121 CLR 353; [1969] ALR 801.

50

(1969) 121 CLR 353 at 359–60; [1969] ALR 801.

51

Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243. See also Ravinder Rohini Pty Ltd v Krizaic (1991) 105 ALR 593.

52

[1941] AC 251.

53

[1941] AC 251 at 269.

54

[1941] AC 251 at 269.

55

J Gooley and P Radan, Principles of Australian Contract Law, LexisNexis Butterworths, Sydney, 2006, p 82.

56

(2015) 88 NSWLR 281; 318 ALR 260.

57

Whitlock v Brew (1968) 118 CLR 445; [1969] ALR 243.

58

Wakeling v Ripley (1951) 51 SR (NSW) 183.

59

Hillas & Co Limited v Arcos Limited [1932] All ER 494.

60

[2015] NSWCA 1.

61

[1983] 1 AC 444. See also Barescape Pty Ltd as trustee for The V’s Family Trust v Bacchus Holdings Pty Ltd as trustee for The Bacchus Holdings Trust (No 9) [2012] NSWSC 984.

62

(1960) 104 CLR 206; [1961] ALR 508. See E McKendrick and Q Liu, Contract Law, Palgrave, London, 2015, pp 68–9. Recent authority appears to favour Sudbrook. See Barescape Pty Ltd as trustee for The V’s Family Trust v Bacchus Holdings Pty Ltd as trustee for The Bacchus Holdings Trust

(No 9) [2012] NSWSC 984 at [110]–[111] per Black J. 63

Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; 43 ALR 68.

64

May & Butcher Ltd v R [1934] 2 KB 17.

65

[2005] WASCA 241 at [14].

66

Downer EDI Mining Pty Ltd v Wambo Coal Pty Ltd [2012] QSC 290. See also Straits Exploration (Australia) Pty Ltd v Murchison United NL (2005) 31 WAR 187; Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478; Barescape Pty Ltd as trustee for The V’s Family Trust v Bacchus Holdings Pty Ltd as trustee for The Bacchus Holdings Trust (No 9) [2012] NSWSC 984.

67

(1982) 149 CLR 600; 43 ALR 68.

68

(1991) 24 NSWLR 1.

69

[1992] 2 AC 128.

70

(2009) 74 NSWLR 618.

71

[2009] QSC 139. See also Memery v Trilogy Funds Management Ltd [2012] QCA 160.

72

[2009] QSC 139 at [30].

73

(2010) 41 WAR 318.

74

(2010) 41 WAR 318 at [47]–[57].

75

See Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; 43 ALR 68.

76

See Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; United Group Rail Services Ltd v Rail Corp of New South Wales (2009) 74 NSWLR 618; AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd (2010) 2 Qd R 101; Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 56 MVR 163.

77

[1932] All ER 494 at 505.

78

[1975] 1 All ER 716; [1975] 1 WLR 297.

79

[1975] 1 All ER 716; [1975] 1 WLR 297 at 301.

80

(1991) 24 NSWLR 1.

81

United Group Rail Services Ltd v Rail Corp 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.

82

[1992] 2 AC 128.

83

Shaker v Vistajet Group Holding SA [2012] 2 All ER (Comm) 1010; [2012] EWHC 1329; Petromec v Petroleo Brasileiro SA Petrobas [2005] All ER (D) 209; [2005] EWCA Civ 891.

84

(2009) 74 NSWLR 618.

85

(2009) 74 NSWLR 618 at [65].

86

(2011) 190 FCR 364; 274 ALR 731.

87

(2011) 190 FCR 364; 274 ALR 731 at [224].

[page 233]

CHAPTER 9 Estoppel CHAPTER OVERVIEW 9.1 9.2 9.3 9.6

9.28 9.29 9.32

Introduction The concept of estoppel Common law and equitable estoppel unified? Equitable estoppel: promissory estoppel 9.9 Elements of promissory estoppel 9.10 Representation 9.12 Assumption 9.13 Inducement 9.14 Detrimental reliance 9.19 Knowledge 9.20 Reasonableness 9.23 Family and commercial settings compared 9.26 Unconscionability Equitable estoppel: proprietary estoppel Relief in cases of equitable estoppel Common law estoppel

Introduction 9.1

Estoppel has a long and convoluted history. The High Court of Australia has not articulated a unified doctrine of estoppel. Accordingly, this chapter examines various forms of estoppel. Estoppel is ‘a label which covers a complex array of rules spanning various categories’.1 Unravelling the different forms of estoppel is a complicated task. The difficulty is compounded

by the fact that the jurisprudence dealing with the concept of estoppel uses a bewildering [page 234] array of names to describe the different types of estoppel; for example, estoppel by representation, estoppel by convention,2 estoppel by judgment, estoppel by acquiescence, promissory estoppel, proprietary estoppel and estoppel by deed.3 As many others have noted, at times these names are used interchangeably and without consistency. Nonetheless, it can safely be said that there are two fundamental types of estoppel: common law estoppel and equitable estoppel. Equitable estoppel itself consists of promissory estoppel and proprietary estoppel. The differences between the two might now be regarded as somewhat suspect, as discussed at 9.28. This chapter focuses primarily on promissory estoppel. It also outlines the basic principles of proprietary estoppel and common law estoppel.

The concept of estoppel 9.2

Estoppel works to prevent the unjust departure of one party from representations it has made to another party that have had the effect of enticing the other party to alter their position to their detriment. Enforcement of an estoppel will prevent a party from acting in a way that is inconsistent with a state of affairs that they have convinced another party, by their representations, to think exists or will exist. As Carter has noted: ‘[T]o say that a person is “stopped” is to say that a person is “precluded”’.4

Estoppel only precludes a party (the representor) from acting where the reliance of the other party (the relying party) has been induced by a representation and it is necessary to protect the other party against detriment that would result from the representor so acting. That is, an estoppel will not arise where no detriment is shown by the relying party. This basic principle was identified by Dixon J in Grundt v The Great Boulder Pty Gold Mines Ltd,5 where his Honour stated: ‘[T]he basal purpose of the doctrine [of estoppel] … 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’. [page 235]

Fundamentally, estoppel protects against detriment where reliance has been induced by a representation. Let us consider an example. A represents to B that, if B turns down an offer of cheap rent from a third party, A will lease a house to B for 1 year at about the same price and will sign the lease the following week. Relying on A’s representation, B turns down the third party offer of cheap rent and seeks to sign a lease with A the following week, only to find that A has, in the interim, leased the house to some other person. A has made promises and representations that they must have known would be relied upon by B. In fact, A has seen B acting to their detriment in reliance on A’s promises. It may well be that, in these circumstances, there would be substantial injustice if A could walk away unburdened while B has foregone a benefit. In the absence of a valid, enforceable contract between A and B, the doctrine of consideration can play no part: B has not paid for A’s promise.6 However, estoppel works, even in the absence

of consideration and a binding contractual obligation,7 to prevent the offeror from recanting from their promise in circumstances where the offeree has acted to their detriment and where it would be unjust to let the offeror resile from their representation. The question is whether a court of law should intervene. In Grundt v The Great Boulder Pty Gold Mines Ltd,8 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 or 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

[page 236] upon the faith of the assumption; or because he directly made representations upon which the other party founded the assumption.

This statement by Dixon J sets out the circumstances under which it might be unconscionable for a party to abandon a representation that they have made to another. The notion of unconscionability is a theme of much of the jurisprudence on estoppel, both at equity and common law, although its usage in common law estoppel tends to be less pronounced.9

Common law and equitable estoppel unified?

9.3

It has been suggested that the dividing line between common law estoppel and equitable estoppel is unconscionability.10 However, 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. Unconscionability has not been entirely absent where common law estoppel has been discussed in the past. Indeed, the whole purpose of the doctrine, as developed by Dixon J in Thompson v Palmer11 and Grundt v The Great Boulder Pty Gold Mines Ltd,12 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 and it would be both unjust and against good conscience to allow the former party to resile from their representations. There are two fundamental differences between common law estoppel and equitable estoppel. First, common law estoppel has been confined to assumptions of fact as opposed to assumptions of future conduct. Second, common law estoppel is concerned with rules of evidence, whereas equitable estoppel creates new rights. Notwithstanding the unresolved issue of unconscionability, there are two fundamental differences between common law estoppel and equitable estoppel that warrant consideration. First, as a result of the [page 237] decision in Jorden v Money,13 common law estoppel has been confined to assumptions of fact as opposed to assumptions of future conduct. Second, common law estoppel is concerned with rules of evidence, whereas equitable estoppel creates new

rights. These distinctions are elucidated by the extracts from Commonwealth v Verwayen below. Although various theoretical models have been propounded, the law on estoppel still remains divided into common law estoppel and equitable estoppel. 9.4

Much thought has been given to whether there should be a unified doctrine of estoppel, so that common law estoppel and equitable estoppel would no longer be separate doctrines. Mason CJ in Foran v Wight14 stated: [W]e should now recognise that a common law estoppel as well as an equitable estoppel may arise out of a representation or mistaken assumption as to future conduct. Moreover, the clear acceptance by the Court in Waltons Stores of the doctrine of promissory estoppel makes this course inevitable … the dam wall has fractured at its most critical point with the result that we should accept that a representation or a mistaken assumption as to future conduct will in appropriate circumstances create a common law estoppel as well as an equitable estoppel.

In Commonwealth v Verwayen,15 Mason CJ expressed strong support for unification. 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.

Deane J, in the same case, also expressed support for a unified doctrine of estoppel.16 9.5

In Commonwealth v Verwayen,17 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, gave rise to an estoppel in favour of the respondent. The respondent was a sailor injured in a [page 238]

naval collision in 1964. He had not sued during the limitation period, as he had assumed that the Commonwealth owed him no duty of care. He commenced his action in 1984 in reliance on the Commonwealth’s representation that it would not plead the statute of limitations; that is, that it would not rely on the limitation period in s 5 of the Limitations of Actions Act 1958 (Vic) to bar the respondent’s action in negligence. In the High Court, Gaudron and Toohey JJ held that the Commonwealth had waived its rights.18 Deane and Dawson JJ held that an estoppel arose against the Commonwealth.19 Mason CJ, Brennan and McHugh JJ dissented.20 In deciding that no estoppel arose, McHugh J stated in obiter that the law presently maintains a clear separation between common law and equitable estoppel.

Commonwealth v Verwayen (1990) 170 CLR 394; 95 ALR 321 High Court of Australia Mc Hugh J at CLR 499–501: Both common law and equity … 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 (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. [page 239] 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 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. [page 240] [In the extract below, Dawson J further explains the reasons for maintaining the distinction between equitable and common law estoppel.] Dawson J at 453–4: [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 [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. 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 [page 241] 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. 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. There has been much written in the academic literature about a unified doctrine of estoppel.21 However, though various theoretical models have been propounded, the law on estoppel still remains divided into common law estoppel and equitable estoppel.22

Equitable estoppel: promissory estoppel 9.6

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 Money.24 Prior to Jorden v Money, it had been the position of the English courts that, in equity, 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 [page 242] 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. This limitation still prevails over common law estoppel. As Mason CJ and Wilson J noted in Waltons Stores (Interstate) Ltd v Maher:26 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.

Equitable estoppel evolved to encompass two doctrines — proprietary estoppel and promissory estoppel.27 These are discussed in separate sections below. 9.7

The modern doctrine of promissory estoppel — which for the purposes of this chapter will be used to refer to the form of estoppel developed by the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher — has its basis in the obiter comments of Denning LJ in Central London Property Trust Ltd v High Trees House Ltd.28 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 mid1945. After the war, the plaintiffs successfully sought full rent for the future and the recovery of full rent for the last 6 months of 1945. However, Denning LJ commented in 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 Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd,29 Bank Negara Indonesia v Hoalim (Singapore)30 and Ajayi v R T Briscoe (Nigeria) Ltd.31 In Waltons Stores (Interstate) Ltd v Maher, the High Court of [page 243] Australia endorsed the ‘new’ High Trees estoppel32 which had, partially, been accepted by that Court in Legione v Hateley.33 9.8

In Waltons Stores (Interstate) Ltd v Maher,34 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 2 weeks 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. The 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’ solicitors

returned the signed contract to Waltons’ solicitors. Waltons was aware that the Mahers had commenced the demolition and rebuilding 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. Waltons Stores is a significant decision because it established that estoppel could be used as both a shield and a sword; that is, estoppel could prevent the enforcement of legal rights, in response to a suit brought by the representor against the relying party, where to do so would be a departure from an assumed state of affairs, and also serve as a cause of action for the relying party against the representor. The High Court held that Waltons was estopped from denying the existence of a binding contract and was, therefore, bound. Deane and Gaudron JJ found that the Mahers had assumed the contract had been signed. This was an assumption of fact which supported common law estoppel.35 In contrast, Mason CJ Wilson and Brennan JJ found that the Mahers had acted in reliance on their belief as to Waltons’ future conduct, which supported promissory estoppel.36 Waltons Stores is a significant decision in that it established that estoppel could be used as both a ‘shield’ and a ‘sword’; that is, that estoppel could [page 244] prevent the enforcement of legal rights in response to a suit brought by the representor against the relying party, where to do so would be a departure from an assumed state of affairs,

and also serve as a cause of action for the relying party against the representor. Waltons Stores also recognised that a preexisting legal relationship is not necessary to support an action in promissory estoppel.

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 High Court of Australia Mason CJ and Wilson J at CLR 399–408: 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 noncontractual 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. 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’. 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 [page 245] 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. … 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. 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 [page 246] 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. 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 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. 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. 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. [page 247] 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. 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 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. 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. [page 248] 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. 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. 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 consideration. The first was the element of urgency that pervaded the negotiation of the terms of the proposed lease … 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 …

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 [page 249] 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. … We therefore think that the Court of Appeal was correct in its conclusion. We would dismiss the appeal.

Elements of promissory estoppel 9.9

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 and certain other elements — reliance, assumption, detriment, knowledge, reasonableness and unconscionability — are made out, an estoppel may be asserted by the relying party against the representor.

In Waltons Stores (Interstate) Ltd v Maher,37 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.

This statement has not been approved by a majority of the High Court. Nonetheless, it has commonly been applied by the courts.38 The six elements are examined in detail below. [page 250]

Representation 9.10

The representation may be express or implied but must not be ambiguous or unclear. An important question in any case in which estoppel is argued is: What is the representation? The answer involves interpreting the representations, which are to be understood in ‘the sense in which the representation would be understood by a reasonable person in the position of the representee’.39 In Legione v Hateley,40 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 7 days after the expiry of the completion period. The secretary told the purchaser’s lawyer that the delay 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. 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.41

As Mason and Deane JJ noted, the representation need not be completely unambiguous. 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.42 [page 251] 9.11

In contrast, where there is a high level of ambiguity in the representation, this will not be sufficient to give rise to an estoppel. As Ipp JA stated in Australian Crime Commission v Gray:43 ‘Unconscionability is usually difficult to establish when the representation is ambiguous or unclear’. The issue of how ambiguous a representation can give rise to an estoppel was recently considered by the Court of Appeal of the Supreme Court of Victoria in Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd.44 In that case, Cosmopolitan operated two restaurants in the casino and entertainment

complex owned by Crown. Cosmopolitan leased both restaurant premises from Crown. When Crown gave notice under the leases, requiring the respondents to vacate the premises upon the leases expiring, Cosmopolitan brought proceedings in the Victorian Civil and Administrative Tribunal (VCAT) against Crown, arguing that Crown was bound to renew the lease for a further 5 years either on the basis of an estoppel or a collateral contract to the lease containing the promises made by Crown in certain oral statements before and after the lease was executed. Representatives of Crown had made a series of oral statements to the effect that, in exchange for Cosmopolitan entering into the leases for a 5-year term and undertaking major refurbishment of the premises at Cosmopolitan’s expense, Crown would renew the lease for a further 5 years. The oral statements that Crown made to Cosmopolitan were: (1) the reason Crown had specified five year lease terms was to make the leases align with those of other tenants in the Complex; (2) [Cosmopolitan’s owner] should, on behalf of the tenants, spend money on refurbishment that would result in a high quality finish for the two restaurants; and (3) if that was done, [Cosmopolitan] ‘would be looked after when the time came for Crown to consider renewing the leases’.45

The general manager of Crown’s retail business had also threatened Cosmopolitan’s owner that Cosmopolitan’s restaurants would not be allowed to re-open after the refurbishment works unless Cosmopolitan signed and returned unaltered leases which did not contain any mention of an agreement that Crown would renew the leases for a further 5 years. The question was whether the vagueness of the phrase ‘looked after’ was sufficiently clear to constitute a representation under the doctrine of equitable estoppel. Warren CJ in the Court of Appeal found that Crown’s statements were sufficiently clear to ground an estoppel but not certain enough to give rise to a collateral contract.

[page 252]

Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2014] VSCA 353 Supreme Court of Victoria, Court of Appeal Warren CJ: [75] In assessing this ground it is important to set out the basic premise of promissory estoppel. Priestley JA in Austotel Pty Ltd v Franklins Self Serve Pty Ltd provided a helpful summary of promissory estoppel: For equitable estoppel to operate there must be the creation or encouragement by the defendant in the plaintiff of an assumption that a contract will come into existence or a promise be performed or an interest granted to the plaintiff by the defendant, and reliance on that by the plaintiff, in the circumstances where departure from the assumption by the defendant would be unconscionable. [76] The first issue to consider is the nature of the assumption, in effect what did [Cosmopolitan] assume the relationship was in the context of the representation of [Crown]. … [78] … The High Court has held that estoppel will be established where ‘the plaintiff assumed that a particular legal relationship existed’ [Waltons Stores at 428], and that there must be ‘an assumption which has been adopted by the other party’ [Commonwealth v Verwayen at 444]. Once the court has established what assumption the representee subjectively held, the court should then consider whether adopting that assumption was reasonable [Standard Chartered Bank Aust Ltd v Bank of China (1991) 23 NSWLR 164 at 180]. This is in contrast to VCAT’s approach which was to consider what was a reasonable assumption to be drawn from the representation and then consider whether this was a sufficient basis for the estoppel claim. Therefore, the senior member

should have considered the sense in which the tenants understood the representations and whether it was reasonable for them to rely upon them. [79] Having established the nature of the assumption, the next step is to then assess whether it was reasonable for the tenants to rely on the assumption from Crown that they would renew the lease on similar terms, as opposed to renewal on Crown’s own terms. [80] Whether an assumption is reasonable involves consideration of whether it is certain. In Sullivan v Sullivan [(2006) 13 BPR 24,755] Hodgson JA stated: Generally, a promise or representation will be sufficiently certain to support an estoppel if it was reasonable for the representee to interpret the representation or promise in a particular way and to act in reliance [page 253] on that interpretation, thereby suffering detriment if the representor departs from what was represented or promised. [81] The trial judge held that this requirement of certainty and reasonableness was not satisfied because the representations were not promissory and, further, because the senior member held that the tenants’ assumption was incorrect and unreasonable. With respect, I disagree with his Honour’s finding for the following reasons. [82] First, while his Honour held that the assumption was not certain as the statements were merely encouraging, this is not an impediment to a claim for estoppel. Dodds-Streeton JA went further in Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd when her Honour stated that there are ‘a wide variety of apparently vague, imprecise and incomplete representations which have been construed in context and given effect’ by the courts. [83] In light of the authorities, the vague nature of the representation

that the tenants would be ‘looked after’ does not prevent the estoppel claim from being made out. [84] Secondly, a representation that is not certain enough to amount to a contract can support a claim in estoppel. There are a number of cases where a claim for estoppel has been successful where a representation would be too uncertain to give rise to a contract. This is because equity focuses on substance over technical form. [85] The trial judge analysed the certainty of the assumption in the same terms as he analysed the collateral contract claim, and by referring to his findings in relation to the collateral contract. The authorities state that there is a lower standard of certainty for estoppel than in contract law and therefore the fact that the representation was not sufficiently certain to establish a collateral contract does not mean that it is not sufficiently certain for estoppel. [86] Thirdly, estoppel can be established notwithstanding that a promise is lacking in detail. In Giumelli v Giumelli the High Court held that the representor should be estopped from resiling from a promise to give a portion of land notwithstanding the boundaries of the proposed land were not precisely defined. [87] In the somewhat analogous case of Wright mentioned already, the Queensland Court of Appeal considered a promise to renew a licence for further periods of five years. It was held that the absence of specific details of the promise such as the mechanism and timing of exercise of the right to renew were not fatal to the estoppel claim as the court could determine these details by reference to what would be reasonable in the circumstances. Likewise, the New South Wales Court of Appeal (Mason P, Ipp and Tobias JJA) in Australian Crime Commission v Gray held that a promise may be clear notwithstanding it falls ‘within a discretionary range and its determination was by no means a simple matter’. [page 254] [88] In applying the facts of this case to these principles, the fact that

the terms of the renewed lease were yet to be determined or were ambiguous would not mean necessarily, the assumption was unreasonable or unclear. Crown had represented that Mr Zampelis would be looked after when it came to renewal time what the tenants might be entitled to in equity as a result is yet to be determined. [89] Fourthly, considering the representation in all the circumstances leads me to conclude that the representation was sufficient to give rise to a claim of estoppel. Relevant circumstances in this case include VCAT’s findings that the director of the tenants sought assurances from directors of Crown about the renewal of the leases on several occasions, which ‘was encouraging enough to give rise to Mr Zampelis’ belief that if such a promise happened to be made thereafter it would have their approval and the approval of Crown’. On several occasions the tenants made it clear that they were concerned to secure a renewal of their lease and had expressed their concerns about spending a lot of money on refurbishment for a five year lease. In these circumstances, the representations that money should be spent to refurbish the premises and that the tenants would be looked after were in response to their concerns and intended to give them comfort that they would obtain the renewal. [90] Fifthly, while his Honour was correct to outline the disconformity between the interpretation of the representation by the tenants and VCAT, that does not mean that the assumption was not reasonable. In Low v Bouverie it was held that the requirement that a representation be unambiguous ‘does not necessarily mean that the language must be such that it cannot possibly be open to different constructions.’ [91] Furthermore, in Walton [sic] Stores Deane J held that the fact that there were differences between the trial judge and Court of Appeal’s interpretations of the assumption was unimportant. It was sufficient that both the trial judge and Court of Appeal had found that the respondents acted on the basis of a mistaken belief. I accept that the representation from Mr Boesley that the tenants would be looked after come renewal time is open to different interpretations. It may have meant that Crown would offer a complete renewal, or that Crown would offer Mr Zampelis a smaller extension or even that Crown would offer compensation for fixtures and fittings left behind.

[92] Having found that the assumption was reasonable, the third issue is whether Crown induced the tenants to adopt the assumption. In Commonwealth v Verwayen, Deane J discussed the importance of the role of the representor in the doctrine of estoppel: That party must have played such a part in the adoption of, or persistence in, the assumption that he would be guilty of unjust and oppressive conduct if he were now to depart from it. [93] A party can induce an assumption by express or implied representation. When assessing the surrounding circumstances of the negotiation, it is clear that [page 255] the tenants had sought multiple assurances from Crown as to its position after the first lease concluded. Further, Crown knew and encouraged the tenants to spend money refurbishing its restaurants in full knowledge of the representation given. In light of the authorities and the nature of the negotiations, Crown induced the tenants to adopt the assumption. [94] The final element to consider is whether the tenants placed reliance on the assumption of Crown and thus acted to their detriment. It is uncontroversial that the expenditure of funds to improve a property is sufficient to prove reliance. [95] The tenants expressed their reluctance to sign the lease and agree to carry out the refurbishment works for a lease of five years. However, as VCAT found, following the representations made by Mr Boesley the tenants sought finance for the refurbishment and carried out these works, thereby changing their position in reliance on the assumption. In summary, the trial judge was correct in finding that VCAT considered the wrong assumption as it should have considered the tenants’ subjective assumption. However, with respect, his

Honour erred in finding that the assumption was unreasonable and uncertain in light of the standard of certainty set by the authorities. It follows that I would grant leave and allow the appeal on the estoppel ground. Whelan JA, with whom Santamaria JA agreed,46 did not decide whether an estoppel arose because, their Honours found, neither VCAT nor the Supreme Court had addressed estoppel on the basis of the limited representation which VCAT found was in fact made (that Crown told Cosmopolitan that they would be looked after at renewal time). Rather, Whelan and Santamaria JJA held that VCAT and the Supreme Court had only decided the estoppel point ‘by reference to the “lower limit” of what was meant by “looking after” the tenants at renewal’.47 The majority therefore ordered that the estoppel claim be remitted for determination by VCAT. At the time of writing, Crown has been granted special leave to appeal to the High Court.48 As Keane J pointed out at the special leave hearing on 11 December 2015, the outcome of the Court of Appeal decision appears, on one argument, to be that ‘someone [Cosmopolitan] who has been expressly refused a right in contract, expressly refused it, signs a contract and says but I have got it anyway’.49 One issue with this outcome is that it potentially outflanks the rule in Hoyt’s Pty Ltd v [page 256] Spencer,50 which held that a collateral contract cannot impinge or alter the rights created by the main contract.

Assumption 9.12

For an estoppel to arise, the representation must lead the

relying party to adopt an assumption. An assumption of existing fact induced by a representation will give rise to a common law estoppel, whereas an assumption as to future behaviour will support an equitable estoppel.51 In Waltons Stores (Interstate) Ltd v Maher,52 Brennan J referred to the need for there to be an assumption about the legal relationship between the representor and the relying party. The relying party’s assumption may be that a particular legal relationship existed, or that relationship would exist and the representor was not free to withdraw from that expectation, or that there is no legal relationship between them.53 The ‘assumption or expectation does not relate to mere facts’, but to facts about the parties’ legal relationship.54 In Waltons Stores, this requirement was easily satisfied. The Mahers had adopted an assumption that the contract (a lease) between them and Waltons had been made, or expected that it would be made, and that Waltons was not free to withdraw. This was clearly an assumption as to the legal relationship between the representor and the relying party. However, where a promise is made outside a legal relationship, Brennan J’s formula might not apply. In Austotel Pty Ltd v Franklins Selfserve Pty Ltd,55 Priestley JA suggested that the assumption that a promise would be performed would be sufficient regardless of any legal relationship: For equitable estoppel to operate there must be the creation or encouragement by the defendant in the plaintiff of an assumption that a contract will come into existence or a promise be performed or an interest granted to the plaintiff by the defendant, and reliance on that by the plaintiff, in circumstances where departure from the assumption by the defendant would be unconscionable.56

[page 257] This formulation was approved by the Full Court of the Federal Court in S & E Promotions Pty Ltd v Tobin Brothers Pty Ltd.57

Inducement 9.13

There must be a causal link between the actions of the representor and the detriment suffered by the relying party; the element of inducement satisfies this link. Therefore, it is essential that the assumption by the relying party has been induced by the representation. Brennan J stated in Waltons Stores (Interstate) Ltd v Maher:58 For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant’s property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiffs reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.

The element of inducement relates to the role played by the representor in the relying party’s adoption of the assumption. In Grundt v The Great Boulder Pty Gold Mines Ltd,59 Dixon J explained: The justice of an estoppel is not established by the fact in itself that a state of affairs has been assumed as the basis of action or inaction and that a departure from the assumption would turn the action or inaction into a detrimental change of position. It depends also on the manner in which the assumption has been occasioned or induced. 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.… [quoting from Thompson v Palmer (1933) 49 CLR 507 at 547 per Dixon J] ‘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; … 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.’

Emphasising that the ‘categories’ of where the representor may be said to have induced an assumption for the purpose of estoppel — for example, those referred to above by Dixon J in Grundt v The Great Boulder Pty Mines Ltd — are not exhaustive and that the question must

[page 258] be resolved ‘not by reference to some preconceived formula framed to serve as a universal yardstick but by reference to all the circumstances of the case’,60 Deane J in Commonwealth v Verwayen61 reiterated that the assumption must be induced by the representor; that is, the representor ‘must have played such a part in the adoption of, or persistence in, the assumption that he would be guilty of unjust and oppressive conduct if he were now to depart from it’.62

Detrimental reliance 9.14

The party who adopts an assumption based on the representation must, in reliance on that assumption, 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 or disadvantage if the representor is allowed to depart from the representation. As mentioned at 9.2 above, the prevention of detriment is the key aim of estoppel. In Thompson v Palmer,63 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.’

9.15

Forms of detriment The forms that detriment can take vary in accordance with the circumstances of the particular case. The relying party must have ‘placed himself in a position of material disadvantage if departure from the assumption be permitted.’64 However, the detriment must be something of value. In Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd,65 Handley JA noted the contrast between the doctrine of consideration, where a mere peppercorn may suffice to facilitate an exchange of binding promises, and the doctrine of

estoppel, where the loss of an item such as a peppercorn would not constitute a detriment. Examples of the circumstances in which a detriment has been found to exist include demolishing and beginning to construct a building;66 providing domestic services for your father;67 and improving another person’s land.68 The detriment need not be financial, as demonstrated by Commonwealth v Verwayen, where the detriment was the lost opportunity to proceed with a negligence claim without the Commonwealth pleading the statute of limitations as a defence. [page 259] 9.16

The High Court of Australia considered the equitable concept of ‘detriment’ in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd.69 This was a case in the context of the ‘change of position’ defence to the repayment of money paid by mistake, a form of restitution. Australian Financial Services and Leasing Pty Ltd (AFSL) made payments to trade creditors (Hills) of one of its customers. AFSL was induced to make these payments by the customer’s fraud. At the customer’s request, Hills applied the payments from AFSL to discharge the customer’s debts. When AFSL discovered the fraud and demanded payment, Hills resisted the claim on the basis that they had changed their position on the faith of the payments (the ‘change of position’ defence). The ‘change of position’ defence requires the party relying on it to show that it would suffer detriment if they were required to repay the money, such that ‘it would be inequitable in all the circumstances to require [the party who received the mistaken payment] to make restitution’.70 The plurality referred to the concept of ‘detrimental reliance’ in cases of estoppel, and both French CJ and Gageler J referred to the possibility of a detrimental change of position in this case being grounds for estoppel if other

elements required for estoppel were present.71

Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560; 307 ALR 512 High Court of Australia Hayne, Crennan, Kiefel, Bell and Deane JJ at CLR 599–600: This view accords with the understanding of detrimental reliance sufficient to ground an estoppel, as explained in Grundt v Great Boulder Pty Gold Mines Ltd by Dixon J. The fundamental purpose of an estoppel is to provide protection against the detriment which would flow from a party’s change of position if the assumption which led to it were deserted. While it may be accepted that estoppel affords a level of protection to expectations different from that afforded by the change of position defence, and estoppel is also concerned with the manner in which expectations are created, both estoppel and the defence are grounded in that body of equitable doctrine that prevents the unconscientious assertion of what are said to be legal rights. In Grundt, Dixon J explained the precise ground on which estoppel precludes an otherwise good claim. [page 260] … It will be observed that Dixon J saw that a party’s position, which had changed on the basis of an assumed state of affairs that is now sought to be altered, provided the necessary detriment. The passage makes clear that the detriment must flow from reliance upon that assumption, when that assumption is to be departed from. Detriment has not been considered to be a narrow or technical concept in connection with estoppel. So long as it is substantial, it need not

consist of expenditure of money or other quantifiable financial detriment, as Robert Walker LJ observed in Gillett v Holt. His Lordship went on to say that the requirement of detriment must be approached as ‘part of a broad inquiry as to whether repudiation of an assurance is or is not unconscionable in all the circumstances.’ In the context of mistaken payments, the question is whether it would be unconscionable for a recipient who has changed its position on the faith of the receipt to be required to repay. [French CJ expressed agreement with the plurality’s statement that detriment is not a ‘narrow or technical concept’.72 Gageler J also made some observations about the doctrines of equitable and common law estoppel.] Gageler J at 622–5 (footnotes omitted): The principle on which [the doctrine of estoppel] is founded is that explained by Dixon J in Thompson v Palmer (where the doctrine was relied on as a defence to a claim in equity) and in Grundt (where the doctrine was relied on as a defence to an action at law). The principle is that the law does not permit an unjust departure by a party from an assumption which that party has had some part in occasioning another party to adopt or accept for the purpose of their legal relations. What makes such a departure ‘unjust’ — what might in the present context be said to be the relevant ‘unjust factor’ — is that, if departure were permitted, the other party would be left in a position of material detriment through having made the assumption the other party caused to be adopted. That is to say: … The foundation of an estoppel lying in a change of position to the prejudice of the party asserting the estoppel, the burden of proof lies with that party. The ‘real detriment or harm’ which that party must prove to ground an estoppel can be any ‘material disadvantage’ which would arise from permitting departure from the assumption on the faith of which that party acted or refrained from acting. Material disadvantage must be substantial, but need not be quantifiable in the same way as an award of damages. Material disadvantage can lie in the loss of a legal remedy, or of a ‘fair chance’ of obtaining a

commercial or other benefit which ‘might have [been] obtained by ordinary diligence’. [page 261] The joint reasons in David Securities noted that the defence of change of position had been recognised in Lipkin Gorman [[1991] 2 AC 548], against the background of two perceived inadequacies or rigidities in the doctrine of estoppel as it had then developed in the United Kingdom. One was the perceived need for a representation by the payer to the effect that the recipient was entitled to retain the money paid. The other was the perceived operation of the doctrine as no more than a rule of evidence so as always to produce an all-or-nothing consequence: the payer being held to the assumption to which the recipient was induced, so as to recover nothing in a case where the doctrine was found to be applicable, irrespective of the degree of detriment that would flow to the recipient were the induced assumption to be abandoned. The doctrine of estoppel in pais has not developed so rigidly in Australia, at least since The Commonwealth v Verwayen. First, even outside the area of conventional estoppel, in which it has long been accepted that belief in the correctness of an assumed state of affairs is not always necessary, the doctrine is not necessarily confined to assumptions induced by representations. The doctrine is capable of principled extension to another category of induced assumption from which departure would be unconscionable. The doctrine, as has long been observed, is particularly apt to provide a defence to an action to enforce a potentially onerous obligation which can arise without fault on the part of the obligor. Secondly, whatever other differences might exist between its operation in various specific categories of circumstances, the doctrine now operates at law as in equity as a substantive rule of law. As a substantive rule of law, there is no reason to consider that the doctrine should be confined to producing an all-or-nothing consequence where that consequence would undermine the rationale for its operation. To the

contrary, ‘the substantive doctrine of estoppel permits a court to do what is required to avoid detriment and does not, in every case, require the making good of the assumption’. That is to say, ‘the prima facie entitlement to relief based on the assumed state of affairs’ is ‘qualified if it appears that that relief would exceed what could be justified by the requirements of conscientious conduct and would be unjust to the estopped party’. To be more precise: Prima facie, the operation of an estoppel by conduct is to preclude departure from the assumed state of affairs. It is only where relief framed on the basis of that assumed state of affairs would be inequitably harsh, that some lesser form of relief should be awarded. … In particular, the prima facie entitlement to relief based upon the assumed state of affairs will be qualified in a case where such relief would exceed what could be justified by the requirements of good conscience and would be unjust to the estopped party. In such a case, relief framed on the basis of the assumed state of affairs represents the outer limits within which the relief appropriate to do justice between the parties should be framed. [page 262] The precise relief which flows from an estoppel operating as a defence, whether to an action at law or to a claim in equity, is in this way tailored so as not to be disproportionate to a measurable detriment. There is no reason in principle why that tailoring of relief cannot involve the reduction pro tanto of an order for restitution. The joint reasons in David Securities invoked the language of estoppel when it emphasised the ‘central element’ of the defence of change of position to be that the defendant ‘has acted to his or her detriment on the faith of the receipt’. There is much to be said for treating the

defence of change of position as there articulated as a particular application of that doctrine. The High Court held unanimously that the ‘change of position’ defence was made out. Hills could show that it had suffered detriment by continuing to trade with the customer on the basis of the payments received,73 and had not gone ahead with appointing lawyers and seeking payment of the debt owed to it by the customer, which meant that it gave up a commercial opportunity the value of which had been lost because the customer, in the interim, went into liquidation.74 9.17

In Ashton v Pratt,75 the New South Wales Court of Appeal applied Hills Industries in a case of estoppel where detrimental reliance was in issue. Ashton provided Pratt with escort services at various points in time. In November 2003, Pratt allegedly promised Ashton to settle $2.5 million on trust for each of Ashton’s children, pay her an allowance of $500,000 per annum, pay her $36,000 for rental accommodation and $30,000 per annum for business expenses, in return for her not returning to the escort industry but providing him with services as his mistress. When Pratt died, Ashton brought proceedings against his estate in an attempt to hold Pratt’s estate to his promise. Ashton pleaded equitable estoppel, among other things; she pleaded that Pratt was estopped from denying that Ashton and Pratt had entered into a contractual arrangement that Ashton would become Pratt’s mistress and that he would perform his promises. Ashton said that she suffered detriment by not returning to the escort business and becoming Pratt’s mistress.76 The Court of Appeal found that Ashton had not suffered detriment in the relevant sense. [page 263]

Ashton v Pratt (2015) 88 NSWLR 281; 318 ALR 260 New South Wales Court of Appeal Bathurst CJ at NSWLR 307: It is difficult to see what detriment, if any, Ms Ashton suffered by becoming Mr Pratt’s mistress. Her evidence was that prior to the November conversations she had embarked on a sexual relationship with him and the continuation of that relationship, particularly when she did not regard it as exclusive and where she said there was affection between them, did not seem to amount to a detriment. Indeed, any detriment involved in simply becoming Mr Pratt’s mistress was removed when he indicated the relationship could no longer continue. The only other detriment identified by Ms Ashton was that she was unable to return to the escort business. However, during the period she was Mr Pratt’s mistress, a period of about 12 months, she received gifts totalling $165,000, together with the use of a car. This amount does not include the $20,000 cash she received in October 2003 from Mr Pratt, nor the $160,000 and the title to the motor vehicle that she received subsequent to the termination of the relationship. Further, there was nothing to suggest that the period during which she acted as Mr Pratt’s mistress in some way disabled her from returning to the escort business. She in fact did return to the industry in 2006. In these circumstances it does not seem to me that Ms Ashton suffered any detriment in Mr Pratt resiling from his promise, certainly not one that good conscience requires his estate to be held to the promises made by him. As was stated by Gageler J in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; 88 ALJR 552 at [150] the detriment or harm required to ground an estoppel can be any material disadvantage. Such material disadvantage must be substantial, although it need not be quantifiable in the same way as an order of damages. In the present case Ms Ashton suffered no material disadvantage, certainly not one which could be described as substantial.

McColl JA agreed with Bathurst CJ.77 Meagher JA also agreed with Bathurst CJ but added some of his Honour’s own observations on questions raised by Ashton’s claim in relation to equitable estoppel.78 9.18

Onus of proof — establishing detrimental reliance In Sidhu v Van Dyke,79 the High Court of Australia considered what is necessary to establish detrimental reliance for the purpose of equitable estoppel. A married [page 264] couple, the Sidhus, allowed another married couple, the Van Dykes, to occupy a cottage on part of a property the Sidhus owned. Mr Sidhu and Ms Van Dyke commenced a sexual relationship. Mr Sidhu told Ms Van Dyke that he wanted her to have a home with him and that he planned to subdivide the Sidhu’s property and then transfer the cottage on that property to Ms Van Dyke. The Van Dykes divorced after Ms Van Dyke and Mr Sidhu’s affair was discovered. Ms Van Dyke did not seek a property settlement in the divorce. She continued to live in the cottage with her young son and paid the Sidhus rent below the market rate. Mr Sidhu then gave Ms Van Dyke a signed note confirming that he had represented to her that he was willing to give the cottage to her as a gift. The property was not subdivided, the cottage was destroyed by fire and Ms Van Dyke moved into a vacant demountable cottage on the homestead block. After this, Mr Sidhu gave Ms Van Dyke a handwritten statement confirming that Ms Sidhu agreed that the cottage would be transferred once rebuilt and it was possible to transfer the lot on which it was rebuilt. A couple of months later, Ms Van Dyke offered to purchase the demountable cottage from the Sidhus. The Sidhus refused to

sell, on the basis that they did not own the land on which it was located. That day Ms Van Dyke left the homestead, ending her relationship with Mr Sidhu. The homestead block was never subdivided. Ms Van Dyke sued Mr Sidhu, claiming that he was estopped from denying her interest in the property on which the cottage had been and seeking orders that Van Dyke pay her equitable compensation reflecting the value of the cottage that had been burnt down. Ms Van Dyke had suffered detriment in that she did not seek a property settlement in the divorce from her husband and, for about eight-and-a-half years while she lived in the cottage, did not seek full-time employment thereby forgoing the opportunity to earn wages. Aside from paying rent to the Sidhus, Ms Van Dyke had also done maintenance and renovation work, unpaid, on both the cottage and the homestead.80 The issues considered on appeal to the High Court were the sufficiency of proof of detrimental reliance and the relief to be ordered (discussed below at 9.31). The plurality judgment explained that an inference may arise as to detrimental reliance where the relying party enters into a contract after a material representation has been made to that party; the onus of proof remains on the relying party who is alleging the estoppel to show detrimental reliance. [page 265]

Sidhu v Van Dyke (2014) 251 CLR 505; 308 ALR 232 High Court of Australia

French CJ, Kiefel, Bell and Keane JJ at CLR 521–3: In Gould v Vaggelas [(1984) 157 CLR 215 at 236], Wilson J, with whom Gibbs and Dawson JJ agreed, speaking of an action in deceit, said: 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. It is apparent that in the passage cited from the plurality judgment in Newbon v City Mutual Life Assurance Society Ltd [(1935) 52 CLR 723], their Honours were speaking of a ‘presumptive connection’ as the equivalent of the ‘fair inference’ of which Wilson J spoke. In Gould v Vaggelas, Brennan J said: An inference of inducement may be drawn when a party enters into a contract after a material representation has been made to him, but it is no more than an inference of fact and it is settled law that such an inference may be rebutted by the facts of the case. Nothing in the judgments in Gould v Vaggelas suggests that the onus of proof in relation to detrimental reliance shifts to the defendant in any circumstances. The line of English authority on which Barrett JA relied was founded on the statement by Lord Denning MR in Greasley v Cooke [[1980] I WLR 1306] that ‘[t]here [was] no need for [the promisee] to prove that she acted to her detriment or to her prejudice.’ In the present case, this statement was treated as involving a shift in the burden of proof on the issue of detrimental reliance. Lord Denning’s view is contrary to observations of high authority in Smith v Chadwick [(1884) 9 App Cas 187 at 196] by Lord Blackburn, with whom the Earl of Selborne LC and Lord Watson agreed. Lord Blackburn spoke of the circumstances in which a fair inference of fact might be drawn in terms substantially repeated by Wilson J in the

passage from Gould v Vaggelas set out above; but his Lordship expressly rejected the suggestion that a defendant might be obliged to disprove inducement once the making of a material representation had been proved. In point of principle, to speak of deploying a presumption of reliance in the context of equitable estoppel is to fail to recognise that it is the conduct of the representee induced by the representor which is the very foundation for equitable intervention. Reliance is a fact to be found; it is not to be imputed on the basis of evidence which falls short of proof of the fact. It is actual reliance by [page 266] the promisee, and the state of affairs so created, which answers the concern that equitable estoppel not be allowed to outflank Jorden v Money [[1854] 10 ER 868 at 880–1] by dispensing with the need for consideration if a promise is to be enforceable as a contract. It is not the breach of promise, but the promisor’s responsibility for the detrimental reliance by the promisee, which makes it unconscionable for the promisor to resile from his or her promise. In Giumelli v Giumelli [(1999) 196 CLR 101 at 121], Gleeson CJ, McHugh, Gummow and Callinan JJ approved the statement of McPherson J in Riches v Hogben [[1985] 2 Qd R 292 at 301] that: It is not the existence of an unperformed promise that invites the intervention of equity but the conduct of the plaintiff in acting upon the expectation to which it gives rise. … The approach suggested by Lord Denning [in Greasley v Cooke [1980] 1 WLR 1306] should not be applied in Australia. The legal burden of proof borne by a plaintiff did not shift. To speak of a shifting onus of proof is both wrong in principle and contrary to authority. The respondent at all times bore the legal burden of proving that she had been induced to rely upon the appellant’s promises.

The High Court disagreed with the primary judge’s finding that Ms Van Dyke’s decision not to seek a property settlement from Mr Van Dyke was not in reliance on Mr Sidhu’s promises because it was not ‘objectively reasonable’ for her to rely on a promise of a transfer given that the performance of the promise depended on the land being subdivided and the consent of Mr Sidhu’s wife.81 In this respect, the High Court affirmed the Court of Appeal’s decision. However, as illustrated by the extract above, the High Court rejected the Court of Appeal’s application of a ‘presumption of reliance’; that is, the court rejected the Court of Appeal’s view that Ms Van Dyke had to prove that she would not have remained on the property and acted in the way that she did ‘in any event’. Instead, the High Court focused on Ms Van Dyke’s evidence which positively established detrimental reliance. The court also held that the representation need not have been the sole inducement to the relying party’s conduct: First, there is the evidence-in-chief of the respondent … That evidence was likely, as a matter of the probabilities of human behaviour, to be true. Indeed, it would be remarkable if the appellant’s promises did not have some influence upon the respondent’s decision to stay on and work at Burra Station. Upon the breakdown of the respondent’s marriage, she was confronted with difficult

[page 267] decisions relating to the course of her life and the care and maintenance of her child. The appellant’s promises were objectively likely to have had a significant effect upon the decision-making of a person in the respondent’s position. The appellant’s assurances were integral to his proposal to the respondent to put their relationship on a firm long-term footing. It is unlikely that she would have thrown in her lot with the appellant and exerted herself as she did over a period of eight and a half years if he had not made the promises which he in fact made. To the contrary, it is likely that she would have sought to maximise her own income for the benefit of herself and her infant son by seeking the most gainful form of employment. … Her Honour’s finding that the appellant’s promises ‘played a part in her willingness to spend time and effort in the maintenance and improvement of The Oaks Cottage

and assisted on the Burra Station property’ warranted the conclusion that the respondent had discharged the onus she bore on the basis that to establish estoppel by encouragement it is not necessary that the conduct of the party estopped should be the sole inducement operating on the mind of the party setting up the estoppel. Counsel for [Mr Sidhu] disputed this proposition but did not cite any authority in support of their position. [Ms Van Dyke’s] position is amply supported by authority.82

Although Gageler J agreed with the majority as to the outcome, he posited a different test to be satisfied in order to show that conduct was in reliance on the assumption induced by the representor. His Honour held that Ms Van Dyke needed to establish ‘that she would not have so acted or refrained from acting if she did not have the belief [in the truth of Mr Sidhu’s representations]’, not merely that Mr Sidhu’s representations were a ‘contributing cause’ of her conduct.83

Knowledge 9.19

In Waltons Stores (Interstate) Ltd v Maher,84 Brennan J held that the representor must know that the relying party has acted or will act, or refrain from acting, to their detriment in reliance on the assumption the representor has induced. Knowledge will be present in most situations where a representation induces an assumption, due to the proximity of the parties. In that case, Waltons was aware that the Mahers had demolished their building and commenced construction in reliance on the assumption that the lease had, or would be, executed by Waltons. Further, Waltons had received a signed lease from the Mahers, making it difficult to deny [page 268] that it knew the Mahers thought the lease binding on the parties and were going about the demolition and construction on this assumption.

In Commonwealth v Verwayen,85 the Commonwealth was aware that Verwayen was continuing his legal action in reliance on the Commonwealth’s representation that it would not plead the statute of limitations.

Reasonableness 9.20

The actions of the relying party on the basis of the assumption induced by the representor must be reasonable.86 There are two relevant considerations with regard to reasonableness. First, the relying party must act reasonably in adopting the assumption; that is, reliance on the representation must be reasonable. Second, the action taken in reliance on the assumption must be reasonable. Reasonableness thus acts as a limitation or, some have argued, a normative judgment about,87 the circumstances in which an estoppel will arise. As Deane J indicated in Commonwealth v Verwayen, this assessment is not always clear-cut and involves questions of judgment: Ultimately, however, the question whether departure from the assumption would be unconscionable must be resolved not by reference to some preconceived formula framed to serve as a universal yardstick but by reference to all the circumstances of the case, including the reasonableness of the conduct of the other party in acting upon the assumption and the nature and extent of the detriment which he would sustain by acting upon the assumption if departure from the assumed state of affairs were permitted.88

9.21

Reasonableness of reliance on assumption Whether reliance on the representation is reasonable will often be related to the question of whether the representation is sufficiently clear. It may be unreasonable for a person to rely on a representation that is vague.89 For example, it is unlikely to be reasonable to act in reliance on representations where the language of those representations expressly indicates that ‘a lot more work’ needs to be done on a proposal, the proposal is going to be ‘very very difficult’ to operate because of certain legislation and the proposal omits key terms.90

[page 269] It is also likely to be unreasonable to rely on representations in pre-contract negotiations where the agreement of the parties is stated to be ‘subject to contract’ in the Masters v Cameron91 sense. In these circumstances, the parties are ‘taken to be aware of the right of the other either not to proceed with a contract or to change his or her … intentions’.92 It would be a struggle, although not impossible, to contend that it was reasonable to adopt an assumption that the representor would not depart from the subject-to-contract agreement, because that phrase shows that the representor explicitly retained his or her right to depart from it.93 It may be unreasonable to rely on a representation that involves predictions of matters that are likely to vary over the long term. In Murphy v Overton Investments Pty Ltd,94 Mr and Mrs Murphy entered into a 99-year lease with Overton, which owned and operated a retirement village. The Murphys claimed that Overton made certain statements before entering into the lease which misled them as to the extent of the contributions they would have to make to the expenses of running the retirement village, and that these statements induced them to enter into the lease. The Murphys pleaded that Overton was estopped from recovering certain amounts that the lease expressly permitted to be recovered, because it would be unconscionable to allow Overton to depart from the assumption it had induced as to the contribution levels to be paid by the Murphys. Branson J rejected the Murphys’ estoppel argument: What Mr and Mrs Murphy sought, in effect, was to prevent Overton over the entire life of the Lease from claiming contributions in respect of types of expenditure which did not form the basis for the calculation of the $55.71 figure and levels of expenditure out of line with those which did form the basis of that calculation. If Mr and Mrs Murphy did assume that, in arriving at the figure of $55.71 per week as the initial contribution level, Overton had taken into account all expenditure likely to be incurred in future budget periods in operating the Heritage Village, it was, in my view, unreasonable for them to have done so. As his Honour recognised, in the life

of a retirement village new kinds of expenditures can from time to time be expected to arise and costs incurred in one period may be expected to differ appreciably from costs incurred in another. To take but a few examples, expenditure on maintenance might be expected to increase as buildings and chattels age; new levels of costs might at any time flow from changed requirements of public authorities; changes in management practices over time

[page 270] might result in changed cost structures; and unprecedented expenditures might arise from accidents and natural disasters. If the approach is adopted of looking to see if Overton made a promise or representation to Mr and Mrs Murphy as to the expenditure likely to be incurred in future budget periods in operating the Heritage Village (see Legione v Hateley (1983) 152 CLR 406 per Mason and Deane JJ at 435), it seems to me that neither the statements of Mrs Taylor, nor the Information Booklet, nor the statements and the Information Booklet in combination, can be seen as constituting a clear promise or representation as to such expenditure.95

It has also been held that it is unreasonable to adopt an assumption that if, in the course of litigation, a new case is decided, the other party will not inform the court of that decision and will change its position accordingly. In Australian Securities Commission v Marlborough Gold Mines Ltd,96 a company claimed that the regulator was estopped from objecting to the court approving a scheme of arrangement. The company’s argument failed because, among other things, it was unreasonable for the company to assume that the regulator would continue to maintain a particular view of the Corporations Law despite a new Federal Court decision which gave a contrary view and which the regulator became aware of during the course of the scheme of arrangement proceedings.97 The reasonableness of reliance may also be related to the question of whether it would unconscionable for the representor to resile from the representation. It is difficult to argue that it is unconscionable for the representor to depart from a representation where no reasonable person in the

representor’s position would have expected the representation it made to be relied upon.98 Moreover, no estoppel will arise where a reasonable person would not interpret the representation relied upon the way that the relying party interpreted that representation.99 For example, in Legione v Hateley,100 Mason and Deane JJ found that the Hateleys’ solicitors had merely represented that she personally thought an extension on settlement would be alright but that she would have to get instructions from her client. Their Honours found that it was not possible, let alone reasonable, to interpret the solicitor’s statement in the way Legione contended; [page 271] that is, as a representation that the purchasers could, with impunity, disregard the deadline fixed by the written notice of rescission that had been served on the purchasers by the vendors. 9.22

Reasonableness of action taken in reliance on assumption Ciavarella v Polimeni101 provides an example of where the action taken in reliance on the assumption was not entirely reasonable. In that case, a case of proprietary estoppel, Ciavarella sought specific performance of a contract for the purchase of a vineyard and associated water rights. Young CJ had to assess the compensation payable in light of finding that an estoppel arose but holding that specific performance was not an appropriate remedy due to innocent third parties having subsequently contracted to purchase the same vineyard. Acting on the assumption induced by the respondent that the transaction was binding, Ciavarella alleged that, among other things, he retained 500 megalitres of water to use on the vineyard rather than selling the excess water at a profit. Retaining this amount

of excess water was not required or contemplated by the contract Ciavarella alleged existed. Young CJ found that ‘only the expenditure that a reasonable person might expect to flow from the inducement … should be laid against the conscience of the defendant’.102 While the retention of 500 megalitres of water did not reasonably flow from the assumption induced by the respondent, Young CJ held that it would have been reasonable to retain 168 megalitres because that was required to compensate the relevant water authority under the alleged contract. The compensation for loss resulting from holding, rather than selling, the water was thus adjusted by a factor of 168/500.103

Family and commercial settings compared 9.23

A cluster of cases involving proprietary estoppel has arisen in circumstances involving family arrangements of transferring property from parents to their children; for example, Waddell v Waddell,104 Sion v NSW Trustee & Guardian,105 Evans v Braddock106 and Re Mahoney.107 There has been some discussion of whether the principles of estoppel are to be applied in the same way in both commercial and family settings, particularly the principles attending the reasonableness element of promissory estoppel. [page 272] In Tadrous v Tadrous,108 Meagher JA, with whom Young JA and Handley AJA agreed, suggested the following distinction between the requirements for estoppel in family, as opposed to commercial, settings: One feature that distinguishes the equitable principle from the enforcement of a contractual obligation is the absence of a legally binding promise. What attracts that principle is an assurance or encouragement which creates an expectation that a [sic]

interest will be granted and conduct in reliance upon that expectation: Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 at [35] quoting McPherson J in Riches v Hogben [1985] 2 Qd R 292 at 300–301. It is sufficient to give rise to the equity that between the parties the expectation is created and acted upon on the basis that it will be made good: Ramsden v Dyson (1866) LR 1 HL 129 at 170 per Lord Kingsdown. An equitable estoppel can be established notwithstanding that the expectation contains elements that would not be sufficiently certain to amount to a valid contract or is formed on the basis of vague assurances: Gillett v Holt [2001] Ch 210 at 226 per Robert Walker LJ. This is particularly so in circumstances … where the estoppel arises in a domestic or family context.

9.24

In DHJPM Pty Ltd v Blackthorn Resources Ltd,109 Meagher JA had expressed this view more fully with reference to two English cases.

DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728; 285 ALR 311 New South Wales Court of Appeal Meagher JA at NSWLR 742–3: Whether a representation or promise has created or encouraged an expectation which if relied upon will be sufficient to give rise to an equity obviously depends upon the circumstances, including the nature of the relationship between the parties and whether they contemplate that any interest to be granted or promise to be performed is to be created by a binding contract. This is illustrated by the decisions of the House of Lords in Cobbe v Yeoman’s Row Management Ltd and Thorner v Major. In the former, an equitable estoppel was relied upon in a commercial context. In the latter, the claimant sought to enforce an expectation of inheritance against the estate of his father’s cousin. In Cobbe v Yeoman’s Row Management Ltd the critical question was whether the conduct was such as to induce an expectation affecting legal relations which was binding and irrevocable. Having noted that it is ‘not enough to hope, or even to have a confident expectation, that the person who has given assurances will eventually do the proper thing’, Lord Walker continued:

[page 273] [66] The point that hopes by themselves are not enough is made most clearly in cases with a commercial context, of which Attorney General of Hong Kong … is the most striking example. It does not appear so often in cases with more of a domestic or family flavour, from Inwards v Baker and Pascoe v Turner to Windeler v Whitehall; Gillett v Holt; Grundy v Ottey; Jennings v Rice and Lissimore v Downing. The son who built the bungalow in Inwards v Baker, the young farm manager in Gillett v Holt, the elderly country neighbour in Jennings v Rice and the female companions in the other three cases almost certainly did not take any legal advice until after the events relied on as creating the estoppel. They may not have had a clear idea of the quantum of what they expected to get … But in those cases in which an estoppel was established, the claimant believed that the assurance on which he or she relied was binding and irrevocable. … [68] … In the commercial context, the claimant is typically a business person with access to legal advice and what he or she is expecting to get is a contract. In the domestic or family context, the typical claimant is not a business person and is not receiving legal advice. What he or she wants and expects to get is an interest in immovable property, often for long-term occupation as a home. The focus is not on intangible legal rights but on the tangible property which he or she expects to get. The typical domestic claimant does not stop to reflect (until disappointed expectations lead to litigation) whether some further legal transaction (such as a grant by deed, or the making of a will or codicil) is necessary to complete the promised title. (Emphasis in original; citations omitted) In Thorner v Major, the party resisting the estoppel argued that the assurances were not sufficiently certain and relied upon observations of

Lord Scott in Cobbe v Yeoman’s Row Management Ltd. Addressing that argument, Lord Neuberger said: [96] Secondly, the analysis of the law in Cobbe’s case … was against the background of very different facts. The relationship between the parties in that case was entirely arm’s length and commercial, and the person raising the estoppel was a highly experienced businessman. The circumstances were such that the parties could well have been expected to enter into a contract, however, although they discussed contractual terms, they had consciously chosen not to do so. They had intentionally left their legal relationship to be negotiated, and each of them knew that neither of them was legally bound. What Mr Cobbe then relied on was ‘an unformulated estoppel … asserted in order to protect [his] interest under an oral agreement for the purchase of land that lacked both the requisite statutory formalities … and was, in a contractual sense, incomplete’.

[page 274] 9.25

In Construction Technologies Australia Pty Ltd v Doueihi,110 White J discussed this issue and referred to Tadrous v Tadrous and DHJPM Pty Ltd v Blackthorn Resources Ltd, extracted above, with some hesitancy.

Construction Technologies Australia Pty Ltd v Doueihi (2014) 17 BPR 33,457 Supreme Court of New South Wales White J at 33,489–33,505: The question whether a party claiming an equity arising by estoppel must have adopted an assumption about a

matter of binding legal right can arise both in cases where commercial parties are negotiating the terms of a contract which they propose to enter into and in cases where a party to a domestic or familial relationship assumes that an interest will be granted without there being any negotiation as to the terms of a contract. This was a point made by Lord Walker of Gestingthorpe in Cobbe at [68] where his Lordship said: It is unprofitable to trawl through the authorities on domestic arrangements in order to compare the forms of words used by judges to describe the claimants’ expectations in cases where this issue (hope or something more?) was not squarely raised. But the fact that the issue is seldom raised is not, I think, coincidental. In the commercial context, the claimant is typically a business person with access to legal advice and what he or she is expecting to get is a contract. In the domestic or family context, the typical claimant is not a business person and is not receiving legal advice. What he or she wants and expects to get is an interest in immovable property, often for long-term occupation as a home. The focus is not on intangible legal rights but on the tangible property which he or she expects to get. The typical domestic claimant does not stop to reflect (until disappointed expectations lead to litigation) whether some further legal transaction (such as a grant by deed, or the making of a will or codicil) is necessary to complete the promised title. But the cases do not neatly fall into two such separate categories. This is a case involving commercial parties, but one where there was also a familial relationship between the parties through Mr Hogan’s family relationship with three of the owners. Despite there having been early discussions about terms of an agreement for lease and although there was discussion and agreement about some terms of the lease, CTA did not expect to get a contract. Moreover, many cases between commercial parties where a plea of equitable estoppel has succeeded are cases where the plaintiff’s focus was on intangible rights, such as a right to possession or a right of way.

[page 275] … What is it that distinguishes Tadrous v Tadrous and DHJPM Pty Ltd v Blackthorn Resources Ltd as to the required expectation? … The ground of distinction adverted to in the reasons of the Court of Appeal in Tadrous v Tadrous (at [39]) is that the estoppel there arose in a domestic or family context, albeit in the context of a commercial property development. My own view … is that the broader formulation is to be preferred and a belief as to current rights, or as to whether the defendant is legally bound to proceed, should not be a separate requirement for the establishment of an equitable estoppel. Commercial cases are adequately dealt with by the requirements of reliance on the defendant’s conduct as inducing an assumption that it would proceed, and that the reliance be reasonable. … A domestic or family context will be relevant to the establishment and reasonableness of reliance. The reasonableness of reliance is relevant to, but not decisive of, the question whether permitting departure from the assumption would be unconscionable. … However, I do not think I am free to act on my own view. I must take the law as most recently stated by the Court of Appeal. I do not think that in Tadrous v Tadrous the Court of Appeal intended to depart from what had been said earlier in DHJPM Pty Ltd v Blackthorn Resources Ltd, except in a domestic or family context. In my view, the differences of outcome in cases in a purely commercial setting and cases in a domestic [or] family setting are to be explained not by applying different principles to those different classes of case, but by the different application (in some, but not all, cases) of the same

requirements of reliance and reasonable reliance that are applicable to all cases. I respectfully doubt that equitable principles should be fragmented in the way indicated in Tadrous v Tadrous. Nonetheless, I think I am bound by DHJPM unless the present case is in a domestic or family context.

Unconscionability 9.26

Unconscionability is the element upon which equity creates rights; it is the ‘driving force behind equitable estoppel.’111 As McHugh J stated in Commonwealth v Verwayen:112 [page 276] 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.

There is, however, some dispute as to whether unconscionability is a separate element in estoppel, or merely a principle underpinning estoppel.113 In Forbes v Australian Yachting Federation Inc,114 Santow J stated: ‘[I]t is an essential requirement of the principle of estoppel, that the conduct of the parties sought to be estopped must properly be characterised as unconscionable’. Deciding whether certain conduct is unconscionable requires an evaluation of the conduct of the allegedly estopped party in all of the circumstances of the case. As Seddon and Ellinghaus note, the issue is not whether there has been any unconscionability but ‘whether the conduct is sufficiently unconscionable’.115 Deane J in Commonwealth v Verwayen116

suggested four main categories, expressed to be nonexhaustive, which may indicate unconscionability: The cases indicate four main, but not exhaustive, categories in which an affirmative answer to that question may be justified, namely, where that party: (a) has induced the assumption by express or implied representation; (b) has entered into contractual or other material relations with the other party on the conventional basis of the assumption; (c) has exercised against the other party rights which would exist only if the assumption were correct; (d) knew that the other party laboured under the assumption and refrained from correcting him when it was his duty in conscience to do so. Ultimately, however, the question whether departure from the assumption would be unconscionable must be resolved not by reference to some preconceived formula framed to serve as a universal yardstick but by reference to all the circumstances of the case, including the reasonableness of the conduct of the other party in acting upon the assumption and the nature and extent of the detriment which he would sustain by acting upon the assumption if departure from the assumed state of affairs were permitted.117

[page 277] In Sidhu v Van Dyke,118 the plurality explained how one might gauge unconscionability: This category of equitable estoppel serves to vindicate the expectations of the representee against a party who seeks unconscionably to resile from an expectation he or she has created. The extent to which it is unconscionable of the appellant to seek to resile from the position expressed in his assurances to the respondent may be gauged by reflecting on the likely response of the respondent if the appellant had told her in January 1998: ‘I am happy for you to remain at Oaks Cottage, but only for so long as it suits me and my wife to have you here; and, while you remain on the property, you must care for it as if you were the owner of the property and do unpaid work on parts of Burra Station other than the property. Until I make the property over to you, you must pay rent sufficient to content my wife. Should you choose to leave, you will leave with nothing in return for the value of your work here.’119

9.27

It has been suggested that, similarly to the element of reasonableness discussed above, in assessing whether conduct is unconscionable, factors specific to a particular family relationship may bear on the evaluation. Corby J stated in Como v Helmers:120

Cases in which courts have recognised a proprietary estoppel in a domestic or family context generally involve acts of reliance and the prospect of detriment that extend beyond what would ordinarily be attributable to natural love and affection and/or the recognition of family ties and obligations. It is that extra dimension in the facts that will often mark the departure or proposed departure from a representation or assumption as unconscionable. It will also stamp the relevant representation or promise with the clarity required for an estoppel and indicate that what was said or done was intended to affect legal relations between the parties. … [The respondent] also claims that she provided care and assistance for [her mother] and paid for maintenance work to be undertaken. It will most often be the case that family members do not perform such acts in reliance on an expectation that will found an estoppel.

Equitable estoppel: proprietary estoppel 9.28

Proprietary estoppel is a category of equitable estoppel, which is generally said121 to stem from the English cases of Dillwyn v Llewelyn122 and Ramsden v Dyson.123 Proprietary estoppel arises where there is a [page 278] representation as to the future acquisition of ownership of property that induces an assumption in another person, who relies on that assumption to their detriment.124 Although proprietary estoppel is viewed as a species of equitable estoppel, there is debate about whether it remains distinct from promissory estoppel insofar as promissory estoppel acts only as a ‘restraint on the enforcement of legal rights’, while proprietary estoppel may operate to be a ‘source of obligation’.125 It has also been suggested that, unlike promissory estoppel, proprietary estoppel does not require ‘certainty of the representation or promise’ such that ‘vague and imprecise conduct is often enough to give rise to an equitable proprietary estoppel’.126

Proprietary estoppel arises where there is a representation as to future acquisition of ownership of property that induces an assumption in another person, who relies on that assumption to their detriment. Giumelli v Giumelli,127 discussed at 9.30, and Sidhu v Van Dyke,128 discussed at 9.18 and 9.31, are cases about proprietary estoppel.

Relief in cases of equitable estoppel 9.29

When the elements of equitable estoppel are established, an equity is created in favour of the relying party. A court has a broad discretion in applying equitable relief, and the specific remedy that a court provides — specific performance, equitable compensation or an injunction — will depend upon the particular circumstances of the case.129 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 [page 279] parties will suffer injustice. As Meagher, Heydon and Leeming have put it, ‘equity is concerned with good conscience, not a sentimental urge to render sinners virtuous.’130 The fundamental purpose of a court in applying an equitable remedy is to prevent the relying party from suffering a detriment.

9.30

In Giumelli v Giumelli,131 the appellants made a promise to the respondent, their son, to the effect that if he remained on their

property (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 his brother, Steven, moved onto the land. The respondent sued on the basis that his parents held the property on trust for him. The respondent established proprietary estoppel on the basis that he acted to his detriment in reliance on his parents’ promise. The issue was whether an order for conveyance of the property to the son was the appropriate relief, or whether it was more appropriate to make an order for payment of a monetary sum representing the present value of the respondent’s claim to the promised property, given there were third parties (for example, Steven) that would be affected by a conveyance. 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 the proposition put forward by Deane J in Commonwealth v Verwayen132 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’. In the extract below, the majority in Giumelli v Giumelli outline the current approach to equitable relief in estoppel.

[page 280]

Giumelli v Giumelli (1999) 196 CLR 101; 161 ALR 473 High Court of Australia Gleeson CJ, McHugh, Gummow and Callinan JJ at CLR 122–20: 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. 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 [page 281] 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 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. 9.31

The High Court in Sidhu v Van Dyke reinforced the principles in Giumelli v Giumelli. [page 282]

Sidhu v Van Dyke

(2014) 251 CLR 505; 308 ALR 232 High Court of Australia French CJ, Kiefel, Bell and Keane JJ at CLR 529–30: In Giumelli v Giumelli, Gleeson CJ, McHugh, Gummow and Callinan JJ held that, because the fundamental purpose of equitable estoppel is to protect the plaintiff from the detriment which would flow from the defendant’s change of position if the defendant were to be permitted to resile from his or her promise, the relief granted may require the taking of active steps by the defendant including the performance of the promise and the performance of the expectation generated by the promise. That holding is supported by the leading decisions to which this category of equitable estoppel is usually traced. The requirements of good conscience may mean that in some cases the value of the promise may not be the just measure of relief. In The Commonwealth v Verwayen, Deane J noted that: There could be circumstances in which the potential damage to an allegedly estopped party was disproportionately greater than any detriment which would be sustained by the other party to an extent that good conscience could not reasonably be seen as precluding a departure from the assumed state of affairs if adequate compensation were made or offered by the allegedly estopped party for any detriment sustained by the other party. If the respondent had been induced to make a relatively small, readily quantifiable monetary outlay on the faith of the appellant’s assurances, then it might not be unconscionable for the appellant to resile from his promises to the respondent on condition that he reimburse her for her outlay. But this case is one to which the observations of Nettle JA in Donis v Donis [(2007) 19 VR 577 at 588–9] are apposite: [H]ere, the detriment suffered is of a kind and extent that involves life-changing decisions with irreversible consequences of a profoundly personal nature … beyond the measure of

money and such that the equity raised by the promisor’s conduct can only be accounted for by substantial fulfilment of the assumption upon which the respondent’s actions were based. The appellant’s argument, rightly, sought no support from the discussion in cases decided before Giumelli v Giumelli of the need to mould the remedy to reflect the ‘minimum relief necessary to “do justice” between the parties’. There may be cases where ‘[i]t would be wholly inequitable and unjust to insist upon a disproportionate making good of the relevant assumption’; but in the circumstances of the present case, as in Giumelli v Giumelli, justice between the [page 283] parties will not be done by a remedy the value of which falls short of holding the appellant to his promises. While it is true to say that ‘the court, as a court of conscience, goes no further than is necessary to prevent unconscionable conduct’, where the unconscionable conduct consists of resiling from a promise or assurance which has induced conduct to the other party’s detriment, the relief which is necessary in this sense is usually that which reflects the value of the promise. In the circumstances of the present case, no reason has been identified by the appellant to conclude that good conscience does not require that the appellant be held to his promises. In particular, it is no answer for the appellant to say that the performance of his promises was conditional on the completion of the subdivision and the consent of his wife to the transfer to the respondent. His assurances to the respondent were expressed categorically so as to leave no room for doubt that he would ensure that the subdivision would proceed and that the consent of the appellant’s wife would be forthcoming.

Common law estoppel

9.32

In contrast to equitable estoppel, common law estoppel applies only to assumptions about facts, as opposed to assumptions about future conduct.133 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. In Avon County Council v Howlett,134 for example, common law estoppel was successfully raised as a defence against a claim by a local council in which it attempted to recover salary and sickness benefits paid to Howlett. Howlett had inquired with the council about the payments, suggesting that they were incorrect, but was told that the payments were correct. Relying on the council’s representation, Howlett spent the funds that the council paid to him and forewent his opportunity to claim a social security benefit to which he would otherwise have been entitled. The English Court of Appeal found that the council had represented to Howlett that he was entitled to treat the overpaid money as his own, a misrepresentation as to fact, such that the council was barred by [page 284] estoppel from claiming restitution of the overpayments.135 Notably, the court held that estoppel was a bar to the whole of the council’s claim, even if it could be shown that part of the money overpaid was still in Howlett’s possession. Common law estoppel can also support an action based on an assumed state of affairs when the true facts are contrary to the representor’s representation. This was the situation held by the primary judge in Waltons Stores: had there been an assumption that the contracts had in fact been exchanged, as opposed to an assumption that the contracts would be exchanged at some

time in the future, common law estoppel would likely have been established.136 Given the limited circumstances in which common law estoppel may arise, that is, in circumstances where there is a representation as to existing facts, equitable estoppel is more commonly pleaded.

Key Points for Revision 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 and equitable estoppel remain two separate doctrines; the former is concerned with assumptions of fact and is a rule of evidence, while the latter is concerned with assumptions as to future conduct. 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 that can be used as a cause of action. There is some disagreement on the elements of promissory estoppel, which is a form of equitable estoppel; however, Brennan J’s formulation in Waltons Stores has been applied by several courts. Proprietary estoppel, a form of equitable estoppel, arises where there is a representation as to future acquisition of ownership of property which induces an assumption in another person, who relies on that assumption to their detriment. A court seeking to provide equitable remedies will not provide relief that would be unfair to the representor or third parties, but will try to prevent, or compensate the relying party for, the detriment that would accrue to the relying party were the representor permitted to depart from the assumption they have induced.

_________________ 1

Sidhu v Van Dyke (2014) 251 CLR 505 at 511; 308 ALR 232 per French CJ, Kiefel, Bell and Keane JJ, quoting Commonwealth v Verwayen (1990) 170 CLR 394 at 409; 95 ALR 321 per Mason CJ.

2

See Steiner v Strang [2016] NSWSC 9 at [39], where Lindsay J stated: ‘The essential idea of estoppel by convention … is that parties who have conducted their relations with each other on an agreed or assumed state of affairs (adopted as the conventional basis of their relationship) will, in proceedings against one another, be estopped from denying that agreed or assumed state of affairs’.

3

This is not an exhaustive list. See Discount and Finance Ltd v Gehrig’s NSW Wines Ltd (1940) 40 SR (NSW) 598 at 602–3 per Jordan CJ (Halse Rogers and Bavin JJ concurring).

4

J W Carter, E Peden and G J Tolhurst, Contract Law in Australia, 5th ed, LexisNexis Butterworths, Sydney, 2007, p 146.

5

(1937) 59 CLR 641 at 674.

6

But see Hamer v Sidway 124 NY 538 (1891).

7

Commonwealth v Verwayen (1990) 170 CLR 394 at 410; 95 ALR 321 per Mason CJ; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 425; 76 ALR 513 per Brennan J.

8

(1937) 59 CLR 641 at 675–6.

9

Although in Steria Ltd v Hutchinson [2007] ICR 445 at [93], Neuberger LJ referred to unconscionability in the context of estoppel by representation, which is a form of common law estoppel.

10

A Robertson, ‘Knowledge and Unconscionability in a Unified Estoppel’ (1998) 24 Monash University Law Review 115; see also Grundt v The Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 675–7 per Dixon J, where his Honour alludes to unconscionability but does not name it.

11

(1933) 49 CLR 507.

12

(1937) 59 CLR 641.

13

(1854) 10 ER 868; see 9.6.

14

(1989) 168 CLR 385 at 411–12; 88 ALR 413.

15

(1990) 170 CLR 394 at 410–11; 95 ALR 321.

16

(1990) 170 CLR 394 at 445; 95 ALR 321.

17

(1990) 170 CLR 394; 95 ALR 321.

18

(1990) 170 CLR 394; 95 ALR 321 at CLR 476 per Toohey J, 487 per Gaudron J.

19

(1990) 170 CLR 394; 95 ALR 321 at CLR 431 per Deane J (agreeing with Dawson J and adding further observations), 463 per Dawson J.

20

(1990) 170 CLR 394; 95 ALR 321 at CLR 417 per Mason CJ, 431 per Brennan J, 499, 502 per McHugh J.

21

See, for example, M Bryan, ‘Unifying Estoppel Doctrine: The Argument for Heresy’ (2013) 7 Journal of Equity 209; Lord Neuberger, ‘Thoughts on the Law of Equitable Estoppel’ (2010) 84 Australian Law Journal 225; See Robertson, above n 10; M Spence, ‘Australian Estoppel and the Protection of Reliance’ (1997) 11 Journal of Contract Law 203; 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’ (1988) 1 Journal of Contract Law 205.

22

See Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 at CLR 399 per Mason CJ and Wilson J, 413–17 per Brennan J, 458–9 per Gaudron J; DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728; 285 ALR 311 at NSWLR 739 per Meagher JA, 730 per Macfarlan JA (agreeing), 750 per Handley AJA. See also the extracts from Commonwealth v Verwayen (1990) 170 CLR 394; 95 ALR 321 above. But see Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 447; 76 ALR 513 per Deane J.

23

[1947] KB 130, discussed below.

24

(1854) 10 ER 868.

25

Hammersley v De Biel (1845) 8 ER 1312.

26

(1988) 164 CLR 387 at 399; 76 ALR 513.

27

Legione v Hateley (1983) 152 CLR 406 at 430; 46 ALR 1 per Mason and Deane JJ.

28

[1947] KB 130 at 134–5, referring to Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 at 448 per Lord O’Hagan.

29

[1955] 1 WLR 761; [1955] 2 All ER 657.

30

[1973] 2 MLJ 3.

31

[1964] 1 WLR 1326; [1964] 3 All ER 556.

32

(1988) 164 CLR 387; 76 ALR 513 at CLR 399 per Mason CJ and Wilson J, 448 per Deane J, 459 per Gaudron J.

33

(1983) 152 CLR 406; 46 ALR 1 at CLR 420 per Gibbs CJ and Murphy J, 435 per Mason and Deane JJ; see Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 at CLR 399 per Mason CJ and Wilson J, 448 per Deane J.

34

(1988) 164 CLR 387; 76 ALR 513.

35

(1988) 164 CLR 387; 76 ALR 513 at CLR 443 per Deane J, 464 per Gaudron J.

36

(1988) 164 CLR 387; 76 ALR 513 at CLR 398, 408 per Mason CJ and Wilson J, 430 per Brennan J.

37

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428–9; 76 ALR 513.

38

See, for example, Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475 at 512; 153 ALR 198 per Lockhart, Lindgren and Tamberlin JJ.

39

Legione v Hateley (1983) 152 CLR 406 at 435–6; 46 ALR 1; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1 at CLR 576–7 per Brennan, Deane, Gaudron and McHugh JJ.

40

(1983) 152 CLR 406; 46 ALR 1.

41

(1983) 152 CLR 406 at 438–9; 46 ALR 1.

42

See Australian Crime Commission v Gray [2003] NSWCA 318 at [205] per Ipp JA.

43

[2003] NSWCA 318 at [200].

44

[2014] VSCA 353 per Warren CJ, Whelan and Santamaria JJA.

45

[2013] VSC 614 at [11] per Hargrave J.

46

[2014] VSCA 353 at [206].

47

[2014] VSCA 353 at [198].

48

[2015] HCATrans 335.

49

[2015] HCATrans 335, line 425.

50

(1919) 27 CLR 133; 26 ALR 21.

51

See Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 at CLR 399 per Mason CJ and Wilson J, 413–17 per Brennan J, 458–9 per Gaudron J. See also the extracts from Commonwealth v Verwayen (1990) 170 CLR 394; 95 ALR 321 above. But see Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 447; 76 ALR 513 per Deane J.

52

(1988) 164 CLR 387; 76 ALR 513.

53

(1988) 164 CLR 387 at 420, 428; 76 ALR 513; see also 164 per Mason CJ and Wilson J.

54

(1988) 164 CLR 387 at 420; 76 ALR 513 per Brennan J.

55

(1989) 16 NSWLR 582 at 610.

56

See also 585 per Kirby P.

57

(1994) 122 ALR 637 at 653 per Neaves, Gummow and Higgins JJ. See also Construction Technologies Australia Pty Ltd v Doueihi (2014) 17 BPR 33,457 at 33,486 per White J.

58

(1988) 164 CLR 387 at 429; 76 ALR 513.

59

(1937) 59 CLR 641 at 675–6.

60

Commonwealth v Verwayen (1990) 170 CLR 394 at 444–5; 95 ALR 321.

61

(1990) 170 CLR 394; 95 ALR 321.

62

(1990) 170 CLR 394 at 444; 95 ALR 321.

63

(1933) 49 CLR 507 at 547.

64

Thompson v Palmer (1933) 49 CLR 507 at 547 per Dixon J.

65

(1991) 22 NSWLR 298 at 307–8.

66

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513.

67

Public Trustee as Administrator of the Estate of Williams (dec’d) v Wadley (1997) 7 Tas R 35.

68

Dillwyn v Llewelyn (1862) 45 ER 1285.

69

(2014) 253 CLR 560; 307 ALR 512.

70

(2014) 253 CLR 560; 307 ALR 512 at CLR 568, 583 per French CJ, 594 per Hayne, Crennan, Kiefel, Bell and Keane JJ, 620 per Gageler J.

71

(2014) 253 CLR 560; 307 ALR 512 at CLR at 575 per French CJ, 624 per Gageler J.

72

(2014) 253 CLR 560 at 582; 307 ALR 512.

73

(2014) 253 CLR 560; 307 ALR 512 at CLR 603 per Hayne, Crennan, Kiefel, Bell and Keane JJ; 24 per Gageler J who found that this circumstance was a detriment but would not, alone, support the defence of ‘change in position’.

74

(2014) 253 CLR 560; 307 ALR 512 at CLR 569, 583 per French CJ, 603 per Hayne, Crennan, Kiefel, Bell and Keane JJ, 628 per Gageler J.

75

(2015) 88 NSWLR 281; 318 ALR 260.

76

(2015) 88 NSWLR 281 at 307; 318 ALR 260 per Bathurst CJ.

77

(2015) 88 NSWLR 281 at 319; 318 ALR 260.

78

(2015) 88 NSWLR 281 at 319–20; 318 ALR 260.

79

(2014) 251 CLR 505; 308 ALR 232.

80

(2014) 251 CLR 505 at 513; 308 ALR 232 per French CJ, Kiefel, Bell and Keane JJ.

81

(2014) 251 CLR 505 at 518; 308 ALR 232.

82

(2014) 251 CLR 505 at 525–6; 308 ALR 232.

83

(2014) 251 CLR 505 at 531; 308 ALR 232.

84

(1988) 164 CLR 387 at 429; 76 ALR 513.

85

(1990) 170 CLR 394; 95 ALR 321.

86

Construction Technologies Australia Pty Ltd v Doueihi (2014) 17 BPR 33,457 at 33,489 per White J.

87

A Robertson, ‘Reasonable Reliance in Estoppel by Conduct’ (2000) 23 University of New South Wales Law Journal 87 at 88.

88

(1990) 170 CLR 394 at 445; 95 ALR 321.

89

See Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2014] VSCA 353 at [197] per Whelan CJ.

90

Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475 at 513–16; 153 ALR 198 per Lockhart, Lindgren and Tamberlin JJ.

91

(1954) 91 CLR 353.

92

Construction Technologies Australia Pty Ltd v Doueihi (2014) 17 BPR 33,457 at 33,489 per White J, citing Silink, ‘Equitable Estoppel in “Subject to Contract” Negotiations’ (2011) 5 Journal of Equity 252.

93

See especially the discussion of estoppel and executory contracts in Construction Technologies Australia Pty Ltd v Doueihi (2014) 17 BPR 33,457.

94

(2001) 112 FCR 182; 182 ALR 138.

95

Murphy v Overton Investments Pty Ltd (2001) 112 FCR 182; 182 ALR 138 at FCR 208 per R D Nicholson J; 228 per Gyles J (dissenting). On appeal, the High Court of Australia disapproved of Gyles J’s formulation of estoppel but did not have to decide the point in light of the way the appellants framed their case on appeal: Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388 at 415; 204 ALR 26 per Gleeson CJ, McHugh, Gummow, Kirby, Hayne, Callinan and Heydon JJ.

96

(1993) 177 CLR 485; 112 ALR 627.

97

(1993) 177 CLR 485 at 506; 112 ALR 627 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ.

98

Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 93; 112 ALR 627.

99

See, for example, Legione v Hateley (1983) 152 CLR 406 at 440; 46 ALR 1 per Mason and Deane JJ.

100 (1983) 152 CLR 406; 46 ALR 1. 101 [2008] NSWSC 234. 102 [2008] NSWSC 234 at [181]. 103 [2008] NSWSC 234 at [184]–[186]. 104 (2012) 292 ALR 788. 105 [2013] NSWCA 337. 106 [2015] NSWSC 249. 107 [2015] VSC 600. 108 [2012] NSWCA 16 at [38]–[39]. 109 (2011) 83 NSWLR 728 at 739; 285 ALR 311 per Meagher JA. 110 (2014) 17 BPR 33,457. 111 Commonwealth v Verwayen (1990) 170 CLR 394 at 407; 95 ALR 321 per Mason CJ.

112 (1990) 170 CLR 394 at 500; 95 ALR 321. 113 See Anaconda Nickel Ltd v Edensor Nominees Pty Ltd (2004) 50 ACSR 679; [2004] VSCA 167 at [40] per Buchanan JA, [49] per Eames JA (agreeing), [50] per Coldrey AJA (agreeing). 114 (1996) 131 FLR 241 at 287. 115 N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed, LexisNexis Butterworths, Sydney, 2008, p 79. 116 (1990) 170 CLR 394 at 444; 95 ALR 321. 117 See also Grundt v The Great Boulder Proprietary Mines Ltd (1937) 59 CLR 641 at 675–6 per Dixon J; Thompson v Palmer (1933) 49 CLR 507 at 547 per Dixon J. 118 (2014) 251 CLR 505 at 527–8; 308 ALR 232. 119 The facts of this case are set out at 9.18. 120 [2011] WASC 179 at [78]–[79]. 121 Sidhu v Van Dyke (2014) 251 CLR 505 at 511; 308 ALR 232 per French CJ, Kiefel, Bell and Keane JJ; Ashton v Pratt (2015) 88 NSWLR 281 at 300; 318 ALR 260 per Bathurst CJ. 122 [1862] 45 ER 1285. 123 (1866) LR 1 HL 129. 124 Sidhu v Van Dyke (2014) 251 CLR 505 at 511; 308 ALR 232 per French CJ, Kiefel, Bell and Keane JJ. 125 Ashton v Pratt (2015) 88 NSWLR 281 at 299, 302, 306; 318 ALR 260 per Bathurst CJ; Construction Technologies Australia Pty Ltd v Doueihi (2014) 17 BPR 33,457 at 33,484 per White J; Van Dyke v Sidhu (2013) 301 ALR 769; 17 BPR 32,545 at ALR 777 per Barrett JA, 771 Basten JA (agreeing), 797 per Tobias AJA (agreeing); Saleh v Romanous (2010) 79 NSWLR 453; (2010) 15 BPR 29,505 at NSWLR 462 per Handley AJA, 454 per Giles JA (agreeing), 463 per Sackville AJA (agreeing); DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728; 285 ALR 311 at NSWLR 739 per Meagher JA, 730 per Macfarlan JA (agreeing), 750 per Handley AJA; Thorner v Major [2009] All ER (D) 257; [2009] 1 WLR 776. 126 Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 at [1748]–[1751] per Drummond AJA. 127 (1999) 196 CLR 101; 161 ALR 473. 128 (2014) 251 CLR 505; 308 ALR 232. 129 See the discussion as to the Australian and English positions on choice of remedy in Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407 at [75]–[124] per Randerson J, Ellen France and White JJ agreeing. 130 R P Meagher, J D Heydon and M J Leeming (eds), Meagher Gummow & Lehane’s Equity Doctrines & Remedies, 4th ed, LexisNexis Butterworths, Sydney, 2002, [17-075]. 131 (1999) 196 CLR 101; 161 ALR 473. 132 (1990) 170 CLR 394 at 442–3; 95 ALR 321. 133 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 at CLR 399 per Mason CJ and Wilson J, 413–17 per Brennan J, 458–9 per Gaudron J; DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728; 285 ALR 311 at NSWLR 739 per Meagher JA, 730 per Macfarlan JA (agreeing), 750 per Handley AJA. See also the extracts from Commonwealth v

Verwayen (1990) 170 CLR 394; 95 ALR 321 at 9.5. But see Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 447; 76 ALR 513 per Deane J. 134 [1983] 1 All ER 1073; [1983] 1 WLR 605. Cf Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560; 307 ALR 512. 135 [1983] 1 All ER 1073; [1983] 1 WLR 605 at 621–5 per Slade LJ. 136 (1988) 164 CLR 387 at 398; 76 ALR 513 per Mason CJ and Wilson J.

[page 285]

CHAPTER 10 Formalities CHAPTER OVERVIEW 10.1 10.2

Introduction Statute of Frauds 10.3 Relevant provisions 10.8 What should the written evidence contain? 10.10 Signature 10.12 Joinder of documents 10.15 Parol and oral evidence 10.16 Sale of goods 10.17 Acceptance 10.18 Earnest and part payment 10.19 Effect of non-compliance 10.20 Part performance

Introduction 10.1

A reference to formalities is usually a reference to the requirement for certain contracts to be written, as was required by the Statute of Frauds of 1677 (Imp). 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 [page 286] fraudulent practices which are commonly endeavoured to be upheld by perjury and subordination of perjury’.1

Statute of Frauds 10.2

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 noncompliance 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 that, if crossed, alters the legal relationship between the parties. Channelling usually refers to wellestablished 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

[page 287] 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 that 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 interest in property, either a rudimentary written contract or conduct amounting to part performance of the agreement may suffice for enforcement of the agreement.9 The equitable doctrine of part performance enforces a contract in the absence even of the written agreement, or of written evidence of any such agreement existing between the parties. On the other hand, such a contract may not be enforceable against the party liable under the contract, or the party who bore the onus of documenting it in written form.10 Where a deed is necessary under legislation to transfer an interest in property, either a rudimentary written contract or conduct amounting to part performance of the agreement may suffice for enforcement of the 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, [page 288] may be valid and enforceable despite a provision to the contrary, because: the provision having that effect on verbal variations has itself been varied;11 the breadth of the provision does not capture the particular variation made;12 one party has waived their right to insist on the other party’s obligation under the provision or under the contract;13 the verbal variation may be the subject of specific enforcement;14 or a party may, by effect of waiver or by action of estoppel, be barred from relying on the provision.15

Relevant provisions 10.3

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

[page 289] 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 this or that mode of conveyance, it looks to the substance of the thing.’ As to the type of contract to which s 4 applies today, in Kelly v Webster17 Maule J said in a curial exchange with counsel that ‘the Statute of Frauds does not contemplate this or that mode of conveyance, it looks to the substance of the thing’. In his decision, 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.

Note that a contract to convey to and purchase from a third party also falls within the statute.20 10.4

In Powercell v Cuzeno,21 Campbell J conveniently summarised the cases to which the Statute of Frauds will and will not apply. [page 290]

Powercell v Cuzeno [2003] NSWSC 600 Supreme Court of New South Wales Campbell J: [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 [page 291] defendants. (The defendants 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. 10.5

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.22 It follows that a sale that is not in written form will not be enforceable unless the doctrine of part performance applies. 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. 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,23 options to purchase or lease land,24 and contracts to transfer life interests in land.25

10.6

The Statute of Frauds writing requirement for the sale of goods has been repealed in most jurisdictions.26 In all jurisdictions except Western [page 292]

Australia and Tasmania, contracts for the sale of goods may be made in writing, orally, or implied from the conduct of the parties. 10.7

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 acceptance27 (unless subject to a condition precedent of a written document).28 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.29 In Popiw v Popiw,30 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 Supreme Court of Victoria 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)

[page 293] 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. Note that while his Honour referred to the decision in Dudgeon v Chie,31 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? 10.8

As to what the written evidence should contain, the terms forming a material or substantial part of the agreement32 (but not every term)33 are probably sufficient. It follows that if the terms of the document are different from those proposed to be established as those bargained [page 294] for, then they will not constitute evidence of the contract.34 Equally, a document missing a term that is essential or important to the contract at issue, such as the time for the commencement of a lease35 or the time that a purchase price was payable by,36 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,37 the court set out the requirements for sufficient evidence of a contract for the sale of land that were required of a receipt. These were that the receipt contain the names of the vendor and the purchaser, a description of the property, and that it acknowledge complete or partial payment of the price for which the land was sold. 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.

The further requirement of the intention of the participants to create a contractual relationship binding them was not fulfilled in the case of Martyn v Glennan,38 where the evidence of a real estate agent’s receipt was evidence that the sale was made ‘subject to the owner’s consent’. As to the unambiguous identification of the parties, a name in the written evidence to the contract will suffice as long as the 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.39 In Rodrick v City Mutual Life Assurance Society Ltd,40 City Mutual Life Assurance Society Ltd was sufficiently identified as the vendor of land by means of a reference to ‘The City Mutual Life’. However, [page 295] a memorandum omitting the name of a vendor has been held to be insufficient evidence of the contract.41 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.42 The description of the subject matter in the written evidence must be sufficient to identify it as the subject matter of the contract, and depends on the facts and circumstances of the case. Examples of insufficiently described subject matter include the reference to the sale of ‘my property’43 or ‘part of Lot B, Princes Highway, Sylvania Heights’.44 However, in McDowell v Meader,45 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 description46 or to clarify an ambiguity.47

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.48 The contract is unenforceable when the written evidence makes no mention of the consideration for the promise in the contract.49 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 Instruments Act 1958 (Vic) 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

[page 296] 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.50

10.9

If a term is omitted from a contract, a court may favour providing relief to a party that submits to it.51 If a term is not documented in the written evidence, the party benefiting from it may waive it.52 Neither situation will obtain where the written evidence of a contract contains terms that in essence deviate from those of an oral contract and the applicant seeks specific performance by waiving beneficial rights, or submitting to detrimental terms.53

Signature 10.10 Where a document is required to be signed54 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.55 The Statute of Frauds expressly permits signature by a person ‘lawfully authorised’, such as an agent.56 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.57 This does not apply where the party intends to subscribe the document with their own signature at a later date.58 10.11 In Sturt v McInnes59 Wilson J identified the following elements of the authenticated signatures fiction: [page 297] (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.

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’.60 The High Court considered the authenticated signature fiction in Pirie v Saunders,61 accepting on that basis Saunders’ claim that the handwritten notes of the other party’s solicitor in 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: [I]f 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.62

In Leeman v Stock63 and Neill v Hewens,64 however, the principle appears not to be capable of applying to notes or memoranda that are not of concluded agreements; whereas in Pirie v Saunders the written evidence was accepted without its indicating the existence of an existing contract.65 [page 298] Statutory construction66 will determine whether the signature that is required is personal67 or falls within the scope of an agent’s authority to provide,68 but note that cases determined upon statutory requirements derived from the Statute of Frauds permit authorised agents to sign.69 In Thomson v McInnes,70 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;71 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.72 Persons qualifying as lawfully authorised include estate agents with express authority73 but not acting outside the scope of their authority,74 and solicitors executing explicit instructions.75 In Victoria, s 126 of the Instruments Act 195876 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 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.

[page 299] (2)

It is declared that the requirements of subsection (1) may be met in accordance with the Electronic Transactions (Victoria) Act 2000.77

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.78 Auctioneers are agents of both purchaser and vendor and are authorised to sign and bind parties in relation to the auctioned property.79 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.80 The document must, however, be recognisably written evidence of a contract.81 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.82 Signatures need not accompany each part or page purported to be included in the document.83 Neither does a document that 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.84

[page 300]

Joinder of documents 10.12 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,85 or, as Griffiths CJ said in Thomson v McInnes,86 referring to 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’.87 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.88 On a broader reading, endorsed in Stokes v Whicher89 and affirmed in Harvey v Edwards Dunlop & Co Ltd,90 the other document is not restricted to a written document but may include a transaction or event. In Stokes v Whicher the court held: [I]f 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.91

In Kalmenas v Kovacevich,92 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 [page 301] 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.93 The leading case establishing the broader test as law is Elias v George Sahely & Co (Barbados) Ltd,94 where it was held that in appropriate cases, a sufficient memorandum in writing may be constituted by two or more documents that are capable of being read together95 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.96 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.97 10.13 Incorporation may arise by necessary implication.98 As Jenkins LJ said in Timmins v Moreland Street Property Co Ltd:99 [I]t 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 …

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

[page 302] 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.100

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.101

Their Lordships accordingly were of the view that, on the facts of that case, the requirements of a sufficient note or memorandum were satisfied. 10.14 The narrowness of the basis of the statement of law in Thomson v McInnes102 has been the subject of criticism. In Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd,103 Holland J asserted that the principle enunciated in Thomson v McInnes conflicted with English authority, in particular Harvey v Edwards, Dunlop & Co Ltd.104 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’.105

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

[page 303] a contemplated payment of a deposit under a sale of land contract, but failed to fix the amount.106

Parol and oral evidence 10.15 The role of parol evidence in identifying the written evidence to the contract is unsettled law. Parol evidence was admitted in Thomson v Mcinnes107 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 Wharton108 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:109 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 …

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.110 Harvey v Edwards, Dunlop & Co Ltd111 was followed (and the approach in Thomson v McInnes rejected) in Commonwealth v

John White & Sons (NT) Pty Ltd,112 where Blackburn J admitted oral evidence of a transaction to [page 304] 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.

Sale of goods 10.16 Where a note or memorandum is required in relation to the sale of goods, the written evidence must document every material term,113 bear the signature of the party to be charged114 or a person lawfully authorised to sign on their behalf (such as an agent) and bind them.115 In addition, where a number of documents are to be read together, the relationship between them must be clear and sufficient.116 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: accepting the goods actually or constructively; making a payment in earnest; or 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.

Acceptance 10.17 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.117 Whether the buyer has acted in the requisite way will depend on the facts of the case.118 Actual receipt of the goods by the purchaser and thereafter dealing with them as their own property will satisfy the acceptance requirement.119 [page 305] Constructive delivery effecting acceptance and receipt of the goods occurs if the nature of the seller’s possession is altered.120 An act of rejection of the goods on the buyer’s part may result in acceptance by recognising that a prior contract exists.121 Metropolitan Knitting and Hosiery Co Ltd (in liq) v Thomas Burnely & Sons Ltd122 was a case in which a dispute arose as to which of two contracts was in place between the parties. The plaintiff claimed that 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’.123 Further, acceptance was satisfied as long as the defendant recognised ‘some contract of sale’ between the parties, not necessarily the particular contract of sale.124

Earnest and part payment

10.18 To have given ‘something in earnest’ to bind the purchaser to the fulfilment of the contract usually refers to a monetary deposit125 or a part payment126 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.127 In that case, 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’.128 However, under the terms of the contract, the buyers had made payment, so the defence failed. [page 306] 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.129

Effect of non-compliance 10.19 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.130 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,131 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,132 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.133 [page 307]

Part performance 10.20 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,134 or other equitable remedy.135 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 Hoeven,136 Glass JA (with whom Reynolds and Hutley JJA agreed) stated: 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.

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.137 [page 308] 10.21 Specific performance may also be available to the plaintiff under promissory estoppel138 if no legally enforceable contract is found. The High Court in Waltons Stores (Interstate) Ltd v Maher,139 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.

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.140 Hardwicke LJ

observed in Walker v Walker141 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’. 10.22 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,142 although it is also said to have been known in some form earlier than this.143 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 ‘contrivance’ 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 [page 309] of s 4 of the Statute of Frauds in this regard is preserved in current legislation.144 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.145 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.146 However, the practical importance of the doctrine is largely supported by the continued relevance of the writing requirement in contracts involving land, a requirement that has disappeared from other contracting situations. While estoppel147 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. 10.23 The law in Australia is stated in Australia and New Zealand Banking Group Ltd v Widin.148

Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21 Federal Court of Australia Hill J: [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. [page 310]

Neither Hutley nor Mahoney JJA 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, eg, 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). The United Kingdom case of Steadman v Steadman,149 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.150 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 is 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’151 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’.152 [page 311] 10.24 The doctrine of part performance has its foundations in the speech of Lord Selbourne in Maddison v Alderson.153

Maddison v Alderson (1883) 8 App Cas 467 House of Lords, United Kingdom Lord Selbourne at 474–6: 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 … 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. … [page 312] 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’.154 Cases will turn on their particular facts and circumstances. In McBride v Sandland,155 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 Millett156 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 [page 313] 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.157 However, those expenditures will not displace equivocal circumstances, such as continued rental payment in a claim for part performance of a lease.158 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 Millett159 is narrower than that in the House of Lords decision of Steadman v Steadman,160 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.161 Acts in preparation of the performance of a contract — such as surveying land in order to prepare a contract of a sale of land162 — 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.163 The High Court views the effectiveness of equity as diminished if it were held to and restricted by compliance with contractual provisions.164 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.165 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.166 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.167

[page 314]

Key Ponoints for Revision 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.

_________________ 1

See Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646 at 655 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 at 544 per Lord Bingham (with whom Lords Woolf and Walker agreed), 549 per Lord Hoffmann (with whom Lords Bingham, Woolf and Walker agreed); see also Sir W 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 at 440 (the High Court made the point that the Statute of Frauds was not specifically pleaded); Take Harvest Ltd v Liu [1993] AC 552 at 561–2, 568–569; [1993] 2 All ER 459 (PC) at 464–5, 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 at 617 (CA).

3

See Marginson v Ian Potter & Co (1976) 136 CLR 161 at 168; 11 ALR 64 at 69–70.

4

N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed, LexisNexis Butterworths, Sydney, 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: RJT Consulting Engineers Ltd v DM Engineering (Northern Ireland) Ltd [2002] All ER (D) 108; [2002] 1 WLR 2344 (CA).

6

It has been suggested that the United Kingdom approach of stricter channelling — with fewer exceptions of the Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 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.

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, 567–70; Butts v O’Dwyer (1952) 87 CLR 267 at 285; [1953] ALR 117; Terrex Resources NL v Magnet Petroleum Pty Ltd [1988] 1 WAR 144 (FC); Watson v Delaney (1991) 22 NSWLR 358 at 365–6.

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 (FC).

11

Mendelssohn v Normand Ltd [1970] 1 QB 177 at 183; [1969] 2 All ER 1215 at 1217–18 per Lord Denning MR (Edmund Davies and Phillimore LJJ agreeing) (CA).

12

New England Reinsurance Corp v Messoghios Insurance Co SA [1992] 2 Lloyd’s Rep 251 at 255–6 per Leggatt LJ (CA).

13

Hill v Terry [1993] 2 Qd R 640 at 646 per McPherson SPJ (Byrne J agreeing) (FC).

14

See Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 at 750–1 per Santow J.

15

See Astilleros Canarios SA v Cape Hatteras Shipping Co Inc (The Cape Hatteras) [1982] 1 Lloyd’s Rep 518 at 524 per Staughton J; see also United Nations Convention on Contracts for the International Sale of Goods (1980), art 29(2).

16

For commentary, see A W B Simpson, A History of the Common Law of Contract — The Rise of the Action of Assumpsit, Clarendon Press, United Kingdom, 1975, pp 610–19.

17

(1852) 12 CB 283.

18

(1852) 12 CB 283 at 296.

19

[1904] 1 KB 124 at 127.

20

See S Williston, A Treatise on the Law of Contract, 3rd ed, Baker, Voorhis, NY, 1960, Vol 3, p 513, [488].

21

(2003) 11 BPR 21,385; [2003] NSWSC 600.

22

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).

23

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 at 433; 76 ALR 513 at 545 per Brennan J.

24

See Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146; [1931] ALR 89; Spiro v Glencrown Properties Ltd [1991] Ch 537 at 543; [1991] 2 WLR 931 at 935–6; [1991] 1 All ER 600 at 605 per Hoffmann J; Tonitto v Bassal (1992) 28 NSWLR 564 (CA).

25

See McBride v Sandland (1918) 25 CLR 69.

26

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.

27

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 at 82 per Clarke J; compare and contrast McCaul v Clark [1929] VLR 233; (1929) 35 ALR 196; Bosaid v Andry [1963] VR 465 at 472–3; Georgiou v Sindel [1982] 1 NSWLR 435 at 441 (affirmed sub nom Sindel v Georgiou (1984) 154 CLR 661; 55 ALR 1); Haydon v McLeod (1901) 27 VLR 395; Pirie v Saunders (1961) 104 CLR 149 at 154 (Full High Court); Banks v Williams (1912) 12 SR (NSW) 382; Darter Pty Ltd v Malloy [1993] 2 Qd R 615 at 618 (CA).

28

See, for example, Neill v Hewens (1953) 89 CLR 1; compare Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 79; 14 ALR 169.

29

See Giasoumi v Hutton [1977] VR 294.

30

[1959] VR 197 per Hudson J; see also Buxton v Bellin (1877) 3 VLR (E) 243; compare Schaefer v Schuhmann [1972] AC 572; [1972] 1 All ER 621 (PC).

31

(1954) 55 SR (NSW) 450.

32

See Harvey v Edwards Dunlop & Co Ltd (1927) 39 CLR 302 at 307; [1927] ALR 189 per Knox CJ, Gavan Duffy and Starke JJ; see also Baxton v Kara [1982] 1 NSWLR 604 at 607; Rhodes Pty Ltd v Galati [1961] WAR 180 at 186, 187 per Virtue J (citing Johnson v Humphrey [1946] 1 All ER 460); Hawkins v Price [1947] Ch 645 at 658–659; [1947] 1 All ER 689 at 694.

33

See Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 318; [1929] ALR 336; Ryrie v Cruickshank (1896) 13 WN (NSW) 41.

34

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; 42 ALR 463.

35

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.

36

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.

37

[1922] VLR 49.

38

[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.

39

See Sims v Robertson (1921) 21 SR (NSW) 246; MacCormac v Bradford [1927] SASR 152 at 160, 164.

40

(1897) 18 LR (NSW) Eq 128.

41

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.

42

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.

43

Corcoran v O’Rourke (1888) 14 VLR 889; see also Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21 at 28–9; 102 ALR 289 at 297 per Hill J (FC).

44

Pirie v Saunders (1961) 104 CLR 149; see also Watson v Issell (1890) 16 VLR 607.

45

(1891) 13 ALT 116; see also Parker v Barnett (1889) 16 VLR 214.

46

Corley v Chippendale (1882) 1 QLJ 69.

47

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.

48

(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.

49

Burgess v Cox [1951] Ch 383; [1950] 2 All ER 1212 per Harman J (a contract that made no mention of deposits received from guests rendered an agreement to sell a holiday camp unenforceable).

50

See also Law of Property Act 2000 (NT) s 58(2); Property Law Act 1974 (Qld) s 56(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).

51

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).

52

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.

53

Contrast Bastard v McCallum [1924] VLR 9; (1924) 30 ALR 1.

54

See Smith v Lush (1952) 52 SR (NSW) 207.

55

Shiel v Colonial Bank of Australia (1870) 1 VR (E) 40.

56

Williams v Mason (1873) 37 JP 264; 28 LT 232 at 233 per Grove J (Common Pleas); Swift v Jewsbury (1874) LR 9 QB 301 at 310–12; [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 at 239 per Mayo J; Nguyen v Taylor (1992) 27 NSWLR 48 at 61 per Meagher JA (Kirby P agreeing), 62 per Sheller JA (Kirby P agreeing) (CA).

57

Farrelly v Hircock (No 1) [1971] Qd R 341 at 356; see also Neill v Hewens (1953) 89 CLR 1 at 13; Pirie v Saunders (1961) 104 CLR 149 at 154 (FC).

58

Neill v Hewens (1952) 53 SR (NSW) 113.

59

[1974] 1 NZLR 729 at 732–4.

60

S M Waddams, The Law of Contracts, 3rd ed, Canada Law Book Inc, Toronto, ON, 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.

61

(1961) 104 CLR 149.

62

(1961) 104 CLR 149 at [7].

63

[1951] Ch 941.

64

(1953) 89 CLR 1.

65

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.

66

See Bosaid v Andry [1963] VR 465.

67

See Re Whitely Partners Ltd (1886) 32 Ch D 337 at 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, Sydney, 1986, pp 92–4; R M Stonham, The Law of Vendor and Purchaser, Law Book Company, Sydney, 1964, pp 69–72.

68

See, for example, Williams v Mason (1873) 28 LT 232 (CP); Swift v Jewsbury (1874) LR 9 QB 301 at 310–12 per Lord Coleridge CJ; Re Prince Blücher; Ex parte Debtor [1931] 2 Ch 70 (CA); Re Teller Home Furnishers Pty Ltd (in liq); Electronic Industries v Horsburgh [1967] VR 313 at 318 per Gowans J.

69

See, for example, R v Moore; Ex parte Myers (1884) 10 VLR (L) 322 at 324 per the Full Court; Muirhead v Commonwealth Bank of Australia [1997] 1 Qd R 567; (1996) 139 ALR 561 at 565 per McPherson JA, with whom Davies JA agreed (Qld CA).

70

(1911) 12 CLR 562 at 573 per Griffith CJ (with whom Barton J agreed).

71

See Byers v Brown (1859) 2 Legge 1136; Williams v Mason (1873) 28 LT 232 at 233 per Grove J (CP).

72

But see Russell v Slater [1912] St R Qd 237.

73

See Byers v Brown (1859) 2 Legge 1136.

74

Thomson v McInnes (1911) 12 CLR 562 at 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.

75

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 Bellin (1877) 3 VLR (E) 243 at 248.

76

See also Property Law Act 1958 (Vic) s 53(1)(a).

77

See Rhodes Pty Ltd v Galati [1961] WAR 180.

78

Clohesy v Maher (1880) 6 VLR (L) 357 at 359; Gladstone v Ball (1862) 1 W & W (E) 277.

79

Anders v Schluter (1973) 6 SASR 325; see also Egan v Caveny [1921] VLR 37.

80

Re Byrne; Ex parte Norco Co-op Ltd (1986) 15 FCR 255; see also Kalnenas v Kovacevich [1961] WAR 188; Nguyen v Taylor (1992) 27 NSWLR 48 at 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 at 154 per the Full High Court; Firstpost Homes Ltd v Johnson [1995] 4 All ER 355; [1995] 1 WLR 1567 at 1574 per Peter Gibson LJ (Hutchison and Balcombe LJJ agreeing) (CA).

81

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; [1948] 2 ALR 439; Grummitt v Natalisio [1968] VR 156; Collin v Holden [1989] VR 510; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217 at 220 at 232 per Ormiston J. See Nguyen v Taylor (1992) 27 NSWLR 48 at 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 at 58–9 per Virtue SPJ, based on the application of the Property Law Act 1969 (WA) s 34(1).

82

See Nguyen v Taylor (1992) 27 NSWLR 48 at 61 per Meagher JA (with whom Kirby P agreed), 68 per Sheller JA (with whom Kirby P agreed) (CA).

83

Gladstone v Ball (1862) 1 W & W (E) 277; see also Firstpost Homes Ltd v Johnson [1995] 4 All ER 355 at 359–60; [1995] 1 WLR 1567 at 1573 per Peter Gibson LJ (Hutchison and Balcombe LJJ agreeing) (CA).

84

See Di Biase v Rezek [1971] 1 NSWLR 735, not following King v Grimwood (1891) 17 VLR 253.

85

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 at 569.

86

(1911) 12 CLR 562.

87

(1911) 12 CLR 562 at 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.

88

Thomson v McInnes (1911) 12 CLR 562 at 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.’ 89

[1920] 1 Ch 411.

90

(1927) 39 CLR 302 at 307; [1927] ALR 189 per Knox CJ, Gavan Duffy and Starke JJ.

91

[1920] 1 Ch 411 at 418; compare Ballantine v Harold (1893) 19 VLR 465; see also Tomlinson Bros & Co v Daniels (1931) 33 WALR 101; Di Biase v Rezek [1971] 1 NSWLR 735 at 748–50; Ellul v Oakes (1972) 3 SASR 377 at 383; Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212 at 218.

92

Kalnenas v Kovacevich [1961] WAR 188; see also Ellul v Oakes (1972) 3 SASR 377 at 383; Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212; Tonitto v Bassal (1992) 28 NSWLR 564 at 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.

93

See also Riley v Melrose Advertisers (1915) 17 WALR 127 (FC); Subdivisions Ltd v Payne [1934] SASR 214; compare Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21; 102 ALR 289 (FC); Corcoran v O’Rourke (1888) 14 VLR 889.

94

[1983] 1 AC 646.

95

[1983] 1 AC 646 at 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 at 569.

96

[1983] 1 AC 646 at 655; see also Thomson v McInnes (1911) 12 CLR 562.

97

Thomson v McInnes (1911) 12 CLR 562 at 569.

98

Timmins v Moreland Street Property Co Ltd [1958] Ch 110 at 134 per Romer LJ; Stokes v Whicher [1920] 1 Ch 411 at 418; compare Griffiths CJ in Thomson v McInnes (1911) 12 CLR 562 at 569.

99

[1958] Ch 110 at 130; [1957] 3 All ER 265 (CA) at 276 per Jenkins LJ (with whom Romer and Sellers LJJ agreed) (CA); see also De Leuil v Jeremy (1964) 65 SR (NSW) 137; Bosaid v Andry [1963] VR 465 at 475; Cable (1956) Ltd v Caratti [1971] WAR 86; Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] 2 NSWLR 212 at 218–19. Jenkins LJ was approved by the Privy Council in Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646 at 655.

100 Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646 at 651–2. 101 Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646 at 655. 102 (1911) 12 CLR 562. 103 [1976] 2 NSWLR 212 at 218. 104 (1927) 39 CLR 302; [1927] ALR 189. 105 (1927) 39 CLR 302 at 307; [1927] ALR 189, referring to Stokes v Whicher [1920] 1 Ch 411. 106 Thomson v McInnes (1911) 12 CLR 562 at 569; see also Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646 at 655 per Lord Scarman, delivering the advice of the Privy Council; Burgess v Cox [1951] Ch 383 at 388; [1950] 2 All ER 1212 at 1215 per Harman J. 107 (1911) 12 CLR 562. 108 (1857) 6 HLC 238, cited by Griffiths CJ in Thomson v McInnes (1911) 12 CLR 562 at 569. 109 [1958] Ch 110 at 130 (emphasis added). 110 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. 111 (1927) 39 CLR 302; [1927] ALR 189. 112 (1967) 13 FLR 172 at 177–8. 113 See Pratt v Rush (1879) 5 VLR (L) 421; Parbury Henty & Co Pty Ltd v General Engineering & Agencies Pty Ltd (1973) 47 ALJR 336; JB & BL Nominees Pty Ltd v McCormack [1982] WAR 258. 114 See Bastard v McCallum [1924] VLR 9; (1924) 30 ALR 1; Cohen v Roche [1927] 1 KB 169. 115 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. 116 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. 117 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 at 240. 118 Metropolitan Knitting and Hosiery Co Ltd (in liq) v Thomas Burnley & Sons Ltd (1924) 35 CLR 232 at 243. 119 Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167. 120 See Dublin City Distillery (Great Brunswick Street, Dublin) Ltd v Doherty [1914] AC 823 at 844. 121 Abbott & Co v Wolsey [1895] 2 QB 97. 122 (1924) 35 CLR 232. 123 (1924) 35 CLR 232 at 240 per Isaacs J. 124 (1924) 35 CLR 232 at 242 per Isaacs J. 125 Dougan v Ley (1946) 71 CLR 142. 126 Gardiner v Grigg (1938) 38 SR (NSW) 524. 127 [1928] 1 KB 397. 128 [1928] 1 KB 397 at 408. 129 Sale of Goods Act 1895 (WA) s 4; Sale of Goods Act 1896 (Tas) s 9. 130 See Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146 at 157; [1931] ALR 89; Smith v Hartshorn (1959) 60 SR (NSW) 391 at 394; Popiw v Popiw [1959] VR 197 at 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 at 655 per Lord Scarman, delivering the advice of the Privy Council; Take Harvest Ltd v Liu [1993] AC 552 at 568 (PC); Smith v Hartshorn (1959) 60 SR (NSW) 391 at 394 (FC). 131 See Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59 per McPherson J; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217 at 246 per Ormiston J. 132 Perpetual Executors and Trustees Association of Australia Ltd v Russell (1931) 45 CLR 146; [1931] ALR 89 at CLR 153 per Gavan Duffy CJ, Starke and McTiernan JJ, 155 per Evatt J; see also Head v Kelk [1963] SR (NSW) 340 at 348; [1962] NSWR 1363 per Herron J, following Miles v New Zealand Alford Estate Co (1886) 32 Ch D 266. 133 Take Harvest Ltd v Liu [1993] AC 552 at 569 per the Privy Council. 134 See R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines

and Remedies, 4th ed, LexisNexis Butterworths, 2002, para 20-220. 135 Jones v Baker (2002) 10 BPR 19,115; [2002] NSWSC 89. 136 [1974] 1 NSWLR 622 at 626. 137 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, Sydney, 1997, pp 248–88. The doctrine no longer applies 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 at 172 per Robert Walker LJ (CA). 138 See Chapter 9. 139 (1988) 164 CLR 387 at 405; 76 ALR 513 per Mason CJ and Wilson J. 140 See Meagher, Heydon and Leeming, above n 134, para 20-225. 141 (1740) 2 Atk 98 at 100. 142 (1686) 1 Vern 363; see Simpson, above n 16, p 614. 143 Simpson, above n 16, 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 Litchford (1705) 2 Freeman 285. 144 See, for example, Property Law Act 1958 (Vic) s 55(d). 145 See Marsh v Mackay [1948] St R Qd 113 at 123 (FC); Meagher, Heydon and Leeming, above n 134, para 30-215. 146 See, for example, J C Williamson Ltd v Lukey (1931) 45 CLR 282; [1931] ALR 157. 147 See Nobleza v Lampl (1986) 85 FLR 147; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513; see also Chapter 9. 148 (1990) 26 FCR 21; 102 ALR 289. 149 [1976] AC 536. 150 See Ogilvie v Ryan [1976] 2 NSWLR 504 at 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 at 37; 102 ALR 289 per Hill J (Wilcox and Foster JJ agreeing) (FC), 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; Spry, above n 137, p 274. 151 Meagher, Heydon and Leeming, above n 134, para 20-205. 152 Maddison v Alderson (1883) 8 App Cas 467 at 478 per Lord Selbourne. Knox CJ made similar observations in Cooney v Burns (1922) 30 CLR 216 at 222–3; 28 ALR 181. 153 (1883) 8 App Cas 467. 154 Maddison v Alderson (1883) 8 App Cas 467 at 479 per Lord Selborne LC; see also McBride v Sandland (1918) 25 CLR 69 at 77 per Isaacs and Rich JJ; Cooney v Burns (1922) 30 CLR 216 at 243; 28 ALR 181; J C Williamson Ltd v Lukey (1931) 45 CLR 282; [1931] ALR 157 at CLR 291–2 per Starke J, 318 per McTiernan J; Regent v Millett (1976) 133 CLR 679 at 683; 10 ALR 496 per Gibbs J; Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59 at 71 per McPherson J; Waltons

Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 431; 76 ALR 513 per Brennan J; Watson v Delaney (1991) 22 NSWLR 358 at 362. 155 (1918) 25 CLR 69. 156 (1976) 133 CLR 679; 10 ALR 496. 157 See, for example, Raffaele v Raffaele [1962] WAR 29 at 32 per D’Arcy J. 158 See Kalnenas v Kovacevich [1961] WAR 188 at 193. 159 Regent v Millett (1976) 133 CLR 679 at 683; 10 ALR 496 per Gibbs J (Stephen, Mason, Jacobs and Murphy JJ concurring). 160 Steadman v Steadman [1976] AC 536. 161 J C Williamson Ltd v Lukey (1931) 45 CLR 282 at 300; [1931] ALR 157 per Dixon J (Gavan Duffy CJ agreeing); see also Australia and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21; 102 ALR 289. 162 Grummitt v Natalisio [1968] VR 156; see also Cooney v Burns (1922) 30 CLR 216; 28 ALR 181. 163 See McBride v Sandland (1918) 25 CLR 69 at 79 per Isaacs and Rich JJ. 164 Regent v Millet (1976) 133 CLR 679 at 683; 10 ALR 496 per Gibbs J (Stephen, Mason, Jacobs and Murphy JJ concurring); see also Riley v Osborne [1986] VR 193; contrast Reid v Zoanetti [1943] SASR 92 at 101. 165 See Millett v Regent [1975] 1 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 JJ 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. 166 Millett v Regent [1975] 1 NSWLR 62 at 66. 167 Millett v Regent [1975] 1 NSWLR 62 at 71.

[page 315]

CHAPTER 11 Express Terms CHAPTER OVERVIEW 11.1 11.2 11.4 11.6

11.11 11.13 11.14 11.18

Introduction The effect of signature Misrepresentation and non est factum Incorporation of written terms by notice 11.7 Notice prior to contract formation 11.8 Contractual effect 11.9 Reasonable steps Unusual terms Incorporation through a course of dealings The parol evidence rule Pre-contractual statements

Introduction 11.1

This chapter examines the topic of express terms, which are those that are explicitly included in the contract by the parties. In this area of contract law, we are concerned with determining whether those terms form part of the contract and in assessing their effectiveness. In most contracts the express terms are clearly set out as obligations. However, in some instances the identity of the express terms is unclear, nor is it clear whether or not they are effective in binding the other party. The difficulty arises for three reasons. First, it may be unclear as to whether some pre-contractual representations may in fact be terms of the contract. Second, some contracts are part-written and part oral. Third, some terms may be incorporated into a contract by different means.

There are some crucial factors that need to be taken into account in this area: the effect of signature on a written contract; the difference between written and unwritten contracts; [page 316] the degree of notice required for the incorporation of unusual terms in both written and unwritten contracts; and the attitude of the courts towards sophisticated commercial parties and written contracts.

The effect of signature 11.2

The general rule is that where a written memorandum has been signed by a party to the contract, then that party is highly likely to be bound by the contents of the agreement.1 In L’Estrange v F Graucob Ltd,2 the plaintiff bought a cigarette vending machine from the defendant, on the basis of terms that were contained in a document described as a sales agreement. Unbeknown to the plaintiff, who signed the contract without reading it, the document contained an all-pervasive exclusion clause. While the plaintiff won her claim at first instance, she lost on appeal. In the Court of Appeal, Lord Scrutton stated: ‘[W]hen a document containing contractual terms is signed, then, in the absence of fraud … the party signing is bound and it was wholly immaterial whether he has read the document or not.’3 This principle is well recognised in Australian law. In Wilton v Farnsworth,4 Latham CJ stated: 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.5

More recently, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,6 the High Court stated: 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.

The above statements effectively amount to a presumption that signature indicates a binding assent to a written agreement. However, the presumption can be rebutted where one of the vitiating factors [page 317] doctrines is present. The statements of the High Court in Wilton and Toll are based on the reasoning of Scrutton LJ in L’Estrange v F Graucob Ltd. The judgment of Scrutton LJ is extracted below.

L’Estrange v F Graucob Ltd [1934] 2 KB 394 King’s Bench Division [The plaintiff signed an agreement, which included an exclusion clause. The agreement concerned the purchase of a cigarette vending machine. The machine did not work properly. The plaintiff sued the defendant for damages.] Scrutton LJ at 400–3: The plaintiff commenced proceedings against the defendants in the county court, her claim being for 9 pounds 1s as money received by the defendants to the use of the plaintiff a part of the

consideration for the delivery of an automatic slot machine pursuant to a contract in writing dated 7 February 1933, which consideration was alleged wholly to have failed by reason of the fact that the machine was delivered in a condition unfit for the purpose for which it was intended. The only document which corresponds to the contract there mentioned is a long document headed ‘sales agreement.’ … … the plaintiff contended that she was induced to sign the contract by the misrepresentation that it was an order form, and that at the time when she signed she knew nothing of the conditions. … As to the defence that no action would lie for breach of implied warranty, the defendants relied upon the following clause in the contract: ‘This agreement contains all the terms and conditions under which I agree to purchase the machine specified above and any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded’. A clause of that sort has been before the courts for some time. … The main question raised is whether that clause formed part of the contract. If it did, it clearly excluded any condition or warranty. In the course of the argument in the county court reference was made to the railway passenger and cloak-room ticket cases, Such as Richardson Spence & Co v Rowntree. In that case Lord Herschell, LC, laid down the law applicable to these cases and stated the three questions which should be left to the jury. In the present case the learned judge asked himself the three questions appropriate to these cases, and in answering them has found as facts; (i) that the plaintiff knew that there was [page 318] printed material on the document which she signed; (ii) that she did not know that the document contained conditions relating to the contract;

and (iii) that the defendants did not do what was reasonably sufficient to bring these conditions to the notice of the plaintiff. The present case is not a ticket case, and it is distinguishable from the ticket cases. In Parker v South Eastern Rail Co Mellish, LJ, laid down in a few sentences the last of which is applicable to this case. He there said (2 CPD at p 421): In an ordinary case, where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature, and, in the absence of fraud, it is wholly immaterial that he has not read the agreement and does not know its contents.’ Having said that, he goes on to deal with the ticket cases, where there is no signature to the contractual document, the document being simply handed by the one party to the other and continues: The parties may, however, reduce their agreement into writing, so that the writing constitutes the sole evidence of the agreement, without signing it; but in that case there must be evidence independently of the agreement itself to prove that the defendant has assented to it. In that case, also, if it is proved that the defendant has assented to the writing constituting the agreement between the parties, it is, in the absence of fraud, immaterial that the defendant had not read the agreement and did not know its contents.’ In cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to prove that an alleged party was aware, or ought to have been aware, of its terms and conditions. These cases have no application when the document has been signed. When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not. The rule in L’Estrange v F Graucob Ltd is not without its critics. Mason and Gageler have argued that the rule does not reflect the true consent of the parties and that justice and fairness require a reconsideration of the rule.7 Similarly, Greig and Davis have suggested that where a party has not had a reasonable opportunity to read the terms that they should not be bound by them.8 Nor can it be said that the rule in L’Estrange v F Graucob Ltd is without any limitation. In D J Hill Co Pty Ltd v

Walter H Wright Pty Ltd,9 the Court of Appeal of Victoria held that an exclusion clause was not incorporated into a contract because the agreement was only signed after the contract had been performed and because the terms were not those that would normally have been expected in such an agreement. In D J Hill, the parties operated under an oral contract for [page 319] the purchase of machinery. When the plaintiff received the machinery he was presented with a document that he assumed was a delivery receipt. The plaintiff signed for delivery without realising that there were terms, including an exclusion clause, in the document. The defendant later sought to rely upon the exclusion clause, but the Court of Appeal, in addition to the reasons noted above, stated that the document was presented to the plaintiff as if it were a delivery receipt and as such no actual notice had been given. D J Hill represents a limitation on the rule in L’Estrange v Graucob in that a party cannot be bound by their signature if they are presented with a document that does not appear contractual in nature and that they duly sign. 11.3

Nonetheless, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,10 the High Court reaffirmed the primacy of a party’s signature in the context of documents that are contractual in both nature and appearance. In Toll, the transporter damaged medical goods that belonged to Alphapharm while in the process of carrying them. Alphapharm duly sued and the transporter relied upon an exclusion clause that was contained in a document that Alphapharm’s agent had signed. The High Court held that the agent’s signature meant that Alphapharm was bound by the agreement, even though the agent had not familiarised himself with all of the terms. The judgment of the High Court is extracted below.

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342 High Court of Australia [Alphapharm purchased shipments of vaccine. The vaccine needed to be stored within a given temperature range. Alphapharm’s agent arranged with Toll (which was then trading under the name of Finemore) to transport the vaccine shipments. The vaccine shipments were not stored at an appropriate temperature and they spoiled. Alphapharm sued.] Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ: The terms of contract issue [35] A striking feature of the evidence at trial, and of the reasoning of the learned primary judge, is the attention that was given to largely irrelevant information about the subjective understanding of the individual participants in the dealings between the parties. Written statements of witnesses, no doubt prepared by lawyers, were received as evidence in chief. [page 320] Those statements contained a deal of inadmissible material that was received without objection. The uncritical reception of inadmissible evidence, often in written form and prepared in advance of the hearing is to be strongly discouraged. It tends to distract attention from the real issues, give rise to pointless cross-examination and cause problems on appeal where it may be difficult to know the extent to which the inadmissible material influenced the judgment at first instance. [36] In Codelfa Construction Pty Ltd v State Rail Authority of NSW, Mason J observed: We do not take into account the actual intentions of the

parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract. [37] It is not in dispute that Finemores stored and transported the goods pursuant to a contract made between Finemores and Richard Thomson. The role of Alphapharm in that contract is a matter of dispute, and is the subject of the agency issue. It may be put to one side for the moment. The issue presently under consideration concerns the identification of the terms on which Finemores and Richard Thomson contracted. [38] It is not in dispute that Mr Gardiner-Garden was authorised by Richard Thomson to sign the Application for Credit, and that when he signed that document he did so intending that it would affect the legal relations between Richard Thomson and Finemores. So much was acknowledged in the course of argument in this Court. Counsel for Richard Thomson said that there was no suggestion that the document that was signed was not intended to create legal relations. In their consideration in Ermogenous v Greek Orthodox Community of SA Inc of the requisite intention to create contractual relations, Gaudron, McHugh, Hayne and Callinan JJ said: Although the word ‘intention’ is used in this context, it is used in the same sense as it is used in other contractual contexts. It describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened. It is not a search for the uncommunicated subjective motives or intentions of the parties. The point at issue on this appeal concerns not the creation of legal relations but the nature of the legal relations created. [39] Any suggestion that the agreement between Richard Thomson and Finemores was vitiated by misrepresentation would be untenable. Mr Gardiner-Garden signed a document which invited him to read the

terms and conditions on the reverse before signing. He was not rushed or tricked into signing the document. He chose to sign it without reading it. He could have read it had he [page 321] wished. Finemores did not set out to conceal from him the terms and conditions on the document, or to encourage him not to read them. Finemores had no way of knowing that he did not read the document. No case of mistake or non est factum is advanced. [40] This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. 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. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. [41] In Taylor v Johnson, Mason ACJ, Murphy and Deane JJ explained the significance of the difference between the subjective and objective theories of contractual assent by reference to the impeachment of a contract on the ground of unilateral mistake. They said: According to the subjective theory, there is no binding contract either at common law or in equity, equity following the common law in this respect. Of course in deciding whether the contract is void ab initio for the unilateral mistake, regard will be had to the doctrine of estoppel in

order to determine whether effect should be given to the claim that there has been unilateral mistake. On the other hand, according to the objective theory, there is a contract which, in conformity with the common law, continues to be binding, unless and until it is avoided in accordance with equitable principles which take as their foundation a contract valid at common law but transform it so that it becomes voidable. The important distinction between the two approaches is that, according to the subjective theory, the contract is void ab initio, whereas according to the objective theory, it is voidable only. Their Honours went on to say that ‘the clear trend in decided cases and academic writings has been to leave the objective theory in command of the field.’ [42] Consistent with this objective approach to the determination of the rights and liabilities of contracting parties is the significance which the law attaches to the signature (or execution) of a contractual document. In Parker v South Eastern Railway Company, Mellish LJ drew a significant distinction as follows: [page 322] In an ordinary case, where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature, and, in the absence of fraud, it is wholly immaterial that he has not read the agreement and does not know its contents. The parties may, however, reduce their agreement into writing, so that the writing constitutes the sole evidence of the agreement, without signing it; but in that case there must be evidence independently of the agreement itself to prove that the defendant has assented to it. [43] More recently, in words that are apposite to the present case, in

Wilton v Farnworth Latham CJ said: In the absence of fraud or some other of the special circumstances of the character mentioned, 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 every-day business transactions. [44] In Oceanic Sun Line Special Shipping Company Inc v Fay, Brennan J said: If a passenger signs and thereby binds himself to the terms of a contract of carriage containing a clause exempting the carrier from liability for loss arising out of the carriage, it is immaterial that the passenger did not trouble to discover the contents of the contract. [45] It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be. That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it. [46] The statements in the above authorities accord with the wellknown principle stated by Scrutton LJ in L’Estrange v F Graucob Ltd (L’Estrange v Graucob) that ‘[w]hen a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.’ Scrutton LJ, in

turn, was repeating the substance of what had been said by Mellish LJ in Parker v South Eastern Railway Company. The principle was applied in Foreman v Great Western Railway Company. A consignor of cattle sent them for transportation by a railway company. They were put in the charge of a drover, who could not read. The drover signed a contract of carriage which contained an exclusion clause. The drover’s employer was held to be bound by the clause. The Exchequer Division [page 323] said that ‘the plaintiff who sends the [illiterate] servant to sign the document is in no better or worse position than if he had signed it himself without reading it.’ In his lecture published as ‘Form and Substance in Legal Reasoning: The Case of Contract’, Professor Atiyah posed, with reference to L’Estrange v Graucob, the question why signatures are, within established limits, regarded as conclusive. He answered: A signature is, and is widely recognized even by the general public as being a formal device, and its value would be greatly reduced if it could not be treated as a conclusive ground of contractual liability at least in all ordinary circumstances. Professor Atiyah added: However, what is, I think, less clear is what is the underlying reason of substance in this kind of situation. The usual explanation for holding a signature to be conclusively binding is that it must be taken to show that the party signing has agreed to the contents of the document; but another possible explanation is that the other party can be treated as having relied upon the signature. It thus may be a mistake to ask, as H L A Hart once asked, whether the signature is merely conclusive evidence of agreement, or whether it is itself a criterion of agreement.

These themes appeared in the judgment of this Court in Petelin v Cullen. There, the Court upheld a plea of non est factum. Under the common law rules, a plea of non est factum was a plea of the general issue which put in issue that the defendant had executed the deed alleged in its declaration. In their joint judgment in Petelin, Barwick CJ, McTiernan, Gibbs, Stephen and Mason JJ said: The principle which underlies the extension of the plea to cases in which a defendant has actually signed the instrument on which he is sued has not proved easy of precise formulation. The problem is that the principle must accommodate two policy considerations which pull in opposite directions: first, the injustice of holding a person to a bargain to which he has not brought a consenting mind; and, secondly, the necessity of holding a person who signs a document to that document, more particularly so as to protect innocent persons who rely on that signature when there is no reason to doubt its validity. The importance which the law assigns to the act of signing and to the protection of innocent persons who rely upon a signature is readily discerned in the statement that the plea is one ‘which must necessarily be kept within narrow limits’ … and in the qualifications attaching to the defence which are designed to achieve this objective. [47] The importance which, for a very long time, the common law has assigned to the act of signing is not limited to contractual documents. Wilton v Farnworth was not a contract case. The passage from the judgment of Latham CJ quoted above is preceded by a general statement that, where a man signs a document [page 324] knowing that it is a legal document relating to an interest in property, he is in general bound by the act of signature. Legal instruments of various kinds take their efficacy from signature or execution. Such instruments

are often signed by people who have not read and understood all their terms, but who are nevertheless committed to those terms by the act of signature or execution. It is that commitment which enables third parties to assume the legal efficacy of the instrument. To undermine that assumption would cause serious mischief.

Misrepresentation and non est factum 11.4

Where the terms of a contract have been misrepresented or where the defence of non est factum can successfully be raised, then the rule in L’Estrange v F Graucob Ltd will not apply.11 In Curtis v Chemical Cleaning & Dyeing Co,12 a wedding dress with trimmed beads was sent for cleaning. When the plaintiff presented the dress she was given a document with the heading ‘receipt’ and was asked to sign it. She inquired as to why her signature was required. The clerk replied that the contract exempted the defendant from certain specified risks and in the present case, the risk from the beads. In fact, the document contained a clause to the effect that the company was not liable for any damage. When the dress was returned to the plaintiff it was stained. The court held that the clause did not apply because the width of it had been determined by the clerk’s misrepresentation. In Petelin v Cullen,13 Petelin, who could not read English, signed a document believing it to be a receipt for $50. In fact, the document gave Cullen an option to purchase Petelin’s land which Cullen then exercised. Petelin refused to sign a contract of sale and Cullen sought specific performance. The High Court held that the defence of non est factum applied. The court noted: The class of persons who can avail themselves of the defence is limited. It is available to those who are unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing; it is also available to those who through no fault of their own are unable to have any understanding of the purport of a particular document. To make out the defence a defendant must show that he

signed the document in the belief that it was radically different from what it was in fact and that, at least as against innocent persons, his failure to read and understand it was not due to carelessness on his part.14

The non est factum defence seeks to balance the competing needs of holding people to the agreements that they sign and the necessity of [page 325] avoiding the injustice of forcing an agreement upon a person who has not truly consented to it. The difficulty in balancing these two objectives is neatly illustrated in the case of Saunders v Anglia Building Society.15 In Saunders, an elderly widow wanted to leave her house to her nephew in her will. However, the nephew was in need of money and sought to raise security over the home. The widow agreed, on the basis that she would have a life interest in the property. The nephew was worried that if he raised the money in his own name his wife would take it, so he asked a friend to acquire the money on the security of the home. The friend then took out a mortgage with a building society. The widow signed the mortgage, but was unable to read it as her glasses were broken. The nephew then failed to repay any of the monies and the building society sued for the house. The widow pleaded the defence of non est factum. The House of Lords found in favour of the building society and held that the non est factum defence could not be satisfied on the facts of the case. Even though the widow had no understanding of the mortgage, she had a better opportunity to learn the truth of the transaction than the building society and had in fact set up the chain of events into which an unwitting third party eventually took part. 11.5

The defences of misrepresentation and non est factum highlight the importance of the vitiating factors doctrines in this area of the law. In the extract below, Lord Denning’s statements on

misrepresentation in Curtis are extracted.

Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 England and Wales Court of Appeal, Civil Division Lord Denning at 808–10: This case is of importance because of the many cases nowadays when people sign printed forms without reading them, only to find afterwards that they contain stringent clauses exempting the other side from their common-law liabilities. In every such case it must be remembered that, if a person wishes to exempt himself from a liability which the common law imposes on him, he can only do it by an express stipulation brought home to the party affected, and assented to by him as part of the contract: Olley v Marlborough Court n(2). If the party affected signs a written document, knowing it to be a contract which governs the relations between them, his signature is irrefragable evidence of his assent to the whole contract, including the exempting clauses, unless the signature is shown to be obtained by fraud or misrepresentation: L’Estrange v Graucob n(3). But what is a sufficient misrepresentation for this purpose? That is the point which Mr Geoffrey Lawrence has raised in this appeal. [page 326] In my opinion any behaviour, by words or conduct, is sufficient to be a misrepresentation if it is such as to mislead the other party about the existence or extent of the exemption. If it conveys a false impression, that is enough. If the false impression is created knowingly, it is a fraudulent misrepresentation; if it is created unwittingly, it is an innocent misrepresentation; but either is sufficient to disentitle the creator of it to the benefit of the exemption. In Rex v Kylsant (Lord) n(4) it was held that a representation might be literally true but practically false, not because of what it said, but because of what it left unsaid; in short,

because of what it implied. This is as true of an innocent misrepresentation as it is of a fraudulent misrepresentation. When one party puts forward a printed form for signature, failure by him to draw attention to the existence or extent of the exemption clause may in some circumstances convey the impression that there is no exemption at all, or at any rate not so wide an exemption as that which is in fact contained in the document. The present case is a good illustration. The customer said in evidence: ‘When I was asked to sign the document I asked why? The assistant said I was to accept any responsibility for damage to beads and sequins. I did not read it all before I signed it’. In those circumstances, by failing to draw attention to the width of the exemption clause, the assistant created the false impression that the exemption only related to the beads and sequins, and that it did not extend to the material of which the dress was made. It was done perfectly innocently, but nevertheless a false impression was created. It was probably not sufficiently precise and unambiguous to create an estoppel: Low v Bouverie n(5); but nevertheless it was a sufficient misrepresentation to disentitle the cleaners from relying on the exemption, except in regard to beads and sequins. In the present case the customer knew, from what the assistant said, that the document contained conditions. If nothing was said she might not have known it. In that case the document might reasonably be understood to be, like a boot repairer’s receipt, only a voucher for the customer to produce when collecting the goods, and not understood to contain conditions exempting the cleaners from their common-law liability for negligence. In that case it would not protect the cleaners: see Chapelton v Barry Urban District Council n(6). I say this because I do not wish it to be supposed that the cleaners would have been better off if the assistant had simply handed over the document to the customer without asking her to sign it; or if the customer were not so inquiring as the plaintiff, but were an unsuspecting person who signed whatever she was asked without question. In those circumstances the conduct of the cleaners might well be such that it conveyed the impression that the document contained no conditions, or, at any rate, no condition exempting them from their common-law liability, in which case they could not rely on it.

The second point made by Mr Geoffrey Lawrence was that, even if there was an innocent misrepresentation, the plaintiff cannot in point of law avoid the terms of the contract. He said that an innocent misrepresentation gives no right to [page 327] damages but only to rescission; that rescission was not possible because the contract was executed; and that in any case rescission was of no use to the plaintiff because, once rescission has taken place, there would be no contract to sue upon. That is an attractive argument, but I do not think that it is right. One answer to it is that an executed contract can in a proper case be rescinded for innocent misrepresentation; and if this contract was rescinded the plaintiff could sue in tort for negligence, because the defendants, having entered upon the task of cleaning the dress, were under a duty to do it carefully. I do not pursue this, however, because I prefer to put it more simply. In my opinion when the signature to a condition, purporting to exempt a person from his common-law liabilities, is obtained by an innocent misrepresentation the party who has made that misrepresentation is disentitled to rely on the exemption. Whether you call that a rule of law or equity does not matter in these days. We have got too far beyond 1873 to trouble about distinctions of that kind. Scrutton and Maugham, LJJ, in L’Estrange v Graucob n(7) treated it as plain. I therefore agree that the appeal should be dismissed.

Incorporation of written terms by notice 11.6

Many contracts that feature in everyday life are wholly or partly unwritten. For example, a train ticket or entry into a parking lot may well be governed by a contract whose terms are not going to be presented to the customer in written form for signature. Accordingly, those terms that a party wishes to impose upon others must be incorporated into the contract by

notice. There are three requirements that must be satisfied in order for the terms to be incorporated into the contract. First, the other party must be able to view the terms before the contract is formed.16 Second, the terms must be contained in a document that is intended to have contractual effect.17 Third, the party who seeks to rely on the terms must have taken reasonable steps to bring them to the attention of the other party;18 that is, the party that seeks to rely upon the terms must have given the other party reasonably sufficient notice of the terms.19 Moreover, clear evidence that proper and adequate notice has been given is required to justify the incorporation of particularly onerous or unusual terms.20 [page 328]

Notice prior to contract formation 11.7

Notice of the terms must have been provided before the contract was formed. In Oceanic Sun Line Special Shipping Co Inc v Fay,21 a passenger booked a cruise to the Greek Islands. The ticket was given to the passenger after the contract had been made. However, the ticket contained a term giving the Greek courts exclusive jurisdiction over any dispute arising under the contract. The passenger was injured during the cruise and sought to sue the shipowner in Australia. The High Court held that as the ticket had been issued after the contract had formed, the clause pertaining to the Greek courts had no effect. As Brennan J noted: ‘[A] condition printed on a ticket is ineffective to alter a contract of carriage if the ticket is issued after the contract is made.’22 Similarly, in eBay International AG v Creative Festival Entertainment Pty Ltd,23 a term included on a ticket, but not displayed on the website where the tickets had been purchased, was held not to have formed part of the contract as it was only provided after the customer had paid for the ticket

and the contract had been completed. In Olley v Marlborough Court Ltd,24 a hotel guest had furs stolen from her hotel room. The hotel sought to rely upon the terms contained in a notice that was available in her room. The notice would have exempted the hotel owners from any liability for the loss suffered by the guest. However, the court held that the contract had been formed when the guest checked in at reception. Consequently, the notice in the room was not incorporated into the contract.

Contractual effect 11.8

Terms that are included in a document that is not intended to have contractual effect will not be incorporated into the contract. In Oceanic Sun Line Special Shipping Co Inc v Fay,25 a brochure that was given to the passenger contained a statement that the terms of the contract were contained in his ticket. The brochure was essentially advertising material which was available to any prospective customer. Wilson and Toohey JJ remarked that it was ‘informative but not contractual.’26 In Chapleton v Barry UDC,27 an exclusion clause contained on a ticket was held to be unenforceable because it was presented to the customer as if it were a mere receipt. In Causer v Browne,28 the plaintiff’s husband left the plaintiff’s dress with the defendant for dry cleaning. However, [page 329] when the dress was collected it had somehow acquired a new stain and some of its threads had been noticeably pulled. The plaintiff sued and the defendant sought to rely upon an exemption clause contained on the foot of the docket that had been given to the husband. The Supreme Court of Victoria held that the docket appeared to be a mere receipt and that as such

the defendants could not rely upon it as they had not demonstrated that they had brought it to the attention of the husband.

Reasonable steps 11.9

The party that seeks to rely upon the terms must take reasonable steps to bring them to the attention of the other party.29 In Oceanic Sun Line Special Shipping, Brennan J held that the test was whether the party who sought to rely on the terms ‘had done all that was necessary to bring it to notice.’30 In Thornton v Shoe Lane Parking Ltd,31 a parking garage company sought to rely upon an exclusion clause. A customer had entered the car park and had been given a ticket indicating the time of his entry into the parking lot. The ticket also contained a statement in small print stating that the ticket was issued subject to the conditions of issue that were displayed on the premises. In fact, these conditions could only be viewed once the customer was inside the parking lot. They were not visible from the outside or at the entrance where the ticket was issued. The Court of Appeal held that the customer was not bound by the exclusion clause. The judgment of Lord Denning MR is extracted below.

Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 England and Wales Court of Appeal, Civil Division [The plaintiff drove his car into a new automatic car park. He had not been there before. A notice on the outside of the carpark gave the charges and stated that all cars were ‘parked at owner’s risk.’ A traffic light on the entrance lane showed red and a machine produced a ticket when the car had drawn up beside it. The plaintiff took the ticket and, the light having turned green, drove on into the garage, where his car

was parked by mechanical means. On the plaintiff’s return to collect the car there was an accident and he was severely injured. The plaintiff claimed damages from the defendant garage. The defendants contended, inter alia, that the ticket incorporated a condition exempting them from liability. [page 330] The ticket stated the car’s time of arrival and that the ticket was to be presented when the car was claimed. In the bottom left-hand corner in small print it was said to be ‘issued subject to conditions … displayed on the premises.’ On a pillar opposite the ticket machine a set of eight printed ‘conditions’ was displayed in a panel. In the second condition it was stated that the garage would not be liable for any injury to a customer occurring when his or her car was on the premises.] Lord Denning MR at 167–70: In 1964 Mr Thornton, the plaintiff, who was a free-lance trumpeter of the highest quality, had an engagement with the BBC at Farringdon Hall. He drove to the City in his motor car and went to park it at a multistorey automatic car park. It had only been open a few months. He had never gone there before. There was a notice on the outside headed ‘Shoe Lane Parking.’ It gave the parking charges: ‘5s for two hours; 7s 6d for three hours,’ and so forth; and at the bottom: ‘All Cars Parked At Owner’s Risk.’ Mr Thornton drove up to the entrance. There was not a man in attendance. There was a traffic light which showed red. As he drove in and got to the appropriate place, the traffic light turned green and a ticket was pushed out from the machine. Mr. Thornton took it. He drove on into the garage. The motor car was taken up by mechanical means to a floor above. Mr. Thornton left it there and went off to keep his appointment with the BBC. Three hours later Mr Thornton came back. He went to the office and paid the charge for the time the car was there. His car was brought down from the upper floor. He went to put his belongings into the boot of the car. But unfortunately there was an accident. Mr Thornton was severely injured. The judge has found it was half his own

fault, but half the fault of Shoe Lane Parking Ltd, the defendants. The judge awarded him £3,637, 6s 11d. On this appeal the garage company do not contest the judge’s findings about the accident. They acknowledge that they were at fault, but they claim that they are protected by some exempting conditions. They rely on the ticket which was issued to Mr Thornton by the machine. They say that it was a contractual document and that it incorporated a condition which exempts them from liability to him. The ticket was headed ‘Shoe Lane Parking.’ Just below there was a ‘box’ in which was automatically recorded the time when the car went into the garage. There was a notice alongside: ‘Please present this ticket to cashier to claim your car.’ Just below the time, there was some small print in the left hand corner which said: ‘This ticket is issued subject to the conditions of issue as displayed on the premises.’ That is all. Mr Thornton says he looked at the ticket to see the time on it, and put it in his pocket. He could see there was printing on the ticket, but he did not read it. He only read the time. He did not read the words which said that the ticket was issued subject to the conditions as displayed on the premises. If Mr Thornton had read those words on the ticket and had looked round the premises to see where the conditions were displayed, he would have had to have driven his car on into the garage and walked round. Then he would have found, [page 331] on a pillar opposite the ticket machine, a set of printed conditions in a panel. He would also have found, in the paying office (to be visited where coming back for the car) two more panels containing the printed conditions. If he had the time to read the conditions — it would take him a very considerable time — he would read: CONDITIONS The following are the conditions upon which alone motor

vehicles are accepted for parking:– 1. The customer agrees to pay the charges of Shoe Lane Parking Developments Ltd. … 2. The customer is deemed to be fully insured at all times against all risks (including, without prejudice to the generality of the foregoing, fire, damage and theft, whether due to the negligence of others or not) and the company shall not be responsible or liable for any loss or misdelivery of or damage of whatever kind to the customer’s motor vehicle, or any articles carried therein or thereon or of or to any accessories carried thereon or therein or injury to the customer or any other person occurring when the customer’s motor vehicle is in the parking building howsoever that loss, misdelivery, damage or injury shall be caused; and it is agreed and understood that the customer’s motor vehicle is parked and permitted by the company to be parked in the parking building in accordance with this licence entirely at the customer’s risk. … There is a lot more. I have only read about one-tenth of the conditions. The important thing to notice is that the company seek by this condition to exempt themselves from liability, not only for damage to the car, but also for injury to the customer howsoever caused. The condition talks about insurance. It is well known that the customer is usually insured against damage to the car. But he is not insured against damage to himself. If the condition is incorporated into the contract of parking, it means that Mr Thornton will be unable to recover any damages for his personal injuries which were caused by the negligence of the company. We have been referred to the ticket cases of former times from Parker v South Eastern Railway Co (1877) 2 CPD 416 to McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125. They were concerned with railways, steamships and cloakrooms where booking clerks issued tickets to customers who took them away without reading them. In those cases the issue of the ticket was regarded as an offer by the company. If the customer took it and retained it without objection, his act was regarded as an acceptance of the offer: see Watkins v Rymill (1833) 10 QBD 178,

188 and Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41, 47. These cases were based on the theory that the customer, on being handed the ticket, could refuse it and decline to enter into a contract on those terms. [page 332] He could ask for his money back. That theory was, of course, a fiction. No customer in a thousand ever read the conditions. If he had stopped to do so, he would have missed the train or the boat. None of those cases has any application to a ticket which is issued by an automatic machine. The customer pays his money and gets a ticket. He cannot refuse it. He cannot get his money back. He may protest to the machine, even swear at it. But it will remain unmoved. He is committed beyond recall. He was committed at the very moment when he put his money into the machine. The contract was concluded at that time. It can be translated into offer and acceptance in this way: the offer is made when the proprietor of the machine holds it out as being ready to receive the money. The acceptance takes place when the customer puts his money into the slot. The terms of the offer are contained in the notice placed on or near the machine stating what is offered for the money. The customer is bound by those terms as long as they are sufficiently brought to his notice beforehand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, because the ticket comes too late. The contract has already been made: see Olley v Marlborough Court Ltd [1949] 1 KB 532. The ticket is no more than a voucher or receipt for the money that has been paid (as in the deckchair case, Chapelton v Barry Urban District Council [1940] 1 KB 532) on terms which have been offered and accepted before the ticket is issued. In the present case the offer was contained in the notice at the entrance giving the charges for garaging and saying ‘at owner’s risk,’ i.e., at the risk of the owner so far as damage to the car was concerned. The offer was accepted when Mr Thornton drove up to the entrance and, by the movement of his car, turned the light from red to green, and the ticket

was thrust at him. The contract was then concluded, and it could not be altered by any words printed on the ticket itself. In particular, it could not be altered so as to exempt the company from liability for personal injury due to their negligence. Assuming, however, that an automatic machine is a booking clerk in disguise — so that the old fashioned ticket cases still apply to it. We then have to go back to the three questions put by Mellish LJ in Parker v South Eastern Railway Co, 2 CPD 416, 423, subject to this qualification: Mellish LJ used the word ‘conditions’ in the plural, whereas it would be more apt to use the word ‘condition’ in the singular, as indeed the Lord Justice himself did on the next page. After all, the only condition that matters for this purpose is the exempting condition. It is no use telling the customer that the ticket is issued subject to some ‘conditions’ or other, without more: for he may reasonably regard ‘conditions’ in general as merely regulatory, and not as taking away his rights, unless the exempting condition is drawn specifically to his attention. (Alternatively, if the plural ‘conditions’ is used, it would be better prefaced with the word ‘exempting,’ because the exempting conditions are the only conditions that matter for this purpose.) Telescoping the three questions, they come to this: the customer is bound by the exempting [page 333] condition if he knows that the ticket is issued subject to it; or, if the company did what was reasonably sufficient to give him notice of it. Mr Machin admitted here that the company did not do what was reasonably sufficient to give Mr Thornton notice of the exempting condition. That admission was properly made. I do not pause to inquire whether the exempting condition is void for unreasonableness. All I say is that it is so wide and so destructive of rights that the court should not hold any man bound by it unless it is drawn to his attention in the most explicit way. It is an instance of what I had in mind in J Spurling Ltd v Bradshaw [1956] 1 WLR 461, 466. In order to give sufficient notice, it

would need to be printed in red ink with a red hand pointing to it — or something equally startling. But, although reasonable notice of it was not given, Mr Machin said that this case came within the second question propounded by Mellish LJ, namely that Mr Thornton ‘knew or believed that the writing contained conditions.’ There was no finding to that effect. The burden was on the company to prove it, and they did not do so. Certainly there was no evidence that Mr Thornton knew of this exempting condition. He is not, therefore, bound by it. Mr Machin relied on a case in this court last year — Mendelssohn v Normand Ltd [1970] 1 QB 177. Mr Mendelssohn parked his car in the Cumberland Garage at Marble Arch, and was given a ticket which contained an exempting condition. There was no discussion as to whether the condition formed part of the contract. It was conceded that it did. That is shown by the report in the Law Reports at p 180. Yet the garage company were not entitled to rely on the exempting condition for the reasons there given. That case does not touch the present, where the whole question is whether the exempting condition formed part of the contract. I do not think it did. Mr Thornton did not know of the condition, and the company did not do what was reasonably sufficient to give him notice of it. I do not think the garage company can escape liability by reason of the exemption condition. I would, therefore, dismiss the appeal. In Thornton, the garage company lost because notice of the exclusion clause came after the contract had formed between the parties. Nonetheless, the judgment of Lord Denning MR suggests that a fine line needs to be drawn in cases like Thornton. In the ticket case of Parker v South Eastern Railway Co,32 Lord Denning MR noted that a convenient legal fiction existed in that the customer, upon taking a ticket on which he knew there were terms, was immediately bound by those terms. However, Lord Denning noted that the customer would

assume that these terms would regulate his carriage rather than take away his rights. The idea to which Lord Denning alludes is that of the red ink rule that [page 334] he developed in J Spurling Ltd v Bradshaw.33 In effect, the red ink rule suggests that some clauses are so onerous that they should be printed in red ink with a red hand pointing towards them, to ensure that the other party has sufficient notice of their terms. Whether the red ink rule is necessary after the advent of the Australian Consumer Law is less clear. 11.10 In New South Wales Lotteries Corp Pty Ltd v Kuzmanovski,34 the Full Court of the Federal Court held that the terms of the Public Lotteries Act 1996 (NSW) had been incorporated into a contract between the Lottery Company and a customer. The customer had purchased a ticket and on the basis of the images displayed had believed that they had won. The Lotteries Corporation refused to pay and pointed out that the Lotteries Act allowed them to rely on a verification code to determine if a ticket was in fact intended to be the winning ticket. As the Act had been incorporated into the ticket, even though the legislation was not immediately available to the customer, no prize was payable. However, the court did find for the customer on the basis of misleading and deceptive conduct. Kuzmanowski suggests that though the red ink rule may be of less importance in a contemporary context, it still is present in a sense through the laws on misleading and deceptive conduct.35

Unusual terms 11.11 While its relevance is slightly declining, the red ink rule spawned a small body of jurisprudence that remains relevant

in Australia.36 It is notable that almost all of the incorporation by notice cases have concerned exclusion clauses. However, though the general rule is that the party who seeks to rely upon certain terms must take reasonable steps to bring them to the attention of the other party,37 it is not necessarily the case that the party accepting the contract will not be bound by the terms if he or she has had a reasonable chance to inspect the terms.38 Moreover, if the other party has had an opportunity to read the terms, but has not done so of their own accord, they may still be bound by the terms, provided that they are those that might reasonably be expected in such a contract.39 Nevertheless, if the terms are unusual and would not be [page 335] reasonably expected in the contract then the offeror must do more to bind the other party to the agreement. In Maxitherm Boilers Pty Ltd v Pacific Dunlop Pte Ltd,40 Buchanan JA defined ‘unusual’ as meaning ‘more than ordinarily onerous’.41 In Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd,42 Lyons J summarised the position on the following terms: The fundamental question is whether the offeror is reasonably entitled to conclude that the acceptor has accepted the terms in the document, including the exemption clause. That conclusion should be reached where the second party has had a reasonable opportunity to consider the terms, including the exemption clause, and has behaved in a way which manifests acceptance of the document as recording contractual terms. In other cases, where the clause is one reasonably to be expected in contracts of the kind in question, acceptance of the document makes the clause binding, even if the acceptor does not know its terms, or even that it is contained in the document. If the clause is not one reasonably to be expected, then something more is required by way of provision of information about the clause to the acceptor before the contract is formed. What information will be required will depend on the circumstances, but particularly on the terms of the clause.

11.12 The issue of unusual terms was raised in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd.43 In Interfoto, the plaintiff sent 47 photographic transparencies to the defendant. A

delivery note with terms was included in the dispatch bag. The defendant forgot about the transparencies, but eventually returned them. The plaintiff sought to rely upon a clause in the note that would have imposed a significant fee of £3783 on the defendant. The defendant refused to pay and the plaintiffs sued. The United Kingdom Court of Appeal found for the defendant on the basis that the plaintiff had not done enough to draw attention to the clause. The decision of Dillon LJ in Interfoto is extracted below.

Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433 England and Wales Court of Appeal, Civil Division Dillon LJ at 434–9: The defendants appeal against a decision of his Honour Judge Pearce QC given in the Lambeth County Court at the trial of this action on 11 March 1987 whereby the judge awarded the plaintiffs judgment against the defendants in the sum of £3,783.50 with interest and costs. The judge described the case as an interesting case, and in that I agree with him. [page 336] The plaintiffs run a library of photographic transparencies. The defendants are engaged in advertising. On 5 March 1984 Mr Beeching, a director of the defendants, wanting photographs for a presentation for a client, telephoned the plaintiffs, whom the defendants had never dealt with before. He spoke to a Miss Fraser of the plaintiffs and asked her whether the plaintiffs had any photographs of the 1950s which might be suitable for the defendants’ presentation. Miss Fraser said that she would research his request, and a little later on the same day she sent round by hand to the defendants 47 transparencies packed in a Jiffy bag.

Also packed in the bag, among the transparencies, was a delivery note which she had typed out, and to which I shall have to refer later. Having received the transparencies, Mr Beeching telephoned the plaintiffs at about 3.10 on the afternoon of 5 March, and told Miss Fraser, according to a contemporary note which the judge accepted, that he was very impressed with the plaintiffs’ fast service, that one or two of the transparencies could be of interest, and that he would get back to the plaintiffs. Unfortunately he did not get back on to the plaintiffs and the transparencies seem to have been put on one side and overlooked by the defendants. The plaintiffs tried to telephone Mr Beeching on 20 March and again on 23 March, but only spoke to his secretary. In the upshot the transparencies, which the defendants did not use for their presentation, were not returned to the plaintiffs until 2 April. The plaintiffs thereupon sent an invoice to the defendants for £3,783.50 as a holding charge for the transparencies. The invoice was rejected by the defendants, and accordingly in May 1984 the plaintiffs started this action claiming the £3,783.50, the amount of the invoice. That is the sum for which the judge awarded the plaintiffs judgment by his order now under appeal. The plaintiffs’ claim is based on conditions printed on their delivery note, which I have briefly mentioned, and must now describe in greater detail. It is addressed to Mr Beeching of the defendants at the defendants’ address and in the body of it the 47 transparencies are listed by number. In the top right-hand corner the date of dispatch is given as 5 March 1984 and the date for return is clearly specified as 19 March. Across the bottom, under the heading ‘Conditions’ fairly prominently printed in capitals, there are set out nine conditions, printed in four columns. Of these the important one is no 2 in the first column, which reads as follows: All transparencies must be returned to us within 14 days from the date of posting/delivery/collection. A holding fee of £5.00 plus VAT per day will be charged for each transparency which

is retained by you longer than the said period of 14 days save where a copyright licence is granted or we agree a longer period in writing with you. [page 337] Condition 8 provides: When sent by post/delivered/collected the above conditions are understood to have been accepted unless the package is returned to us immediately by registered mail or by hand containing all the transparencies whole and undefaced and these conditions shall apply to all transparencies submitted to you whether or not you have completed a request form. The conditions purport to be merely the conditions of the bailment of transparencies to a customer. If the customer wishes to make use of transparencies so submitted to him, a fresh contract has to be agreed with the plaintiffs, but, as that did not happen so far as the defendants are concerned, it is unnecessary to consider that aspect further. The sum of £3,783.50 is calculated by the plaintiffs in strict accordance with condition 2 as the fee for the retention of 47 transparencies from 19 March to 2 April 1984. It is of course important to the plaintiffs to get their transparencies back reasonably quickly, if they are not wanted, since if a transparency is out with one customer it cannot be offered to another customer, should occasion arise. It has to be said, however, that the holding fee charged by the plaintiffs by condition 2 is extremely high, and in my view exorbitant. The judge held that on a quantum meruit a reasonable charge would have been £3.50 per transparency per week, and not £5 per day, and he had evidence before him of the terms charged by some ten other photographic libraries, most of which charged less than £3.50 per week and only one of which charged more (£4 per transparency per week). It would seem therefore that the defendants would have had a strong case for saying that condition 2 was

void and unenforceable as a penalty clause but that point was not taken in the court below or in the notice of appeal. The primary point taken in the court below was that condition 2 was not part of the contract between the parties because the delivery note was never supplied to the defendants at all. That the judge rejected on the facts he found that the delivery note was supplied in the same Jiffy bag with the transparencies, and that finding is not challenged in this court. He made no finding however that Mr Beeching or any other representative of the defendants read condition 2 or any of the other printed conditions, and it is overwhelmingly probable that they did not. An alternative argument for the defendants, in this court as below, was to the effect that any contract between the parties was made before the defendants knew of the existence of the delivery note, viz either in the course of the preliminary telephone conversation between Mr Beeching and Miss Fraser or when the Jiffy bag containing the transparencies was received in the defendants’ premises but before the bag was opened. I regard these submissions as unrealistic and unarguable. The original telephone call was merely a preliminary inquiry and did not give rise to any contract. But the contract came into existence when the plaintiffs sent the transparencies to the defendants and the defendants, after opening the bag, accepted them by Mr Beeching’s phone call [page 338] to the plaintiffs at 3.10 on 5 March. The question is whether condition 2 was a term of that contract. There was never any oral discussion of terms between the parties before the contract was made. In particular there was no discussion whatever of terms in the original telephone conversation when Mr Beeching made his preliminary inquiry. The question is therefore whether condition 2 was sufficiently brought to the defendants’ attention to make it a term of the contract which was only concluded after the defendants had received, and must have known that they had received the transparencies and the delivery note.

This sort of question was posed, in relation to printed conditions, in the ticket cases, such Parker v South Eastern Rly Co (1877) 2 CPD 416, [1874–80] All ER Rep 166, in the last century. At that stage the printed conditions were looked at as a whole and the question considered by the courts was whether the printed conditions as a whole had been sufficiently drawn to a customer’s attention to make the whole set of conditions part of the contract if so the customer was bound by the printed conditions even though he never read them. More recently the question has been discussed whether it is enough to look at a set of printed conditions as a whole. When for instance one condition in a set is particularly onerous does something special need to be done to draw customers’ attention to that particular condition? In an obiter dictum in J Spurling Ltd v Bradshaw [1956] 2 All ER 121 at 125, [1956] 1 WLR 461 at 466 (cited in Chitty on Contracts (25th edn, 1983) vol 1, para 742, p 408) Denning LJ stated: Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient. Then in Thornton v Shoe Lane Parking Ltd [1971] 1 All ER 686, [1971] 2 QB 163 both Lord Denning MR and Megaw LJ held as one of their grounds of decision, as I read their judgments, that where a condition is particularly onerous or unusual the party seeking to enforce it must show that that condition, or an unusual condition of that particular nature, was fairly brought to the notice of the other party. Lord Denning restated and applied what he had said in the Spurling case, and held that the court should not hold any man bound by such a condition unless it was drawn to his attention in the most explicit way (see [1971] 1 All ER 686 at 689–690, [1971] 2 QB 163 at 169–170). Megaw LJ deals with the point where he says ([1971] 1 All ER 686 at 692, [1971] 2 QB 163 at 172–173): I agree with Lord Denning MR that the question here is of the particular condition on which the defendants seek to rely, and not of the conditions in general. When the conditions sought to be attached all constitute, in Lord Dunedin’s words [in

Hood v Anchor Line (Henderson Bros) Ltd [1918] AC 837 at 846– 847, [1918] All ER Rep 98 at 103] ‘the sort of restriction … that is usual’, it may not be necessary for a defendant to prove more than that the intention to attach some conditions has been fairly brought to the notice [page 339] of the other party. But at least where the particular condition relied on involves a sort of restriction that is not shown to be usual in that class of contract, a defendant must show that his intention to attach an unusual condition of that particular nature was fairly brought to the notice of the other party. How much is required as being, in the words of Mellish LJ [in Parker v South Eastern Rly Co (1877) 2 CPD 416 at 424, [1874– 80] All ER Rep 166 at 170], ‘reasonably sufficient to give the plaintiff notice of the condition’, depends on the nature of the restrictive condition. In the present case what has to be sought in answer to the third question is whether the defendant company did what was reasonable fairly to bring to the notice of the plaintiff, at or before the time when the contract was made, the existence of this particular condition. This condition is that part of the clause — a few words embedded in a lengthy clause — which Lord Denning MR has read, by which, in the midst of provisions as to damage to property, the defendants sought to exempt themselves from liability for any personal injury suffered by the customer while he was on their premises. Be it noted that such a condition is one which involves the abrogation of the right given to a person such as the plaintiff by statute, the Occupiers’ Liability Act 1957. True, it is open under that Act for the occupier of property by a contractual term to exclude that liability. In my view, however, before it can be said that a condition of that sort, restrictive of statutory rights, has been fairly brought to the notice of a party to a contract there must be some clear indication which would lead an ordinary sensible person to

realise, at or before the time of making the contract, that a term of that sort, relating to personal injury, was sought to be included. I certainly would not accept that the position has been reached today in which it is to be assumed as a matter of general knowledge, custom, practice, or whatever is the phrase that is chosen to describe it, that when one is invited to go on the property of another for such purposes as garaging a car, a contractual term is normally included that if one suffers any injury on those premises as a result of negligence on the part of the occupiers of the premises they shall not be liable.’ (My emphasis). Counsel for the plaintiffs submits that Thornton v Shoe Lane Parking Ltd was a case of an exemption clause and that what their Lordships said must be read as limited to exemption clauses and in particular exemption clauses which would deprive the party on whom they are imposed of statutory rights. But what their Lordships said was said by way of interpretation and application of the general statement of the law by Mellish LJ in Parker v South Eastern Rly Co and the logic of it is applicable to any particularly onerous clause in a printed set of conditions of the one contracting party which would not be generally known to the other party. Condition 2 of these plaintiffs’ conditions is in my judgment a very onerous clause. The defendants could not conceivably have known, if their attention was not drawn to the clause, that the plaintiffs were proposing to charge a ‘holding fee’ for the retention of the transparencies at such a very high and exorbitant rate. [page 340] At the time of the ticket cases in the last century it was notorious that people hardly ever troubled to read printed conditions on a ticket or delivery note or similar document. That remains the case now. In the intervening years the printed conditions have tended to become more and more complicated and more and more one-sided in favour of the

party who is imposing them, but the other parties, if they notice that there are printed conditions at all, generally still tend to assume that such conditions are only concerned with ancillary matters of form and are not of importance. In the ticket cases the courts held that the common law required that reasonable steps be taken to draw the other parties’ attention to the printed conditions or they would not be part of the contract. It is in my judgment a logical development of the common law into modern conditions that it should be held, as it was in Thornton v Shoe Lane Parking Ltd, that, if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party. In the present case, nothing whatever was done by the plaintiffs to draw the defendants’ attention particularly to condition 2 it was merely one of four columns’ width of conditions printed across the foot of the delivery note. Consequently condition 2 never, in my judgment, became part of the contract between the parties. I would therefore allow this appeal and reduce the amount of the judgment which the judge awarded against the defendants to the amount which he would have awarded on a quantum meruit on his alternative findings, ie the reasonable charge of £3.50 per transparency per week for the retention of the transparencies beyond a reasonable period, which he fixed at 14 days from the date of their receipt by the defendants.

Incorporation through a course of dealings 11.13 A party may also rely on a prior course of dealing as a basis for incorporating terms into a contract. The two requirements that must be established in such cases include, firstly, a consistent and sufficiently long course of dealing and, secondly, 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. Ultimately, satisfaction of each requirement depends on the particular circumstances of the case.44 [page 341]

Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379; 13 ALR 249 High Court of Australia O’Connor J at CLR 388–94: The legal position on which the plaintiff relies may be thus stated:– He entered the wharf under a contract to be carried in the company’s steamer from Sydney to Balmain. Before the contract was performed he decided to abandon it, and, having no further business on the wharf, became entitled to pass out to the street through the turnstiles, or, if not through them, at least through the eight and a-half inch space between the turnstile and the bulkhead. The company’s officers by force prevented him from doing so, refused to allow him to pass out through the turnstile except on payment of a penny at the exit turnstile, and thus kept him imprisoned as a means of enforcing payment of that demand. He maintains that, even if he were bound to pay the extra penny as a matter of contract and it became a debt recoverable in the Courts, the company could not thus take the law into their own hands and deprive him of his liberty in order to enforce payment. If that were an accurate statement of the position the plaintiff’s contention would be unanswerable. But it is not an accurate statement of the position. Undoubtedly it is not permissible for a creditor, except under due process of the law, to abridge the liberty of his debtor for the purpose of enforcing payment. But the abridgment of a man’s liberty is not under all circumstances actionable. He may enter into a contract which

necessarily involves the surrender of a portion of his liberty for a certain period, and if the act complained of is nothing more than a restraint in accordance with that surrender he cannot complain. Nor can he, without the assent of the other party, by electing to put an end to the contract become entitled at once, unconditionally and irrespective of the other party’s rights, to regain his liberty as if he had never surrendered it. A familiar instance of such a contract is that between a passenger and the railway company which undertakes to carry him on a journey. If the passenger suddenly during the journey decided to abandon it and to leave the train at the next station, being one at which the train was not timed to stop, he clearly would not be entitled to have the train stopped at that station. However much he might object, the railway company could lawfully carry him on to the next stopping place of that particular train. In such a case the passenger’s liberty would be for a certain period restrained, but the restraint would not be actionable, because it is an implied term of such a contract that the passenger will permit the restraint of his liberty so far as may be necessary for the performance by the company of the contract of carriage according to the time table of that train. Or a person [page 342] may conditionally, by his own act, place himself in such a position that he cannot complain of a certain restraint of his liberty. Take an illustration which was used in the course of the argument. Assume that the turnstiles on the company’s wharf completely closed the opening between the bulkheads, that they were worked on the penny in the slot system, and would not open except when a penny dropped in the slot operated the mechanism. If under these circumstances the plaintiff, having opened the entry turnstile by his penny and entered the wharf, changed his mind about crossing in the company’s steamers, and wished to return at once to the street, could he claim that he was not bound to use the ordinary means of opening the exit turnstile by dropping in his penny, but was entitled to break his

way through it, or to demand from the company’s officers that they should specially unlock the apparatus to enable him to pass out? If, under the circumstances, the officers refused to comply with his request, could it possibly be contended that the company would be liable to an action for false imprisonment? Prima facie, no doubt, any restraint of a person’s liberty without his consent is actionable. But, when the restraint is referable to the terms on which the person entered the premises in which he complains he was imprisoned, we must examine those terms before we can determine whether there has been an imprisonment which is actionable. The fallacy in the plaintiff’s legal position lies in the assumption that, immediately he abandoned the contract to be carried to Balmain by the company’s steamer, he was in the same position as if the wharf was one to which the public had free right of access, that, finding his exit barred by the turnstiles, he was entitled either to squeeze past them, or to demand from the company’s officers that they should be specially released to let him through. Whether that assumption is or is not justifiable depends upon the terms on which the plaintiff was permitted to enter the wharf. In ascertaining those terms it must be remembered that the wharf was not a place to which the public had free right of access. If it had been so no one could legally place upon the wharf any bar or obstruction to the free entry or exit of any member of the public. But it was not a public place in that sense. It was private property. No one had a right to enter there without the company’s permission, and they could impose on the members of the public any terms they thought fit as a condition of entering or leaving the premises. What were the terms on which the plaintiff entered the company’s wharf? There was no express contract, and the terms must therefore be implied from the circumstances. In dealing with the circumstances I leave the question of the notice board out of consideration. In my view, it is immaterial whether the company did what was reasonable to direct public attention to the notice, or whether the plaintiff ever read it until his attention was called to it by the officer at the turnstile. But as to the material facts from which the contract must be implied there is no dispute. The plaintiff was aware that the only entrance to and exit from the

wharf on the land side was through the turnstiles, and that, to quote his evidence, ‘When the turnstile was not released there was a complete barrier stretching across [page 343] the whole entrance,’ in other words, entrance to and exit from the wharf were completely barred except when by the action of the officer in charge the turnstile was released. He also knew that the turnstiles were so constructed as to admit only persons entering the wharf through the entry turnstile, and only persons leaving the wharf through the exit turnstile, that the passing through of every passenger was automatically registered by the turnstile, and that the automatic register was a check on the cash taken by the officer. He himself in speaking to one of the officers said, ‘If it is the question of putting out the tally of your turnstiles I can squeeze through there,’ referring to the eight and a-half inch space before mentioned. Having travelled on many occasions backward and forward by the company’s boats, and, as he says, paid his fare to the officers at the turnstiles, he must have been aware that the company’s method of conducting their business was to release the turnstiles only on payment of a penny, and that in every case where there was a departure from that method ‘the tally of the turnstile,’ as he terms it, would be thrown out. Such being the condition of the company’s premises, and such being their method of carrying on their business, the plaintiff paid his penny to the officer and went through the entry turnstile on to the wharf. The first question is, what is the contract to be implied from the plaintiff’s payment at and passing through the turnstiles under these circumstances? It is that in consideration of that payment the company undertook to carry him as a passenger to Balmain by any of their ferry boats from that wharf. That is the only contract which could be implied from those circumstances, and the plaintiff was permitted to enter the wharf for the purpose of that contract being performed. It is not denied that the company were ready to perform their part, but the plaintiff, as far as

one party can do so, rescinded the contract and determined to go back from the wharf to the street. What then were his rights? They were, in my opinion, no more and no less than they would have been if he had landed from his own boat at the company’s wharf. He was on private property. He had not been forced or entrapped there. He had entered it of his own free will and with the knowledge that the only exit on the land side was through the turnstile, operated as a part of the company’s system of collecting fares in the manner I have mentioned. If he wished to use the turnstile as a means of exit he could only do so on complying with the usual conditions on which the company opened them. The company were lawfully entitled to impose the condition of a penny payment on all who used the turnstiles, whether they had travelled by the company’s steamers or not, and they were under no obligation to make an exception in the plaintiff’s favour. The company, therefore, being lawfully entitled to impose that condition, and the plaintiff being free to pass out through the turnstile at any time on complying with it, he had only himself to blame for his detention, and there was no imprisonment of which he could legally complain. [page 344] Next, had he the right to force his way through the narrow space between the turnstile and the bulkhead? Clearly he had not. If the turnstile had filled the whole space between the bulkheads, it could not be contended that the plaintiff would have been entitled to break it open in order to pass through. The company’s officers were, in my opinion, entitled to regard the turnstile as blocking the whole space, not only for the necessary protection of the mechanism of the turnstiles from injury, but also because it was a necessary part of their system of collecting fares on entry and exit that the turnstile should be an effective barrier against entry and exit of any person except on the company’s conditions. They were therefore entitled to prevent the plaintiff from squeezing through the space in question, and were justified in meeting the plaintiff’s forcible attempt with as much force as was reasonably

necessary to defeat it. It is not alleged that they did more, and any assault they may have committed on the plaintiff under these circumstances was justified. In this connection I may observe that it is not necessary to determine whether or not this justification is, strictly speaking, open to the company on the pleadings. The case has been conducted all through on the footing that it is open, and, if it were necessary, the Court would make any amendment required to formally shape the issues in accordance with the way in which both parties regarded them at the trial. … Taking then the whole facts in this case together, the plaintiff, in my opinion, was not entitled to succeed, and the verdict which the jury returned in his favour must be set aside. The only remaining question is, whether this Court should grant a new trial, or order the verdict to be entered for the defendants. The Court may make any order which the Supreme Court ought to have made in the first instance. That Court ought, in my opinion, to have directed a verdict to be entered for the defendants. All the material facts were before them as they have been before us. It is impossible that any jury could on those facts find a verdict for the plaintiff which could stand for one moment if questioned. The verdict ought therefore to have been entered for the defendants, and this Court must now order accordingly that the verdict for the plaintiff be set aside and judgment be entered for the defendants. Appeal allowed.

The parol evidence rule 11.14 The parol evidence rule stipulates that where an agreement has been reduced to writing, extrinsic evidence cannot be adduced to add, vary or contradict the agreement. In some instances, parties may rely upon an ‘entire agreement clause’ to ensure that pre-contractual statements do not form part of the contract.45 The effect of the parol evidence rule

[page 345] is that statements made during negotiations do not become part of the contract. Nonetheless, false statements made during negotiations can still be actionable for misrepresentation or misleading or deceptive conduct. In Goss v Lord Nugent,46 Denman CJ stated: If there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties, either before the written document was made, or during the time that it was in a state of preparation, so as to add to or subtract from, or in any manner to vary or qualify the written contract.

11.15 The parol evidence rule does not apply where a contract is part written and part oral.47 That is, the parol evidence rule does not apply if the written contract was not meant to reflect the entirety of the agreement between the parties. In Masterton Homes Pty Ltd v Palm Assets Pty Ltd,48 the New South Wales Court of Appeal stated that ‘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.’ In determining whether the parol evidence rule applies it is necessary to determine whether the contract is wholly written or not. The applicable principles in this area were neatly summarised by Campbell JA in Masterton Homes Pty Ltd v Palm Assets Pty Ltd.

Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234 New South Wales Court of Appeal Campbell JA: [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; Gordon v Macgregor [1909] HCA 26; (1909) 8 CLR 316 at 319–20 per Griffith CJ (with whom O’Connor J agreed), at 322–3 per Isaacs J; Hoyt’s Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133 [page 346] at 143–4 per Isaacs J (with whom Rich J agreed); Maybury v Atlantic Union Oil Co Ltd [1953] HCA 89; (1953) 89 CLR 507 at 517 per Dixon CJ, Fullagar and Taylor JJ; 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; (2001) 117 FCR 424 (FC) at 505–6 [280]–[281], 509 [293] per Allsop J (with whom Drummond and Mansfield JJ agreed); 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: … Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90; (1937) 59 CLR 348 at 357 per Latham CJ; Maybury v Atlantic Union Oil at 517 per Dixon CJ, Fullagar and Taylor JJ; Health Outdoor at 191D–F per McHugh JA; Carmichael v National Power Plc [1999] UKHL 47; [1991] 1 WLR 2042; [1999] 4 All ER 897 (UKHL) at WLR 2047B–D, F–H; All ER 901e–g, 901j–2b per Lord Irvine of Lairg LC (with whom Lords Goff of Chieveley, Jauncey of Tullichettle and Browne-Wilkinson agreed), at WLR 2049C–D, 2050B–D; All ER 903e–g, 904e–h per Lord Hoffmann (with whom

Lords Goff of Chieveley and Jauncey of Tullichettle agreed); Saad v TWT Ltd [1998] NSWCA 199 at 6 per Handley JA (with whom Priestley and Powell JJA agreed); 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; Heath Outdoor at 191E, 192A–C per McHugh JA; Norwest Beef Industries Ltd v Peninsular and Oriental Steam Navigation Co (1987) 8 NSWLR 568 at 570B–C per Hope JA (with whom Samuels JA agreed); NSW Cancer Council v Sarfaty at 76G per Gleeson CJ and Handley JA; 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] EngR 1122; … Deane v The City Bank of Sydney (1904) 2 CLR 198 at 209 per Griffith CJ, Barton and O’Connor JJ; J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 at [page 347] 1083E–F; [1976] 2 All ER 930 at 935a–b (EWCA) per Roskill LJ; Handbury v Nolan (1977) 13 ALR 339 (HCA) at 341 per Barwick CJ, 348–9 per Jacobs J (Aickin J agreed with both Barwick CJ and Jacobs J), at 346 per Stephen J (but dissenting as to whether the

evidence established a partly written and partly oral agreement), (Gibbs J agreed with Stephen J); Finucane v NSW Egg Corporation (1988) 80 ALR 486 (FCA) at 520–1 per Lockhart J … Similarly, finding the terms of a wholly oral contract is a question of fact: Gardiner v Grigg [1938] NSWStRp 40; (1938) 38 SR (NSW) 524 at 532 per Jordan CJ (with whom Nicholas J agreed); Torbett v Faulkner [1952] 2 TLR 659 (EWCA) at 661 per Romer LJ; Handbury v Nolan at 346 per Stephen J (with whom Gibbs J agreed); Maggs v Marsh [2006] EWCA Civ 1058; [2006] BLR 395 at [26] per Smith LJ (with whom Moses and Hallett LJJ agreed). (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; Deane v The City Bank of Sydney at 209 per Griffith CJ, Barton and O’Connor JJ; Handbury v Nolan at 341–2 per Barwick CJ, at 346 per Stephen J, at 348–9 per Jacobs J; Liverpool City Council v Irwin [1976] UKHL 1; [1977] AC 239 at 253C–E per Lord Wilberforce. 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 at 209; Handbury v Nolan at 341–2, 346, 348–9. If it is not possible to make a finding about the particular words that were used (as sometimes happens when a 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: J Evans & Son v Anthony Merzario at WLR 1083C–E; All ER 934h–5a per Roskill LJ, at WLR 1084H; All ER 936c per Geoffrey Lane LJ; Hoyt’s v Spencer at 144–5 per Isaacs J; Equuscorp v Glengallan Investments at 484 [36] per Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ. 11.16 Fundamentally, the parol evidence rule serves an evidentiary

function in that it enables a party to prove that an agreement existed. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,49 Mason J stated: The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract

[page 348] from, add to, vary or contradict the language of a written instrument … Although the traditional expositions of the rule did not in terms deny resort to extrinsic evidence for the purpose of interpreting the written instrument, it has often been regarded as prohibiting the use of extrinsic evidence for this purpose. No doubt this was due to the theory which came to prevail in English legal thinking in the first half of this century that the words of a contractor are ordinarily to be given their plain and ordinary meaning. Recourse to extrinsic evidence is then superfluous. At best it confirms what has been definitely established by other means; at worst it tends to ineffectively to modify what has been so established.

11.17 The High Court has not yet settled on an approach to the parol evidence rule. However, the decision in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd50 suggests that the court may favour the more flexible approach. The following extract from Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd51 sets out some of the considerations around the parol evidence rule. Some of these matters, particularly as they relate to construction, are addressed in more detail in Chapter 12.

Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 Supreme Court of Western Australia, Court of Appeal Murphy JA:

[171] The parol evidence rule has frequently been expressed to be to the effect that the terms of a contract wholly in writing cannot be contradicted, altered or added to by oral evidence: Lord Kinnear in Gordon-Cumming v Houldsworth [1910] AC 537, 548, cited by Isaacs J in RW Cameron & Co v L Slutzkin Pty Ltd [1923] HCA 20; (1923) 32 CLR 81, 92; Hoyt’s Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133, 143– 144; Bank of Australasia v Palmer [1897] AC 540, 545. [172] The parol evidence rule proceeds from the premise that a party executing a written agreement is bound by it: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 [33]. In Equuscorp, Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ referred to the ‘general test of objectivity’ that is a pervasive influence in the law of contract [34] and continued: [I]n 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 [page 349] 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 [35]. [173] The uncertainties which the rule was designed to address in cases where the parties had committed their agreement to writing, were also referred to by Latham CJ in Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90; (1937) 59 CLR 348, 357. [174] Although traditionally expressed with respect to oral evidence, the rule applies to extrinsic evidence in other forms: Codelfa (347). Difficulty and expense may arise not only from disputed oral communications, but also from the parties inviting the court to parse and construe the (often significant) volume of pre-contractual emails and the like which themselves may be redolent with equivocation (deliberate or otherwise) and ambiguity. [175] The parol evidence rule has, however, always been somewhat porous and the subject of recognised limitations and exceptions. Before turning to Codelfa, some of these may be noted. [176] For example, it was traditionally accepted that extrinsic evidence which identified the subject matter of the contract did not infringe the parol evidence rule: Hope; Macdonald v Longbottom [1859] EngR 635; (1859) 1 E & E 977 [120 ER 1177] (where the subject matter was ‘your wool’). The rationale was that if the evidence identified the subject matter of the contract, it did not infringe the parol evidence rule because the evidence was being used to ‘apply’ the written contract and not to ‘modify’ it: RW Cameron (92); White v Australian & New Zealand Theatres Ltd [1943] HCA 6; (1943) 67 CLR 266, 270–271, 280–281; Hope (357). [177] Also, it was accepted that where the literal meaning of a provision would render the transaction futile, the court could admit extrinsic evidence of the genesis and objective aim of the transaction: DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423, 429; Prenn (1384); Utica City National Bank v Gunn (1918) 118 NE 607 (Cardozo J). In Prenn Lord Wilberforce noted Cardozo J’s observation to the effect that surrounding circumstances ‘may stamp

upon a contract a popular or looser meaning’ where its strict legal meaning would make the transaction futile. [page 350] [178] Extrinsic evidence was also always admitted to explain technical expressions in a written contract: F L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235, 261. Even where the word to be construed had a plain English meaning, extrinsic evidence of usage in a trade or business could always be admitted to show that it had a particular or technical signification in the trade or business in which the contract was made: Rosenhain v Commonwealth Bank of Australia [1922] HCA 41; (1922) 31 CLR 46, 53; Appleby v Pursell [1973] 2 NSWLR 879, 889; Homestake Australia Ltd v Metana Minerals NL (1991) 11 WAR 435, 446–447. [179] Similarly, it was accepted that the parol evidence rule did not preclude recourse to extrinsic evidence to identify and resolve latent ambiguity in the application of the written contract. Generally speaking, latent ambiguity arose when a description, evidently meant to apply to only one person or thing, was shown by extrinsic evidence to be equally applicable to more than one person or thing; eg, a legacy ‘to my nephew John’, where the testator had two nephews of that name: Hope (356– 357).

Pre-contractual statements 11.18 In certain situations, some uncertainty may eventually arise regarding the legal status of the pre-contractual statements made by one party to the other; that is, it may be unclear as to whether certain representations actually form part of the resulting contract. A rudimentary dichotomy of pre-contractual statements is necessary in this context in order to make sense of the law. The existing jurisprudence effectively divides precontractual statements into three categories. The first category

concerns mere puffs or statements of opinion that have no contractual effect. The second refers to terms or warranties that are in effect terms of the contract. Though the case law does use the word ‘warranty’, this can be misleading as in the context of contract construction there is an important dichotomy between conditions and warranties. Accordingly, it is preferable to use the word ‘terms’ to refer to those statements that form part of the contract. The third category pertains to mere representations. These have no contractual effect and must be contrasted with terms. It is also quite possible that a statement might not be a term of the contract at all, but might be instead a separate collateral contract. In Hospital Products Ltd v United States Surgical Corp,52 Gibbs CJ, using the word ‘warranty’ rather than ‘term’, noted: 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

[page 351] 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.53

Much will depend on the intention of the parties and the manner in which they have conducted themselves. In Oscar Chess Ltd v Williams,54 Lord Denning stated: 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.55

11.19 There are three key issues that a court will take into account. These are: (i) the importance of the statement; (ii) the words used; and (iii) the relative knowledge and expertise of the parties.56 These factors are by no means exhaustive and other considerations may come into play.

The importance of a statement might well be discerned by both its context and timing; that is, if a statement is made shortly before the contract is effected, then it is easier to say that it was important in facilitating the contract.57 A statement that is promissory in nature and that facilitates the contract is likely to be a term of the subsequent agreement. In Manning Motel Pty Ltd v DH MB Pty Ltd,58 Lindsay J stated: The fact that a pre-contractual representation was intended to operate as an inducement to the representee to enter a contract does not, of itself, justify characterisation of the representation as ‘contractual’. For that step to be taken, the Court must be satisfied that, objectively, the parties intended the representation to be promissory in character.59

In determining whether a statement is promissory in nature it is important to look at the content of the statement. In JJ Savage & Sons Pty Ltd v Blakney,60 a seller made the claim that his boat could travel at an ‘estimated speed’ of 15 miles per hour. However, in fact the boat had a top speed of 12 miles per hour. The High Court held that the statement was a mere representation of opinion rather than a promise. [page 352] It is important to look at the conduct as a whole and the statement in context. In Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission,61 McLure JA stated: ‘Whether a statement is promissory or representational depends upon the intention of the parties, and their intention is to be ascertained objectively from the totality of the evidence.’ The existence of special knowledge or expertise can also assist in determining whether a pre-contractual statement is in fact a term of the contract. In Oscar Chess Ltd v Williams,62 Williams traded his vehicle to Chess for a new car. Williams said that the car was a 1948 model; however, it later turned out that he was mistaken. Chess paid £290 for the car, but subsequently

discovered that it was in fact a 1939 model worth just £175. Chess sued, claiming that the statement that it was a 1948 model was a term of the contract. The English Court of Appeal rejected Chess’ claim on the basis that as a car dealer he had superior knowledge and should have known that Williams had no special knowledge.

Key Points for Revision The general rule is that where a written memorandum has been signed by a party to the contract then that party is highly likely to be bound by the contents of the agreement. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd the High Court reaffirmed the primacy of a party’s signature in the context of documents that are contractual in both nature and appearance. Where the terms of a contract have been misrepresented or where the defence of non est factum can successfully be raised, then the rule in L’Estrange v F Graucob Ltd will not apply. A party who seeks to rely upon unusual terms must take reasonable steps to bring them to the attention of the other party. The parol evidence rule stipulates that where an agreement has been reduced to writing, extrinsic evidence cannot be adduced to add, vary or contradict the agreement. In certain situations, some uncertainty may eventually arise regarding the legal status of the pre-contractual statements made by one party to the other.

_________________ 1

L’Estrange v F Graucob Ltd [1934] 2 KB 394.

2

[1934] 2 KB 394.

3

[1934] 2 KB 394 at 403.

4

(1948) 76 CLR 646 at 649; [1948] 2 ALR 445.

5

See Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342 at [57]. See also L’Estrange v F Graucob Ltd [1934] 2 KB 394 at 403 per Scrutton LJ.

6

(2004) 219 CLR 165; 211 ALR 342 at [57].

7

Mason and Gageler, ‘The Contract’ in P Finn (ed), Essays on Contract, Thomson, Sydney, 1987.

8

Greig and Davis, The Law of Contract, Lawbook Book Co, Sydney, 1987.

9

[1971] VR 749.

10

(2004) 219 CLR 165; 211 ALR 342.

11

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342 at [57].

12

[1951] 1 KB 805.

13

(1975) 132 CLR 355; 6 ALR 129.

14

(1975) 132 CLR 355 at 359; 6 ALR 129.

15

[1971] AC 1004.

16

Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197; 79 ALR 9; Olley v Marlborough Court Ltd [1949] 1 KB 532.

17

Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197; 79 ALR 9; Chapleton v Barry UDC [1940] 1 KB 532.

18

Parker v South Eastern Railway Co (1877) LR 2 CPD 416.

19

Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379 at 386; 13 ALR 249 per Griffith CJ.

20

Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163; Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433.

21

(1988) 165 CLR 197; 79 ALR 9.

22

(1988) 165 CLR 197 at 228.

23

(2006) 170 FCR 450.

24

[1949] 1 KB 532.

25

(1988) 165 CLR 197 at 229; 79 ALR 9

26

(1988) 165 CLR 197 at 208; 79 ALR 9.

27

[1940] 1 KB 532.

28

[1952] VLR 1; [1952] ALR 12.

29

Parker v South Eastern Railway Co (1877) 2 CPD 416.

30

(1988) 165 CLR 197 at 229; 79 ALR 9.

31

[1971] 2 QB 163.

32

(1877) LR 2 CPD 416.

33

[1956] 2 All ER 121; [1956] 1 WLR 461.

34

(2011) 195 FCR 234.

35

See Australian Consumer Law s 18. See further Chapter 17.

36

See, for example, Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd [2015] QSC 290 at [37]– [70] per Lyons J.

37

Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197; 79 ALR 9; Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1991) 22 NSWLR 1.

38

Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31.

39

Maxitherm Boilers Pty Ltd v Pacific Dunlop Insurances Pte Ltd [1998] 4 VR 559. See also Circle Freight International Ltd v Medeast Gulf Exports Ltd [1988] 2 Lloyd’s Rep 427; Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd (2002) 18 BCL 122; [2001] NSWCA 313.

40

[1998] 4 VR 559 at 569.

41

See also Ange v First East Auction Holdings Pty Ltd (2011) 284 ALR 638 at [67] per Sifris J.

42

[2015] QSC 290 at [70].

43

[1989] QB 433.

44

Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31; Hawkins v Clayton (1988) 164 CLR 539 at 573; 78 ALR 69; Esso Australia Resources Ltd v Plowman (1995) 183 CLR 10; 128 ALR 391; Breen v Williams (1996) 186 CLR 71 at 79, 91; 138 ALR 259.

45

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; 264 ALR 15.

46

[1833] 110 ER 713.

47

Skyrise Consultants Pty Ltd v Metrolands Funds Management Ltd [2011] NSWCA 406.

48

[2009] NSWCA 234 at [90].

49

(1982) 149 CLR 337 at 347; 41 ALR 367.

50

(2004) 218 CLR 471; 211 ALR 101.

51

[2014] WASCA 164.

52

(1984) 156 CLR 41 at 62–3; 55 ALR 417.

53

See also Cosmopolitan Hotel (Vic) v Crown Melbourne Ltd [2014] VSCA 353; Gough & Gilmour Holdings Pty Ltd v Peter Campbell Earthmoving Pty Ltd [2009] NSWCA 37.

54

[1957] 1 All ER 325; [1957] 1 WLR 370 at 375.

55

Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission (2006) 32 WAR 204.

56

Ellul v Oakes (1972) 3 SASR 377.

57

Harling v Eddy [1951] 2 KB 739. See also Van den Esschert v Chappell [1960] WAR 114.

58

[2013] NSWSC 1582 at [46].

59

See also Cutts v Buckley (1933) 49 CLR 189; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; 63 ALR 600; Heilbut, Symons and Co v Buckleton [1913] AC 30; JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435; [1971] ALR 92.

60

(1970) 119 CLR 435; [1971] ALR 92.

61

(2006) 32 WAR 204 at [82].

62

[1957] 1 All ER 325; [1957] 1 WLR 370. See also Smythe v Thomas (2007) 71 NSWLR 537.

[page 353]

CHAPTER 12 Construction of Contracts CHAPTER OVERVIEW 12.1 12.2 12.3 12.8 12.9

Introduction Construction and interpretation The ambiguity gateway and the construction debate Comparative approaches Exclusion clauses

Introduction 12.1

A large amount of ink has been spilt on the topic of constructing contracts.1 The source of the controversy has been a persistent and intractable difference of opinion between the High Court of Australia and the various state Courts of Appeal. Most notably, the New South Wales Court of Appeal has expressed particular concern over the somewhat cautious attitude of the High Court. The particular difficulty arises from the question of ambiguity in written contracts. In particular, it is still unclear under Australian law as to when the surrounding circumstances of a contract can be taken into account in determining whether an ambiguity exists. In this respect, Australia lags behind other leading jurisdictions, such as the United Kingdom, Canada and Singapore, and, at this point, the frustration of the lower courts is understandable. This chapter begins with a discussion of construction and interpretation. It then examines the construction debate. Finally, the chapter sets out some comparative approaches to construction by considering United Kingdom and Singaporean jurisprudence.

Construction and interpretation 12.2

Interpretation refers to the process of ascertaining the meaning of the express terms of a contract. In this sense, interpretation is concerned with [page 354] allocating a set meaning to the given words in a contract. In Equitable Life Assurance Society v Hyman,2 Lord Steyn stated that interpretation serves to ‘assign to the language of the text the most appropriate meaning which the words can legitimately bear.’ The limitation of interpretation is that it provides no immediate assistance where a contract is silent on an important matter. Put simply, one cannot interpret a statement that has not been explicitly made. Under those circumstances, the implication of terms is required to fill the gaps in the contract. This requires recourse to the intention of the parties. In effect, this is a matter of construction. In Sembcorp Marine Ltd v PPL Holdings Pte Ltd,3 Mennon CJ stated: [T]he ‘construction’ of a contract refers to the composite process that seeks to ascertain the parties’ intentions, both actual and presumed, arising from the contract as a whole without necessarily being confined to the specific words used. Construction, in this sense, encompasses both the interpretation of express terms as well as the implication of terms to fill gaps.

The particular difficulty that arises in contract construction surrounds the issue of ambiguity, in particular, the troubling matter of when recourse can be had to the surrounding circumstances to resolve an ambiguity. Should it be when an ambiguity is detected in the text of the contract or when one is discerned from the overall circumstances and context around the contract?

The ambiguity gateway and the construction debate 12.3

In the case of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,4 Mason J, with whom Stephen and Wilson JJ agreed, stated: The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.

This short restatement of the true rule engendered a conflict of sorts between the various judges of the High Court and some of the justices of the New South Wales Court of Appeal and the Victorian Court of Appeal. In part, the difficulty owed itself to somewhat ambiguous obiter comments made by the High Court. The overall debate is set out well by Pullin JA in the following extract from McCourt v Cranston.5 [page 355]

McCourt v Cranston [2012] WASCA 60 Supreme Court of Western Australia, Court of Appeal Pullin JA: … [14] In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 352 (Mason J, Stephen & Wilson JJ agreeing) said: The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one

meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. [15] Preceding that statement (between pages 348–351) Mason J had referred with apparent approval to what had been said by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1383–1384 quoting Cardozo J to the effect that surrounding circumstances may ‘stamp upon a contract a popular or looser meaning’ than the strict legal meaning and to what Lord Wilberforce had said in similar vein in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995. [16] Subsequently, five members of the High Court (Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ) said in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, that when determining the meaning of a contractual document, the meaning of the terms of the document is to be determined by what a reasonable person would have understood them to mean and that normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction [40]. Those judges cited as authority for that proposition, Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22] where the same five judges said: The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. In Codelfa Construction Pty Ltd v State Rail Authority of NSW, Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–996: In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the

context, the market in which the parties are operating. [page 356] [17] In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45, Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ, after stating that there was an ambiguity in the document under consideration in that case, said that: In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract: ‘presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’ Such statements exemplify the point made by Brennan J in his judgment in Codelfa: The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used [10]. [18] As an aside, and because McHugh J was a member of the court in Royal Botanic, it is appropriate to note that when his Honour was on the New South Wales Court of Appeal, he said in Manufacturers’ Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cases 60-853, after referring to Mason J’s statement about the ‘true rule’ in Codelfa: However few, if any, English words are unambiguous or not

susceptible of more than one meaning or have a plain meaning. Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means. In my view evidence of surrounding circumstances will generally be admissible if it is known to both parties or sufficiently notorious to be presumed to be within their knowledge (75,343). [19] In Royal Botanic [39] the plurality said that reference had been made during the course of argument to several decisions of the House of Lords delivered since Codelfa which had not referred to Codelfa and that particular reference was made to Investors Compensation Scheme Ltd v West Bromwich Building Society [No 1] [1997] UKHL 28; [1998] 1 WLR 896, 912–913 and Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251, 259, 269. In those cases, principles of contractual construction were discussed. In Royal Botanic the plurality continued at [39]: It is unnecessary to determine whether their Lordships there took a broader view of the admissible ‘background’ than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian [page 357] courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa [39]. No reference was made by the plurality to the sentiments subsequently expressed in Paribas or Toll and that appears to be because the two English cases might be read as suggesting that evidence of surrounding circumstances may be referred to in order to contradict the written terms of the contract. Read in that way, what was said in Royal Botanic at [39] was merely reaffirming what was said by Mason J in Codelfa about

extrinsic evidence not being admitted to contradict the plain meaning of the contract. [20] Until recently, it was possible to read Paribas and Toll and Royal Botanic as meaning that even without ambiguity, evidence of surrounding facts and the object or aim of the transaction was admissible. This is what other intermediate courts of appeal thought they meant: see for example Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 [17]; MBF Investments Pty Ltd v Nolan [2011] VSCA 114 [198]–[203]. [21] However, in the brief reasons of the High Court in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 [5] the members of that court (Gummow, Heydon & Bell JJ), did not accept that its earlier decisions may be read in that way. Their Honours said that they did not ‘read anything said’ in Paribas, Toll, Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522 [15] or International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 [8] as ‘operating inconsistently’ with what was said by Mason J in the passage in Codelfa on page 352 and quoted above. This is not withstanding that in Wilkie, in the paragraph referred to in Jireh’s case, Gleeson CJ said: Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure [15]. Also in the Ansett case, Gleeson CJ at the paragraph referred to ([8]), stated that in giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract and the objects which it is intended to secure. [22] None of the statements in Paribas, Toll, Wilkie or Ansett were preceded by a qualification that a contract had to be ‘ambiguous or susceptible of more than one meaning’ before evidence of surrounding circumstances could be received. Many judges around Australia did not appreciate that there was such a qualification. However the reasons in

Jireh require courts to consider whether the statements in those cases should be read with that qualification; ‘until’ the High Court embarks upon ‘a reconsideration’ of Codelfa: see Jireh [3]. In doing so, courts will have to consider whether the pronouncements in Jireh were ratio or ‘seriously considered dicta’: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] [page 358] HCA 22; (2007) 230 CLR 89 [134]. In that respect, consideration will have to be given to whether a set of reasons of the high Court dismissing an application for special leave have anything more than persuasive value: see North Ganalanja Aboriginal Corporation v The State of Queensland [1996] HCA 2; (1996) 185 CLR 595, 643 (McHugh J); Mason A, ‘The Uses & Abuses of Precedent’ (1988) 4 Aust Bar Rev 93, 96–97; Wong D and Michael B, ‘Western Export Services v Jireh International: Ambiguity as the gateway to surrounding circumstances?’ (2012) 86 ALJ 57, 64. On the facts of this case these questions do not have to be answered. 12.4

As the extract from Pullin JA very gently suggests, the harsh rebuke that the High Court delivered in the special leave hearing in Jireh overlooked the uncertainty created by the court’s own observations. In 2014, the High Court considered the applicable principles around interpretation in Electricity Generation Corp v Woodside Energy Ltd,6 where the majority stated: Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention

is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties … intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.7

12.5

This short statement appeared to resolve the debate around ambiguity. Moreover, in Woodside the High Court was at pains to suggest that the reasons given in Jireh, in refusing special leave, had no effect as precedent. Subsequently, in Mainteck Services Pty Ltd v Stein Heurtey SA8 and Campbelltown City Council v WSN Environmental Solutions Pty Ltd9 the New South Wales Court of Appeal proceeded to decide cases as if the debate had been resolved. The following extract from Campbelltown City Council is instructive. [page 359]

Campbelltown City Council v WSN Environmental Solutions Pty Ltd [2015] NSWSC 155 Supreme Court of New South Wales Sackar J: … [22] The principles applicable to the construction of the Contract are not in dispute between the parties and may be shortly stated. The starting point for construction is the plain and ordinary meaning of the words used: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 348 per Mason J. The construction given to particular language may vary depending on the context and circumstances: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]. A court will construe the contract as a whole in order to determine the effect and meaning of a particular term:

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) [2000] HCA 25; (2000) 202 CLR 588. [23] The following summary was given by Bathurst CJ, with whom Macfarlan and Meagher JJA agreed, in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52]: [52] The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Limited v Alphafarm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Limited v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Limited [2011] HCA 45; (2011) 282 ALR 604. [24] In 2014, the High Court considered the applicable principles in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 (Woodside Energy). The majority observed (citations omitted): … [Sackar J then reproduced the extract from Woodside included at 12.5 above, and continued:] … [page 360]

[26] The New South Wales Court of Appeal recently considered Woodside Energy in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184: see Leeming JA (with whom Ward and Emmett JJA agreed) at [69]–[86]. More recently, Gleeson JA (Basten and Meagher JJA agreeing) made the following observations in Newey v Westpac Banking Corporation [2014] NSWCA 319: [89] As subsequently observed by Leeming JA (Ward and Emmett JJA agreeing) in Mainteck Services Pty Ltd v Stein Heurtey SA (Mainteck) [2014] NSWCA 184 at [71], Woodside endorses and requires a contextual approach to the construction of commercial contracts and ‘ambiguity’ is to be evaluated having regard to surrounding circumstances and commercial purposes or objects. To the extent that what was said in the reasons of three members of the High Court when refusing special leave in Western Export Services Inc v Jireh International Pty Ltd (Jireh) [2011] HCA 45; 86 ALJR I supports the contrary proposition, Jireh should be regarded as inconsistent with what was said in Woodside at [35], for the reasons explained in Mainteck at [72]–[86]. See also Stratton Finance Pty Ltd v Webb (Stratton Finance) [2014] FCAFC 110 at [41] where the Full Court of the Federal Court of Australia (Allsop CJ, Siopis and Flick JJ) agreed with the conclusion in Mainteck and with the reasons given there in elaboration at [72]–[86]. [90] Nonetheless it is also important to bear in mind the extent to which context and legitimate surrounding circumstances can be used as an aid in the construction of a written agreement. In McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) [2011] NSWCA 315; 81 NSWLR 690 at [17]–[18] Bathurst CJ (Macfarlan JA and Sackville AJA agreeing) said: [17] … Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 350, 352) even in cases where

there is an absence of apparent ambiguity (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [8]; Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317 at [39]; Franklins Pty Ltd v Metcash Trading Ltd at [14], [63], [305]) that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109. [18] This does not mean that there are not exceptional cases where, to use the words of Lord Hoffmann, something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense: see [page 361] Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 at [15]–[16]; Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [55], [60]. In such a case, in my opinion, a court is entitled to depart from the ordinary meaning to give effect to what objectively speaking the parties intended … . [91] The reference in McGrath v Sturesteps at [17] to the wellknown observation of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd at 109, is a strong reminder that there is no licence for ‘judicial rewriting’ of an agreement: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27]

(Basten JA; Giles and Tobias JJA agreeing); Franklins at [23] (Allsop P). The ability of courts to give commercial agreements a commercial and business-like interpretation is constrained by the language used by the parties. If, after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation: Jireh International Pty Ltd v Western Exports Services Inc at [55] (Macfarlan JA; Young JA and Tobias AJA agreeing). [27] A contract should be construed in a way that avoids commercially nonsensical outcomes or commercial inconvenience: Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530 at [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. In Dance With Mr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332 at [52] Hammerschlag J commented: When parties to a commercial contract agree, at the time of making the contract, and before any disputes have yet arisen, to refer to arbitration any dispute or difference arising out of the agreement, their agreement should not be construed narrowly. They are unlikely to have intended that different disputes should be resolved before different tribunals, or that the appropriate tribunal should be determined by fine shades of difference in the legal character of individual issues, or by the ingenuity of lawyers in developing points of argument: Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 at 165 per Gleeson CJ. The same considerations apply, in my view, to agreed alternative dispute resolution mechanisms such as expert determination.

REVIEW QUESTIONS 1.

Why have the different statements of the High Court in various cases caused uncertainty in the lower courts with regard to the issue of ambiguity and surrounding

circumstances? 2.

Does the position of the New South Wales Court of Appeal in Campbelltown and Mainteck supersede Codelfa? Why might this be impermissible?

[page 362] 12.6

Barely a year after deciding Woodside, the High Court effectively reopened the ambiguity debate in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd.10

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 325 ALR 188; 89 ALJR 990 High Court of Australia French CJ, Nettle and Gordon JJ: … Applicable legal principles in these appeals [46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding

circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals. [50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, [page 363] circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations. [51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’. [52] These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales and Electricity Generation Corporation v Woodside Energy

Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Inc v Jireh International Pty Ltd. [53] It is appropriate to consider each construction issue in turn. … Kiefel and Keane JJ: … [107] A construction of the words ‘deriving title’ in cl 24(iii) as meaning a chain of title analogous to that in systems of land registration could only be arrived at by placing undue emphasis upon those words to the exclusion of other words. In any event the possibility that such a meaning could have been intended is negated by reference to the circumstances surrounding the meaning of the 1970 Agreement and in particular the facts known to the parties. To the extent that there is any ambiguity arising from these words it is resolved in favour of the construction referred to above. [108] That regard may be had to the mutual knowledge of the parties to an agreement in the process of construing it is evident from Codelfa Construction Pty Ltd v State Rail Authority of New South Wales. Mason J, with whom Stephen and Wilson JJ agreed, accepted that there may be a need to have regard to the circumstances surrounding a commercial contract in order to construe its terms or to imply a further term. In the passages preceding what his Honour described as the ‘true rule’ of construction, his Honour identified ‘mutually known facts’ which may assist in understanding the meaning of a descriptive term or the ‘genesis’ or ‘aim’ of the transaction. His Honour had earlier referred to the judgment of Lord Wilberforce in Prenn v Simmonds, where it was said that: [page 364] [t]he time has long passed when agreements … were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations.

[109] In a passage from DTR Nominees Pty Ltd v Mona Homes Pty Ltd, to which Mason J referred, it was said that the object of the exercise was to show that ‘the attribution of a strict legal meaning would “make the transaction futile”’. In Electricity Generation Corporation v Woodside Energy Ltd, French CJ, Hayne, Crennan and Kiefel JJ explained that a commercial contract should be construed by reference to the surrounding circumstances known to the parties and the commercial purpose or objects to be secured by the contract in order to avoid a result that could not have been intended. [110] The ‘ambiguity’ which Mason J said may need to be resolved arises when the words are ‘susceptible of more than one meaning.’ His Honour did not say how such an ambiguity might be identified. His Honour’s reasons in Codelfa are directed to how an ambiguity might be resolved. [111] In reasons for the refusal of special leave to appeal given in Western Export Services Inc v Jireh International Pty Ltd, reference was made to a requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and the object of the transaction. There may be differences of views about whether this requirement arises from what was said in Codelfa. This is not the occasion to resolve that question. [112] It should, however, be observed that statements made in the course of reasons for refusing an application for special leave create no precedent and are binding on no one. An application for special leave is merely an application to commence proceedings in the Court. Until the grant of special leave there are no proceedings inter partes before the Court. [113] The question whether an ambiguity in the meaning of terms in a commercial contract may be identified by reference to matters external to the contract does not arise in this case and the issue identified in Jireh has not been the subject of submissions before this Court. To the extent that there is any possible ambiguity as to the meaning of the words ‘deriving title through or under’, it arises from the terms of cl 24(iii) itself.

Bell and Gageler JJ: [118] These appeals do not raise an important question on which intermediate courts of appeal are currently divided. That question is whether ambiguity must be shown before a court interpreting a written contract can have regard to background circumstances. [119] Until that question is squarely raised in and determined by this Court, the question remains for other Australian courts to determine on the basis [page 365] that Codelfa Construction Pty Ltd v State Rail Authority of New South Wales remains binding authority. That point, which of itself says nothing about the scope of the holding in Codelfa, was made in the joint reasons for judgment in Royal Botanic Gardens and Domain Trust v South Sydney City Council. The point was reiterated, but taken no further, in the joint reasons for refusing special leave to appeal in Western Export Services Inc v Jireh International Pty Ltd. It should go without saying that reasons for refusing special leave to appeal in a civil proceeding are not themselves binding authority. [120] The question whether ambiguity must be shown before a court interpreting a written contract may have regard to background circumstances does not arise for determination in these appeals because the parties agree that the terms ‘MBM area’ in cl 2.2 and ‘through or under’ in cl 3.1 of the 1970 Agreement are ambiguous. The parties also agree, consistently with numerous recent statements of principle in this Court, that the proper interpretation of each of those terms is to be determined by reference to what reasonable businesspersons having all the background knowledge then reasonably available to the parties would have understood those terms to have meant as at 5 May 1970. [121] To the extent that there is any issue of interpretative principle which divides the parties, that issue is limited to whether the meaning of the defined term ‘MBM area’ can be informed by the defined term itself. The issue is not to be resolved by invocation of the strictures of logic

presumptively applicable to the interpretation of a defined expression within a complex statutory scheme. It is to be resolved instead by reference to the overriding criterion of how reasonable businesspersons can be taken to have understood the term. In the absence of the background circumstances indicating some reason to think otherwise, it is therefore appropriate to proceed on the assumption that the words chosen as the label for the defined term were not chosen arbitrarily but as ‘a distillation of … a concept intended to be more precisely stated in the definition. [122] No other issue of interpretative principle falls for determination in these appeals. Indeed, no other issue has been argued. [123] Save that we see no occasion to address the ‘true rule’ stated by Mason J in Codelfa, we agree with the reasons given by Kiefel and Keane JJ for concluding that Hanwright’s interpretation of each of the disputed terms is to be preferred. For those reasons, we agree with the orders proposed by French CJ, Nettle and Gordon JJ. 12.7

The question of contract construction is an important one and such disputes are commonly brought before state Supreme Courts. In that regard, though it may be only a matter of time before the right case emerges and the debate is resolved, the High Court’s stewardship of the common law in this area has left much to be desired. Notwithstanding [page 366] the continuing issues around ambiguity, there are some key principles of contract interpretation that bear repeating: Interpretation involves ascertaining the meaning that the reasonable commercial bystander would give to the contract in question. Interpretation does not involve giving effect to the subjective intention of the parties.

Interpretation will often involve a choice between meanings. Accordingly, the background facts to a contract cannot easily be discounted. The task of a court in interpreting a contract is to ascertain the meaning that the parties have assigned to the terms of their agreement. A court can interpret, but cannot rewrite, the agreement between the parties. As the English Court of Appeal noted in Re Golden Key Ltd (in rec),11 the line between construing a contract in a commercially sensible manner and effectively rewriting the agreement can at times be thin. However, it can be presumed that the parties intended some commercial result to transpire and a commercially insensible outcome should be avoided. Nevertheless, where the words themselves are unambiguous a court must apply them even though their effect may be capricious, unreasonable or unintended by the parties.12

Comparative approaches 12.8

It is regrettable that the ambiguity debate is still unresolved in Australia. In stark contrast, comparable jurisdictions, such as the United Kingdom and Singapore, appear to be in lockstep and more in tune with the realities of commercial contracting. The following extract from Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd13 contains one of the most thorough discussions of the contract construction debate. In Zurich Insurance, Rajah JA sets out the issues around contract interpretation and the different schools of thought. The key issues that the extract addresses are (1) the role of the parol evidence rule in contract interpretation; (2) the traditional approach to construction; (3) the modern contextual approach;

and (4) the concern that in the process of construction judges might inadvertently add to, subtract from or vary the terms of the agreement between the parties. These four issues set out the true background of the construction debate in Australia and will no doubt be relevant to its resolution. [page 367]

Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] SGCA 27 Supreme Court of Singapore, Court of Appeal V K Rajah JA (delivering the judgment of the court): … The use of extrinsic evidence to affect written contracts The law in England The common law rule against parol evidence [32] We shall use as the starting point of our discussion the muchdiscussed and oft-maligned parol evidence rule at common law. Although long relied on by the English courts as a bulwark against admitting extrinsic evidence for the purposes of interpreting written contracts, the exact formulation of this common law rule is a matter of some disagreement. In the UK, Law Commission, Law of Contract: The Parol Evidence Rule (Law Com No 154, 1986) (Chairman: Beldam J) (‘Law Com No 154’) at para 1.2, the Law Commission of England and Wales (‘the Law Commission’) endorsed an earlier definition of the rule as set out in a working paper issued in 1976 (viz, Working Paper No 70), which was as follows: When a transaction is recorded in a document, it is not generally permissible to adduce other evidence of (a) its terms

or (b) other terms not included, expressly or by reference, in the document or (c) its writer’s intended meaning. There are here three distinct rules which exclude what is known as extrinsic evidence, being evidence outside or extrinsic to the document. The evidence excluded is usually oral, but it may be other documentary evidence. The three rules, either separately or together, are sometimes known as the parol evidence rule. The first rule excludes a particular means of proof, namely secondary evidence of a document: where the rule applies it prevents the contents of the document being proved by any means other than the production of the document. This is more usually known as the “best evidence rule”. By the second rule extrinsic evidence is inadmissible for the purpose of adding to, varying, contradicting or subtracting from the terms of the document: the writing is conclusive. The third rule deals with the admissibility of facts in aid of the interpretation or construction of documents. [emphasis added] [33] We shall refer to the Law Commission’s multi-pronged formulation as the ‘thick’ definition of the parol evidence rule. The leading textbooks, however, usually focus on the second limb of the thick definition, which is stated in Chitty [page 368] on Contracts vol 1 (H G Beale gen ed) (Sweet & Maxwell, 29th Ed, 2004) (‘Chitty’) at para 12-096 as follows: [I]n 1897, Lord Morris accepted [in Bank of Australasia v Palmer [1897] AC 540 at 545] that ‘[p]arol testimony cannot be received to contradict, vary, add to or subtract from the terms of a written contract, or the terms in which the parties

have deliberately agreed to record any part of their contract.’ This rule is usually known as the ‘parol evidence’ rule. Similarly, Edwin Peel, Treitel: The Law of Contract (Sweet & Maxwell, 12th Ed, 2007) (‘Treitel’) states at para 6-012 that: The parol evidence rule states that evidence cannot be admitted (or, even if admitted, cannot be used) to add to, vary or contradict a written instrument. We shall refer to this formulation of the parol evidence rule as the ‘thin’ definition. The thin definition of the parol evidence rule [34] The thick definition of the parol evidence rule, especially its third prong pertaining to the interpretation of documents, is clearly no longer strictly adhered to in England (see [53]–[65] below). Even the thin definition of the rule is beleaguered. … [36] However, there have also been recent pronouncements by the English courts affirming the survival and importance of the thin definition of the parol evidence rule. In the House of Lords decision of Shogun Finance Ltd v Hudson [2004] 1 AC 919, Lord Hobhouse of Woodborough said at [49]: The rule that other evidence may not be adduced to contradict the provisions of a contract contained in a written document [ie, the thin definition of the parol evidence rule] is fundamental to the mercantile law of this country; the bargain is the document; the certainty of the contract depends on it. … This rule is one of the great strengths of English commercial law and is one of the main reasons for the international success of English law in preference to laxer systems which do not provide the same certainty. [37] There is also continued academic support for it. In Treitel ([33] supra) at para 6-013, it is explained that:

There is much force in this view [that the thin definition of the parol evidence rule is no more than a circular statement] in cases in which, at the time of contracting, both parties actually shared a common intention with regard to the term in question. But in most cases in which the rule is invoked this is not the position: the dispute arises precisely because the parties had different intentions, and one alleges, while the other denies, that terms not set out in the document were intended to form part [page 369] of the contract. In such cases, the court will attach importance to the appearance of the document: if it looks like a complete contract to one of the parties taking a reasonable view of it, then the rule will prevent the other party from relying on extrinsic evidence to show that the contract also contained other terms. This result has been described as being simply an application of the objective test of agreement; but, even if it can be so regarded, it is such a common and frequently recurring application of this test as to amount to an independent rule. [emphasis added in italics] [38] It has been argued that, in deciding whether a document is meant to be a complete contract, the law goes beyond the normal objective test (see [126]–[127] below). As stated in Treitel (at para 6-013): That test normally requires the party relying on it [ie, the document alleged to constitute the contract] to prove that he reasonably believed that the other party was contracting on the terms alleged. Where a document looks like a complete contract, the party relying on it does not have to prove that he had such a belief: he can rely on a presumption to that effect which it is up to the other party to rebut. … Moreover, the objective test normally prevents a party from relying on his ‘private but uncommunicated intention as to what was to be agreed’

[citing para 2.14 of Law Com No 154 ([32] supra)]. The presumption which applies in the case of an apparently complete contractual document goes beyond this: it prevents a party from relying on evidence of intention that was not ‘private and uncommunicated’ at all, but simply not recorded in the document. For these reasons, it is submitted that the admissibility of extrinsic evidence, where it is proved that the document was not in fact intended to contain all the terms of the contract, does not turn the [thin definition of the parol evidence] rule into a merely ‘circular statement. [emphasis added in italics] [39] In a similar vein, Robert Stevens has wryly noted in ‘Objectivity, Mistake and the Parol Evidence Rule’ in Contract Terms (Andrew Burrows & Edwin Peel eds) (Oxford University Press, 2007) ch 6 (‘Stevens’ article’) that ‘[t]he parol evidence rule [according to the thin definition] is not dead, or even ill, but merely misunderstood’ (at p 107). He argues (at p 109) that: Now it can be said that [the thin definition of] the so-called parol evidence rule is not a separate rule of law at all, but merely a specific application of general principles. The rule does indeed follow as a matter of course from the general rule as to the objective test for agreement. This does not show that the parol evidence rule is dead, but merely that it is a species of a wider genus. [emphasis in original] [40] Ultimately, the academic disagreements over the status of the thin definition of the parol evidence rule may be unwarranted. The commentators are united in the view that it operates only when it is proved that the document was intended by the parties to contain all the terms of the contract. They also agree that, in determining whether the parties so intended, the court may look at [page 370] extrinsic evidence and apply the normal objective test, subject to a

rebuttable presumption that a contract which is complete on its face was intended to contain all the terms of the parties’ agreement (see Treitel ([33] supra) at para 6-013; Chitty ([33] supra) at para 12-098; and Stevens’ article at pp 107 and 109). At the heart of the various views articulated at [33]–[39] above, therefore, the proposition undeniably remains: Where a contract has been determined by the court to contain all the terms of the parties’ agreement, no extrinsic evidence is admissible to vary the terms of that document. Whether or not this proposition should be given the appellation of a rule, a principle or an application of an existing rule or principle is to a large extent a pointless debate. The English courts’ use of extrinsic evidence in aid of interpretation THE CONCEPT OF “INTERPRETATION” [41] ‘Interpretation’, as Neil MacCormick, Rhetoric and the Rule of Law (Oxford University Press, 2005) succinctly states (at pp 121–122), usually denotes the process of uncovering meaning in and seeking to understand a text where there is some doubt or room for a difference of opinion. In the context of contractual interpretation, the text sought to be understood is the written contract, which constitutes prima facie proof of the parties’ intentions where the contract is complete on its face (see [132] below). In this regard, Prof Ronald Dworkin’s comments in his seminal work, Law’s Empire (Hart Publishing, 1998), at p 52 should be borne in mind: Interpretation is an activity undertaken in relation to an object or a practice already existing, and the shape of that object or practice will be a constraint upon the interpretation that can be applied to it. It should also be noted that the term ‘construction’ is often used interchangeably with ‘interpretation’, although some commentators regard these as qualitatively different processes (for examples of the latter view, see Catherine Mitchell, Interpretation of Contracts: Current controversies in law (Routledge-Cavendish, 2007) (‘Mitchell’) at p 26; Phipson on Evidence (Hodge M Malek gen ed) (Sweet & Maxwell, 16th Ed, 2005) (‘Phipson’) at para 43-02). … [44] What, then, is the difference between interpreting a contract and

contradicting, varying, adding to or subtracting from its terms? In Chitty ([33] supra), greater elucidation can be found at para 12-117: Different considerations apply to the admissibility of extrinsic evidence to interpret or explain a written agreement. Extrinsic evidence of this sort does not usurp the authority of the written document or contradict, vary, add to or subtract from its terms. It is the writing which operates. The extrinsic evidence does no more than assist in its operation by assigning a definite meaning to terms capable of such explanation or by pointing out and connecting them with the proper subject-matter. Accordingly, no ‘parol evidence rule’ [as set out in the thin definition] … will apply to such a situation. [emphasis added] [page 371] [45] Arthur Linton Corbin’s explanation in ‘The Interpretation of Words and the parol Evidence Rule’ (1965) 50 Cornell LQ 161 at 171 is also illuminating: Extrinsic evidence is admissible to aid in the process of interpretation …, to determine the meaning of language that the parties actually gave to [the written contract], to expound and enforce the contract that the parties actually intended to make. Such evidence is never relevant or admissible when offered for the purpose of establishing another meaning or intention and to expound and enforce a different contract. Contradiction, deletion, substitution: these are not interpretation. [emphasis added] The above observations are consistent with Dworkin’s view (see [41] above) of the interpretive process as being constrained by the form of the object sought to be interpreted, ie, the written contract. [46] The concept of ‘interpretation’ set out in Chitty at para 12-117 (reproduced at [44] above) — namely, ‘assigning a definite meaning to terms capable of such explanation or … pointing out and connecting

them with the proper subject-matter’ — reflects the traditional approach to interpretation, under which ambiguity (or absurdity, or the existence of an alternative technical meaning) is a prerequisite for the admissibility of extrinsic evidence (see further [52] below). This requirement also draws the line between interpreting and varying the terms of a contract. In the former scenario, the court is explaining the equivocal language of a contract by assigning one of a range of possible meanings to its terms. The shift towards what is often called the ‘contextual’ approach to contractual interpretation, however, appears to have removed this prerequisite of establishing (inter alia) ambiguity before extrinsic evidence may be considered when interpreting contracts. This has created further pressure on the raison d’être of the thin definition of the parol evidence rule since, in ‘interpreting’ language that is clear on its face, the court sometimes veers dangerously close towards varying, adding to or subtracting from the contract (see [64], [104] and [122]–[123] below). Indeed, it has recently been affirmed in Gerard McMeel, The Construction of Contracts: Interpretation, Implication, and Rectification (Oxford University Press, 2007) (‘McMeel’) at para 1.65 that ‘the parol evidence rule [in its thin definition] … is dead’ [emphasis in original]. We now turn to examine these differing approaches to the interpretation of contracts. THE TRADITIONAL APPROACH [47] We begin with what is now described as the ‘traditional’ approach to the interpretation of contracts (see McMeel at paras 1.28 to 1.30). McMeel neatly outlines the scope of the traditional approach with the following propositions: The traditional approach: what is the purpose of construction? 1.28 First, interpretation is an exercise in ascertaining the ‘intentions of the parties.’ This is immediately qualified by the objective principle which entails that English law is not concerned with either or both parties’ actual [page 372]

or subjective intentions. It is focused on the intentions as manifested in the document which embodies the agreement. In this sense the parties’ intentions are objectively ascertained. The traditional approach: what is the approach of the court to language? 1.29 Second, these common intentions are to be discerned from the ‘plain’ or ‘natural and ordinary meaning’ of the language which [the parties] have employed. A relatively strict or formal approach to language is adopted. The traditional approach: what materials or evidence will the court consider? 1.30 Third, the court will not ordinarily consider evidence outside the four corners of the document being construed in order to supplement, vary or contradict the written terms. This restrictive approach to ‘extrinsic evidence’ was known as the parol evidence rule. On occasion extrinsic evidence was admitted, but usually only in cases of ambiguity or other problems of expression. [emphasis added in italics] [48] Similarly, Chitty ([33] supra) states (at para 12-118) that: [U]nder the older restrictive view … extrinsic evidence is admissible only where the sense and meaning of the words of the written instrument is doubtful or difficulty arises when it is sought to apply the language of the instrument to the circumstances under consideration. If the words have a clear and fixed meaning, not capable of explanation, extrinsic evidence would not be admissible to show that the parties meant something different from what they have written. [emphasis added] [49] In Malcolm A Clarke, The Law of Insurance Contracts (Informa, 5th Ed, 2006) (‘Clarke’), the author provides (at para 15-3B1) a helpful summary of the circumstances (in relation to a contract of insurance

specifically) in which a court may look beyond the strict confines of the contract: [T]raditionally, if a court wants to go outside the policy, it must use one of three routes. The first route is the technical route, that, although the words appear clear they have a technical meaning that is not apparent without seeking extrinsic evidence … The second route is ambiguity, that the words are not clear but ambiguous and the ambiguity must be resolved by taking a wider view … The third route is absurdity, that a literal reading is not just unreasonable but unworkable or absurd and that must be avoided by taking a wider view … [emphasis added] [50] A word or statement is ambiguous ‘when it has two (or more) primary meanings, each of [which may] be adopted without distortion of the language’ (see Kim Lewison, The Interpretation of Contracts (Sweet & Maxwell, 4th Ed, 2007) (‘Lewison’) at para 8.01). Older English authorities classify ambiguity into two categories: (a) patent ambiguity, ie, ambiguity which appears from the language of [page 373] the instrument; and (b) latent ambiguity, ie, ambiguity which becomes apparent only when the language is applied to the factual situation … [51] In England, the distinction between patent and latent ambiguity has been criticised. Lord Simon of Glaisdale in L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 remarked (at 268): [T]he distinctions between patent ambiguities, latent ambiguities and equivocations as regards admissibility of extrinsic evidence are based on outmoded and highly technical and artificial rules and introduce absurd refinements. However, the distinctions remain relevant in Singapore in view of the

Evidence Act (Cap 97, 1997 Rev Ed) (see [75]–[80] below). [52] It is important to note that, under the traditional approach to contractual interpretation, ambiguity, absurdity or the existence of an alternative technical meaning is ostensibly a prerequisite for the court’s journey outside the contract towards its external context (see [46] above). This, on considered reflection, seems odd. Ambiguity under the traditional approach encompasses latent ambiguity (see McMeel ([46] supra) at para 1.86). Yet, in order to establish whether or not there is latent ambiguity in a contract, the court would first have to be cognisant of its external context. Then, if latent ambiguity indeed arises, extrinsic evidence would be used to resolve that ambiguity. Furthermore, it is difficult to see how the traditional approach would work in the context of what Clarke refers to as ‘the technical route’ (at para 15-3B1) since, on the plain language of the contract, it may not be apparent at all that the particular word has an alternative technical meaning. The court would have to refer to extrinsic material first in order to detect the existence of the alternative technical meaning. Thus, in denying the role of extrinsic evidence in the interpretation of contracts, proponents of the traditional approach are only creating frustration, conflict and inconsistency (see also [114]–[120] below). THE SHIFT TO THE CONTEXTUAL APPROACH [53] Over the past few decades, the traditional approach has increasingly been sidelined in favour of an approach which has been variously described as the ‘purposive’ approach, the ‘commercial’ approach, the ‘common sense’ school and the ‘contextual’ approach (see McMeel at para 1.31). For present purposes, we prefer to use the expression ‘contextual approach’ to describe this newer approach simply because the ‘context’ of a contract is wide enough to encompass include its commercial object and purpose as well. A useful image is provided in Clarke of the context of a contract (at para 15-3) as follows: The context is a series of circles: the phrase, the sentence, the paragraph, the part of the [contract], the whole of the [contract], and then, outside the [contract] itself, the past dealings of the parties [subject to the rule against the admissibility of pre-contractual negotiations

[page 374] (see [62] and [132] below)], the trade context, and the objects which the [contract] was intended to achieve. From this, it is apparent that the word ‘context’ has at least two possible meanings: first, the document as a whole, which includes the provisions other than those sought to be interpreted and the organisation of the document (‘internal context’); and, second, the circumstances surrounding the formation of the contract, including the object or purpose for which it was entered into (‘external context’). In this judgment, it is the external context of a contract (and not its internal context) that we refer to when we use the word ‘context’. [54] In England, the seeds of the paradigm shift to the contextual approach were arguably first sown by the House of Lords in Prenn v Simmonds [1971] 1 WLR 1381, where Lord Wilberforce said (at 1383– 1384): The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. … We must … inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. [55] Lord Wilberforce reiterated this principle in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (‘Reardon Smith Line’) at 995– 996, as follows: In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. [56] The high watermark of the contextual approach was reached in

Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (‘Investors Compensation Scheme’). In what has become regarded as the most lucid modern restatement of this approach, Lord Hoffmann stated (at 912–913): … I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds … [at] 1384–1386 and Reardon Smith Line … is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows. [page 375] (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact,’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] A.C. 749. (5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201:

[page 376] if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense. [57] The second of Lord Hoffmann’s propositions in Investors Compensation Scheme (as set out in the preceding paragraph) must now be qualified and read in the light of Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 (‘BCCI v Ali’), in which Lord Hoffmann clarified (at [39]) his reference to ‘absolutely anything’ (in Investors Compensation Scheme at 913) as follows: I should say in passing that when, in Investors Compensation Scheme …, I said that the admissible background included ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’, I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant. I was merely saying that there is no conceptual limit to what can be regarded as background. It is not, for example, confined to the factual background but can include the state of the law (as in cases in which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken. But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage: ‘we do not easily accept that people have made linguistic mistakes, particularly in formal documents’. I was certainly not encouraging a trawl through ‘background’ which could not have made a reasonable person think that the parties must have departed from conventional usage. [emphasis in original]

We shall refer to Lord Hoffmann’s propositions in Investors Compensation Scheme, as qualified by the above extract from BCCI v Ali, as ‘the Investors Compensation Scheme restatement’. [58] Despite this qualification, serious disquiet has periodically been expressed about the Investors Compensation Scheme restatement. For example, in The Tychy (No 2) [2001] 2 Lloyd’s Rep 403 at [29], Lord Phillips of Worth Matravers MR said: With respect to Lord Hoffmann, we are inclined to think that a little intellectual hand luggage is no bad thing when approaching the task of construing a contract. Several other judges have expressed concerns regarding the likelihood of an increase in legal costs and the length of commercial litigation, as well as uncertainty concerning what might be embraced by the ‘matrix of facts’ (per Lord Wilberforce in Prenn v Simmonds ([54] supra) at 1384) in any particular matter (see, for example, the comments by Lightman J in Wire TV Ltd v CableTel (UK) Ltd [1998] CLC 244 at 257 that ‘[a] very large part of the flood of evidence [page 377] in [that] case on the factual matrix … was legally inadmissible and the greater part of the remainder was totally unhelpful’). Further, it has been noted that the position of third parties (in terms of whether they may rely on the written agreement alone where the words in question have only one meaning which is not evidently nonsensical, or whether they must construe the relevant words in view of all the surrounding circumstances of the agreement) does not seem to have been considered at all (see the observations of Saville LJ in the English Court of Appeal’s decision in National Bank of Sharjah v Dellborg (9 July 1997) (unreported)). There is also an inarticulate anxiety that some judges may seek refuge under the generous shade of the umbrella of ‘matrix of facts’ in order to rewrite commercial bargains, especially since counsel

are now employing considerable ingenuity in discovering intricate ‘ambiguities’ against the backdrop of a broader ‘matrix’. [59] By and large, however, the Investors Compensation Scheme restatement has been unreservedly adopted by the English courts and has yielded more principled decisions. It has been applied in a myriad of cases (see, for instance, the cases cited in Lewison ([50] supra) at para 1.02, fn 19). Thus, in the recent English Court of Appeal case of Phillips v Rafiq [2007] EWCA Civ 74; [2007] 1 WLR 1351, Ward LJ was able to state (at [8]): It is common ground between the parties that the proper approach [to contractual interpretation] is, of course, the enunciation of principle expressed by Lord Hoffmann in Investors Compensation Scheme … THE IMPACT OF RESTATEMENT

THE

INVESTORS

COMPENSATION

SCHEME

[60] Views about the impact of the Investors Compensation Scheme restatement have been mixed. Some commentators have expressed concerns that it goes too far; others, on the other hand, are of the view that it merely covers old ground (for an example of the latter view, see NLA Group Ltd v Bowers [1999] 1 Lloyd’s Rep 109, where Timothy Walker J stated (at 112) that ‘Lord Hoffmann was simply overruling old and outdated cases by reference to an approach on construction which has been followed in the Commercial Court for many years’). [61] In our view, the significance and impact of the Investors Compensation Scheme restatement is aptly summarised in Mitchell ([41] supra) at p 60 as follows: The significance of Lord Hoffmann’s speech lies in its recognition that all understanding relies upon context to a greater or lesser extent, and that contractual interpretation is no different. The ‘reasonable person’, in deciphering communicative utterances, utilises all necessary background knowledge to access meaning. Thus a plain meaning or literal approach is not an alternative to contextual interpretation, but

can only be understood as operating within contextual method. On the whole, the new approach is to be welcomed, not least because it can be seen as a reflection of two factors of undeniable importance to modern contract thinking. [page 378] One of these is the realisation that contracts are first and foremost social phenomena. The other is the increasing European influence over domestic law. Although the shift to contextual interpretation can be seen as part of these wider developments, the method of contextual interpretation, as least as it is applied in contract law, is not without difficulties. Whether or not, by the Investors Compensation Scheme restatement, Lord Hoffmann was in fact making new law or merely declaring the existing state of the law, there is no gainsaying that ‘[t]he Investors Compensation Scheme restatement certainly represented a watershed, representing a decisive endorsement of the modern approach’ (see McMeel ([46] supra) at para 1.101). Two features of this pragmatic approach are significant. [62] First, the scope and quantity of extrinsic evidence that can be used in the exercise of interpretation has now increased. It should be noted, however, that the prohibition on evidence of the prior negotiations of the contracting parties and their declarations of subjective intent apparently remains applicable (see Lord Hoffmann’s third proposition in Investors Compensation Scheme ([56] supra)); such evidence may, however, be admitted and used to interpret a contract after the court has determined that it contains a latent ambiguity (see [50] above and [132] below). The restriction on evidence of prior negotiations has been said to arise out of the principle that the parties’ intentions have to be objectively ascertained (see Prenn v Simmonds ([54] supra)). … The second, and by far more important, impact of the Investors Compensation Scheme restatement is the change in the way in which contractual interpretation is to be carried out. From Lord Hoffmann’s fourth

proposition in this restatement (see [56] above), it appears that ambiguity is no longer a prerequisite for the admissibility of extrinsic evidence. Furthermore, the court may conclude that the ‘wrong words or syntax’ (see Investors Compensation Scheme at 913) have been used, ie, the court may substitute what it deems to be the correct language or syntax for that used in the contract. This creates an immediately apparent tension with the thin definition of the parol evidence rule as articulated at [33] above. [63] Indeed, this tension surfaced in Investors Compensation Scheme itself. In that case, the issue was the meaning of a provision in a claim form (‘section 3(b)’) used by Investors Compensation Scheme Ltd (‘ICS’), which read as follows (at 900): ICS agrees that the following claims shall not be treated as a ‘third party claim’ (as defined in section 4 of this form) for the purposes of this agreement and that the benefits of such claims shall enure to you [ie, the investors who had entered into home income plans under which they took out mortgages on their homes with, inter alia, West Bromwich Building Society] absolutely: Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society in which you claim an abatement of sums which you would otherwise have to repay to that society in respect of sums borrowed by you … [emphasis added] [page 379] … [66] Nevertheless, there is no doubt that the line between interpreting a contract and contradicting, adding to, varying or subtracting from its terms is often difficult to draw. With this in mind, we turn now to discuss the law in Singapore on the use of extrinsic evidence in contractual interpretation. In the light of our discussion of the English position, we will focus on the following issues:

(a) whether the parol evidence rule (as set out in the thin definition at [33] above) is alive and well in Singapore; (b) if it is, whether and in what circumstances extrinsic evidence is admissible to interpret a written contract; and (c) where the line between interpreting a contract on the one hand and varying, adding to or subtracting from its terms on the other should be drawn. … [Rajah JA then discusses Singaporean law, including the Evidence Act. Rajah JA subsequently discusses the Sandar Aung case:] … [105] we come now to the recent Court of Appeal case of Sandar Aung v Parkway Hospitals Singapore Pte Ltd [2007] 2 SLR 891 (‘Sandar Aung’). In Sandar Aung, the appellant’s mother (‘the Patient’) was admitted to the respondent hospital (‘the Hospital’) to undergo an angioplasty. At the time of the Patient’s admission, the appellant had signed two documents issued by the Hospital — an estimate of hospital charges (‘the Estimate’) and a standard form contract stating the Hospital’s conditions of services and policies (‘the Standard Contract’). The Estimate for the Patient’s angioplasty computed the total estimated hospital charges to be $15,227.30. The appellant later signed an undertaking agreeing to be jointly and severally liable with the Patient for ‘all charges, expenses and liabilities incurred by and on behalf of the [P]atient’ (see Sandar Aung at [7]) (‘the Undertaking’). Unfortunately, unanticipated complications in the Patient’s recovery after surgery resulted in a medical bill that far exceeded the amount presented in the Estimate. The Court of Appeal had to determine, inter alia, whether the appellant’s liability in the Undertaking referred to only the expenses related to the Patient’s angioplasty or all the expenses incurred as a result of the medical services provided by the Hospital to the Patient. [106] The court firmly and lucidly stated (id at [29]): It is clear that, at common law, it has always been open to the court to have recourse to extrinsic material where such material

would aid in establishing the factual matrix which would (in turn) assist the court in construing the contract in question. This assumes, of course, that the reference to such material would not result in the contravention of the parol evidence rule which is statutorily embodied within ss 93 and 94 of the Evidence Act. This is, in fact, precisely [page 380] the situation in the present case. The key concept here is that of context. No contract exists in a vacuum and, consequently, its language must be construed in the context in which the contract concerned has been made. We would go so far as to state that even if the plain language of the contract appears otherwise clear, the construction consequently placed on such language should not be inconsistent with the context in which the contract was entered into if this context is clear or even obvious, since the context and circumstances in which the contract was made would reflect the intention of the parties when they entered into the contract and utilised the (contractual) language they did. It might well be the case that if a particular construction placed on the language in a given contract is inconsistent with what is the obvious context in which the contract was made, then that construction might not be as clear as was initially thought and might, on the contrary, be evidence of an ambiguity. [emphasis added in italics] [107] The court also stated (id at [35]) that ‘[r]eference may also be usefully made to the views of Lord Hoffmann in the leading House of Lords decision of Investors Compensation Scheme’, and set out the Investors Compensation Scheme restatement (reproduced at [56] above). The court concluded (at [37] of Sandar Aung): It is clear, in our view, that the common law principle [as stated in the quotation at [106] above], whose purpose and rationale is set out in the case law above, is applicable to the

present appeal. In particular, this court is justified in looking at, inter alia, the Estimate in order to arrive at the conclusion that the factual matrix clearly demonstrated that the ambit and scope of the contract between the appellant and the [Hospital] was confined to the angioplasty procedure. [emphasis in original] [108] It is evident from the Court of Appeal’s reasoning in Sandar Aung that in Singapore, the parol evidence rule (as statutorily embedded in s 94 of the Evidence Act) still operates as a restriction on the use of extrinsic material to affect a contract. However, extrinsic material is admissible for the purpose of interpreting the language of the contract. In this respect, Sandar Aung acknowledges that extrinsic material is admissible even if no ambiguity is present in the plain language of the contract. However, ambiguity still plays an important role, in that the court can only place on the relevant contractual word, phrase or term an interpretation which is different from that to be ascribed by its plain language if a consideration of the context of the contract leads to the conclusion that the word, phrase or term in question may take on two or more possible meanings, ie, if there is latent ambiguity (as defined at [50] above). In Sandar Aung, after the Estimate was taken into account, the phrase ‘all charges, expenses and liabilities incurred by and on behalf of the [P]atient’ could plausibly be taken to mean all charges, expenses and liabilities incurred by and on behalf of the Patient in respect of the envisaged angioplasty. Thus, the court had a legitimate basis to place a [page 381] narrower interpretation on the contractual term (or, in more informal parlance, to ‘read down’ that term) which would not otherwise have been warranted by its broad and general language. It may be possible to argue that what the court did in Sandar Aung in fact constituted variation of the relevant contractual terms in contravention of s 94 of the Evidence Act. This issue shall be addressed in greater detail at [122]– [123] below. It remains to be noted that proviso (f) to s 94 was not discussed in Sandar Aung. Thus, the issue of whether ambiguity was a

prerequisite for the application of this proviso and its relationship with the common law contextual approach to contractual interpretation was left open. Summary of the applicable principles in Singapore [109] As is evident from the discussion above, the law in Singapore on whether, when and to what extent extrinsic evidence may be admitted for the purposes of interpreting a written contract has seen significant developments, especially in the move towards the contextual approach to contractual interpretation. We take the present opportunity to clarify and consolidate our view of this area of the law as it currently stands. ATTRIBUTES OF THE DOCUMENT IN QUESTION [110] In their zealous resistance to extrinsic material, the proponents of the traditional approach to contractual interpretation (as outlined at [47]–[49] above) have neglected the commercial reality and logic that reference to such evidence is necessary even before the actual interpretive exercise takes place (see [52] above). The first and foremost consideration in approaching any written contract must be the essence and attributes of the document being examined. Different genres of documents may require different treatment by the court at various stages of the analytical process. For example, for standard form contracts and documents intended for commercial circulation (eg, negotiable instruments), the presumption that all the terms of the agreement between the parties are contained in the contract will be almost impossible to rebut. Such documents are examples par excellence of contracts that look complete to the parties (see [37] above); laymen are also more likely to attach greater importance to the written document in this particular context such that, on an objective view, it is difficult to say that the parties did not intend the agreement to be wholly contained in the written document. Furthermore, when interpreting such a contract, the courts will usually be more restrained in its examination of the context of the contract. There are many commercial contracts that will be relied on by persons who may have no more than a rudimentary understanding of the background to such contracts. These third parties must be able to enforce the plain words

of such documents unless there is a reason to believe that the relevant contextual peculiarities were made known or made available to them before they entered into the contract in question. If the courts do not exercise restraint in interpreting such documents, this could engender commercial [page 382] uncertainty and thereby encourage pointless litigation. In this regard, we respectfully agree with the following extra-judicial observations of Lord Steyn in ‘The Intractable Problem of the Interpretation of Legal Texts’ (see Commercial Law and Commercial Practice (Sarah Worthington ed) (Hart Publishing, 2003) ch 5 at p 126), as follows: The common law does not in principle differentiate between the interpretation of a rudimentary cobbled-together contract and a sophisticated standard form contract; between the interpretation of a consumer contract and a commercial contract; or between the interpretation of a domestic [contract] and [a] transnational contract. That is not, however, to say that in working out what is the best interpretation of a contract a court may not have to take into account, for example, a consumer as opposed to a commercial context, or the need for uniformity in international transactions. [emphasis added] THE PAROL EVIDENCE RULE [111] As mentioned earlier, in Singapore, the parol evidence rule lives on in s 94 of the Evidence Act (see [71] above) and has been applied assiduously by the courts in case law (see [82]–[98] and [105]–[108] above). The Singapore courts have always been mindful of the need for contractual certainty, especially in commercial agreements (such as the Policy in the present case). In Forefront Medical Technology (Pte) Ltd v Modern-Pak Pte Ltd [2006] 1 SLR 927, the High Court emphasised (at [24]) that not only is ‘[s]anctity of contract … vital to certainty and predictability in commercial transactions’, but also (at [26]):

[T]he perception of [the] importance [of commercial certainty and predictability] is deeply entrenched within the commercial legal landscape in general and in the individual psyches of commercial parties (and even non-commercial parties, for that matter) in particular. [emphasis in original] [112] However, the parol evidence rule only operates where the contract was intended by the parties to contain all the terms of their agreement. Where the contractual terms are ambiguous on their face, it is likely that the contract does not contain all the terms intended by the parties. Furthermore, in order to ascertain whether the parties intended to embody their entire agreement in the contract, the court may take cognisance of extrinsic evidence or the surrounding circumstances of the contract (see [40] above). [113] Assuming that the contract is one to which the parol evidence rule applies, no extrinsic evidence is admissible to contradict, vary, add to or subtract from its terms (see s 94 of the Evidence Act). ADMITTING EXTRINSIC EVIDENCE IN AID OF INTERPRETATION [114] We affirm our approval of the contextual approach to contractual interpretation manifested in Sandar Aung ([105] supra). There is considerable [page 383] force in Seng’s thesis (see [84] above) that proviso (f) to s 94 should be given a permissive interpretation which does not make ambiguity a prerequisite for the admissibility of extrinsic evidence in aid of contractual interpretation. Seng’s view has been adopted (at least implicitly) in two High Court decisions, viz, Standard Chartered Bank ([90] supra) and China Insurance Co ([90] supra), and we agree with it. [115] In reaching this conclusion, we found the views expressed in some of the leading commentaries and cases on the Indian Act helpful, although we must acknowledge that they do not invariably speak with one voice. In discussing the scope of the Indian proviso (6) (which is in

pari materia with proviso (f) to s 94), the author of Woodroffe ([2] supra) clarifies (at p 3475) that: Up to a certain stage, and apart from any question of ambiguity, extrinsic evidence is necessary to point [out] the operation of the simplest instrument. … ‘Some evidence’, says Wood, VC in [In re Feltham’s Trusts (1855) 1 K & J 528; 69 ER 528], ‘is necessary in any case of a will, that is to say, evidence to show the subjects and objects of the gift.’ … In reality, external information is requisite in construing every instrument: but when any subject is thus discovered which not only is within the words of the instrument, according to their natural construction, but exhausts the whole of those words, then the investigation must stop; you are bound to take the interpretation which entirely exhausts the whole of the series of expressions used by the author of the instrument, and are not permitted to go any further. [emphasis added] Thus, extrinsic evidence is always admissible even if there is no ambiguity in the contract sought to be interpreted. Although Woodroffe goes on to state (at p 3477) that ‘where the language used in a document is clear, no evidence should be received to explain away the language’ [emphasis added], this does not preclude the admission of extrinsic evidence imprimis to determine if the terms of the documents require explanation in the light of that evidence.

REVIEW QUESTIONS 1.

In Zurich Insurance, what does Rajah JA identify as the purpose of the parol evidence rule in contract construction?

2.

What is the traditional approach to contract construction? How does the contextual approach differ?

3.

In your opinion, are the Singaporean and United Kingdom approaches to contract construction superior to the Australian approach?

[page 384]

Exclusion clauses 12.9

Exclusion clauses are those terms in a contract that attempt to exclude liability or limit the liability of a potential defendant. Exclusion clauses can be regarded as risk-allocating devices. In Photo Production Ltd v Securicor Transport Ltd,14 Lord Wilberforce stated: … in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said, and this seems to have been Parliament’s intention, for leaving the parties free to apportion the risks as they think fit and for respecting their decisions.

True equality in a commercial sense is not always achievable. Nevertheless, in the absence of those consumer protections mandated by state, the courts have developed four approaches to construing exclusion clauses so as to achieve a just outcome in contract disputes. First, the courts have applied the contra proferentum rule.15 The rule stipulates that where an ambiguity exists, an exclusion clause will be interpreted against the interests of the party who drafted it and who is subsequently attempting to rely upon it.16 Second, in deviation cases such as those where a carrier deviates from the specified route, he or she will lose the benefit of the exclusion clause.17 Third, the courts have applied a four-corners rule wherein an act by the defendant that causes loss to the plaintiff and that is not an authorised or contemplated act under the contract will result in the loss of benefit of the exclusion clause.18 Fourth, the courts have resisted the notion that parties would willingly contract to allow their counterparts to be negligent in the performance of their duties under the contract.19 Accordingly, negligence will not be covered unless the language of the clause is broad and unambiguous enough to cover it.20

[page 385]

Key Points for Revision Interpretation involves ascertaining the meaning that the reasonable commercial bystander would give to the contract in question. Interpretation does not involve giving effect to the subjective intention of the parties. Interpretation will often involve a choice between meanings. Accordingly, the background facts to a contract cannot easily be discounted. The task of a court in interpreting a contract is to ascertain the meaning that the parties have assigned to the terms of their agreement. A court can interpret, but cannot rewrite, the agreement between the parties. As the English Court of Appeal noted in Re Golden Key Ltd (in rec), the line between construing a contract in a commercially sensible manner and effectively rewriting the agreement can at times be thin. However, it can be presumed that the parties intended some commercial result to transpire and a commercially insensible outcome should be avoided. Nevertheless, where the words themselves are unambiguous a court must apply them even though their effect may be capricious, unreasonable or unintended by the parties.

_________________ 1

There is some excellent scholarship on this topic. See K Lindgren, ‘The Ambiguity of “Ambiguity” in the Construction of Contracts’ (2014) 38 Australian Bar Review 153.

2

[2002] 1 AC 408 at 458.

3

[2013] SGCA 43 at [31].

4

(1982) 149 CLR 337 at 352; 41 ALR 367.

5

[2012] WASCA 60.

6

(2014) 251 CLR 640; 306 ALR 25.

7

(2014) 251 CLR 640; 306 ALR 25 at [35].

8

(2014) 310 ALR 113.

9

[2015] NSWSC 155.

10

(2015) 325 ALR 188; 89 ALJR 990. One commentator accurately suggested that Woodside was not a departure from Codelfa. See T Prince, ‘Defending Orthodoxy: Codelfa and Ambiguity’ (2015) 89 Australian Law Journal 491.

11

[2009] EWCA Civ 636.

12

Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd (2004) 12 BPR 22,879.

13

[2008] SGCA 27.

14

[1980] AC 827 at 843.

15

Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; 68 ALR 385.

16

Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; 68 ALR 385.

17

Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353; [1967] ALR 3.

18

Nissho Iwai Australia Ltd v Malaysian International Shipping Corp (1989) 167 CLR 219; 86 ALR 375.

19

Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642; [1954] ALR 831; Council of the City of Sydney v West (1965) 114 CLR 481; [1966] ALR 538.

20

Canada Steamship Lines Ltd v R [1952] AC 192.

[page 387]

CHAPTER 13 Implied Terms CHAPTER OVERVIEW 13.1 13.2

Introduction Terms implied in fact 13.3 Formal contracts 13.4 Reasonable and equitable 13.5 Business efficacy 13.6 Obviousness 13.8 Clarity 13.9 Consistency 13.10 Informal contracts 13.11 Terms implied by custom 13.12 Terms implied by law 13.15 The implied duty of good faith 13.16 Development of the implied duty of good faith 13.22 The implied duty to cooperate

Introduction 13.1

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; and, 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. It is important to note the distinction between terms implied by law and terms

implied in fact. In Commonwealth Bank of Australia v Barker,1 Gageler J stated: [page 388] Contractual terms implied in fact are ‘individualised gap fillers, depending on the terms and circumstances of a particular contract’. Contractual terms implied in law, of the kind in issue in the present case, are ‘in reality incidents attached to standardised contractual relationships’ operating as ‘standardised default rules’. The former are founded on what is ‘necessary’ to give ‘efficacy’ to the particular contract. The latter are founded on ‘more general considerations’, which take into account ‘the inherent nature of [the] contract and of the relationship thereby established’.2

Terms implied in fact 13.2

Where a court is faced with implying a term in fact, the general presumption is that the contract is effective without the implication.3 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.4 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.5 As Mason J noted in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales:6 ‘[T]he 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’. 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.7 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 overreaching application of an entire contract clause; that is, where a term must necessarily exist in order to give proper meaning and effect to an express term, then that term must be implied. As Isaacs J stated in Hart v MacDonald,8 an entire contract clause ‘excludes what [page 389] is extraneous to the written contract: but it does not in terms exclude implications arising on a fair construction of the agreement itself’. Accordingly, provided that a putative implied term is not barred by an express term in the contract, it might be safely implied where it is necessary to support the operation of an express term in the contract. Provided that a putative implied term is not barred by an express term in the contract, it might be safely implied where it is necessary to support the operation of an express term in the contract. 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.

Formal contracts 13.3

The legal requirements for implying a term into a formal contract were considered in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council.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

[page 390] 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 In Bull v Australian Quarter Horse Association,16 Beazley P, with whom Bathurst CJ and Sackville AJA agreed, stated: The criteria for an implied term are not necessarily independent of each other. If a term such as is sought to be implied is not necessary to give business efficacy to the contract, it does not matter that the term is otherwise capable of clear expression, although if a term is so obvious it goes without saying it may well be that it is necessary to give business efficacy to the contract. To require each and every criterion to be independently satisfied could lead to a degree of artificial characterisation.

While Beazley P did not cite Lord Hoffman’s reasoning in her judgment in Bull, her comments appear to draw upon his Lordship’s statements in Attorney General of Belize v Belize Telecom Ltd.17 In that case, Lord Hoffmann took issue with the test in BP Refinery. His Lordship stated that the test was ‘best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means.’18 The criticisms made by Lord Hoffman in Attorney General of Belize have cast some doubt on the correct test for implying terms into a contract in the United Kingdom. However, in Australia the courts have tended to follow BP Refinery quite closely. Moreover, even though the lead judgment in Commonwealth Bank of Australia v Barker cited some of Lord Hoffman’s comments with approval, the High Court did not follow his Lordship on this point.19 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 [page 391] inquiry.20 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 MacDonald,21 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.

Reasonable and equitable

13.4

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’.22 In BP Refinery (Westernport) Pty Ltd v Hastings Shire Council,23 as discussed briefly above, 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.24 The fact that a term may be regarded as reasonable and equitable as between the parties does not necessarily mean that it should be implied into the contract. In Attorney General of Belize v Belize Telecom Ltd,25 Lord Hoffmann, stated: … it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.

This proposition was quoted with approval by French CJ, Bell and Keane JJ in Commonwealth Bank of Australia v Barker,26 where their Honours noted that ‘the distinction thus drawn is appropriate even though the scope of the constructional approach adopted by Lord Hoffmann has been debated.’ In Peters American Delicacy Co Ltd v Champion,27 it was argued that an implied term of reasonableness affected an express clause in the contract [page 392] that allowed the manufacturer to alter prices by giving the retailer 7 days’ notice. It was argued that any prices fixed by the manufacturer had to be reasonable. The High Court rejected this argument on the ground that such a term was not

fair and reasonable to the manufacturer, as it would be forced to enter litigation to prove that its prices were reasonable.28 A term cannot be implied where it would operate in a ‘partisan fashion’.

Business efficacy 13.5

Any implied term must give business efficacy to the contract.29 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.30 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’.31 In Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd,32 the Court of Appeal of Victoria stated: Where the express terms of an agreement are sufficient to give it the business efficacy the parties intended it to have, it will not become necessary to imply additional terms. However, a term may be commercially necessary, in order for the contract to be workable in a business sense, notwithstanding that it can operate without the term.

In The Moorcock,33 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.34 Bowen LJ stated:

[page 393] 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 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.35

In Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd,36 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 Williams,37 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 13.6

Under the requirement of obviousness, the implied term must be one that is so obvious that it goes without saying.38 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 that the parties themselves would suggest was so obvious that it did not need to be remarked upon. In Shirlaw v Southern Foundries (1926) Ltd,39 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!’.

[page 394]

‘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.’ 13.7

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,40 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 sought payment for these costs from the State Rail Authority, which declined to pay them for the increased costs. Codelfa sued, alleging that there was an implied term in the contract that afforded it a right to payment. Codelfa lost in the High Court after it was held that such a term would not be obvious.

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 High Court of Australia Mason J at 345–7, 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. 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. [page 395] 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 …’ 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. 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. 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.

[page 396]

Clarity 13.8

The implied term must be capable of clear expression.41 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 that the parties can readily and easily identify. In Shell (UK) Ltd v Lostock Garage Ltd42 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 that 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’.43

Consistency 13.9

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.44

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?

Informal contracts 13.10 The requirements for implying terms into a formal contract are more exacting than those that 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,45 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

[page 397] 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.

The High Court has, in subsequent decisions, approved this statement.46 In Byrne v Australian Airlines Ltd,47 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.

Terms implied by custom 13.11 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) Ltd,48 the High Court addressed this issue.

Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur

Insurance (Australia) Ltd (1986) 160 CLR 226 High Court of Australia 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 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 [page 398] 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

[page 399] 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. 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.

[page 400]

Terms implied by law 13.12 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 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.49 This duty is well recognised at 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.50 13.13 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.51 Second, the term must be suitable for that class of contracts; this requirement effectively calls for the standard of ‘necessity’.52 In Liverpool City Council v Irwin53 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

[page 401] (high rise blocks) and the relationship created by the tenancy demand, of their nature, some contractual obligations on the landlord.54

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,55 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.

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. 13.14 In Commonwealth Bank of Australia v Barker,56 the High Court considered and rejected the proposition that an implied term of trust and confidence could be implied by law into employment contracts. In the extract below, French CJ, Bell and Keane JJ consider some of the policy issues at play in implying such a term.

Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; 312 ALR 356 High Court of Australia French CJ, Bell and Keane JJ (footnotes omitted): … The implication of terms [19] The common law in Australia must evolve within the limits of judicial power and not trespass into the province of legislative action. This Court and, to a lesser

[page 402] extent, intermediate appeal courts have a law-making function. That function can only be exercised as an incident of the adjudication of particular disputes. The first point of reference in its exercise is ‘the web of established legal principle’. As Brennan J said in Dietrich v The Queen: There must be constraints on the exercise of the power, else the courts would cross ‘the Rubicon that divides the judicial and the legislative powers’. [20] A judicial announcement of an obligation of mutual trust and confidence, to be applied as an incident of employment contracts and applicable to employers and employees alike, involves the assumption by courts of a regulatory function defined by reference to a broadly framed normative standard. Broadly framed normative standards are familiar to courts required to apply, in common law or statutory settings, criteria such as ‘reasonableness’, ‘good faith’ and ‘unconscionability’. However, the creation of a new standard of that kind is not a step to be taken lightly. Where the standard is embodied in a new contractual term implied in law, the bases for the implication in law of contractual terms must be considered as the first point of reference. [21] Courts have implied terms in contracts in a number of ways: in fact or ad hoc to give businesss efficacy to a contract; by custom in particular classes of contract; in law in particular classes of contract; or in law in all classes of contract. Contractual terms implied in law may be effected by the common law or by statute. If effected by the common law they may be displaced by the express terms of the contract or by statute. [22] Implication of a term in fact in a contract, by reference to what is necessary to give it business efficacy, was described in Codelfa Construction Pty Ltd v State Rail Authority of NSW as raising issues ‘as to

the meaning and effect of the contract’. Implication is not ‘an orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision.’ It is nevertheless an ‘exercise in interpretation, though not an orthodox instance.’ The implication of terms in fact was also characterised in Attorney General of Belize v Belize Telecom Ltd as an exercise in construction. Lord Hoffmann, delivering the judgment of the Privy Council, said: it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means. The distinction thus drawn is appropriate even though the scope of the constructional approach adopted by Lord Hoffmann has been debated. [23] In Codelfa, the implication of a term in law was said to be based upon ‘more general considerations’ than those covered by the concept of business efficacy. [page 403] That distinction attracted authoritative support in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd. [24] It has also been argued that some ‘terms’ said to be implied in law are in fact rules of construction and that all implied ‘terms’ of universal application fall into that category. The application of that proposition to what has been treated as a contractual duty to cooperate is considered below. Debates about characterisation have attracted persuasive protagonists on both sides. They involve taxonomical distinctions which do not necessarily yield practical differences. Those debates are not concerned with the distinct question whether, and when, implication of a term is to be regarded as an exercise in the construction of a contract or class of contract. [25] It has been accepted in this Court that some rules treated as implications of terms in law in particular classes of contract, or

contracts generally, can also be characterised as rules of construction. Mason J, in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd, so characterised the principle enunciated by Lord Blackburn in Mackay v Dick: 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. What is the part of each must depend on circumstances. The language of Lord Blackburn was indicative of a rule of construction rather than of implication. Nevertheless, Mason J also referred to the rule as defining an implied ‘duty to co-operate’. [26] The majority in the Full Court of the Federal Court referred to the implied duty of cooperation as providing an ‘alternative approach’ to the application of the implied duty of mutual trust and confidence. Their Honours relied upon its formulation in Secured Income as one which ‘requires a party to a contract to do all things necessary to enable the other party to have the benefit of the contract.’ That obligation of cooperation required the Bank to take the positive steps necessary to enable Mr Barker to have the benefit of cl 8, which contemplated the possibility of redeployment within the Bank as an alternative to termination. In opening that alternative approach, their Honours adverted to the suggestion by Lord Steyn in Malik that the implied duty of mutual trust and confidence propounded in that case ‘probably has its origin in the duty of co-operation between contracting parties.’ As appears below, whatever the historical basis in the United Kingdom for the implied duty of mutual trust and confidence, it cannot be supported in this country as an expression or development of the implied duty of cooperation. [27] As to the direct application of the implied duty of cooperation, the Bank submitted in this Court, as Jessup J had reasoned in his dissent, that there was

[page 404] no relevant contractual benefit with which the implied term could engage. Clause 8 conferred a benefit by way of a termination payment but did not confer a contractual entitlement to the benefit of the Redeployment Policy. The submission made on behalf of Mr Barker that ‘the prospect of … redeployment was a benefit in the relevant sense’ should not be accepted. [28] An implication in law may have evolved from repeated implications in fact. As Gaudron and McHugh JJ observed in Breen v Williams, some implications in law derive from the implication of terms in specific contracts of particular descriptions, which become ‘so much a part of the common understanding as to be imported into all transactions of the particular description.’ The two kinds of implied terms tend in practice to ‘merge imperceptibly into each other’. That connection suggests, as is the case, that the ‘more general considerations’ informing implications in law are not so remote from those considerations which support implications in fact as to be at large. They fall within the limiting criterion of ‘necessity’, which was acknowledged by both parties to this appeal. The requirement that a term implied in fact be necessary ‘to give business efficacy’ to the contract in which it is implied can be regarded as a specific application of the criterion of necessity. The present case concerns an implied term in law where broad considerations are in play, which are not at large but are not constrained by a search for what ‘the contract actually means.’ [29] In Byrne v Australian Airlines Ltd, McHugh and Gummow JJ emphasised that the ‘necessity’ which will support an implied term in law is demonstrated where, absent the implication, ‘the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined’ or the contract would be ‘deprived of its substance, seriously undermined or drastically devalued’. The criterion of ‘necessity’ in this context has been described as ‘elusive’ and the suggestion made that ‘there is much to be said for abandoning’ the concept. Necessity does, however, remind courts that implications in law must be kept within the limits of the

judicial function. They are a species of judicial law-making and are not to be made lightly. It is a necessary condition that they are justified functionally by reference to the effective performance of the class of contract to which they apply, or of contracts generally in cases of universal implications, such as the duty to cooperate. Implications which might be thought reasonable are not, on that account only, necessary. The same constraints apply whether or not such implications are characterised as rules of construction.

The implied duty of good faith 13.15 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 [page 405] to good faith.57 Broadly speaking, the major controversy at present is whether good faith is an implied term in all commercial contracts, including those between large and sophisticated commercial entities.58 The state Supreme Courts have been quite willing to recognise the existence of an implied term of good faith.59 However, it has quite often been somewhat unclear as to whether the implied term of good faith is derived from law or from fact.60 Further, as will be outlined below, there has been some judicial scepticism as to whether good faith should be implied in law between sophisticated commercial parties. The major controversy at present is whether good faith is an implied term in all commercial contracts, including those between large and sophisticated commercial entities.

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.61 The High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council62 declined to either endorse or reject the implied duty of good faith, though Kirby J did note that: [I]n 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.63

[page 406] In the course of finding that an implied duty of trust and confidence did not exist in Commonwealth Bank of Australia v Barker,64, French CJ, Crennan and Bell JJ stated: The above conclusion should not be taken as reflecting upon the question whether there is a general obligation to act in good faith in the performance of contracts. Nor does it reflect upon the related question whether contractual powers and discretions may be limited by good faith and rationality requirements analogous to those applicable in the sphere of public law.65

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.

Development of the implied duty of good faith 13.16 When two parties enter into a contract with each other 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 Ltd v Minister for Public Works,66 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 complete certain work 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

[page 407] view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.67

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.68 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 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 thirdparty 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’.69 13.17 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 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 Ltd70 and Alcatel Australia Ltd v Scarcella,71 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:

[page 408] 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.72

In the paragraph preceding the statement above, the court cited favourably the obiter remarks of Finn J in Hughes Aircraft Systems International v Airservices Australia,73 where his Honour stated that a ‘more open recognition [of an implied term of good faith] in our own contract law is now warranted’.74 The Court of Appeal noted that Finn J in Hughes was ‘pointedly’ disagreeing with the view expressed by Gummow J in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd,75 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’. If the Court of Appeal’s discussion of good faith in Burger King76 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.77 Certainly, subsequent courts have relied on Burger King to found a duty of good faith in commercial contracts as an implication of law.78 13.18 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 Peden as to the basis of the implication.79 One suggestion that Peden has made is that

[page 409] a construction-based approach to good faith might be preferable.80 This approach has drawn criticism from the judiciary in Vodafone Pacific Ltd v Mobile Innovation Ltd81 and Insight Oceania Pty Ltd v Philips Electronics Australia Ltd.82 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,83 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 Council84 or in those situations where the contract is uncertain or incomplete. 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. 13.19 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,85 Warren CJ in the Victorian Court of Appeal qualified her acknowledgment of good faith by adding a caution with respect to large commercial entities:

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.86

[page 410] 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.87

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 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 scepticism as to whether large commercial entities need legal protection from harsh dealings can be found in cases concerning estoppel and statutory unconscionability.88 In Austotel Pty Ltd v Franklins Selfserve Pty Ltd,89 Kirby P stated: [C]ourts should, in my view, be wary lest they distort the relationships of substantial, well-advised corporations in commercial transactions by subjecting them to the overly tender consciences of judges.

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 King90 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. [page 411] 13.20 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’.91 This formulation of good faith has been applied by the New South Wales Supreme Court in Alcatel Australia Ltd v Scarcella,92 Burger King Corp v Hungry Jack’s Pty Ltd,93 Overlook Management BV v Foxtel Management Pty Ltd94 and United Group Rail Services Ltd v Rail Corp of New South Wales.95 Other state Supreme Courts have recognised the existence of good faith and adopted the Mason formulation.96 Good faith has also been defined as either solely excluding bad faith97 or comprising loyalty to the contract.98 While good faith is not a term of art,99 its meaning will depend on the context and contract in which it is employed.100

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.101 This might well include having regard to the contract as a whole.102 There is a crucial limitation upon good faith in that the obligation does not prohibit a party from acting in its own legitimate selfinterest.103 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’.104 [page 412] 13.21 The recent decision of North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd105 provides a useful summary of many of the key issues within good faith. Crucially, in North East Solution, Croft J was at pains to make it clear that good faith should not automatically be conflated with reasonableness. At issue was a development contract between the plaintiff, North East Solution Pty Ltd, and the defendants, Masters Home Improvements and Woolworths. The contracts pertained to the development and construction of a Masters Home Improvement store that North East Solution would build and then lease to Masters. It was intended that Woolworths and Masters would contribute to the costs of the construction. However, Woolworths sought to terminate the agreements due to disagreements over costs. North East Solution argued that there was no disagreement and that Woolworths was not acting reasonably and in good faith. Croft J found that the agreements between the parties amounted to more than an agreement to negotiate in good faith and that Woolworths did not act reasonably and in good faith in attempting to resolve differences between the parties.

Notably, when Woolworths sought to review the costs of the construction and other land works it did not invite the participation and input of North East Solution. In doing so, Woolworths artificially created the lack of agreement which it then attempted to use against North East Solution. The extract below sets out the obiter comments of Croft J on the issue of good faith.

North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd [2016] VSC 1 Supreme Court of Victoria Croft J (footnotes omitted): [57] It is the position, as identified by Woolworths, that the good faith obligation has been the subject of extensive judicial and academic analysis and that there does remain considerable debate regarding the proper definition and scope of the obligation. Moreover, it is clear from the authorities that the content of the obligation is context-dependent and moulded according to the relevant circumstances. Of course, having regard to the nature of the obligation, this is unsurprising. The context here, as Woolworths contend, is an obligation on the part of sophisticated commercial parties to act ‘reasonably and in good faith’ in attempting to agree outstanding commercial terms. The parties were not fiduciaries and there was no special character or quality to the relationship [page 413] between them. Moreover, it is said that there was also no dependency or long term intersection of interests, as is typically the case in, for example, the franchising context. Although it might be said that the

latter proposition is not so clear in the present context having regard to the long term leasing arrangements provided for in the Agreement for Lease, this does not, in my view, affect the nature and content of the good faith obligation in the present context. [58] It is also clear from the authorities that a breach of the good faith obligation will not be made out even if the court finds that the processes followed by the relevant party were sub-optimal or, with the benefit of hindsight or otherwise, the responses or steps taken could have been more helpful. More is required to make out a breach of an obligation to act in good faith. [59] A formulation of the good faith obligation to which reference is often made was provided by Sir Anthony Mason in an address given at the University of Cambridge, in which he noted that the concept of ‘good faith’ embraced three related notions, namely: an obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself); compliance with honest standards of conduct; and compliance with standards of conduct that are reasonable having regard to the interests of the parties. [60] Allsop P (as the Chief Justice then was) similarly described the ‘usual content’ of the obligation of good faith, based on a line of authorities from the New South Wales Court of Appeal, as follows: obligations to act honestly and with a fidelity to the bargain; obligations not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and obligations to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained. [61] The notions or elements inherent in the good faith obligation to which reference has been made are not, however, to be regarded as a code, or to be applied independently of each other. Various authorities and commentaries have spoken in terms of conduct that involves ‘bad faith’ or that violates community standards of decency, fairness and reasonableness, an obligation not to act capriciously, or not acting in an arbitrary manner or for an extraneous purpose. Although it has been said that ideas of unconscionability, unfairness and lack of good faith

‘have a great deal in common’, it does not follow that these concepts are synonymous; indeed, the authorities demonstrate the contrary. Nevertheless, it is clear that an obligation to act in good faith does not require one contracting party to subordinate their interests to those of another. [His Honour then considered the judgment of Allsop CJ in Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50:] [62] The obligation to act in good faith was again discussed in detail quite recently by the Full Court of the Federal Court, where Allsop CJ discussed and [page 414] reaffirmed the notions or elements inherent in the obligation, by reference to the developing jurisprudence: [287] … [Good faith] is a conception that has been recognised (though not by all courts in Australia) as an implication or feature of Australian contract law attending the performance of the bargain and its construction and implied content. Yet, good faith in the performance of contracts is well-known to the common law and to civilian systems. It is a good example of the presence of values in the common law. I repeat what I said in United Group Rail Services Ltd v Rail Corporation New South Wales (in a commercial context of a clause expressly incorporating good faith): [G]ood faith is not a concept foreign to the common law, the law merchant or businessmen and women. It has been an underlying concept in the law merchant for centuries. It is recognised as part of the law of performance of contracts in numerous sophisticated commercial jurisdictions. It has been recognised by this Court to be part of the law of performance of contracts.

[288] The usual content of the obligation of good faith that can be extracted from cases such as Renard Constructions (ME) Pty Ltd v Minister for Public Works, Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney, Burger King Corporation v Hungry Jack’s Pty Ltd, Alcatel Australia Ltd v Scarcella, and United Group Rail Services Ltd v Rail Corporation New South Wales is an obligation to act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained. [289] None of these obligations requires the interests of a contracting party to be subordinated to those of the other. It is good faith or fair dealing between the parties by reference to the bargain and its terms that is called for, be they both commercial parties or business dealing with consumers. As Posner J said in Market Street Associates Ltd Partnership v Frey the contractual notion of good faith varies in what is required for its satisfaction by reference to the nature of the contract. But the notion is rooted in the bargain and requires behaviour to support it, not undermine it, and not to take advantage of oversight, slips and the like in it. To do so is akin to theft, and if permitted by the law led to over-elaborate contracts, and defensive and mistrustful attitudes among contracting parties. At 595 Posner J said: The contractual duty of good faith is thus not some newfangled bit of welfare-state paternalism or … the sediment of an altruistic [page 415]

strain in contract law, and we are therefore not surprised to find the essentials of the modern doctrine well established in nineteenth century cases. [290] The standard of fair dealing or reasonableness that is to be expected in any given case must recognise the nature of the contract or relationship, the different interests of the parties and the lack of necessity for parties to subordinate their own interests to those of the counterparty. That a normative standard is introduced by good faith is clear. It will, however, not call for the same acts from all contracting parties in all cases. The legal norm should not be confused with the factual question of its satisfaction. The contractual and factual context (including the nature of the contract or contextual relationship) is vital to understand what, in any case, is required to be done or not done to satisfy the normative standard. [291] It is unnecessary to deal with the jurisprudence on the subject of good faith in other jurisdictions, beyond saying that the above expression of the matter is consistent with the content ascribed to the phrase ‘good faith’ in persuasive cases in influential jurisdictions in the United States: for example, refraining from acting with subterfuge and evasion; refraining from opportunistic conduct such as by taking advantage of a disadvantageous position of the other party who has performed first; refraining from hindering or preventing the occurrence of conditions of the party’s own duty or the performance of the other party’s duty; cooperating to achieve the contractual goals. The above are but a few examples. [292] Good faith does not import an equitable notion of the fiduciary that is rooted in loyalty to another in the service of her or his interests. Rather, it is rooted in honest and reasonable fair dealing. [293] Trickery and sharp practice impede commerce by decreasing trust and increasing risk. Good faith and fair dealing

promote commerce by supporting the central conception and basal foundation of commerce: a requisite degree of trust. Business people understand these things. [63] In this context, Woolworths submit that the use of the phrase ‘reasonably and in good faith’ is, in cl 2.2 of the Agreement for Lease, a ‘composite phrase’, which involves the use of terms which are intertwined and complementary, and which does not impose two separate standards of conduct. Even if this position were to be accepted, it might nevertheless be thought that the elements of the expression — each limb — would inform the other even if no more than one standard of conduct is to be taken to be prescribed. [64] As Priestley JA observed in Renard Constructions (ME) Pty Ltd v Minister for Public Works: in ordinary English usage there has been constant association between the words fair and reasonable. Similarly, there is a close association [page 416] of ideas between the terms unreasonableness, lack of good faith, and unconscionability. Although they may not be always co-extensive in their connotations, partly as a result of the varying senses in which each expression is used in different contexts, there can be no doubt that in many of their uses there is a great deal of overlap in their content … [65] Although, as Priestly JA observed, there is a great deal of overlap in the ordinary meaning of words used in the composite expression ‘reasonably and in good faith’, it does not follow, either from this observation or ordinary English usage, that the ingredients of the composite as used in cl 2.2 of the Agreement for Lease lose the force of their separate meanings. Thus, I am of the view that though these ingredients may overlap in their meanings, this does not constrain their separate operation in the context of these provisions.

[66] When considering a statutory immunity for ‘anything necessarily or reasonably done or omitted to be done in good faith’, the Victorian Court of Appeal in Victoria v Horvath said that the expression should be read as a whole and that the word ‘reasonably’ cannot be construed as importing a totally objective test. That is, the proper test to be applied was to have regard to all of the circumstances existing at the time and, viewed from the perspective of the person claiming immunity, and ask whether reasonable grounds existed for the course of action adopted. Moreover, the Court of Appeal, in the process of reading this expression as a whole, did not regard that approach as detracting from the position that each word used was to be given meaning. Thus, the Court (Winneke P Chernov and Vincent JJA) said: Section 123 accordingly contains a number of limiting expressions. The acts or omissions which would otherwise give rise to civil liability must be ‘necessarily or reasonably’ performed or omitted ‘in good faith’ and, of course, ‘in the course of duty’. There is a considerable overlap between these notions. Thus, for example, for the section to operate, all relevant acts or omissions had to be performed in the course of duty of the member concerned. Clearly, conduct not undertaken in good faith could not be regarded as being relevantly linked to the performance of the member’s duty. Further, an act or omission not in good faith could hardly be described as necessarily or reasonably done, or not done, in the course of duty. Moreover, whatever test of reasonability was adopted, it would have to be assessed in terms of the duty of the member in the circumstances in which that member was placed. The interdependence of the notions underlying these expressions, acknowledging that as a matter of statutory interpretation proper effect must be given to each of the words used, makes it apparent that the expression anything necessarily or reasonably done or omitted to be done in good faith in the exercise of his or her duty should be read as a whole. In my view, there is no basis to confine this approach to statutory

interpretation in the context of the provisions of cl 2.2 of the Agreement for Lease. [page 417] [67] Woolworths contend that the courts have ‘tended to equate or incorporate reasonableness with or into fair dealing and good faith’, referring to the judgment of Allsop P (as the Chief Justice then was) in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service. The President did not, however, put the position so starkly. Rather, Allsop P emphasised the importance of context in the interpretation of provisions imposing good faith obligations and highlighted unresolved issues with respect to obligations of ‘reasonableness’ and ‘good faith’, in the following terms: [14] It is important to recognise that these obligations must be assessed and interpreted in the light of the bargain itself and its contractual terms. Those terms, however, must be assessed and interpreted in the light of the presence of the obligation of good faith, here pursuant to an express clause. [15] whilst the cases in this court have tended to equate or incorporate reasonableness with or into fair dealing and good faith, that is not without its controversy. Nevertheless, in these contracts, with express clauses of this width that have a necessary place in the working out and performance of the contracts, in some cases over many years, an objective element of reasonableness in fair dealing is appropriate, taking its place with honesty and fidelity to the bargain in the furtherance of the contractual objects and purposes of the parties, objectively ascertained. As to the controversy, the discussion of issues and authorities to which reference is made by Allsop P is particularly helpful. More specifically, discussing the notion of ‘reasonable conduct’, Peden writes: Sir Anthony Mason stated that the obligation of good faith

includes ‘compliance with standards of conduct which are reasonable having regard to the interests of the parties’. If by this were meant that contracts will be construed reasonably, considering the position of the parties, then there would be no argument that that is a correct statement of principle, and another example of an element of good faith in our law. Indeed, this is what is probably meant by Lord Wright in Hillas & Co Ltd v Arcos Ltd: [one should not ignore] the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts. It is also true that some gaps in contracts will be filled with concepts of ‘reasonableness’, such as ‘reasonable time’ and ‘reasonable price’, where no time or price is specified. However, this is not the same as requiring a standard of objectively ‘reasonable’ exercise of rights, when the contract does not require such a standard. If what is meant by ‘reasonable behaviour’ is subjective reasonableness, then this description really goes no further than requiring ‘honesty’. [page 418] However, it seems that many are confusing an obligation of objectively ‘reasonable’ behaviour with ‘good faith’, or imposing both obligations at once. In Burger King Corporation v Hungry Jack’s Pty Ltd, the NSW Court of Appeal repeatedly referred to terms of ‘good faith and reasonableness’ and in fact stated: it is worth noting that the Australian cases make no distinction of substance between the implied term of reasonableness and that of good faith. As Priestley

JA said in Renard Constructions (ME) Pty Ltd v Minister for Public Works: ‘The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith’. Priestley JA commented further at 265 that: ‘in ordinary English usage there has been constant association between the words fair and reasonable. Similarly, there is a close association of ideas between the terms unreasonableness, lack of good faith and unconscionability.’ With respect, to equate an obligation of reasonableness and one of good faith is misconceived. There is no doubt that our law, including contract law, is concerned about fairness and justice. There are arguments that there is no need for a distinct obligation of good faith, since the law is scattered with examples of legal principles designed to bring about fairness and justice, such as promissory estoppel and many construction rules such as contra proferentum. However, as more courts are incorporating good faith obligations into contracts, the meaning of ‘good faith’ must be given a much more precise meaning than ‘fairness’, ‘justice’ or even ‘reasonableness’. This distinction has been recognised in other areas, such as ‘satisfactory finance’ clauses, where the High Court has construed such conditions as requiring honesty, but has not taken the step of also requiring reasonable behaviour. To introduce a requirement that parties exercise their rights ‘reasonably’ would also require a reconsideration of the principle in White and Carter (Councils) Ltd v McGregor, which, to date, has never even been discussed in ‘good faith’ cases. The decision is taken as authority for the propositions that a party does not have to mitigate loss if suing in debt rather than damages and that a party cannot be compelled to terminate a contract for repudiation by the other party, and the choice must not be exercised reasonably. At present, the authority seems to be at odds with the introduction in other areas of a good faith obligation.

It is interesting that in Renard Constructions (ME) Pty Ltd v Minister for Public Works Priestley JA moved away from his earlier extra-judicial statement that ‘[r]easonableness and good faith are distinct concepts in contract law, each also being distinct from the ideas of unconscionability; each one may tend to overlap with either of the others.’ As Stapleton has pointed out, a standard of objectively reasonable behaviour is far more onerous [page 419] than a requirement of good faith behaviour. A party may have behaved in good faith, yet still have behaved unreasonably. Also, ‘provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied.’ Furthermore, it is possible that a party has behaved reasonably, yet still an ‘unreasonable’ outcome is achieved, viewed from the perspective of the other party. While ‘reasonable’ or ‘fair’ behaviour is imposed on corporations vis-à-vis consumers in a variety of contexts, it seems an extreme step for courts to impose an obligation of reasonableness on commercial parties contracting at arm’s length. It seems bizarre that courts are prepared to require commercial parties to behave reasonably towards each other, when they have not expressly included such a standard and the terms of the mutually agreed contract are very clear. As the English Court of Appeal has said when refusing to imply a term in law: ‘[t]he common law cannot … devise such a duty which the legislature has not thought fit to impose and it could not be just or reasonable for the court to impose it.’ [68] It follows that the contention by Woolworths that the general comment made by the New South Wales Court of Appeal in Burger King Corporation v Hungry Jack’s Pty Ltd, (to which reference is made by Peden

in the passage set out above) effectively conflated obligations of ‘reasonableness’ and ‘good faith’ cannot be accepted at face value. The general comment must be viewed in the context of that appeal and the authorities more broadly. In my view, the position contended for is clearly not established — on the basis of the authorities and commentary to which reference has been made and in the further authorities relied upon by Woolworths in this respect. It is to these further authorities relied upon to which I now turn. [69] Reliance is placed by Woolworths on the following part of the judgment of Warren CJ in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL, particularly para 3: … 2.

The development of the law relating to good faith has travelled an almost full circle. Following initial hesitation, even reluctance, by the courts to imply such a duty, there was a discernible preference to imply, instead, a duty of co-operation to secure performance of the contract. However, there has been clear recognition of the doctrine of good faith. That said, courts have, more often than not, decided these matters on other bases and thereby avoided the conceptual difficulty that can attend the concept of a duty of good faith. The courts seem, by and large, to have postulated ‘… if there is a duty of good faith …’ then the duty must be owed mutually, and further, account should be taken of the commercial might and capacity of the affected contracting party. Thus, if both parties to the subject contract breached such duty, neither should be able to rely on an alleged breach of duty of good faith. In essence, the concept of ‘clean hands’ comes into play. [page 420]

3.

There has also been consideration of the capacity of a

contractual party to look after itself and its own interests rather than turn to concepts of good faith for relief. These approaches, more aptly described as judicial reticence, regarding the application of the doctrine of good faith, may be construed as hesitation at the courts’ involvement in contractual performance. If a duty of good faith exists, it really means that there is a standard of contractual conduct that should be met. The difficulty is that the standard is nebulous. Therefore, the current reticence attending the application and recognition of a duty of good faith probably lies as much with the vagueness and imprecision inherent in defining commercial morality. The modern law of contract has developed on the premise of achieving certainty in commerce. If good faith is not readily capable of definition then that certainty is undermined. It might be that a duty of good faith is no more than a duty to act reasonably in performance and enforcement, a long established duty. Of course, some commentators have regarded the duty to act reasonably as properly subsumed within the duty of good faith. 4.

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 outmanoeuvres 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.

[70] The further authorities relied upon by Woolworths take the analysis no further and are, in my view, merely instances of the

application of obligations of reasonableness and good faith — accepting that the concepts overlap but without conflating or absorbing one concept into the other as a mere incident of the broader concept. Thus, in Expectation Pty Ltd v Pinnacle VRB Ltd, in the context of a duty of good faith in negotiations, Steytler J (with whom McKechnie and Jenkins JJ agreed) quoted the trial judge in that case as having said that a clause expressly stating that the parties would negotiate in good faith had ‘placed a mutual obligation on the parties “to negotiate in good faith, to do what was reasonably required in the circumstances affecting the parties to enable the contingent elements of the contract comprised in the letter agreement to be satisfied within the time framework provided, including any extension agreed upon.”’ In Sundararajah v Teachers Federation Health Ltd, Foster J noted that ‘if a contract contains a requirement that the parties act in good faith, they must act honestly, not capriciously, and reasonably.’ [71] In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd, Finkelstein J noted that — a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously. … [P]rovided [page 421] the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied. Similarly, in Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd, Bergin J (as her Honour then was) found that the terms of a clause of an agreement requiring the defendant to not act unreasonably when the plaintiff sought access to its land made the additional implication of a duty to act reasonably and in good faith ‘unwarranted’ in respect of that clause. By contrast, her Honour found that for the other clauses in question, which did not contain a requirement of reasonableness, it

would be ‘necessary for the defendant to act reasonably and in good faith for the plaintiff to have the benefit of the Deed.’ [72] Thus the position in light of the authorities is that whilst there is considerable overlap with respect to an obligation to act reasonably and an obligation to act in good faith, the concepts are not co-extensive and are not to be conflated. Moreover, the content of each depends, in particular cases, on the terms in which the parties provide for such obligations, or either of them, and the circumstances in which they are said to operate.

REVIEW QUESTIONS 1.

What is good faith?

2.

Why has the implied term of good faith been controversial?

The implied duty to cooperate 13.22 An implied duty to cooperate exists in all contracts and extends to each party, allowing the other to have the benefit of the contract.106 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.107 However, the duty must be qualified by the right of a party to act in their own legitimate best interests and does not extend to ensuring that the other party receives all their expected benefits. In Wolfe v Permanent Custodians Ltd,108 the Victorian Court of Appeal stated that although ‘the duty to cooperate [page 422] is broadly stated, the scope of the duty is defined by what has been promised under the contract; it is not a general duty to

ensure another party obtains an anticipated benefit.’ Similarly, in Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd,109 the Full Federal Court noted that in ‘the absence of a fiduciary relationship, there cannot be a duty to cooperate in bringing about something which the contract does not require to happen.’110 As Mason J noted in Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd,111 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 High Court of Australia 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 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. 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. 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 [page 423] 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.112 In contrast, there is an implied duty of ‘best efforts’ with respect to discretionary obligations.113

Key Points for Revision 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; and (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.

_________________ 1

(2014) 253 CLR 169; 312 ALR 356 at [113].

2

See also Donaldson v Natural Springs Australia Ltd [2015] FCA 498 at [158] per Beach J.

3

J Gooley and P Radan, Principles of Australian Contract Law, LexisNexis Butterworths, Sydney, 2006, p 134; J Carter, E Peden and G Tolhurst, Contract Law in Australia, LexisNexis Butterworths, Sydney, 2007, p 221.

4

Heinmann v Commonwealth (1938) 38 SR (NSW) 691 at 695.

5

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 346; 1 ALR 367.

6

(1982) 149 CLR 337 at 346; 41 ALR 367.

7

Liverpool City Council v Irwin [1977] AC 239.

8

(1910) 10 CLR 417 at 427; 16 ALR 585.

9

(1977) 180 CLR 266 at 282–3; 16 ALR 363.

10

(1977) 180 CLR 266 at 282–283.

11

Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596 at 605–6; 26 ALR 567; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347; 1 ALR 367; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 66 at 117–18; 55 ALR 417; Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274 at 274; 57 ALR 455; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422, 441; 131 ALR 422.

12

Wright v TNT Management Pty Ltd (1989) 15 NSWLR 679; 85 ALR 442 at 459.

13

Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 at 68.

14

Carter, Peden and Tolhurst, above n 3, p 223.

15

Hawkins v Clayton (1988) 164 CLR 539; 78 ALR 69; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422, 442; see also 13.2; and Bull v Australian Quarter Horse Association [2015] NSWCA 354 at [52] per Beazley P.

16

[2015] NSWCA 354 at [53].

17

[2009] 2 All ER 1127; [2009] 1 WLR 1988.

18

[2009] 2 All ER 1127 at [27]; [2009] 1 WLR 1988.

19

See 13.14.

20

See J Paterson, A Robertson and A Duke, Principles of Contract Law, 3rd ed, Thomson, Sydney,

2009, p 266. 21

(1910) 10 CLR 417; 16 ALR 585. This would seem also to be consistent with the requirements under the Statute of Frauds 1677 (Imp) requirements: see Chapter 10.

22

Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442; 131 ALR 422.

23

(1977) 180 CLR 266; 16 ALR 363.

24

(1977) 180 CLR 266 at 284; 16 ALR 363.

25

[2009] 2 All ER 1127; [2009] 1 WLR 1988 at [22].

26

[(2014) 253 CLR 169; 312 ALR 356 at [22].

27

(1928) 41 CLR 316; [1928] ALR 317.

28

(1928) 41 CLR 316 at 324; [1928] ALR 317.

29

Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; 55 ALR 417.

30

Bell v Lever Bros Ltd [1932] AC 161 at 226; Heinmann v Commonwealth (1938) 38 SR (NSW) 691 at 695; Australian Meat Industry Employees’ Union v Frugalis Pty Ltd [1990] 2 Qd R 201. See also Gramotnev v Queensland University of Technology (2015) 251 IR 448; [2015] QCA 127.

31

Paterson, Robertson and Duke, above n 20, p 267.

32

[2015] VSCA 190 at [142].

33

(1889) 14 PD 64.

34

(1889) 14 PD 64 at 68.

35

(1889) 14 PD 64 at 67–8.

36

(1982) 149 CLR 600; 43 ALR 68.

37

(1996) 186 CLR 71; 138 ALR 259.

38

Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190.

39

[1939] 2 KB 206 at 227.

40

(1982) 149 CLR 337; 41 ALR 367.

41

Ansett Transport Industries (Operations) Pty Ltd v Commonwealth of Australia (1977) 139 CLR 54; 17 ALR 513.

42

[1977] 1 All ER 481; [1976] 1 WLR 1187.

43

[1977] 1 All ER 481 at 488; [1976] 1 WLR 1187.

44

BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 284; 16 ALR 363.

45

(1988) 164 CLR 539 at 573; 778 ALR 69.

46

See, for example, Byrne v Australian Airlines Ltd (1995) 185 CLR 410; 131 ALR 422.

47

(1995) 185 CLR 411 at 442; 131 ALR 422.

48

(1986) 160 CLR 226; 64 ALR 481.

49

See Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 266–7.

50

Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596 at 607; 26 ALR 567.

51

Scally v Southern Health and Social Services Board [1992] 1 AC 294 at 307.

52

See Byrne v Australian Airlines Ltd (1995) 185 CLR 410; 131 ALR 422; Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 at 487.

53

[1977] AC 239.

54

[1977] AC 239 at 254.

55

(1995) 185 CLR 410 at 450; 131 ALR 422.

56

(2014) 253 CLR 169; 312 ALR 356.

57

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, Law Book Co, Sydney, 1987, pp 155–82; 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.

58

See Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558. For a contrary view, see Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228.

59

Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; 9 BPR 16,385; Burger King Corp v Hungry Jack’s Pty Ltd [2001] 69 NSWLR 558; Erratt v Grills [2015] NSWSC 594.

60

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 at 235.

61

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 266–7; Overlook Management BV v Foxtel Management Pty Ltd (2002) Aust Contracts R 90-143; [2002] NSWSC 17 at [68]–[71]; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477 at [133]–[134].

62

(2002) 186 ALR 289.

63

(2002) 186 ALR 289 at 312.

64

(2014) 253 CLR 169; 312 ALR 356 at [42].

65

See also Swindells v State of Victoria [2015] VSC 19.

66

(1992) 26 NSWLR 234.

67

(1992) 26 NSWLR 234 at 268.

68

(2001) 69 NSWLR 558.

69

(2001) 69 NSWLR 558 at [177].

70

(2001) 69 NSWLR 558 at [177].

71

(1998) 44 NSWLR 349; 9 BPR 16,385.

72

(2001) 69 NSWLR 558 at [159].

73

(1997) 76 FCR 151 at 192; 146 ALR 1.

74

Cited with approval by the Court of Appeal: (2001) 69 NSWLR 558 at [158].

75

(1993) 45 FCR 84 at 96; 117 ALR 393.

76

(2001) 69 NSWLR 558 at [141]–[168].

77

See, in particular, the Court of Appeal’s reasoning at (2001) 69 NSWLR 558 at [155]–[164]; but contrast at [165]–[167], which seems to fall short of implying the term into all commercial contracts.

78

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 R 90-143; [2002] NSWSC 17; Commonwealth Bank of Australia v Spira (2002) 174 FLR 274; Commonwealth Development Bank of Australia Ltd v Cassegraine [2002] NSWSC 965; Softplay Pty Ltd v Perpetual Trustees (WA) Pty Ltd [2002] NSWSC 1059.

79

See E Peden, Good Faith in the Performance of Contracts, LexisNexis Butterworths, Sydney, 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.

80

Peden (2003), above n 79, p 39.

81

[2004] NSWCA 15 at [206]. For Professor Peden’s response, see Peden (2005), above n 79.

82

[2008] NSWSC 710 at [173].

83

(2002) 26 WAR 33 at [52].

84

(1977) 180 CLR 266; 16 ALR 363.

85

[2005] VSCA 228 at [3].

86

See also Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd (2015) 327 ALR 45; 115 IPR 202.

87

[2005] VSCA 228 at [25].

88

See Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301; 189 ALR 76; see also Qantas Airways Ltd v Dillingham Corp Ltd (NSWSC, Rogers J, 8 April 1987, unreported): ‘[F]or 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’.

89

(1989) 16 NSWLR 582 at 586.

90

Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558: see 13.17.

91

Sir A Mason, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 Law Quarterly Review 66 at 69.

92

(1998) 44 NSWLR 349 at 368; 9 BPR 16,385.

93

(2001) 69 NSWLR 558 at [169]–[173].

94

(2002) Aust Contract R 90-143; [2002] NSWSC 17 at [64]–[65].

95

(2009) 74 NSWLR 618 at [70].

96

See, for example, Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33; Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160.

97

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 266–7; Overlook Management BV v Foxtel Management Pty Ltd (2002) Aust Contract R 90-143; [2002] NSWSC 17 at [68]–[71]; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477 at [133]–[134].

98

South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 at [426].

99

Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at [47].

100 United Group Rail Services Ltd v Rail Corp of New South Wales (2009) 74 NSWLR 618 at [70]. 101 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342. 102 Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99 at 109. 103 South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 at [426]; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 369–70; (1998) 9 BPR 16,385. 104 Overlook Management BV v Foxtel Management Pty Ltd (2002) Aust Contract R 90-143; [2002] NSWSC 17 at [65]. 105 [2016] VSC 1. 106 Butt v M’Donald (1896) 7 QLJ 68 at 70–1; Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596 at 607; 26 ALR 567; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 137–8; 55 ALR 417; Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635 at 647; 116 ALR 26; Idoport Pty Ltd v National Australia Bank [1999] NSWSC 828 at [217]–[218]; Concrete Pty Ltd v Parramatta Design and Developments Pty Ltd (2006) 229 CLR 577; 231 ALR 663 at [14]. 107 Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596 at 607; 26 ALR 567. 108 [2013] VSCA 331 at [28]. 109 (2015) 327 ALR 45; 115 IPR 202 at [134]. 110 See also Australis Media Holdings Pty Ltd v Telstra Corp Ltd (1998) 43 NSWLR 104. 111 Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596 at 607; 26 ALR 567. See also Regulski v State of Victoria [2015] FCA 206. 112 Australis Media Holdings Pty Ltd v Telstra Corp (1998) 43 NSWLR 104 at 124. 113 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 63; 55 ALR 417.

[page 425]

CHAPTER 14 Privity of Contract CHAPTER OVERVIEW 14.1 14.2 14.5

Introduction The development of the privity rule Privity of contract 14.8 Privity and the doctrine of consideration 14.9 Remedies 14.10 Damages at common law 14.13 Remedies in equity 14.15 Trusts 14.16 Trident v McNiece 14.19 Exceptions to the privity rule 14.20 Third party beneficiaries and exclusion clauses

Introduction 14.1

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

[page 426] 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

The development of the privity rule 14.2

It is 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 17th century case of Dutton v Poole,8 for example, the absence of privity did not 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

[page 427] 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 Poole — was challenged as the doctrine of privity struggled to establish itself in the 17th, 18th and 19th 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 Thompson13 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 Co, Ltd v Selfridge and Co, Ltd.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.

14.3

This rule has proved inconvenient at times, as aptly demonstrated by the facts in Coulls v Bagot’s Executor & Trustee Co Ltd.19 It is clear that the [page 428] doctrine of privity has the potential to cause serious injustices where third party beneficiaries are concerned. Those justifications that do exist with respect to 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, 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.20

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’.21 Similarly, Lord Reid in Beswick v Beswick22 suggested that if there was a long delay in legislative action, then the courts might have to review the doctrine of privity.23 Lord Scarman also queried whether a review might be required of the jurisprudence that

‘stand[s] guard over an unjust rule’.24 Lord Steyn in Darlington Borough Council v Wiltshire Northern Ltd25 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,26 these well-established exceptions may in fact be the result of the interaction between the doctrine of privity and other well-established doctrines. [page 429]

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. 14.4

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.27 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 press his argument before the House of Lords.28 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 fourpart 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.29 The test developed by Lord Reid was applied by the Privy Council in New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon).30 It has been further applied in the United Kingdom and Australia, and demonstrates the peculiar vulnerability of the privity rule when confronted with other doctrines of general commercial law.31 [page 430] 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.32 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.33

Privity of contract 14.5

Let us assume that A enters a contract with B so that the latter will build a house for the benefit of C. A and C might be related, and it may be the heartfelt wish of A that C has and enjoys the benefit of a house. To achieve that end, A — who has the money to pay for the building of the house — must contract with B. It might well be that C, though deserving, lacks the financial capacity to pay for the building of their own house. Accordingly, C is dependent upon B to ensure that the house is built.

If A pays the money to B to build the house but then dies, C will be relying upon B to build the house. But what can C do if B refuses to build the house? Under the doctrine of privity, C is a stranger to the consideration in the contract between A and B.34 This means that there is not an enforceable contract between C and B. The contract that exists between A and B can be enforced by either party,35 yet it cannot be enforced by C as they are neither bound by the contract nor able to enforce it.36 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. The rule pertaining to third party beneficiaries is derived from the doctrine of consideration. As has been discussed in Chapter 6, [page 431] consideration makes promises enforceable.37 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.38 In Tweddle v Atkinson,39 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. 14.6

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.40 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.41 The famous ratio of Viscount Haldane LC, quoted above,42 affirmed that the doctrine of privity was fundamental to English law.

14.7

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 Duties,43 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 [page 432] 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.

Privity and the doctrine of consideration 14.8

It cannot be doubted that the privity doctrine can operate in ways that create unfairness and inconvenience. In the scenario above, even if A were still alive, if they were unwilling to sue then C would have no means of redress. The justification for denying 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,44 ‘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 that 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 continued to pay Mrs Coulls, but Bagot’s queried whether the payments were appropriate. The majority of the High Court45 — Taylor, Owen and McTiernan JJ — found that the contract was between Mr Coulls and O’Neil alone. As such, Mrs Coulls was a stranger to the contract and was not entitled to payment direct from O’Neil. The minority of Barwick CJ and Windeyer J dissented on the grounds that Mr and Mrs Coulls were joint promisees.46 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 in Australia and in the United Kingdom. [page 433]

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385 High Court of Australia Barwick CJ at 478–9: 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 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. 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 [page 434] 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. 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). 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 Tweddle [(1861) I B & S 393; 121 ER 762] and Dunlop [[1915] AC 847], 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.

[page 435]

REVIEW QUESTIONS What is the relationship between the doctrine of privity and the doctrine of consideration?

Remedies 14.9

As noted above, the situation that commonly arises in cases concerning the privity rule and third party beneficiaries is where both A and B are obligated to each other in a contract and where C would receive a benefit under that contract. Should B default upon their obligations to A, the effect of the privity rule is that C has no standing to sue B. Further, should A sue B, A is only entitled to those damages that represent the benefit A would have received under the contract had it been performed. In circumstances where A does not suffer any real loss, the damages A would receive would only be nominal. 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.

Damages at common law 14.10 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. 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.47

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385 High Court of Australia Windeyer J at 501–2: [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 [page 436] 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. 14.11 In Jackson v Horizon Holidays Ltd,48 Mr Jackson paid £1200 for a 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 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 the parents’ room. Neither condition was met. As the family was 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. When he returned to the United Kingdom, 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 LJJ 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. [page 437] Lord Denning’s judgment addressed the issue of the amount that 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.49

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 Ltd [1975] 3 All ER 92; [1975] 1 WLR 1468 Court of Appeal, Civil Division Lord Denning MR at 95–6: 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 the guests have to go away, hungry and angry, having spent so much on fares to get there? Or suppose the [page 438] 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. 14.12 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.50 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 [page 439] House of Lords and Jackson stands as an awkward precedent within the jurisprudence of the doctrine of privity.51

Remedies in equity 14.13 Note that A may sue for damages in equity as a trustee on behalf of C; if such an action were to be successful, then A would hold any damages received on trust for C.52 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.53 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 Appeal54 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 administrator 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 Smith v River Douglas Catchment Board,55 Drive Yourself Hire Co (London) Ltd v Strutt56 and Adler v Dickson57 — Lord Denning suggested that the common law could sustain Mrs Beswick’s action. In part, this argument rested on the notion that Tweddle v Atkinson58 had been wrongly decided. [page 440] In Beswick, Lord Denning sought to cast the privity doctrine as

a mere rule of procedure;59 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 Selfridge,60 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.61 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, 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 House of Lords, United Kingdom 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. [page 441] 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. 14.14 These principles were neatly set out by Dillon LJ in Darlington BC v Wiltshier Northern Ltd.62 In that case, a finance company assigned its rights under a building contract with Wiltshier, a builder, 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 (that is, itself).

Darlington Borough Council v Wiltshier Northern Ltd [1995] 3 All ER 895; [1995] 1 WLR 68 England and Wales Court of Appeal, Civil Division Dillon LJ at 900–1: 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. [page 442] 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 Ch D 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.

Trusts 14.15 In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,63 Deane J advocated the use of a trust to provide justice to a third

party beneficiary [page 443] under circumstances where the doctrine of privity would otherwise preclude the possibility that any benefit might be conferred to them.

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 High Court of Australia Deane J at 146–9: 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. [page 444] 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 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 [page 445]

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 … The judgment of Deane J in Trident is the logical extension of the trust arguments developed by the United Kingdom courts and by Fullagar J in Wilson v Darling Island Stevedoring & Lighterage Co Ltd.64 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.

Trident v McNiece 14.16 The future of the privity doctrine after Trident65 is unclear. There had been suggestions in Beswick v Beswick66 and Woodar Investment Ltd v Wimpey Construction UK Ltd67 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,68 at best only three of the judges in Trident fully supported completely overturning the privity rule. Prior to the decision in Trident, Windeyer J in Olsson v Dyson69 delivered a plaintive plea for reconsideration of the doctrine of privity. His Honour noted the limitations of precedent, but

hoped that a future court would revisit the issue. Windeyer J stated: Lord Denning hoped a right of action at common law could be found for a third party by looking behind Tweddle v Atkinson. This hope has proved unfounded. In Coulls’s Case (1967) 119 CLR 460, I gave my reasons for thinking that on historic grounds it was, regrettably, doomed to fail. That does not mean that

[page 446] the present doctrine was always firmly established. It was not, as Dixon J recognized in Birmingham v Renfrew (1937) 57 CLR 666, 686, but it is now firmly established and it binds us. It is not however a rule which is necessarily inherent in the idea of contract. It is true that it accords with the classical Roman law … It is not accepted in Scots’ law. And, most importantly, it has been modified or abandoned in very many jurisdictions in the United States. This means that many American decisions on novation, although based on the common law, can provide little guidance for us. But it does perhaps offer some hope that what Lord Denning could not accomplish by looking back to the past may yet be accomplished, as Lord Reid has hinted, by looking to the future. It may be that their Lordships in the House of Lords could use the law’s inherent capacity for growth, as displayed in America in this field, undeterred now by their own previous decisions and by ‘Parliamentary procrastination’: see Beswick v Beswick [1967] UKHL 2; (1968) AC 58, at p 72. And it may be that someday this Court too, expounding the common law as Australia has inherited it, will see the way clear to take the same path. But, for the present time at all events, decisions of high authority stand directly in the way. We must take the law as it is and refuse to recognize a ius tertii arising by way of contract.70

14.17 Eventually, an opportunity to reform the law presented itself in the form of Trident. 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, contractors and subcontractors as the insured. McNiece Bros was Blue Circle’s principal contractor 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 in the context of liability insurance policies, though their judgment suggests a broader application to third party beneficiaries provided that this coincided with the relevant contractual intent. 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 it was the proper [page 447] 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 Corp of New York,71 where Lord Wright in the Privy Council stated that an intention to create a trust must be affirmatively proved and not lightly inferred. 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.72 Brennan

and Dawson JJ, in dissent, affirmed and applied the privity rule.

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 High Court of Australia Mason CJ and Wilson J at 113–24: 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. [page 448] 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. The received doctrine is that Tweddle v Atkinson decided that a third party cannot sue on a contract for his benefit, though Denning LJ 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 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’. 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 … [page 449] 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. 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 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. 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 [page 450] 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 … 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. … 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.

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 [page 451] 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. 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. 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 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. [page 452] 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, Ltd (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. 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. 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. [page 453] … 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). 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. This argument has even greater force when it is applied to an insurance against liabilities which is expressed to cover the insured and its subcontractors. 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? In the circumstances, notwithstanding the caution with which the Court ordinarily will review earlier authorities and the operation of longestablished principle, we conclude that the principled development of the law requires that it be recognized that McNiece was entitled to succeed in the action. For the foregoing reasons, we would dismiss the appeal.

[page 454] 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 recognised the potential 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. 14.18 The counterpoints to the views of Mason CJ and Wilson and Toohey JJ are the dissenting judgments of Brennan and Dawson JJ.73 The strong dissent of Brennan J is extracted below. In his dissent, 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.74

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 High Court of Australia Brennan J at 129–36: Privity is a doctrine which is both settled and fundamental, though it was not settled in England until the 19th century. … 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) [page 455] 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. 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 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, [page 456] 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. 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. 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. [page 457] … 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. 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 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. 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. [page 458] 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 Law75 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?

Exceptions to the privity rule 14.19 There are certain free-standing exceptions to the privity rule under the law. These exceptions provide a foundation for rights and obligations incumbent upon third parties that have a basis in law quite separate [page 459]

from the contract at hand.76 The privity rule cannot 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. The privity rule cannot easily limit the operation of other legal principles and must accede to their operation. 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,77 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.78 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 to the subject matter of the trust. A contracting party can contract for the benefit of the beneficiary. This rule was stated by Lush LJ in Lloyd’s v Harper:79 [page 460] 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.

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.80

Third party beneficiaries and exclusion clauses 14.20 It is now well established that privity will not bar third party beneficiaries with respect to exclusion clauses in certain classes of contracts.81 In shipping contracts for the carriage of goods by sea, for example, exclusion clauses can now cover third party carriers and stevedores.82 For some time prior to the Privy Council’s decision in New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon)83 the privity rule had been a barrier to protecting third parties in shipping contracts concerning the international sale of goods.84 Consider the following scenario: where A (the owner) and B (the carrier) contract for the transport of goods, 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 A and B purports to extend to C (a third party who must of necessity handle the goods), then the privity rule would operate to prevent C from obtaining the benefit of the exclusion clause. In the context of international shipping this would operate against reasonable commercial expectations and practices.85 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 Ltd86 and Scruttons Ltd v Midland Silicones Ltd,87 stevedores who negligently handled goods were unable to get the benefit of exclusion clauses. [page 461] 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: The relevant bill of lading should make it clear that the stevedore was intended to be protected. The carrier should act as an agent for the stevedore with respect to the exclusion clause. The carrier should either have the stevedore’s authority or ratification should be supplied. The stevedore should provide consideration for the promise. The Privy Council in The Eurymedon followed Lord Reid’s test. It 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.88 However, both the High Court and the Privy Council in Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon Pty Ltd (The New York Star)89 endorsed Lord Reid’s four-part test. Further, the principles espoused in The Eurymedon have been followed in nonshipping cases such as Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,90 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.

Key Points for Revision 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 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.

_________________ 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; [1967] ALR 385; Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70; Scruttons Ltd v Midland Silicones Ltd [1962] AC 446; Beswick v Beswick [1968] AC 58; see also Chapter 5.

3

Tweddle v Atkinson (1861) I B & S 393; 121 ER 762; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385.

4

See Tweddle v Atkinson (1861) I B & S 393; 121 ER 762; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574; see also Sir A Mason, ‘Privity — A Rule in Search of Decent Burial’ in P Kincaid, Privity: Private Justice or Public Regulation, Ashgate, 2001, pp 88–103, 90.

5

Mason, above n 4, 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 KB 500; [1949] 2 All ER 179 at 188; Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250; [1953] 2 All ER 1475; Beswick v Beswick [1966] Ch 538; [1966] 3 All ER 1 at 7; see also R Flanigan, ‘Privity — The End of an Era (Error)’ (1987) 103 Law Quarterly Review 564 at 572–5.

7

Dutton v Poole (1678) 83 ER 523.

8

(1678) 83 ER 523

9

In Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 498–9; [1967] ALR 385, Windeyer J suggested that Dutton v Poole rested on an expansive view of the doctrine of consideration.

10

See Tweddle v Atkinson (1861) I B & S 393; 121 ER 762.

11

Flanigan, above n 6, at 570–1.

12

[1726] 86 ER 5.

13

[1802] 127 ER 80.

14

(1823) 1 LJ (KB) 89.

15

[1833] 110 ER 518.

16

(1861) I B & S 393; 121 ER 762.

17

(1861) I B & S 393; 121 ER 762 at 764.

18

[1915] AC 847 at 853.

19

(1967) 119 CLR 460; [1967] ALR 385: see 14.8.

20

P S Atiyah, The Rise and Fall of Freedom of Contract, Clarendon Press, United Kingdom, 1979, pp 413–14.

21

Swain v The Law Society [1983] 1 AC 598 at 611.

22

[1968] AC 58 at 72.

23

Lord Reid’s concerns were eventually answered in part by the passage in the United Kingdom of the Contracts (Right of Third Parties) Act 1999.

24

Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571; [1980] 1 WLR 277 at 300.

25

[1995] 3 All ER 895; [1995] 1 WLR 68.

26

[1962] AC 446.

27

Smith v River Douglas Catchment Board [1949] 2 KB 500; [1949] 2 All ER 179 at 188; Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250; [1953] 2 All ER 1475; Beswick v Beswick [1966] Ch 538; [1966] 3 All ER 1 at 7.

28

See J Crawford, ‘Third Party Rights — Two Recent Cases’ (1968) 3(2) The Adelaide Law Review 260 at 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!’ 29

See 14.20.

30

[1975] AC 154.

31

See, for example, Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon Pty Ltd (The New York Star) (1978) 139 CLR 231; 18 ALR 333 (HC); (1980) 144 CLR 300; 30 ALR 588 (PC).

32

(1988) 165 CLR 107; 80 ALR 574: see 14.16.

33

See Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363 at 368.

34

Tweddle v Atkinson (1861) I B & S 393; 121 ER 762; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385. See also Rocla Pty Ltd v Plastream Pipe Technologies Pty Ltd [2011] SASC 80 at [21] per Anderson J.

35

See Cathels v Commissioner of Stamp Duties (1959) 79 WN (NSW) 271.

36

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.

37

See Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; [1954] ALR 453; Beaton v McDivitt (1987) 13 NSWLR 162.

38

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385 at 478 per Barwick CJ.

39

(1861) I B & S 393; 121 ER 762.

40

[1915] AC 847.

41

[1915] AC 847 at 854, 855–6.

42

See 14.2.

43

(1959) 79 WN (NSW) 271.

44

(1967) 119 CLR 460 at 478; [1967] ALR 385.

45

Note that only five justices sat in this case.

46

Ultimately, O’Neil Constructions was directed to pay Bagot’s, and Mrs Coulls received her interest as a beneficiary under the will.

47

(1967) 119 CLR 460; [1967] ALR 385.

48

[1975] 3 All ER 92; [1975] 1 WLR 1468.

49

Note that Jackson v Horizon Holidays Ltd [1975] 3 All ER 92; [1975] 1 WLR 1468 was decided after the House of Lords had delivered a stern rebuff to Lord Denning’s attempts to overrule the privity doctrine — see 14.13 in relation to Beswick v Beswick [1968] AC 58.

50

[1980] 1 All ER 571; [1980] 1 WLR 277.

51

In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574, Mason CJ and Wilson J stated that the ‘uncertain status of the decision in Jackson v Horizon Holidays Ltd is a telling indictment of the law as it presently stands’: see 14.17.

52

Coulls v Bagot (1967) 119 CLR 460; [1967] ALR 385; Beswick v Beswick [1968] AC 58.

53

[1968] AC 58.

54

Beswick v Beswick [1966] Ch 538; [1966] 3 All ER 1 at 7 (CA).

55

[1949] 2 KB 500; [1949] 2 All ER 179 at 188.

56

[1954] 1 QB 250 at 272–5.

57

[1955] 1 QB 158 at 193.

58

(1861) I B & S 393; 121 ER 762.

59

[1966] Ch 538; [1966] 3 All ER 1 at 7.

60

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.

61

See Tulk v Moxhay (1848) 41 ER 1143.

62

[1995] 3 All ER 895; [1955] 1 WLR 68.

63

(1988) 165 CLR 107; 80 ALR 574, discussed in more detail at 14.16. See also Rail Corp of New South Wales v Fluor Australia Pty Ltd [2008] NSWSC 1348.

64

(1956) 95 CLR 43; [1956] ALR 311.

65

(1988) 165 CLR 107; 80 ALR 574.

66

[1968] AC 58.

67

[1980] 1 All ER 571; [1980] 1 WLR 277.

68

(1991) 101 ALR 363. See also Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37.

69

(1969) 120 CLR 365; [1969] ALR 443.

70

(1969) 120 CLR 365 at 394; [1969] ALR 443.

71

[1933] AC 70 at 79–80.

72

The approach of Gaudron J in Trident has attracted some criticism in later cases on the basis that unjust enrichment is a unifying principle rather than an action in its own right. See, for example, Rail Corp of New South Wales v Fluor Australia Pty Ltd [2008] NSWSC 1348 at [186] per McDougall J.

73

Gaudron and Deane JJ having separately arrived at the same outcome as Mason CJ, Wilson and Toohey JJ, though by different means.

74

See Sir Owen Dixon, ‘Concerning the Judicial Method’ (1956) 29 Australian Law Journal 468.

75

Lord Denning, The Discipline of Law, Butterworths, London, 1979, p 414.

76

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 143; 80 ALR 574 per Deane J.

77

[1968] 2 QB 545 at 552.

78

Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199.

79

(1880) 16 ChD 290 at 321.

80

See Law of Property Act 2000 (NT) s 56; Property Law Act 1974 (Qld) s 55; Property Law Act 1969 (WA) s 11.

81

New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154.

82

New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154.

83

New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154.

84

See Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43; [1956] ALR 311; Scruttons Ltd v Midland Silicones Ltd [1962] AC 446.

85

See, for example, the judgment of Lord Wilberforce in New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 at 168–9. Note that domestic shipping is covered by the Insurance Contracts Act 1984 (Cth).

86

(1956) 95 CLR 43; [1956] ALR 311.

87

[1962] AC 446.

88

See The Mahkutai [1996] 2 Lloyd’s Rep 1 at 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 fullyfledged exception might be preferable; see also Carrington Slipways Pty Ltd v Patrick Operations Pty Ltd (1991) 24 NSWLR 745 at 747 per Kirby P; Justice David Malcolm, ‘The Negligent Pilot and the Himalaya Clause: A Saga of Disagreement’ (1993) 67 Australian Law Journal 14.

89

(1978) 139 CLR 231; 18 ALR 333 (HC); (1980) 144 CLR 300; 30 ALR 588 (PC).

90

(2004) 219 CLR 165; 211 ALR 342.

[page 463]

CHAPTER 15 The Doctrine of Frustration CHAPTER OVERVIEW 15.1 15.2

15.17

15.32 15.33 15.37

Introduction The application of the doctrine 15.8 The frustrating event 15.11 Without the fault of either party 15.12 Onus of proof 15.15 Radically alter the performance of the contract What can constitute a frustrating event? 15.17 External events 15.21 Personality: death or incapacity 15.22 Increased burden of performance 15.23 Frustration of purpose: the principle of Krell v Henry 15.24 Uncontemplated events 15.27 Disappointed expectations 15.28 Illegality 15.29 War 15.30 Delay Absolute contracts Land Effects of frustration 15.37 Automatic discharge of obligation 15.41 Discharge in futuro

Introduction 15.1

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 [page 464] frustration clauses. Frustration is not self-induced, in that neither party is responsible for the event that is said to frustrate the contract.

The application of the doctrine 15.2

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: [W]here, 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

15.3

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 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. [page 465] Different circumstances in which a contract will be frustrated may be summarised as follows:6 a particular thing essential to the performance of the contract becomes unavailable;7 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; 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; 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 the defendant’s obligation has become something radically different from that which the defendant undertook. 15.4

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 in fact, it has been said that construction of the contract is relevant to all theories.10 [page 466] 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 15.5

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 Aickin J observed that the doctrine had changed from being seen as developing from an implied term to ‘depending on changes in the significance of the obligations undertaken and the surrounding circumstances in which the contract was made.’13 His Honour cited the speech of Lord Radclilffe in Davis Contractors Ltd v Fareham Urban District Council, which is reproduced below: Lord Loreburn ascribes the dissolution 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 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 … But it may still be some importance to recall that, if the matter is to be approached by way of an 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 temperament and failings, their interest and circumstances’ … the legal effect of frustration ‘does not depend on their intention of 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,

[page 467] 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.’ By this time it might seem that the parties themselves have become 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 represent 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.14

Similarly, Lord Reid in Davis Contractors Ltd said: 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 … 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.15

‘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.’ 15.6

Codelfa16 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:

[page 468] 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.17

Aickin J18 also referred to and adopted all that Stephen J said in Brisbane City Council v Group Projects Pty Ltd:19 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.

Stephen J commented on Davis Contractors in the following terms: In Port Line Ltd v Ben Line Steamers Ltd Diplock J said: It would appear to be the fate of frustration cases that when they reach the highest tribunals that either there should be agreement as to the principle but differences as to its application, or differences as to the principle but agreement as to its application. This was said despite, or perhaps in the light of, what is the leading modern authority in the field, the decision of their Lordships in the Davis Contractors Case, pronounced in 1956. Such divergency of principle as commentators have extracted from their Lordships’ speeches do not, I think, affect the present case. In the Davis Contractors Case Viscount Simonds and Lord Morton offer no guide to principle, although they do reflect the general disinclination to allow much scope to the operation of frustration. Lord Somervell agrees with Lord Reid’s conclusion upon ‘the proper basis of frustration’. It is in the speeches of Lord Reid and Lord Radcliffe that extensive discussion of principle occurs. Lord Reid rejected the notion of the implied term as the basis of the doctrine. He says that the task for a court confronted with the parties’ contract, is to determine, on the true construction of the terms of the contract, read in the light of the nature of the contract and of the relevant surrounding circumstances when the parties made it, ‘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

[page 469] it is at an end.’ Frustration he describes as ‘the termination of the contract by operation of law on the emergence of a fundamentally different situation.’ What I understand his Lordship’s approach to involve is, then, a comparison between the contemplated situation, as revealed by the terms of the contract on its true construction, and the situation in fact resulting from the frustrating event. If they be ‘fundamentally different’ the contract is frustrated subject, of course, to the frustrating event not being the fault of the party seeking to rely upon the doctrine. Lord Radcliffe considers those cases which treat frustration as involving an implied term, cases which involved diverse approaches, sometimes subjective and sometimes objective, in ascertaining the content of the term to be implied. His Lordship suggests 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.’ This is close to the views of Lord Reid and together they represent the approach which I would apply in the present case. It should, however, be noted that Lord Radcliffe tends rather to concentrate on a change in obligation. Thus he says: ‘it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.’ Lord Radcliffe also introduces the limitation that the frustrating event must be one which the parties could ‘reasonably be thought to have foreseen’. As already mentioned, the ‘change in obligation’ test proposed by Lord Radcliffe, no doubt apt enough in most frustration situations, seems to be inapplicable here, as it was in the so-called Coronation cases, of which Krell v Henry is the leading example. But I do not understand his Lordship to say that without change in obligation there can be no frustration: it is ‘the occurrence of any unexpected event that, as it were, changes the face of things’ that gives rise to frustration. His Lordship’s emphasis upon change in obligation is, I think, to be understood in the context of the factual situation under discussion in the Davis Contractors Case.20

15.7

In accordance with Lord Radcliffe’s remarks, the following requirements need to be satisfied to make out an argument for frustration of a contract: subsequent to the formation of the contract, there must be a frustrating event, or combined series of events;21 the frustrating event must occur without the fault of either party; and 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. [page 470] Lord Radcliffe’s remarks 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.22 An agreement that makes express provision for what is to occur should certain events arise is not ordinarily frustrated if those events happen, because the express terms of the contract leave no room for the operation of the doctrine of frustration.23 In Claude Neon Ltd v Hardie,24 the parties entered into a contract for the hire of a neon sign but the premises on which the sign was to be erected was resumed by the landlord. The resumption of land could not frustrate the contract, a term of 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. The court held that the term applied in the circumstances, and that resumption was construed as an event within the clause for which the parties had expressly agreed regarding what was to follow from the event. In this case the result was a default and the doctrine of frustration could not operate to discharge the contract.25 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,26 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) of the

contract resulting from that event. In Metropolitan Water Board v Dick, Kerr & Co Ltd,27 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,28 the doctrine was applicable despite the presence of a term expressly granting a right of rescission in the circumstances that arose.

The frustrating event 15.8

It is not possible to exhaustively predetermine the nature of, or to define, the frustrating event. What constitutes a frustrating event will depend [page 471] 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 that makes the performance ‘different in substance’ from that originally agreed to;29 that creates a fundamentally different situation30 from that which pertained at the formation of the contract; or that 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’.31 Frustration occurs when the law recognises that 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.32 In Davis Contractors Ltd v Fareham Urban District Council, Lord Reid said that the task of the court is to determine the true construction of the terms of the contract, read in the light of its nature and relevant

surrounding circumstances, and whether the contract is wide enough to apply to the new situation.33 However, while Lord Radcliffe speaks in Davis Contractors in terms of ‘change in obligation’ this is not to be understood as saying that there can be no frustration without a change in obligation.34 His Lordship’s formulation of frustration in that case resulted from its particular factual matrix. In some cases it may suffice that circumstances have given rise to a ‘fundamental commercial difference’ between the contemplated and actual performance for the contract to be frustrated,35 or to a fundamentally different situation for which the parties have made no provision ‘so much so that it would not be just in the new situation to hold them bound to its terms.’36 Other judges and commentators have expressed the view that frustration is a ‘flexible doctrine’ unconstricted by ‘arbitrary formula’37 which is ‘apt to vindicate justice wherever owing to relevant supervening [page 472] circumstances the enforcement of any contractual arrangement in its literal terms would produce injustice’38 and ‘to give effect to the demands of justice, to achieve what is reasonable and fair and as an expedient to escape from injustice.’39 In Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales, Mason J referred to frustration when the parties entered into the contract on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist and that the common assumption proves to be mistaken.40 The crucial issue is whether the situation that had come about was fundamentally different from that

contemplated by the contract on its true construction in the light of the surrounding circumstances.41 Further, in Davis Contractors Ltd v Fareham Urban District Council Lord Radcliffe said: 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 court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.42

15.9

One of the difficulties with general conceptions of frustration is that they do not provide sufficient guidance as to the degree or extent that an event must overturn expectations, or affect the foundations upon the parties contracted, or how unjust and unreasonable a result must follow, or how radically different from that originally undertaken must a contract become, before the contract is taken to be frustrated. As highlighted by Stephen J in Brisbane City Council v Group Projects Pty Ltd, they ‘provide [page 473] little more than single instances of solutions to these questions’,43 and therefore it is often difficult to gauge whether the intervening event is of sufficient gravity to render the contract frustrated: It is no doubt true, as critics complain, that the various expositions of the true basis of the doctrine of frustration leave imprecise its actual operation when applied to the facts of particular cases. How dramatic must be the impact of an allegedly

frustrating event? To what degree or extent must such an event overturn expectations, or affect the foundation upon which the parties have contracted, or, again, how unjust and unreasonable a result must flow or how radically different from that originally undertaken must a contract become (to use the language of some of the various expositions) before it is to be regarded as frustrated.44

Dillon LJ in Notcutt v Universal Equipment Ltd, adopting the test of frustration from the formulations of Lord Reid and Lord Radcliffe, observed: I do not for my part see that these references to justice or injustice introduce any further factor. If the unexpected event produces an ultimate situation which, as a matter of construction, is not within the scope of the contract or would render performance impossible or something radically different from that which was undertaken by the contract, then it is unjust that the contracting party should be held to be still bound by the contract in those altered circumstances.45

15.10 Mason J in Codelfa Constructions identified the close relationship between the doctrine of frustration and the concepts of common contractual assumption and mutual mistake. His Honour explained that if parties enter into a contract on the basis of a common contractual assumption as to an existing fact, it is a case of mistake. The essential criterion of frustration is if the assumption is of a future fact: a ‘common assumption that some particular thing or state of affairs essential to [the contract’s] performance will continue to exist or be available, neither party undertaking responsibility in that regard.’46 To that must be added that ‘the common assumption must be found in the contract’, although, for the purposes of frustration, it is permissible to have regard to relevant surrounding circumstances to assist in the interpretation of the contract, and an event will not ordinarily be taken to have frustrated a contract unless the event supervenes after the contract has been made. The relief available for mutual mistake as to facts (but not law) is that the contract is void ab initio, but that frustrated contracts remain binding until ‘the assumption is falsified.’47 [page 474]

Without the fault of either party 15.11 Lord Radcliffe’s formulation of the frustration doctrine admits no fault on either side.48 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’49 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 caused by the default (either an act or an omission) of the party relying on it.50 Frustration may be self-induced when the party’s default is the cause of the frustrating event. The discharge of the contract will occur as the result of a breach rather than frustration in such cases.51 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. Frustration may be self-induced where it results from the deliberate but impermissible act of a party. The causal connection is imperative.52 Again, note that the discharge is by breach rather than frustration.53 An act that does not breach the contract (or is not contrary to an express term of the agreement) may frustrate the contract if it is deliberate.54 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.55 However, carelessness not amounting to a defaulting breach would not suffice.56 The element of causation between the frustration and the default is essential, and where none exists, the parties will be discharged because the frustration cannot be considered self-

induced. An example would be a contract being frustrated by a breach of contract57 as in Ocean Tramp [page 475] Tankers Corp v V/O Sovfracht (‘The Eugenia’).58 In this case the contract was not frustrated even though the closure of the Suez Canal prevented performance of the contract, because the defendant had entered the canal contrary to an express term of the contract (which made provision for the situation that was claimed to frustrate the contract) and was therefore in breach. 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.59

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,60 or an omission that, although not a breach (negligence, for instance), bars the party from relying on frustration.61 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.62 Thus, 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.63

Onus of proof 15.12 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,64 whether ‘frustration will excuse unless proved to be self-induced or whether frustration will not excuse unless it is proved to be self-induced’. [page 476] 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.65 15.13 The usual rule as to onus of proof is that ‘the party who asserts must prove’.66 Onus of proof lies on the party alleging the absence of an entitlement to rescind.67 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.68 In the leading case of Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd,69 Viscount Maugham LC stated: 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.

The case involved an event alleged by one party to have brought the contract to an end by frustration. The cause of an

explosion that damaged a vessel could not be ascertained, making it impossible for the charterers to establish that the owners’ default had caused the accident. It was held that the mere possibility that the frustrating event was self-induced does not disentitle the party that 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. The onus of proof that the frustrating event results from a breach by the other party lies with the contending party. In Imperial Smelting Corp, [page 477] 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 selfinduced.’ (2) The respondents say: ‘Frustration will not excuse unless it is proved not to be self-induced.’70

Viscount Simon LC made the following observations:

Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 House of Lords, United Kingdom Viscount Simon LC at 161–6: 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: [W]here, 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 [page 478] 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: [W]here 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. 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 FA Tamplin SS Co Ltd v Anglo-Mexican Petroleum Products Co Ltd, at pp 403, 404. It has the advantage [page 479] 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 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 [page 480] 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?’ 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. 15.14 In Urusoglu v MSU Management Pty Ltd,71 land belonging to Huseyin Urusoglu was put up for auction by liquidators when Huseyin became bankrupt. Despite being unable to secure adequate financing Huseyin’s son Mahir successfully bid for

the land at auction on behalf of MSU Management, whose director was listed as the Huseyin’s daughter Elif. As the Urusoglu family were unable to secure financing for the acquisition themselves they made arrangements with Mr Brennan, a finance broker, to have all the shares in MSU Management transferred [page 481] to Mr Brennan who would then secure financing for the property. The Urusoglu family claimed Mr Brennan was obliged to reconvey the shares under the agreement (and receive a commission for his efforts). Mr Brennan contended that under the agreement he was to retain the property (through the corporate vehicle MSU Management) and that the Urusoglu family would derive its benefit from subdividing the land at their own cost and selling the front lot to an entity nominated by Huseyin (Sebat). A number of claims were made by Mahir and Elif against Mr Brennan (including claims for rectification of the company’s share register, damages for breach of contract and oppression of Elif’s interest as a member of the company). In the alternative to these claims, Mahir and Elif sought practical restitution on the basis that there had been frustration of the contract that Mr Brennan says he entered into with Huseyin because Sebat was unable to complete the purchase. The court found that if the failure of Sebat to complete the contract for sale of the land did amount to a frustrating event then it was self-induced and the plaintiffs were not entitled to relief.

Urusoglu v MSU Management Pty Ltd [2011] NSWSC 54

Supreme Court of New South Wales Ward J: [337] As to the alternative claim in frustration, [counsel for the plaintiffs] submits that if the agreement is as Mr Brennan contends, then the inability of the Urusoglu family to have the fruits of their labour, which was in the contemplation of both contracting parties in the lead up to the agreement, is said to constitute a failure of something which was ‘at the root’ of the contract (using the terminology in Scanlan’s New Neon Limited v Tooheys Limited [1943] HCA 43; (1943) 67 CLR 169) and the frustration of the commercial object of the contract. The subject matter of the agreement is said to be the acquisition of the Mt Vernon land front block, as improved by the road access works. It is submitted by [counsel for the plaintiffs] that to the extent that one must focus on the performance of the obligation, the performance by the Urusoglu family, (in contemplation of receiving the benefit of their work), has become a radically more onerous burden (in that their work has in effect stood as a gift to Mr Brennans interests). [338] Reliance was placed on what was said by Lord Denning MR in The Eugenia [1964] 2 QB 227. There, in well-known passages (at p 238 and 239 respectively), his Lordship said: [page 482] … if it should happen, in the course of carrying out a contract, that a fundamentally different situation arises for which the parties made no provision — so much so that it would not be just in the new situation to hold them bound to its terms — then the contract is at an end. (my emphasis) …. We are thus left with the simple test that a situation must arise which renders performance of the contract ‘a thing radically different from that which was undertaken by the contract,’ see Davis Contactors Ltd v Fareham Urban District

Council by Lord Radcliffe. To see if the doctrine applies, you have first to construe the contract and see 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. If they have not provided for it, they [sic] you have to compare the new situation with the situation for which they did provide. Then you must see how different it is. The fact that it has become more onerous or more expensive for one party than he thought is not sufficient to bring about a frustration. It must be more than merely more onerous or more expensive. It must be positively unjust to hold the parties bound. (my emphasis) [339] Has there been frustration of the contract as a matter of law? … [347] I do not consider that the failure of Sebat to complete the contract is something that operates to frustrate the contract — it does not change the fundamental nature of the contractual obligations or render the contract radically different; it does not change the mutual purpose of the contract insofar as that was to develop the land for subdivision — it simply changes the outcome of that performance. Mahir has no obligation left to perform and so the contractual performance required from him has not changed in any fundamentally different or radical way. It is simply that the bargain he struck (based on the expectation that Huseyin’s nominee would acquire the front block) has proven not to be a prudent one, assuming the benefit of the front block has now been lost. (That assumption has not been tested. Therefore, even if a failure to obtain the front block would have constituted sufficient hardship to render the contract such that it would be positively unjust to hold the parties still bound thereby, I am not satisfied that the acquisition of the front block by the Urusoglu family became impossible by the non-completion of the Sebat contract.) [348] There has been no claim for damages for failure on the part of Mr Brennan to convey the land to Huseyin’s nominee (which is the context in which one would expect to see a frustration claim based on impossibility of performance). Nor has Huseyin or Mahir requested or

sought to compel Mr Brennan to sell the land to a third party in place of Sebat. [page 483] [349] This brings me to the question of self induced frustration. Lord Radcliffe in Davis Contractors v Fareham UDC [1956] UKHL 3; [1956] AC 696 at 729 notes that frustration can only occur where there is no ‘default’ by either party. Latham CJ in Scanlan’s New Neon Ltd v Tooheys Ltd [1943] HCA 43; (1943) 67 CLR 169 at [186] affirmed that a ‘state of facts brought about by the act of a party’ cannot be the basis of a claim of frustration by that party (see also Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd, ‘The Kingswood’ [1942] AC 154). [350] Even if I am wrong and the contract was frustrated by reason of the inability of Sebat to complete, in my view that amounts to a selfinduced frustration — since it was open to Huseyin to nominate whomever he chose to purchase the front block and since I have concluded that Sebat entered into the contract at his instigation and on behalf of Huseyin and its failure to complete seems most likely to lie at the feet of Huseyin and/or Mahir, who between them appeared to be responsible for arranging the balance of the financing for the acquisition. [351] There is no suggestion in the proceedings that the termination by MSU Management of the Sebat contract for sale was wrongful — nor was there apparently any suggestion by Huseyin at the time the Sebat contract was entered into that its terms did not reflect the agreement that had been struck with Mr Brennan in relation to the Mt Vernon land. … [352] It could not have been open to Huseyin, for example, to frustrate the agreement he made with Mr Brennan by nominating a purchaser he knew was unable or unwilling to complete the contract (and, in my opinion, that must also be the case where the nominated purchaser is relying, for its ability to complete, on Huseyin procuring part or all of the necessary finance). By way of illustration I note that The Super Servant Two [1989] EWCA Civ 6; [1990] 1 Lloyd’s Rep 1, a contract for

carriage by either of two vessels at the carriers’ option was not frustrated by the loss of the vessel that the defendants had intended to use for that purpose, where the unavailability of the remaining vessel was due to the existence of commitments to other persons. It was said that the contract did not oblige the carriers to use the vessel that had been lost and that the inability to use the other vessel was, for the purposes of self-induced frustration, the carriers’ own fault. [353] I accept that the onus lies on the party (here Mr Brennan) alleging that the frustrating event was due to the other’s fault to establish that this is the case. Here, however, I am satisfied that the apparent failure of Huseyin to take any steps to procure completion by its nominee of the contract or to nominate any other nominee for that purpose means that the contract cannot be said to be frustrated (even had that conclusion otherwise been open). … [page 484] [356] The failure by Sebat to complete the contract seems to be due to a decision by Huseyin not to do so or an inability of Huseyin to arrange finance for that to occur. [357] I find that the alternative claim in frustration fails.

Radically alter the performance of the contract 15.15 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,72 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 2 years of the lease. In Printing and Numerical Registering Co v Sampson,73 Sir George Jessel 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.74 Lord Radcliffe defined the operation of the doctrine of frustration when circumstances have radically altered in Davis Contractors Ltd v Fareham Urban District Council.75 In that case a post-war 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: [F]rustration 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

[page 485] change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.76

Lord Radcliffe was affirming a principle enunciated in British Movietonews Ltd v London & District Cinemas Ltd77 in which the House of Lords stated: [I]f 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 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.

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,78 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 100-fold increase in the price would have.79 [page 486] The test for frustration was restated by Lord Simon in National Carriers Ltd v Panalpina (Northern) Ltd:80 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 declares both parties to be discharged from further performance.

15.16 The leading Australian authority for the doctrine of frustration is Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.81 Codelfa agreed to construct an underground railway 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 preventing Codelfa excavating between 10 pm and 6 am made it

impossible for the company 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.

What can constitute a frustrating event? External events 15.17 In most cases, frustration occurs in circumstances where (and historically the doctrine originates from cases wherein)82 performance has become impossible, either because the subject matter of the contract, through no default on the part of either party, has been destroyed prior to performance, or because undertaking the contract has become commercially inadvisable.83 In most cases, frustration occurs in circumstances where performance has become impossible, either because the subject matter of the contract has been destroyed prior to performance, or because undertaking the contract has become commercially inadvisable.

[page 487] Destruction of the subject matter of the contract does not amount to frustration if one of the parties has agreed to bear the risk of destruction or guaranteed the continued existence of the subject matter. Under the Sale of Goods legislation, an agreement 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. 15.18 The frustrating event may be the loss not of the object itself, but of its availability. In Hirji Mulji v Cheong Yue SS Co Ltd,84 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 the 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 5 years that still made 3 years available to the charterers did not frustrate the purpose of the contract.85 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.86 In the case of a supply contract, where the source is not available, the court must 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 illegality87 (which is a common law principle wider than the contract principle of frustration, but whose legal consequences and

[page 488] results are the same),88 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 selfinduced. 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. 15.19 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 & Co v Kanematsu,89 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. 15.20 In Australia, a contract will be frustrated if the manner in which the contract was to be performed becomes impossible. The contract the subject of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales90 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 6 days per 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 6 days per week, excluding Sundays. The change in the method must be radical or substantial. In Tsakiroglou & Co Ltd v Noblee Thorl GmbH,91 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. [page 489]

Personality: death or incapacity 15.21 A contract will be frustrated when the promisor dies or is disabled from performing a contract that relies on the promisor specifically for its performance. Examples include employment contracts where the employee has died,92 or where an artist contracted to execute a design becomes incapacitated by blindness.93 Temporary incapacity may frustrate a contract, depending on the nature of the contract, the nature of the services, and the extent and duration of the incapacity; if it undermines the purpose of the contract, then temporary incapacity may amount to frustration.94 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.95 However, temporary incapacity is not likely to frustrate a contract that 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,96 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. In Idameneo (No 123) Pty Ltd v Ashraf,97 three interlinked and interdependent contracts were frustrated by Ashraf’s inability to attend to provide medical services to the public as a result of a severe mental illness.

Increased burden of performance 15.22 Frustration of a contract is not lightly found. A contract is not frustrated merely because to perform or to continue performing it would cause hardship on the part of the party seeking to terminate the contract.98 A contract may be frustrated if the obligations under it are able to be performed, but only at a burden much greater and radically different from that contemplated by the parties at the formation of the contract.99 In Codelfa Construction Pty Ltd v State Rail Authority of NSW,100 the [page 490] injunctions taken out by local residents created an additional burden on the promisor, which made the contract radically different from that agreed to by the parties and, in the new circumstances under which construction was able to proceed, 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.101 For example, a charterparty voyage from Odessa to India was not frustrated when the contemplated passage through the Suez Canal had to be replaced by a voyage around the Cape of Good Hope, taking 30 days longer.102 A contract may be frustrated if the obligations under it are able to be performed, but only at a burden much

greater and radically different from that contemplated by the parties at the formation of the contract.

Frustration of purpose: the principle of Krell v Henry 15.23 The non-occurrence of an event may frustrate a contract if that event was the reason for entering the contract. In Krell v Henry,103 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’.104 Note that it is certainly not the ratio of Krell v Henry that changed circumstances in and of themselves, or extraneous factors that deprive a party of an expected outcome, frustrate contracts.105 [page 491]

Uncontemplated events 15.24 The preponderance of authority strongly indicates that the event said to frustrate the contract must be one not foreseen by the parties.106 As Lord Wright said in Maritime National Fish Ltd v Ocean Trawlers Ltd,107 where a supervening event is not only foreseeable but actually foreseen at the time of entry into a contract, it is more difficult to conceive of the parties as having entered into the contract on the basis of a common understanding that the event could not occur during the life of

the contract. Where, however, a supervening event, although foreseeable was not foreseen, at the time of entry into the contract, the fact that it was foreseeable may not be of much significance unless the degree of foreseeability was particularly high. As Somerville LJ said in Jennings & Chapman Ltd v Woodman, Matthews & Co: ‘[F]rustration may apply although the event which frustrated [the contract] is an event which both parties may have realised might happen.’108 15.25 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’.109 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.110 In Herne Bay Steam Boat Co v Hutton,111 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 [page 492] one of its stated purposes (the cruise around the fleet), the hire contract had not been rendered hollow. 15.26 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.112 As Greig and Davis state: The foresight of the parties may be of considerable importance, but ought not to be decisive. Even though the parties may have contemplated a particular risk but not made provision for it, it may be quite unreasonable to throw on one of them the burden of the continued operation of the contract.113

It is important to be precise about the nature and the degree of foresight. So far as foreseen events are concerned, the parties to a contract may have foreseen an event but not foreseen the nature or extent of it. In Sea Angel, Rix LJ gave as an example, based on The Nema,114 a case where the possibility of an industrial strike was foreseen, and actually provided for in the contract, but lasted so long as to go beyond the risk assumed under the contract. It was held to have frustrated the contract. In some cases it may also appear that ‘[f]ailure to provide expressly for an event that was foreseen [is] due to … a deliberate decision to leave matters to be sorted out by the parties, or by the law.’115 In the case of foreseeable but unforeseen events the nature and extent of foreseeability is critical. Since most events are foreseeable in one sense or another the parties to a contract will not ordinarily be taken to have assumed the risk of an event occurring during the life of the contract unless the degree of foreseeability of that event is very substantial. As Chitty on Contracts observes: Much turns on the extent to which the event was foreseeable. The issue which the court must consider is whether or not one or other party has assumed the risk of the occurrence of the event. The degree of foreseeability required to exclude the doctrine of frustration is … a high one: ‘foreseeability’ will support the inference of risk-assumption only where the supervening event is one which any person of ordinary intelligence would regard as likely to occur or …

[page 493] ‘one which the parties could reasonably be thought to have foreseen as a real possibility.’116

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.117 In addition, if the 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.118

Disappointed expectations 15.27 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.119 As Reid LJ observed in Davis Contractors Ltd v Fareham Urban District Council,120 the task of the court is to determine: … on 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.

The common occurrence of a failure to fully realise the expected benefits of a contract provides no basis for the frustration of its purpose. In Scanlan’s New Neon Ltd v Tooheys Ltd,121 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 [page 494] not impossible. The illegality did not radically alter the nature of the contract so as to frustrate it.122

Illegality The discharge of a contract for reasons of illegality is a matter of public policy and a rule of common law rather than a principle of contractual frustration. 15.28 Contracts may be void or unenforceable if at the time of their formation they were illegal for some reason, such as their purpose. They may also be discharged by reason of illegality after they have been entered into. However, note that the discharge of a contract for reasons of illegality is a matter of public policy and a rule of common law rather than a principle of contractual frustration. This means that contracts frustrated by reasons of illegality are in fact discharged on a broader basis than frustration.123 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 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.124 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.125 [page 495] A contract will also be frustrated if illegality causes the foundation of the contract to disappear. The agreement the subject of Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd126 provided for the purchase of pine wood, which was subsequently made the subject of an order under United Kingdom 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,127 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.

War

As mentioned above, war may supervene to frustrate a contract 15.29 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.128 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;129 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.130 The indefiniteness of detention was frustrating in a commercial context where certainty is paramount and in the context of law that entitles the parties to act as soon as they learn of the delay.131 In Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (‘The Evia’ (No 2)),132 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. 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. [page 496] Goods may be delayed as a result of fighting,133 and material that was once readily commercially available may be the subject of government orders making it scarce or unavailable,134 affecting, if not completely undermining, the performance of the contract, but without frustrating it.

Delay 15.30 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.135 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 Ltd136 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.137 Knowledge of a delay activates an entitlement to discharge the contract immediately,138 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.139 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.140 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 & Co,141 the Greek-flagged vessel chartered by the plaintiffs was [page 497]

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 that 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 that would have enabled the completion of the voyage on time. The court upheld the defendants’ action. It reasoned that at the time the defendants exercised their election, the peril 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.142

The doctrine of frustration could still be applied despite the fact that the initial delay would not have frustrated the contract. 15.31 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 & Co143 is the source of the doctrine that partly performed contracts can be discharged for frustration in relation to the unperformed part of the contract.

Absolute contracts 15.32 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.144 [page 498] The determination of whether an obligation is absolute depends on the construction of the contract. Also crucial is the question whether a term drafted in absolute terms must be literally construed. The 17th century case of Paradine v Jane145 holds that it must, and this authority has been followed in many 20th century cases.146 However, it is currently generally accepted that absolute terms need not be literally construed,147 and that indeed such a construction would be inconsistent with the law of frustration of contracts as currently understood.

Land 15.33 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 courts will now, in appropriate circumstances, subject contracts for the sale, an option to buy or lease,148 or an agreement to lease land (but generally not an executed lease) to the doctrine of frustration.149 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,150 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.151 15.34 In Fletcher v Manton,152 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 [page 499] 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. Dixon J stated: 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 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.153

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.154 Contracts have been held not to have been frustrated [page 500] where buildings were destroyed by government order;155 where land was requisitioned after exchange but prior to settlement;156 and because of threatened compulsory acquisition.157 However, executory contracts conferring equitable interest on the purchaser may be frustrated. A landslip that set a construction deadline back by 30 months after the agreed completion date was held to be a frustrating event.158 15.35 Purchasers are said to assume the risk of being unable to use the land as contemplated, so events preventing such use are not

frustrating.159 But frustration was held to have occurred in Austin v Sheldon,160 when 6 of 7 acres of land were resumed despite the purchaser being entitled to compensation in case of resumption.

Austin v Sheldon [1974] 2 NSWLR 661 Supreme Court of New South Wales 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. 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 [page 501] 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. 15.36 Agreements to execute a lease of land may be subject to frustration,161 but not leases recorded in absolute contracts.162 Whether an executed lease can be frustrated in Australia appears open to question, but it is unlikely that they can be segregated from the operations of the principles of contract law.163 Halloran v Firth164 held that the lease was not subject to the principles of contract law in so far as the contractual doctrines of frustration and termination for fundamental breach (or for repudiation)165 were not seen as applicable to an executed demise under which an interest or estate in land had actually passed to the tenant.166 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.167 The High Court upheld the decision and the [page 502] reasons given by the Full Court of the Supreme Court of New South Wales.168 However, the leases in Shiell v Symons169 and Robertson v Wilson170 were treated as having been frustrated despite the

existing authority, and in both Minister of State for the Army v Dalziel171 and Thearle v Keeley172 Williams J173 relied on English, and not Australian, authority, stating that the House of Lords in Matthey v Curling174 had decided that the doctrine did not apply to leases, when the House of Lords had held in National Carriers Ltd v Panalpina (Northern) Ltd175 that it does. Whether and under what conditions a leasehold will be subject to the doctrine of frustration will depend on: the nature of the event, which will ordinarily have to be catastrophic before a lease of land will be frustrated;176 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; and 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.

Effects of frustration Automatic discharge of obligation 15.37 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 [page 503] ready and willing to perform them, and as a result neither party can make claims against the other.177 Unlike discharge based on breach or repudiation, no election is required.178

Similarly, the automatic termination of the contract means that notices of termination have no effect since the contract is no longer on foot after the frustrating event.179 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. In general, the finding that the frustrating event has caused a radical change in the nature of the contract will discharge the entire contract,180 subject to the following exceptions:181 In a partially executed contract that has been frustrated, the parties are only discharged from performing the unexecuted part of the contract.182 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.183 A temporary or permanent excuse to not perform a contract does not amount to a frustration,184 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. If a part of the contract that 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 [page 504]

performed, then only that part of the contract has been frustrated, and the parties are not discharged from performing the rest of the contract.185 Frustration may refer and be restricted to the application of the contract to a given set of facts.186 Where the parties have expressly provided for a partial discharge187 or for a particular event to excuse partial nonperformance.188 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 WaldhofAschaffenberg AG189 was of this view. 15.38 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’190 — 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’. 15.39 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 of frustration may be called upon to discharge the other party where an express term only provides for the discharge of one party.191 An event preventing or prohibiting performance of some but not all obligations under a contract does not necessarily bring about frustration of the whole contract. In Ardee Pty Ltd v Collex Pty Ltd, Palmer J considered whether the contract at issue was frustrated as a whole or only as to those aspects of the contract that could not be performed

by reason of the frustrating event. Palmer J summarised the applicable legal principles: It is well established that an event preventing or prohibiting performance of some but not all obligations under a contract does not necessarily bring about a frustration of the whole contract. Whether the contract is discharged by frustration wholly or partially depends upon whether what has happened defeats the main purpose of the contract. If performance of that part of the

[page 505] contractual obligations which remains performable makes as much commercial sense as performance of the whole of the obligations then performance of those obligations which are prevented is severable and the parties are only excused pro tanto from performance of their obligations under the contract.192

While there is no universal test for determining whether an unenforceable provision in a contract is severable from the remaining provisions, the generally accepted test is that stated by Jordan CJ in McFarlane v Daniell:193 When valid promises supported by legal consideration are associated with, but separate in form from, invalid premises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature … if the elimination of the invalid promises changes the extent only but not the kind of the contract, the valid promises are severable … if the substantial promises were all illegal or void, merely ancillary promises would be inseverable.

15.40 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 that excuse parties from performing obligations in certain circumstances that have a substantial effect on a contract, but that 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.194 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.195 [page 506]

Discharge in futuro 15.41 Greig and Davis say of the application of the doctrine of frustration: [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 whether a change of circumstances has been such as to frustrate the contract.196

Frustration discharges the parties’ obligations in futuro — it does not 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 future — it

does not rescind the contract ab initio.197 The contract is therefore not void; it remains alive as a measure of the rights and liabilities of the parties.198 Terms that identify rights and liabilities that have accrued prior to frustration continue to operate. Accrued rights that the parties have up to the time of termination remain unaffected and enforceable, including the right to claim damages for breaches that had occurred prior to the frustration of the contract.199 The various state Frustrated Contracts Acts may give the court statutory power to adjust the rights and liabilities of the parties under the contract, and the methods of adjusting the rights of the parties following frustration often vary between states.200 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 [page 507] value of the benefit.201 However the court’s approach to determining the amount varies. In New South Wales, a party is entitled to a credit for one-half of the value of any benefit acquired in the performance of the relevant contract,202 whereas in South Australia, the value of the net benefit received after deduction of the value of the burden incurred by each party is assessed and adjusted to ensure equality.203 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.204 A debt due for payment at the time of the contract’s discharge

for frustration is enforceable, even if it was due after the frustrating event or contingent upon a future event outside the performance of the contract, provided that event has occurred.205 However, the basis for recovery is that the accrual of the owed sum has been proved.206 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.207 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.208 [page 508]

Key Points for Revision The applicability of the doctrine of frustration depends on the facts of the case. Usually, frustration involves an event that 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 that 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. 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 that 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.

_________________ 1

(1863) 3 B & S 826.

2

(1863) 3 B & S 826 at 826.

3

Examples include construction contracts as in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367; 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 (FC); 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 S/A 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, Sydney, 1987, p 1304.

6

Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169; [1943] ALR 54; N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed, LexisNexis Butterworths, Sydney, 2008, pp 684–7; Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 728–9 per Lord Radcliffe.

7

Cases supporting this general statement may be found collected in Greig and Davis, above n 5, 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 (NSW) (1982) 149 CLR 337 at 360; 41 ALR 367) they are juristically distinct concepts. 9

[1981] AC 675; [1981] 1 All ER 161 per Lords Hailsham and Simon.

10

Gelling v Crespin (1917) 23 CLR 443 at 454; 24 ALR 41; Bank Line Ltd v Arthur Capel and Co [1919] AC 435 at 444.

11

[1981] AC 675 at 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 at 357; 41 ALR 367. 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 decisionmaking 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 at 275 per Lord Wright.

13

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 376; 41 ALR 367.

14

(1982) 149 CLR 337; 41 ALR 367 at 395, citing Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 728–9.

15

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 720.

16

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 at 356–67, 375–83; 41 ALR 367 at 378–87, 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.

17

(1982) 149 CLR 337 at 345; 41 ALR 367.

18

(1982) 149 CLR 337 at 378; 41 ALR 367.

19

(1979) 145 CLR 143 at 160–3; 26 ALR 525.

20

Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 160; 26 ALR 525.

21

Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724 at 744.

22

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729. See also National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 702 per Lord Simon; but compare 717 per Lord Roskill.

23

Carter, Peden and Tolhurst, Contract Law in Australia, 5th ed, LexisNexis Butterworths, Sydney, 2007, p 772.

24

[1970] Qd R 93.

25

[1970] Qd R 93 at 96.

26

[1919] AC 435.

27

[1918] AC 119.

28

(1979) 13 Build LR 81; PC 7.

29

Metropolitan Water Board v Dick, Kerr & Co Ltd (1917) 2 KB 1 at 30; affirmed Metropolitan Water

Board v Dick, Kerr & Co Ltd [1918] AC 119. 30

British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166 at 185.

31

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 66.

32

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729 per Lord Radcliffe; adopted in Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367.

33

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 720–1.

34

Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143; 26 ALR 525 per Stephen J.

35

Albert D Gaon & Co v SIOFA [1960] 2 QB 318 at 347.

36

Ocean Tramp Tankers Corp v V/O Sovfracht (‘The Eugenia’) [1964] 2 QB 226 at 228.

37

Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 at 241 per Lord Wright; National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 700 per Lord Simon of Glaisdale.

38

Edwinton Commerical Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] 2 Lloyd’s Rep 517 at 532 [86].

39

J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 at 8 per Bingham LJ.

40

(1982) 149 CLR 337 at 357; 41 ALR 367.

41

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 360; 41 ALR 367.

42

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 728–9.

43

Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 162; 26 ALR 525.

44

(1979) 145 CLR 143 at 162–3; 26 ALR 525.

45

[1981] 1 WLR 641 at 647.

46

(1982) 149 CLR 337 at 357; 41 ALR 367.

47

(1982) 149 CLR 337 at 360; 41 ALR 367.

48

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729.

49

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 66 per Diplock LJ.

50

Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 186; [1943] ALR 54.

51

(1943) 67 CLR 169 at 186; [1943] ALR 54 per Latham CJ.

52

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524.

53

J Lauritzen AS v Wijsmuller BV (‘The Super Servant Two’) [1990] 1 Lloyd’s Rep 1 (CA).

54

Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699 (CA).

55

J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 (CA).

56

Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 at 192 per Lord Wright, 204 per Lord Porter.

57

Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169; [1943] ALR 54.

58

[1964] 2 QB 226 (CA).

59

[1964] 2 QB 226 (CA) at 239.

60

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.

61

Pall Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854.

62

See L’Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486 at 521.

63

See Bremer Vulkan Schiffbau und Maschinenfabrick v South India Shipping Corp Ltd [1981] AC 909; and discussion by Lord Mustill in L’Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486 at [33].

64

[1942] AC 154 at 172; see also G H Treitel, Law of Contract, 7th ed, Sweet and Maxwell, London, 1987, p 701.

65

Sharp v Batt (1930) 25 Tas LR 33.

66

See Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; 154 ALR 361 at [99].

67

The City of Gosford v Marim Pty Ltd (1990) 6 BPR 13,871 at 614F per Glass JA, 621A per Mahoney JA, 631G–632D per Priestley JA.

68

Allied Mills Ltd v Gwydir Valley Oilseeds Pty Ltd [1978] 2 NSWLR 26 at 30; compare Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 at 35–36; 7 BPR 14,735.

69

[1942] AC 154 at 174.

70

[1942] AC 154 at 177.

71

[2011] NSWSC 54.

72

(1647) Aleyn 26; 82 ER 897.

73

(1875) LR 19 Eq 462 at 465.

74

Taylor v Caldwell (1863) 3 B & S 826.

75

[1956] AC 696.

76

[1956] AC 696 at 729.

77

[1952] AC 166 at 168.

78

[1952] 2 Lloyd’s Rep 147.

79

See 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. See C M Schmitthoff, The Export Trade — The Law and Practice of International Trade, 4th ed, Stevens & Son Ltd, London, 1962, p 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, where the judge was oriented by a clause in the contract that made express reference to passage through the Suez Canal. 80

[1981] AC 675 at 700.

81

(1982) 149 CLR 337; 41 ALR 367.

82

Taylor v Caldwell (1863) 3 B & S 826.

83

Horlock v Beal [1916] 1 AC 486 at 492 per Loreburn LJ, referring to a contract becoming ‘impracticable in a commercial sense’.

84

[1926] AC 497.

85

FA Tamplin SS Co Ltd v Anglo American Petroleum Products Co Ltd [1916] 2 AC 397.

86

J Lauritzen AS v Wijsmuller BV (‘The Super Servant Two’) [1990] 1 Lloyd’s Rep 1 (CA), where a carrier that 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.

87

See Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 at 163.

88

Consolidated Neon (Phillips System) Pty Ltd v Tooheys Ltd (1942) 42 SR (NSW) 152 at 157.

89

(1913) 13 SR (NSW) 8.

90

(1982) 149 CLR 337; 41 ALR 367.

91

[1962] AC 93.

92

Cutter v Powell (1795) 6 TR 320; Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358.

93

Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125 at 145.

94

Whim Well Copper Mines Ltd v Pratt (1910) 12 WALR 166.

95

Robinson v Davison (1871) LR 6 Ex 269.

96

Finch v Sayers [1976] 2 NSWLR 540 at 558.

97

Idameneo (No 123) Pty Ltd v Ashraf [2015] VSC 317. The relevant contract in this case was not a contract of employment because Idameneo’s Practitioner Contract was not with Ashraf but with Ashraf’s Company which agreed to procure Ashraf’s services.

98

Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 231; [1943] ALR 54 per Williams J. See also Ezishop Net Ltd (in liq) v Veremu Pty Ltd (2003) 45 ACSR 199 at [60].

99

Scottish Halls Ltd v The Minister (1915) 15 SR (NSW) 81.

100 (1982) 149 CLR 337; 41 ALR 367. 101 Scottish Halls Ltd v The Minister (1915) 15 SR (NSW) 81 at 89–90. 102 Ocean Tramp Tankers Corp v V/O Sovfracht (‘The Eugenia’) [1964] 2 QB 226. 103 [1903] 2 KB 740 (CA).

104 [1903] 2 KB 740 (CA) at 750. 105 BAS Capital Funding Corp v Medfinco Ltd [2004] 1 Lloyd’s Rep 652 at 677; [2003] EWHC 1798 (Ch) at [182] per Lawrence Collins J; but compare Independent Grocers Co-operative Ltd v Noble Lowndes Superannuation Consultants Ltd (1993) 60 SASR 525 (FC), where a superannuation fund did not eventuate as a result of surrounding events for which contracting parties were not responsible. 106 Krell v Henry [1903] 2 KB 740 at 751 per Vaughn Williams LJ (Sterling LJ agreeing); Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 724 per Lord Reid; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 359; 41 ALR 367 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 at 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.’ 107 [1935] AC 524 (PC) at 529. 108 [1952] 2 TLR 409 at 413. 109 Krell v Henry [1903] 2 KB 740 at 748. 110 Krell v Henry [1903] 2 KB 740 at 748 per Vaughn Williams LJ. 111 [1903] 2 KB 683. 112 Palmco Shipping Inc v Continental Ore Corp (‘The Captain George K’) [1970] 2 Lloyd’s Rep 21 at 31; Nile Co for Exports of Agricultural Crops v H & J N Bennett (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. 113 Greig and Davis, above n 5, p 1315. See Finlayson v Finlayson & Gillam (2002) 174 FLR 165; [2002] FamCA 898 at [152]. 114 Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) (HL) [1982] AC 724. 115 Seddon and Ellinghaus, above n 6, at 9.12. 116 Citing G H Trietel, Frustration and Force Majeure, 2nd ed, Sweet and Maxwell, London, 2004, 13.012, which in turn cites Mishara Construction Co Inc v Transit-Mixed Concrete Corporation 310 NE 2d 363 (1974), 367. See also Carter, Peden and Tolhurst, Contract Law in Australia, 5th ed, LexisNexis Butterworths, Sydney, [33]–[38]. 117 Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358 (FC). 118 WJ Tatem Ltd v Gamboa [1939] 1 KB 132; Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119. 119 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, 715. 120 [1956] AC 696 at 721–2. Mason J endorsed these views in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 357; 41 ALR 367. 121 (1943) 67 CLR 169; [1943] ALR 54. 122 See Metropolitan Water Board v Dick, Kerr and Co Ltd [1918] AC 119. 123 G H Trietel, The Law of Contract, 11th ed, Thomson Sweet & Maxwell, London, 2003, p 887. 124 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32.

125 Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260. 126 [1944] AC 265. 127 [1995] 1 WLR 1226. 128 Finelvet AG v Vinava Shipping Co Ltd [1983] 1 WLR 1469. 129 Comptoir d’Achat et de Vente du Boerenbond Belge S/A v Luis de Ridder Limitada (The Julia) [1949] AC 293. 130 Bank Line Ltd v Arthur Capel & Co [1919] AC 435. 131 Bank Line Ltd v Arthur Capel & Co [1919] AC 435 at 454 per Lord Sumner. 132 [1983] 1 AC 736. 133 Ringstad v Gollin & Co Pty Ltd (1924) 35 CLR 303; (1925) 31 ALR 221. 134 British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166, where the United Kingdom defence regulations reduced the availability of raw film stock. 135 Dahl v Nelson (1881) 6 App Cas 38 at 48; Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 at 435 per Devlin J. 136 (1874) LR 10 CP 125. 137 Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125. 138 See Scrutton J in Embiricos v Sydney Reid & Co [1914] 3 KB 45 at 54, approved in Watts, Watts & Co Ltd v Mitsui & Co Ltd [1917] AC 227 at 246; National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675. 139 Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125. 140 Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724 at 752. 141 [1914] 3 KB 45. 142 [1914] 3 KB 45 at 54. 143 [1914] 3 KB 45 at 53–4 per Scrutton J. 144 Taylor v Caldwell (1863) 3 B & S 826 at 833. 145 (1647) Aleyn 26 at 27. 146 See, for example, Bruce v Tyley (1916) 21 CLR 277; 22 ALR 215; Matthey v Curling [1922] 2 AC 180; Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169; [1943] ALR 54. 147 See Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 at 184. 148 Denny, Mott & Dickson Ltd v James B Fraser Co Ltd [1944] AC 265. 149 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; 57 ALR 609; Legione v Hately (1983) 152 CLR 406; 46 ALR 1. 150 Fletcher v Manton (1940) 64 CLR 37; [1940] ALR 337; Carpenter v McGrath (1996) 40 NSWLR 39. 151 Fletcher v Manton (1940) 64 CLR 37; [1940] ALR 337 at CLR 45, 48, 51 per Starke, Dixon and McTiernan JJ.

152 (1940) 64 CLR 37; [1940] ALR 337. 153 (1940) 64 CLR 37 at 489; [1940] ALR 337. 154 This principle may be subject to statute such as the Conveyancing Act 1919 (NSW) s 66K (postponement of passing of risk to purchaser); cf Insurance Contracts Act 1984 (Cth) s 50 (sale of insured property). 155 Fletcher v Manton (1940) 64 CLR 37; [1940] ALR 337. 156 Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 229; [1943] ALR 54. 157 E Johnson & Co (Barbados) Ltd v NSR Ltd [1997] AC 400. 158 Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 Build LR 81. 159 See Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671; 10 ALR 296. 160 [1974] 2 NSWLR 661. 161 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; [1931] ALR 177. 162 Paradine v Jane (1647) Aleyn 26 at 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. 163 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, St Paul, Minn, 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, Sydney, 1980, para 211; D M McRae, ‘Repudiation of Contracts in Canadian Law’ (1978) 56 Canadian Bar Review 233; J T Robertson, ‘Frustrated Leases: “No to Never — But Rarely if Ever”’ (1982) 60 Canadian Bar Review 619. 164 (1926) 26 SR (NSW) 183, approved on appeal: Firth v Halloran (1926) 38 CLR 261. 165 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. 166 Halloran v Firth (1926) 26 SR (NSW) 183 at 187; and on appeal: Firth v Halloran (1926) 38 CLR 261 at 268, but compare 269. 167 See Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; 57 ALR 609 at 635. 168 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. 169 [1951] SASR 82 at 88 per Ligertwood J. 170 (1958) 75 WN (NSW) 503 per McClemens J.

171 (1944) 68 CLR 261 at 276. 172 (1958) 76 WN (NSW) 48. 173 (1944) 68 CLR 261 at 302–3 174 [1922] 2 AC 180. 175 [1981] AC 675. 176 See Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221. 177 Hirju Mulji v Cheong Yue SS Co Ltd [1926] AC 497 at 509; Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 203; [1943] CLR 54; J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 at 8; Re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194 at 201. 178 See Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265. 179 Aurel Forras Pty Ltd v Graham Karp Developments Pty Ltd [1975] VR 202 at 206–7 per Menhennitt J. 180 Aurel Foras Pty Ltd v Graham Karp Develpments Pty Ltd [1975] VR 202. 181 See J W Carter and D J Harland, Contract Law in Australia, 4th ed, LexisNexis Butterworths, Sydney, 2002, pp 684–5. 182 Hirsch v Zinc Corp Ltd (1917) 24 CLR 34; 23 ALR 388. 183 Goldsborough Mort & Co Ltd v Carter (1914) 19 CLR 429. 184 See Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 at 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 themselves from building, but remained liable for the rent under the lease. 185 Bremer Vulkan Schiffbau und Maschinenfabrick v South India Shipping Corp Ltd [1981] AC 909 at 980. 186 Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724. 187 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 (HL). 188 See Sharp v Batt (1930) 25 Tas LR 33b (a force majeure clause). 189 [1981] 2 Lloyd’s Rep 446 at 457. 190 Greig and Davis, above n 5, p 1310; see also Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93. 191 See Jackson v Union Marine Insurance Co Ltd (1874) LR 109 CP 125. 192 [2001] NSWSC 836 at [55]. See also Trietel, above n 116. 193 (1938) 38 SR (NSW) 337 at 345. 194 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 (force majeure clause providing for suspension of obligations under banking arrangements). 195 See B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419 (CA). 196 Greig and Davis, above n 5, p 1304.

197 See Re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194 at 201. 198 See Re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194; see also Carter and Harland, above n 181, p 685. 199 Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 356; 111 ALR 289 per Mason CJ. 200 See Frustrated Contracts Act 1978 (NSW) s 13, and compare with Frustrated Contracts Act 1988 (SA) s 7. 201 BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925; [1979] 1 WLR 783 (QB). 202 Frustrated Contracts Act 1978 (NSW) s 13. 203 Frustrated Contracts Act 1988 (SA) s 7. 204 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. 205 See Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361 at 379–80. 206 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. 207 BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925; [1979] 1 WLR 783 (QB) at 829. 208 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 53.

[page 509]

CHAPTER 16 Misrepresentation CHAPTER OVERVIEW 16.1 16.2 16.4

16.12

16.17

16.20 16.21

16.27

Introduction The general rule 16.3 Elements of an actionable misrepresentation Positive misrepresentation 16.5 Mere puffery 16.7 Statements of opinion 16.9 Statements of intention 16.10 Statements of law Silence 16.13 Where the silence distorts some positive representation 16.14 Where the statement becomes untrue 16.15 Where the parties are in a fiduciary relationship Culpable misrepresentation 16.17 Fraudulent misrepresentation 16.18 Negligent misrepresentation Innocent misrepresentation Who may sue for misrepresentation? 16.22 Limitations on actions for misrepresentation 16.22 Where the statement is non-inducing 16.23 Where the plaintiff is unaware of the representation 16.24 Where the plaintiff knows that the representation is false 16.25 Where the plaintiff does not act on the representation 16.26 Where the misrepresentation is not material Rescission

[page 510]

Introduction 16.1

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 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 known as misleading and deceptive conduct.

The general rule 16.2

The general rule that applies to misrepresentation is that the statement in question must refer to an existing or past fact.1 However, this rule is under some pressure before the courts of common law. It had previously been thought that mere puffery, statements of opinion and statements of law could not give rise to claims of misrepresentation, but it has become clear that under certain circumstances they may in fact give rise [page 511] to successful claims of misrepresentation.2 As a general proposition, the courts 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 As a general proposition, the courts 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. 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

Elements of an actionable misrepresentation 16.3

There are four elements of an actionable misrepresentation: 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; and the maker of the statement must have intended that the statement would induce a contract.

Positive misrepresentation 16.4

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 [page 512] 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.

Mere puffery 16.5

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 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. 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 Valherie,11 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 [page 513]

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.)

Mitchell v Valherie (2005) 93 SASR 76 Supreme Court of South Australia White J at 90–3: 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? [N Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract, 8th ed, LexisNexis Butterworths, Sydney, 2002, [11.11]] 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’ [page 514] 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 JJ 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 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. [page 515] 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 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.

[page 516] 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. 16.6

It does seem clear that where a statement is sufficiently specific, it might be regarded as a representation rather than puffery.12 It might be suggested that as the purpose of misrepresentation is to protect contracting parties from actionable deceptions, 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.

Statements of opinion 16.7

A statement of opinion does not ordinarily support a claim of misrepresentation.13 For example, in Bissett v Wilkinson14 a statement that a landholding could support 2000 sheep, when the maker of the statement knew that the land had never actually held sheep, 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. A statement of opinion does not ordinarily support a claim of misrepresentation.

Bissett v Wilkinson [1927] AC 177 United Kingdom Privy Council Merrivale LJ at 183–5: In the present case, as in those cited, the material facts of the transaction, the knowledge of the parties respectively, and their [page 517] 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? 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 sheepfarm. 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 that would have left them losers if they could have carried three thousand sheep. 16.8

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.15 The most obvious example of this is the [page 518] dishonest representation made in Smith v Land & House Property Corp16 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.17 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.18

Statements of intention 16.9

Unless a party to a contract deliberately lies, it is not possible for a statement of intention to be either true or false.19 It is only where a fraudulent statement is made that a statement of intention can give rise to a claim in misrepresentation.20 In Balfour v Hollandia Ravensthorpe NL,21 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 borrow 90 per cent of the value of the property. The salesman knew that this would not happen. The court held that this was actually a misrepresentation of an existing fact, as the building society’s own policy documents indicated that the statement was untrue. Unless a party to a contract deliberately lies, it is not possible for a statement of intention to be either true or false.

In Edgington v Fitzmaurice,22 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

[page 519] knew that it was not true, or made it recklessly not caring whether it was true or not, they would be liable.23

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.24

These principles were followed in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq).25 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.26

Statements of law 16.10 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.27 There have been cases where an incorrect statement of the law has been regarded by the courts as being an actionable misrepresentation.28 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. It is clear that a fraudulent misrepresentation of the law will give rise to an actionable claim.29 This principle accords with the other categories of [page 520] 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.30 After all, the existence and meaning of the law is a fact that 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. 16.11 The extract below from the decision of Kaye J in Public Trustee v Taylor31 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 that 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.

Public Trustee v Taylor [1978] VR 289 Supreme Court of Victoria Kaye J at 296–9: 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 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 [page 521] 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) 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 [page 522] 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. [page 523] The significance 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 misrepresented 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.

Silence 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.

[page 524] 16.12 In the categories considered above, there has usually been a positive action in the form of a statement that gave rise to a misrepresentation. The general rule is that silence does not amount to a misrepresentation.32 But there are circumstances in which a failure to communicate a pertinent fact will give rise to a misrepresentation.33 Note that there is an overlap here between the common law principles and the jurisprudence on misleading and deceptive conduct that was developed under s 52 of the now repealed Trade Practices Act 1974 (Cth).34 There are three main circumstances under which silence can constitute a misrepresentation: where the silence distorts some positive representation; where the statement becomes untrue; and where the parties are in a fiduciary relationship.

Where the silence distorts some positive representation 16.13 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.35 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.36 In Krakowski v Eurolynx Properties Ltd,37 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 3 months’ rentfree 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. [page 525]

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1 High Court of Australia Brennan, Deane, Gaudron and McHugh JJ at CLR 574–7: 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 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. [page 526]

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 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 [page 527] 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 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.

Where the statement becomes untrue 16.14 There may be circumstances where a positive representation has been made that is true, but that later comes to be a halftruth as a result of subsequent events. Moreover, where a party makes a statement that they subsequently find to be false, they are under an obligation to inform

[page 528] the other party.38 Also, where the circumstances have changed and a representation has become untrue, there is an obligation to disclose this to the other party.39 In the case of Lockhart v Osman,40 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.

Where the parties are in a fiduciary relationship 16.15 A party in a fiduciary relationship is bound to reveal all the material facts to the other party. A fiduciary relationship is one of the utmost trust and confidence.41 Where a contract is contemplated between parties who are fiduciaries to each other, there is a corresponding obligation to reveal all material facts. No derogation from this obligation can be tolerated.42 In Hill v Rose,43 the defendant asked the plaintiff to buy a stake in his business, but did not disclose 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 Simms44 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. Where a contract is contemplated between parties who are fiduciaries to each other, there is a corresponding obligation to reveal all material facts. No derogation from this obligation can be tolerated.

16.16 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 insurance contracts. Under these contracts, parties are bound to contract in good faith and must reveal all material facts that are known to them.45 Every contract of insurance is a contract uberrimae fidei. [page 529]

REVIEW QUESTIONS 1.

What are the different circumstances under which a positive misrepresentation can arise?

2.

Why was a misrepresentation found to exist in Bissett v Wilkinson and Public Trustee v Taylor?

Culpable misrepresentation Fraudulent misrepresentation 16.17 The telling of an intentional untruth will be fraudulent misrepresentation.46 In Derry v Peek,47 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.48 The state of mind of the defendant is essential on this issue.49 The defendant must know that their statement is untrue for it to be said that they are fraudulent.50

Negligent misrepresentation

A defendant may be negligent in making statements to the 16.18 plaintiff.51 This is a separate category of misrepresentation from fraudulent or innocent misrepresentation. The fundamental rule here was stated in Hedley Byrne & Co Ltd v Heller & Partners Ltd:52 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.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.

[page 530] 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 that may induce the recipient to contract, then liability will attach where due care has not been taken.54 The facts of Esso Petroleum Co Ltd v Mardon55 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. 16.19 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 Pty Ltd v Parramatta City Council (No 1).56 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 Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225; 36 ALR 385 High Court of Australia Gibbs CJ at 230–1: 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 [page 531] 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 misstatements. 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 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.

Innocent misrepresentation 16.20 Where the maker of a statement neither intends to deceive nor is careless in making a statement, then there may be an innocent misrepresentation.57 Generally, an innocent misrepresentation will not support an action for rescission. However, the innocence of the misrepresentation might [page 532] 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.58 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.

Who may sue for misrepresentation? 16.21 Only the party who has received the misleading communication may sue for misrepresentation.59 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.60 The statement may be made to a class of persons to whom the plaintiff belongs.61 Provided that the plaintiff is contemplated in some manner — either as a direct recipient or as a member of a particular class — and the representation is acted upon, then a claim of misrepresentation will arise. In Peek v Gurney,62 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 & Co,63 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 [page 533] 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.

Limitations on actions for misrepresentation Where the statement is non-inducing 16.22 If the misrepresentation does not induce the contract, then it cannot form the basis of an action for misrepresentation.64 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.65 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 Vaggelas,66 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.

Where the plaintiff is unaware of the representation 16.23 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.67 In Re Northumberland and Durham District Banking Co; Ex parte Bigge,68 the plaintiff, Bigge, a shareholder in a company, sought to rescind his contract on the basis that [page 534] 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 16.24 A plaintiff cannot be misled by a representation that they know is false. The level of knowledge required by the courts is actual knowledge.69 There is a crucial difference here between having the opportunity to discover the truth, but failing to do so, and actually knowing the truth.70 In Redgrave v Hurd,71 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.72 In Gipps v Gipps,73 a husband misrepresented to his wife the value of shares and takings from a business. 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 16.25 A representation that is not acted upon cannot be regarded as being a successful inducement.74 The plaintiff may rely on their own assessment, rather than on the representation of the defendant.75 Alternatively, the

[page 535] party that initially makes the misrepresentation may correct it prior to the contract being completed.76 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. Similarly, effectively correcting a misleading statement negates the earlier misrepresentation.

Where the misrepresentation is not material 16.26 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 Ltd77 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.78 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.79 Moreover, the misrepresentation may not even be the main factor that led the plaintiff into the contract.80 Provided that the misrepresentation has some bearing on the decision to enter into the contract, then the plaintiff will have a claim.81 The term ‘material’ does not have a settled meaning within the law of misrepresentation. In Nicholas v Thompson,82 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 defendant made a false statement about having

received fantastic offers for his property in the past. The plaintiff successfully avoided the contract.

Rescission 16.27 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 [page 536] 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 creates a legal fiction, where, to the extent possible, it is made to appear as if the contract never existed. Accordingly, the remedy of rescission places the parties back in the positions that they were in prior to the formation of the contract. Rescission applies where a contract is voidable. Until such time as the contract is voided, it continues to be in force between the parties, but once the contract has been rescinded the parties are returned to their original positions.83 In effect, rescission creates a legal fiction, where, to the extent possible, it is made to appear as if the contract never existed.84 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.85 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.86 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.87 The communication of the rescission must be clear and unequivocal.88 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.89 In such a situation the court may instead opt to provide them with equitable damages. [page 537]

Key Points for Revision 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.

_________________ 1

Given v Pryor (1979) 24 ALR 442; 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; ASC 55-657.

3

N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed, LexisNexis Butterworths, Sydney, 2008, p 505.

4

Alati v Kruger (1955) 94 CLR 216; [1955] ALR 1047.

5

Sargent v ASL Developments Ltd (1974) 131 CLR 634; 4 ALR 257.

6

See 16.27.

7

Dimmock v Hallett (1866) LR 2 Ch App 21; see also R v Weaver (1931) 45 CLR 321; [1931] ALR 249.

8

Magennis v Fallon (1828) 2 LR Ir 167.

9

Smith v Land & House Property Corp (1884) 28 Ch D 7.

10

(1884) 28 Ch D 7.

11

(2005) 93 SASR 76.

12

Eveready Australia Pty Ltd v Gillette Australia Pty Ltd (No 4) [2000] ATPR ¶41-751.

13

Esso Petroleum Co Ltd v Mardon [1976] QB 801; see also Bissett v Wilkinson [1927] AC 177.

14

[1927] AC 177.

15

Smith v Land & House Property Corp (1884) 28 Ch D 7.

16

(1884) 28 Ch D 7.

17

Fitzpatrick v Michel (1928) 28 SR (NSW) 285; see also Brown v Raphael [1958] Ch 636.

18

Brown v Raphael [1958] Ch 636; Oudaille v Lawson [1922] NZLR 259.

19

Beattie v Lord Ebury (1872) 7 LR Ch App 777.

20

Balfour v Hollandia Ravensthorpe NL (1978) SASR 240; see also Beach Petroleum NL v Johnson (1993) 43 FCR 1; 115 ALR 411; Al Khudairi v Abbey Brokers Ltd [2010] EWHC 1486 (Ch).

21

(1978) 18 SASR 240.

22

(1885) 29 Ch D 459.

23

(1885) 29 Ch D 459 at 479–80.

24

(1885) 29 Ch D 459 at 483.

25

(2001) 188 ALR 566.

26

(2001) 188 ALR 566 at 593.

27

Seddon and Ellinghaus, above n 3, p 506.

28

David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; 109 ALR 57. 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.

29

Public Trustee v Taylor [1978] VR 289; see also Pankhania v London Borough of Hackney [2002] EWHC 2441 (Ch) at [58]; Brennan v Bolt Burdon [2004] EWCA Civ 1017 at [10].

30

See David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; 109 ALR 57; see also Lord Denning MR in Andre et Cie SA v Ets Michel Blanc et Fils [1979] 2 Lloyd’s Rep 427 at 430–1.

31

[1978] VR 289.

32

W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572; Smith v Hughes (1871) LR 6 QB 597.

33

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; 110 ALR 608.

34

See Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; 110 ALR 608; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1. The Trade Practices Act 1974 (Cth) has been replaced by the Competition and Consumer Act 2010 (Cth). Misleading and deceptive conduct is discussed in Chapter 17.

35

Curwen v Yan Yean Land Co Ltd (1891) 17 VLR 745.

36

Jennings v Zihali-Kiss, Zilahi-Kiss and M K Tremaine & Co Pty Ltd (1972) 2 SASR 493; Awaroa Holdings Ltd v Commercial Securities and Finance Ltd [1976] 1 NZLR 19.

37

(1995) 183 CLR 563; 130 ALR 1.

38

Lockhart v Osman [1981] VR 57; Boscaini Investments Pty Ltd v Petrides (1982) ASC 52-222; Robertson and Moffatt v Belson [1905] VLR 555; (1905) 11 ALR 299.

39

Jones v Dumbrell [1981] VR 199; With v O’Flanagan [1936] Ch 575; Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; 146 ALR 1.

40

[1981] VR 57.

41

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; 55 ALR 417.

42

Maguire v Makaronis (1997) 188 CLR 449; 144 ALR 729.

43

[1990] VR 129.

44

[2006] 2 All ER 1024.

45

Mackener v Feldia AG [1967] 2 QB 590.

46

Derry v Peek (1889) 14 App Cas 337.

47

(1889) 14 App Cas 337.

48

Akerhielm v De Mare [1959] AC 789.

49

John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656.

50

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1.

51

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.

52

[1964] AC 465.

53

See also Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241; 142 ALR 750.

54

Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241; 142 ALR 750; see also Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1970) 122 CLR 628; [1971] ALR 235.

55

[1976] QB 801.

56

(1981) 150 CLR 225; 36 ALR 385.

57

Gould v Vaggelas (1984) 157 CLR 215; 56 ALR 31.

58

Brownlie v Campbell (1880) 5 App Cas 925 at 937; Wilcher v Steain [1962] NSWR 1136.

59

Peek v Gurney (1873) LR 6 HL 377.

60

Commercial Banking Co of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337; [1972–73] ALR 393.

61

Leslie Leithead Pty Ltd v Barber (1965) 65 SR (NSW) 172; Mount Gambier Co-operative Milling Society Ltd v Williams [1921] SASR 185.

62

(1873) LR 6 HL 377.

63

(1972) 126 CLR 337; [1972–73] ALR 393.

64

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; 110 ALR 608.

65

Gould v Vaggelas (1984) 157 CLR 215; 56 ALR 31.

66

(1984) 157 CLR 215 at 236; 56 ALR 31.

67

Re Northumberland and Durham District Banking Co; Ex parte Bigge (1858) 28 LJ (Ch) 50.

68

(1858) 28 LJ (Ch) 50.

69

Redgrave v Hurd (1881) 20 Ch D 1; Holmes v Jones (1907) 4 CLR 1692; 14 ALR 89.

70

Redgrave v Hurd (1881) 20 Ch D 1; Holmes v Jones (1907) 4 CLR 1692; 14 ALR 89.

71

(1881) 20 Ch D 1.

72

Gipps v Gipps [1978] 1 NSWLR 454.

73

[1978] 1 NSWLR 454.

74

Holmes v Jones (1907) 4 CLR 1692; 14 ALR 89; Wilcher v Steain [1962] NSWR 1136.

75

Attwood v Small [1835–42] All ER Rep 258; (1838) 7 ER 684.

76

Holmes v Jones (1907) 4 CLR 1692; 14 ALR 89.

77

(1867) LR 2 QB 580.

78

(1867) LR 2 QB 580 at 587.

79

Gould v Vaggelas (1984) 157 CLR 215; 56 ALR 31; Edgington v Fitzmaurice (1885) 29 Ch D 459.

80

Field v Shoalhaven Transport Pty Ltd [1970] 3 NSWR 96; Barton v Armstrong [1976] AC 104.

81

Australian Steel and Mining Corp Pty Ltd v Corben [1974] 2 NSWLR 202.

82

[1924] VLR 554; (1924) 30 ALR 359.

83

Alati v Kruger (1955) 94 CLR 216; [1955] ALR 1047.

84

FAI General Insurance Co Ltd v Ocean Marine Mutual Protection and Indemnity Association (1997) 41 NSWLR 559.

85

Maguire v Makaronis (1997) 188 CLR 449; 144 ALR 729.

86

Alati v Kruger (1955) 94 CLR 216; [1955] ALR 1047.

87

Clough v London and North Western Railway Co (1871) LR 7 Exch 26.

88

Coastal Estates Pty Ltd v Melevende [1965] VR 433.

89

Long v Lloyd [1958] 2 All ER 402; 1 WLR 753.

[page 539]

CHAPTER 17 Misleading or Deceptive Conduct CHAPTER OVERVIEW 17.1 17.2 17.5 17.8

Introduction The objective of s 18 Conduct in trade or commerce Establishing misleading or deceptive conduct 17.9 The Taco Bell steps 17.10 The ordinary and reasonable person 17.12 Examples of misleading or deceptive cases 17.13 Comparative advertising 17.14 Silence where disclosure is expected 17.15 Puffery 17.16 Promises 17.17 Character merchandising

Introduction 17.1

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 Competition and Consumer Act 2010 (Cth) (CCA), which prohibits a variety of anticompetitive trading practices, such as cartels, and contains the Australian Consumer Law (ACL). The text of the ACL is contained in Sch 2 to the CCA. All Australian states and territories have duplicated the text of Sch 2 to the CCA and applied it as a law of their respective jurisdictions. Section 52 of the TPA prohibited corporations from engaging in

conduct that was misleading or deceptive or likely to mislead or deceive. It became one of the most litigated provisions in Australian law. Section 18 of the ACL replicates s 52, and 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). [page 540] Even though s 18 of the ACL prohibits persons from engaging in misleading or deceptive conduct, it also applies to corporations. This is because s 131 of the CCA applies the ACL to the conduct of corporations. This means that the vast body of jurisprudence that has developed under s 52 of the TPA is now applicable to s 18 and guides its interpretation and application. 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’.

The objective of s 18 17.2

Section 18 of the ACL does not state: ‘If a person or corporation engages in misleading or deceptive conduct, he, she or it breaches the ACL’. This means that s 18 sets out to proscribe a particular type of conduct rather than create a form of liability. In effect, s 18 therefore establishes a standard for commercial behaviour.1 This important distinction was referred to in Brown v Jam Factory Pty Ltd,2 where the Federal Court stated in relation to the TPA: ‘Section 52 does not purport to create liability at all; rather it establishes a norm of conduct.’

17.3

In many respects, s 18 is the statutory form of the common law doctrine of misrepresentation.3 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.4 In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1),5 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.

Similarly, in State Government Insurance Corp v Government Insurance Office of NSW,6 French J stated in relation to s 52 of the TPA: 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

[page 541] 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. 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’. 17.4

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’.7 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.

Conduct in trade or commerce 17.5

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.8 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.9

This definition suggests that although the ACL takes a very expansive view of the phrase in ‘trade or commerce’, the conduct must nevertheless have a trading character. This is important as not all the functions of a corporation or person can be defined as being trading in nature. For example, in Argy v Blunts10 it was alleged that precontractual representations made by the vendor, Mr Crooks, were not misleading or deceptive in breach of s 52 of the TPA. The court concluded that the one-off sale of a private asset was not conduct ‘in trade or commerce’. [page 542] However, the court did find that the same representations made by Mr Crooks’s real estate agents, Blunts, were ‘in trade or commerce’ and therefore misleading or deceptive.

17.6

One-off sales can be considered conduct ‘in trade or commerce’ for the purposes of s 18 of the ACL if that sale was part of a larger trading enterprise. In Bevanere Pty Ltd v Lubidineuse,11 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.

17.7

The leading case on the interpretation of the phrase ‘in trade or commerce’ is the decision of the High Court in Concrete Constructions (NSW) Pty Ltd v Nelson.12 This case established the limitations on whether conduct was in trade or commerce under s 52 of the TPA, and these limitations continue to apply to s 18 of the ACL. In Concrete Constructions, a construction worker, Nelson, was working on metal grates that covered airconditioning 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 the conduct of the foreman in representing that it was safe for Nelson to work on the air-conditioning shafts 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 of the foreman did not occur ‘in 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 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.13

Concrete Constructions (NSW) Pty Ltd v Nelson

(1990) 169 CLR 594; 92 ALR 193 High Court of Australia Mason CJ, Deane, Dawson and Gaudron JJ at CLR 600–5: 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 [page 543] 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 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). [page 544] 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) by implication drawn from [page 545] 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 [page 546] 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.

Establishing misleading or deceptive conduct 17.8

There are a variety of situations that may legitimately give rise to claims of misleading or deceptive conduct in breach of s 18 of the ACL; for example, where comparative advertising is used, where silence gives rise to a misrepresentation, or where a product erroneously appears to be affiliated with a famous person.14 Where these claims do arise, it is essential that a basic process of evaluation is followed to assess these claims.

The Taco Bell steps 17.9

The leading case establishing the evaluative process necessary in the assessment of claims of misleading or deceptive conduct is the Federal Court’s decision in Taco Co of Australia Inc v Taco Bell Pty Ltd,15 which established what have become known as the ‘Taco Bell steps’. These steps (in reality, evaluative principles) have been employed by almost all subsequent courts to evaluate s 52 claims.

Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177; ATPR 40-303 Federal Court of Australia Deane and Fitzgerald JJ at ALR 201–3: 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. [page 547] 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 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. [page 548] 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. The basic interpretative principles, the ‘Taco Bell Steps’ that emerged from the Taco Bell decision, and that have been applied in subsequent cases are set out below. They will continue to be relevant under s 18 of the ACL: (1) 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. (2) Where a claim of misleading or deceptive conduct is made, there is no requirement that anyone has actually been misled or deceived. (3) Rather, what must be demonstrated is that there is a very real possibility that people may be misled or deceived. (4) Evidence that someone has been misled or deceived will be persuasive. (5) There must be some conduct on the part of the person or corporation that invites the consumer or other party into error.

The ordinary and reasonable person 17.10 Conduct alleged to be misleading or deceptive, or likely to

mislead or deceive, may be directed toward specific individual consumers, or toward many consumers (such as a television advertisement). When conduct is directed toward specific, identified consumers, then the conduct is evaluated against those specific consumers. [page 549] However, if the allegedly misleading or deceptive conduct is directed toward many consumers, then a slightly different method of evaluation becomes necessary. In these circumstances, it becomes important to identify a class of consumers who may have been misled or deceived or who are likely to have been misled or deceived. Since it is not possible to test the conduct by reference to every member of the class, the courts require the identification of a ‘hypothetical representative member of the class’. This person is said to be the ordinary and reasonable member of the class. 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. 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. 17.11 The process or method of evaluating misleading or deceptive conduct directed toward a large class of consumers was explained by the High Court in Campomar Sociedad Limitada v Nike International Ltd.16 In that case, Campomar sold a fragrance known as ‘Nike Sports Fragrance’. Nike alleged that this conduct was misleading and deceptive. The High Court stated:

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.17

Once that representative member of the class has been identified, the court then examines whether and to what extent the alleged misleading conduct caused the representative member’s misled state of mind. Some limitations apply, as these members are expected to take basic precautions to protect their own interests.18 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. [page 550]

Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45; 169 ALR 677 High Court of Australia Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ at CLR 85–8: 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 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, [page 551]

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 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 [page 552] 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.

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?

[page 553]

Examples of misleading or deceptive cases 17.12 As noted above, there are a number of different circumstances under which allegations of misleading or deceptive conduct in breach of s 18 of the ACL can arise. In particular, misleading or deceptive conduct claims can arise in the context of comparative advertising, silence (that is, where a reasonable

expectation of disclosure exists), puffery, promises and character merchandising.

Comparative advertising 17.13 Comparative advertising occurs where a manufacturer or service provider in an advertisement directly compares their product or services with that of a competitor. 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,19 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.

Silence where disclosure is expected 17.14 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’.20 The test emphasises the effect upon the party that is disadvantaged by the silence or failure to disclose. [page 554]

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’. In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1),21 a statement that a restaurant could seat 128 people, coupled with the nondisclosure 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,22 the parties were negotiating with a view to entering into a distribution arrangement with each other. However, Masters Dairy had in fact entered into a distribution agreement with another party. The court held that the failure by Masters Dairy to disclose this information was misleading or deceptive in breach of s 52 of the TPA.

Puffery 17.15 Puffery will generally not sustain a claim of misleading or deceptive conduct. Puffs are almost always self-evidently exaggerated claims (‘We have the best steaks in town’). 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.23 However, if a claim is capable of misleading or deceiving consumers, it will move from the category of general puffery into that of actionable misrepresentations. The general rule is that the more the puff is capable of objective evaluation, the

more likely it will be a representation. Therefore, a statement that is clearly false in light of its context 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.24

Promises 17.16 Promises of a contractual nature may give rise to claims of misleading or deceptive conduct if they are not fulfilled. Section 18 of the ACL 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. [page 555] Promises about future conduct may also support claims for misleading or deceptive conduct. In Futuretronics Pty Ltd v Gadzhis,25 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.

Character merchandising 17.17 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 except for the emotive appeal of the association. 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 in which these cases 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 Hogan,26 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 …

In that case, an advertisement for shoes involved a scene that was extremely similar to one from the film ‘Crocodile’ Dundee (1986), 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. [page 556]

Key Points for Revision 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 into 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.

_________________ 1

Brown v Jam Factory Pty Ltd (1981) 35 ALR 79; 53 FLR 340 at 348.

2

(1981) 35 ALR 79; 53 FLR 340 at 348.

3

See Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177; ATPR 40-303 at 43,751.

4

Butcher v Lachlan Elder Realty Pty Ltd (2002) 55 NSWLR 558; 11 BPR 20,317.

5

(1988) 39 FCR 546; 79 ALR 83 at 93.

6

(1991) 28 FCR 511; 101 ALR 259 at 311.

7

State Government Insurance Corp v Government Insurance Office of NSW (1991) 28 FCR 511; 101 ALR 259 at 311.

8

ACL s 2.

9

Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth) para. 3.12.

10

(1990) 26 FCR 112; 94 ALR 719.

11

(1985) 7 FCR 325; 59 ALR 334.

12

(1990) 169 CLR 594; 92 ALR 193.

13

Barto v GPR Management Services Pty Ltd (1991) 33 FCR 389; ATPR 41-162 at 40,210.

14

For other situations that may give rise to claims of misleading or deceptive conduct, see 17.4.

15

(1982) 42 ALR 177; ATPR 40-303.

16

(2000) 202 CLR 45; 169 ALR 677.

17

(2000) 202 CLR 45; 169 ALR 677 at [103].

18

See Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; 42 ALR 1.

19

(2002) 193 ALR 629; 56 IPR 1.

20

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; 110 ALR 608 at 618.

21

(1988) 39 FCR 546; 79 ALR 83.

22

(1996) 150 ALR 273; (1997) ATPR (Digest) 46-164.

23

Byers v Dorotea Pty Ltd (1986) 69 ALR 715; (1987) ASC 55-534.

24

Byers v Dorotea Pty Ltd (1986) 69 ALR 715; (1987) ASC 55-534.

25

[1992] 2 VR 209.

26

(1989) 23 FCR 553; 87 ALR 14 at 45.

[page 557]

CHAPTER 18 Unconscionable Conduct CHAPTER OVERVIEW 18.1 18.2

Introduction Unconscionable conduct 18.3 The elements of unconscionability 18.4 Special disadvantage 18.5 Constitutional or situational disadvantage 18.6 Taking advantage 18.7 Knowledge 18.9 Taking unconscionable advantage 18.16 Defences 18.17 Remedies 18.18 Statutory unconscionability

Introduction 18.1

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. [page 558] Unconscionability does not exist simply because a bargain between two competent parties turns out to be harsh on one of the parties.4 Unconscionability can only exist where there has been some moral turpitude in taking advantage of the peculiar disadvantage of one of the parties.5 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 its own elements. In particular, the focus of unconscionability is upon a specific transaction rather than an ongoing relationship. As Deane J noted in Commercial Bank of Australia v Amadio,6 unconscionability focuses on the actions of the stronger party in procuring the bargain, rather than upon the quality of consent of the weaker party.

Unconscionable conduct 18.2

The historical origins of the doctrine of unconscionable conduct can be traced back to the 18th century when the courts of the United Kingdom sought to set aside bargains that had been unscrupulously procured by predatory individuals to the

immediate disadvantage of young upper class heirs.7 The young heirs presented a likely target for rogues as they lacked financial experience and acumen, but stood to inherit considerable sums of money.8 In Earl of Aylesford v Morris,9 Lord Selborne summarised the disparity of experience and power between the expectant heirs and those seeking to ‘catch bargains’ by stating: ‘[P]ower and influence are generally possessed, in every transaction of this kind, by those who trade upon the follies and vices of unprotected youth, inexperience, and moral imbecility.’ It was from this narrow class of cases that a doctrine capable of broader application emerged.10 [page 559] The doctrine of unconscionable conduct was subsequently articulated by the courts as a safeguard for those who suffered from some serious disadvantage and who had been unconscientiously taken advantage of by another party. In Baker v Monk,11 the court found the sale of two cottages by an elderly and illiterate lady to the Mayor of Faversham to have been unconscionably procured. In cases such as Baker v Monk, transactions were set aside where the facts demonstrated that one party was at a significant disadvantage and that the other party had knowingly taken advantage of the situation.

The elements of unconscionability 18.3

The doctrine of unconscionable conduct has three main elements of unconscionability: first, one party must be at a special disadvantage;12 second, the other party must know that the special disadvantage exists;13 and third, the other party must have taken an unconscientious advantage of the party with the special disability.14 The main defence to a claim of

unconscionability is to demonstrate that the transaction is fair, just and reasonable.15

Special disadvantage 18.4

Blomley v Ryan16 is the leading authority on the question of special disadvantage. In Blomley, the High Court overturned a transaction wherein a landowner sold a large parcel of land whilst he was intoxicated. The landowner, Ryan, owned land in rural New South Wales. The purchaser, Blomley, was well aware that Ryan had a drinking problem and during the course of a long drinking session, he sought to conclude a contract for the sale of land with Ryan. At the time that the agreement was made Ryan did not appear drunk. 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. [page 560] 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.17 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.18 In finding in favour of Ryan, Fullagar J articulated in Blomley a series of categories that almost presumptively give rise to a special disadvantage. Fullagar J stated: 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-a-vis the other.19

Later courts have repeatedly endorsed the statement of Fullagar J with the slight qualification that no subsequent court has recognised sex as a basis for creating a special disadvantage.20 Moreover, the existence of a special disadvantage is not necessarily tied to one factor, and even the existence of a particular factor does not definitively establish the existence of the requisite disadvantage. Notably, in Permanent Mortgages Pty Ltd v Vandenbergh,21 Murphy JA remarked that ‘advanced age of itself does not constitute a special disadvantage but may, in combination with other factors, contribute to the condition of being under a special disadvantage.’ Corones has noted that where the special disadvantage is constitutional in nature, ‘it must lead to an inability to make a rational judgment.’22 The question of special disadvantage must be assessed within the overall factual matrix of the relevant case and the existence of one factor that points towards a special disadvantage can be nullified by [page 561] other circumstances that suggest no relevant disadvantage.23 In Luong v Du,24 the fact that the plaintiffs had difficulties with the English language did not amount to a special disadvantage

because they understood the nature of the transaction and were appraised of the need to obtain legal advice. In Luong, Emerton J stated: ‘[T]he suggested disability or disadvantage arising from their limited command of English did not affect the ability of the plaintiffs to make a judgement as to their best interests in the circumstances of this case.’25

Constitutional or situational disadvantage 18.5

There is a difference between situational and constitutional disadvantage, and the cases of Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd26 and Louth v Diprose27 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 parties. For example, in Commercial Bank of Australia v Amadio,28 the poor literacy of the parents was a constitutional disadvantage. In contrast, in Louth v Diprose the fact that Diprose was infatuated with Louth lead to a situation in which the latter took advantage of the former. Note that the existence of a situational disadvantage does not guarantee a finding of unconscionability. The degree of disadvantage and its peculiarities are still crucial considerations for a court. The existence of a situational disadvantage does not guarantee a finding of unconscionability. The degree of disadvantage and its peculiarities are still crucial considerations for a court. In Australian Competition and Consumer Commission v CG Berbatis

Holdings Pty Ltd29 at first instance, French J stated: [page 562] 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.

The High Court overruled French J on the question of whether the Roberts’ situational disadvantage amounted to a special disadvantage.30 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.

Taking advantage 18.6

The level of special disadvantage must be such that the degree of inequality between the parties is more than equity can tolerate. Nonetheless, the existence of a special disadvantage alone is not sufficient to trigger the intervention of equity. The stronger party must be aware of the weakness and must knowingly choose to exploit it for his or her own advantage.31 In the case of Johnson v Smith,32 Allsop P stated: [W]hat lies at the heart of the doctrine is that advantage is taken of the special disadvantage. This may occur because of the unconscientious use of power arising or existing in the circumstances or (as here) the unconscientious attempt to retain the benefit obtained from the person with the special disadvantage.

In this sense, the doctrine of unconscionable conduct is concerned with the conduct of the stronger party, rather than

the quality of the consent of the weaker party. As Deane J noted in Louth v Diprose, the special disadvantage must be ‘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.’33

Knowledge 18.7

The stronger party must have actual knowledge of the special disadvantage.34 In Commercial Bank of Australia Ltd v Amadio,35 Mason J [page 563] stated with regard to the stronger party’s knowledge of the special disadvantage: ‘[I]f, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same.’36 That statement was read by the lower courts as opening the door to constructive knowledge.37 In Lopwell, MacFarlan JA noted the obiter remarks of Mason J in Amadio but found that actual knowledge existed in the facts of the case. However, in Kenneth Charles Ward v Brian Charles Ward,38 Brereton J applied a constructive knowledge standard observed that ‘actual knowledge of any specific diagnosis or condition is not required, and it suffices that the Defendant knew, or ought reasonably have known that the Plaintiff was not in a position to look after his or her own interests.’39 The question was subsequently resolved in the High Court’s decision in Kakavas v Crown Melbourne Ltd.40 In Kakavas the High Court stated that Mason J had not intended to import constructive knowledge

into the doctrine of unconscionable conduct.41 In Kakavas, the High Court stated: It is apparent from what Mason J said in relation to the transaction under consideration in Amadio that his Honour was speaking of wilful ignorance, which, for the purposes of relieving against equitable fraud, is not different from actual knowledge. In this regard, Mason J observed that it must have been obvious to the appellant bank’s officer that the transaction was an improvident one from the respondents’ point of view.42

18.8

The concept of actual knowledge is broad enough to encompass ‘wilful’ blindness’.43 Accordingly, a stronger party cannot deliberately close its eyes to the existence of any special disadvantage.44 In effect, where the facts are such that the stronger party should be put upon inquiry as to the existence of a special disadvantage, they cannot evade responsibility by simply averting their eyes from the situation. In Permanent Mortgages Pty Ltd v Vandenbergh,45 Murphy JA stated that ‘the special disadvantage will be sufficiently evident to the other party if the other party knows facts which would raise the possibility of the special disadvantage in [page 564] the mind of a reasonable person.’ Nonetheless, where the stronger party has no reason to know of the existence of a special disadvantage and is unaware of it, no unconscionable conduct will exist.46 Notably, in Perpetual Trustees Victoria Ltd v Burns,47 Heenan J stated: In Kakavas the court held that equitable relief of this kind required proof of a predatory state of mind and that the principle granting relief for unconscionable conduct is not engaged by mere inadvertence, or even indifference, to all the circumstances of the other party to an arm’s length commercial transaction and that all circumstances in the whole course of dealing between the parties are relevant.

In Burns, the fact that a lender’s agents were aware of the disabilities and poor earning capacities of the borrowers satisfied the knowledge requirement for unconscionable

conduct.48 The willing exploitation of the borrower’s vulnerabilities was clearly predatory. It is axiomatic that the requisite standard of a predatory mind cannot be satisfied by mere constructive knowledge.

Taking unconscionable advantage 18.9

The cases of Commercial Bank of Australia v Amadio49 and Louth v Diprose50 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.51 In the section below, those cases that illustrate the principles of unconscionable conduct are considered.

18.10 Commercial Bank of Australia Ltd v Amadio The case of Commercial Bank of Australia v Amadio52 is often regarded as Australia’s principal authority on unconscionable conduct. The case neatly encapsulates the application of the three elements of unconscionability. In the late 1970s Vincenzo Amadio was trading as a builder. Vincenzo liked to give the impression that he was an affluent man about town, but in reality his company was experiencing significant financial difficulties. As luck [page 565] would have it, Vincenzo was a close friend of his banker, Mr Virgo, and the two of them cooperated to prolong the trading life of Vincenzo’s company by increasing his overdraft and selectively dishonouring cheques. Nonetheless, Vincenzo’s

financial difficulties were such that he ultimately sought assistance from his parents. However, Vincenzo fundamentally misrepresented to his parents the true nature of the guarantee that he was seeking over the family home. He told his parents the guarantee would be in place for 6 months, when in fact this was not the case. Moreover, Mr and Mrs Amadio were not fluent in English, were elderly and commercially inexperienced. The family home and an investment property represented their sole assets. When Mr Virgo met with Mr and Mrs Amadio, all of these characteristics were apparent, along with their misunderstanding of the relevant transaction. Vincenzo’s business deteriorated and went into liquidation. The bank sought to enforce the guarantee. In the High Court, a majority of judges found that Mr and Mrs Amadio could not be 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’.53

In Amadio, all of the relevant elements of unconscionability were present. The Amadio’s had a special disability on account of their poor English, advanced age, lack of business experience and high level of dependence on their son. The bank officer, Virgo, was aware of their situation, and fully aware of Vincenzo’s predicament, yet he still went ahead with the

transaction. Further, there was no defence of reasonableness that the bank could make out under these circumstances. [page 566] 18.11 Louth v Diprose In the case of Louth v Diprose54 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. In 1981, Louis Diprose was an employee solicitor living in Launceston when he met Carol Mary Louth at a party. A brief romantic and sexual relationship transpired shortly thereafter between the pair. For Louth, this all cooled rather quickly. However, Diprose was clearly infatuated with her and he continued to pursue her despite her indifference. In fact, Diprose proposed marriage to Louth, but she rejected him.55 Eventually, Louth moved to Adelaide and in 1983 Dispose did the same in order to be closer to her. While Louth made it plain to Dispose that she had no interest in rekindling a serious romantic relationship, she did suggest that they might have some occasional intimacy. Moreover, Louth tolerated Diprose’s attention and he would pay her bills and the school fees of her children.56 In Adelaide, Louth lived in the Tranmere house owned by her sister and her sister’s husband. When they divorced it was suggested to Louth that she would have to move out. What happened next with regard to the representations that Louth made to Diprose was a point of some disagreement between the parties. Diprose alleged that in 1985, Louth told him that she would commit suicide if she was forced to vacate the house. That year, Diprose bought the Tranmere house and put it in Louth’s name. When subsequently he realised that she had no affection for him he sued for the return of the house. The trial judge, King CJ, found Diprose the more compelling witness. King CJ stated:

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.57

The acquisition of the Tranmere house for $58,000 represented a very substantial purchase for Diprose. At the time of the purchase, Diprose was an employee solicitor with a modest amount of assets and three [page 567] children of his own. Louth was aware of Diprose’s true financial position and King CJ found her assertion that she believed him to be a wealthy man to be ‘unconvincing’. 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 a majority of the Full Court of the Supreme Court. Louth appealed to the High Court, where a majority ruled in favour of Diprose. Deane J stated: … 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.58

In both the Full Court of the Supreme Court and the High Court, the appellate judges in the majority found that the

evidence taken as a whole supported the findings of the trial judge. What was plain was that Diprose had a peculiar attachment to Louth. This made him quite vulnerable to her and he was liable to make improvident decisions where she was concerned. It was equally clear that she was aware of his vulnerability and kept up the pretense of a friendship in order to obtain the benefits that he might bestow. Moreover, when Diprose suggested a number of options for the Tranmere house short of full ownership, Louth rejected them all. That left ownership in Louth’s favour as the only plausible option if Diprose were to purchase the house.

Louth v Diprose (1992) 175 CLR 621; 110 ALR 1 High Court of Australia Brennan J at CLR 626–33: 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; [page 568] 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 at 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, [page 569] in matters in which their interests 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 at 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’ [Blomley at 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 at 447–8] 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 at 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. [page 570] 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 at 415 per Kitto J]. Citing this passage in Amadio [(1983) 151 CLR 447 at 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. 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 at 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-àvis 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 at 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 [page 571] 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 at 182–3]: 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 at 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.

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. [page 572] 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 at 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 at 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 636–8: 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-in-law. She ‘deliberately manufactured’ a false ‘atmosphere of crisis in order to influence the [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 [page 573] 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 at 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 at 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. Sarmas has argued quite convincingly that the casting of Diprose as the romantic fool tended to obscure his own aggression towards Louth.59 For example, at trial there was a dispute between the parties as to an incident in Louth’s kitchen. It was contended by Louth that during an argument, Diprose had grabbed her by the throat and that he had only released her after she had kicked him. Diprose did not convincingly challenge this assertion, but the trial judge said that it mattered little to the unconscionable conduct claim. Strictly speaking, this is true because [page 574] it happened after the gift had been made, but it casts the relationship between the parties in an altogether different light. Similarly, the explicit nature of the Mary Poems, the book of poems which Diprose had written for Louth and presented to her, combined with Diprose’s continued romantic overtures to

Louth, may well have crossed over into sexual harassment.60 It is telling that he refrained from contacting Louth for some time after he had arrived in Adelaide, for fear of giving the impression that he was following her. The constant attempts by Diprose to be a presence in Louth’s life also needs to be assessed in light of her fragility.61 There is an argument to be made that the courts in Louth v Diprose gave too little weight to Louth’s mental health issues and her enduring trauma as a survivor of a violent rape in assessing her conduct and her relationship with Diprose. Moreover, Diprose was well aware of Louth’s background and her meagre financial position and his own conduct must be considered in light of this knowledge. Suffice to say, Louth v Diprose is quite an unusual case and it is not altogether certain that it would be decided in the same way were such a case to present itself today before a modern court.62 Nonetheless, the High Court’s decision in Louth v Diprose that emotional dependence significantly contributed to special disadvantage was a significant development within the doctrine of unconscionable conduct. The decision in Louth established a template of sorts that found useful application in the later cases of Williams v Maalouf,63 Xu v Lin64 and Mackintosh v Johnson.65 Though they are few, these cases form a definable subset within the broader doctrine of unconscionable conduct that might broadly be termed ‘clouded judgement’ cases. These cases quite arguably blur the lines between the doctrines of unconscionable conduct and undue influence. There is a discernible pattern to these matters. In these cases, the donor has formed an attachment to the object of his or her affection. To put matters gently, the affection is misplaced. Nonetheless, the donor makes a gift to the object of his or her affection. Subsequent developments lead the donor to realise that the gift was both improvident and bestowed upon an undeserving party. In some respects, Louth v Diprose is a troublesome precedent. Firstly, the primacy of deception, which was a key issue in Louth, might be

[page 575] regarded as being unduly reductive. It obscures the overall context of the defendant’s conduct. Second, the High Court in Louth overlooked facts that might have undermined the finding that the plaintiff was at a special disadvantage. 18.12 Mackintosh v Johnson In Mackintosh v Johnson,66 a tempestuous sexual relationship and infatuation, in which the appellant pointed out her financial needs during moments of reconciliation, was found not to be unconscionable conduct. The facts of Mackintosh v Johnson depict a plaintiff who repeatedly gave gifts to the defendant in the belief that the defendant cared for him and in the hope of securing a lasting relationship with her. In Mackintosh, the plaintiff and defendant engaged in a tempestuous sexual relationship within which the former was clearly deeply infatuated with the latter. At the time that the relationship began, the plaintiff was 73-years-old and had been long divorced. He was clearly very lonely and looking for intimacy and emotional support. The defendant was substantially younger, at 45 years of age, and was clearly aware of the plaintiff’s general state of isolation. The defendant had been in the broader social circle of the plaintiff, but the nature of their relationship substantially changed after she made a series of sexual advances towards him. During the course of their sporadic relationship the defendant would point out her financial needs during their moments of reconciliation. Consequently, the plaintiff loaned the defendant three sums of money totalling $125,000. In addition to these loans, which he forgave, he bought her other presents and paid for holidays away together. He ultimately gave her $436,000 to buy a house, in the hope that he would live there with her. The case suggests that the courts are now more willing to draw the line on unconscionable conduct and are likely to let foolhardy plaintiffs suffer the consequences of their actions. In contrast,

where the ‘clouded judgement’ is a result of mental illness, as in Williams v Maalouf,67 courts are likely to find unconscionable conduct. 18.13 Kakavas v Crown Melbourne Ltd The High Court’s decision in Kakavas v Crown Melbourne Ltd68 suggests the protection that courts are wont to afford to parties that are at a special disadvantage is not intended to extend to those who simply make unwise and extravagant financial decisions. Moreover, where the stronger party conducts itself reasonably and with no perceptible dishonesty, it is difficult to argue that the weaker party has been treated unconscionably. The case of Kakavas v Crown Melbourne Ltd concerned a claim by a ‘high roller’ that Crown Casino had dealt unconscionably with him over a period of time during which he had gambled away millions of dollars at its premises. [page 576] At trial, the appellant, Kakavas, sought to argue that Crown Casino had preyed upon his weakness for gambling. When that argument failed, the appellant sought to argue that as the respondent was aware of his problems with gambling it should not have accepted his money. The High Court characterised Kakavas’ arguments thus: At the trial of this action the appellant sought to accomplish this task by arguing that Crown and the other respondents should be required to accept responsibility for the appellant’s loss because they deliberately preyed upon his personality flaws to entice him to gamble in Crown’s casino. That case having failed, the appellant now focuses upon Crown’s acceptance of the benefit of the appellant’s improvident activities at the gaming tables. That shift in focus is a bold strategy; bold strategies do not always succeed. The particular flaw in the appellant’s new strategy is that it reveals a case which consists essentially of a complaint about the outcome of riskladen activity between the parties conducted in the ordinary course of Crown’s business. The appellant seeks to distinguish his dealings with Crown from the ordinary course of its business, but it is difficult to see the special factual foundation required to shift responsibility for his own conduct onto the party whose conduct did not go beyond accommodating the appellant’s wish to engage in risky business.69

Over a period of 1 year, from June 2005 to August 2006, Kakavas lost $20.5 million at Crown playing baccarat. He had identified himself as a high roller and was treated as such by Crown. He had voluntarily placed himself on an exclusion order for gambling, but the court did not find that Crown’s employees were fully aware of the order. The losses that Kakavas suffered were incurred over a period of time during which he was voluntarily at Crown Casino’s gaming tables. At the outset of its judgment, the High Court noted that (1) equity did not intervene simply because the result of a dealing was some form of hardship; and (2) equity did not act to relieve people of the consequences of improvident transactions. The High Court agreed with the trial judge in that Crown had no greater advantage over Kakavas than it had over other gamblers; that is, no particular special disadvantage could be made out and no victimisation of the appellant by Crown could be demonstrated. The fact that Crown’s business was lawful was also another telling factor in the High Court’s assessment that the conduct complained of was not unconscionable. The High Court stated: Gambling transactions are a rare, if not unique, species of economic activity in a civilised community, in that each party sets out openly to inflict harm on the counterparty. In the language of Lord Hardwicke, there was nothing ‘surreptitious’ about Crown’s conduct. Generally speaking, it would be an odd use of language to describe the outcome of such voluntary, and avowedly rivalrous, behaviour as the victimisation of one side by the other. This is especially so once the focus of the appellant’s case

[page 577] shifts away from his complaint of being lured or enticed into Crown’s casino. To describe the business of a casino as the victimisation of the gamblers who choose to frequent it might well make sense in moral or social terms depending on one’s moral or social philosophy; but it does not make a lot of sense so far as the law is concerned, given that the conduct of the business is lawful. And the courts of equity have never taken it upon themselves to stigmatise the ordinary conduct of a lawful activity as a form of victimisation in relation to which the proceeds of that activity must be disgorged.70

While there was evidence that Kakavas had a gambling problem, he was able to choose the times at which he would gamble and the amounts that he would wager. Moreover, he was able to refrain from gambling when he chose. As such, there was little to substantiate a claim of special disadvantage. Likewise, Crown had not set out to victimise the plaintiff. As Bigwood has noted, the Kakavas case is notable for the emphasis that the High Court placed upon actual knowledge and predation.71 The absence of both was fatal to the plaintiff’s case. 18.14 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd The High Court in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd72 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 were the proprietors of a fish and chips shop that was located in a suburban shopping centre. The Roberts family rented the shop’s premises from their landlord, who owned the shopping centre. During the course of their tenancy, the Roberts family came to be involved in litigation against their landlord. In essence, the Roberts were suing the landlord for $50,000 worth of overpayments. Whilst the litigation was ongoing, the daughter of the Roberts’ family became quite ill and the family became keen to sell their business. The illness placed the family in a peculiarly vulnerable position. As the lease was set to expire, the Roberts found a potential purchaser for their business. The purchaser informed them that he would buy the business provided that they had a lease in place. The Roberts raised this matter with

the landlord. The landlord then suggested that he would be amenable to [page 578] granting them a new lease provided that it contained a clause (cl 14) that 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 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.

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153 High Court of Australia Gummow and Hayne JJ at CLR 76–9: 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 [page 579] 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. 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; [page 580] 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 Ltd v Amadio and Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd within the context of unconscionability.

18.15 Bridgewater v Leahy It is interesting to contrast the High Court’s

decision in Berbatis with its earlier decision of Bridgewater v Leahy.73 As some commentators have noted, Bridgewater is a rather puzzling decision.74 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 [page 581] 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; 158 ALR 66 High Court of Australia Gleeson CJ and Callinan J at CLR 469–72: 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. [page 582]

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 preemptive 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 [page 583] 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 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 [page 584] 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. 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.] Kirby, Gummow and Gaudron JJ at CLR 478–93: 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 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. [page 585] … 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 undervaluation were important factors in finding unconscionability. It would also appear that Bill York’s attitude towards his wife and daughters coloured their 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 towards 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 a stronger party. [page 586]

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 a stronger party. The case of Bridgewater is somewhat more ambiguous than the earlier decision of the High Court in Louth v Diprose.75 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 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd, it seems likely that the latter option will prevail.

Defences 18.16 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.76 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 amount of money paid by the stronger party to the weaker party; the existence of independent advice; and 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.77 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.

Remedies 18.17 The primary remedy in the case of an unconscionable dealing is that the transaction be set aside.78 A court may also require that any profits [page 587] stemming from the unconscionable transaction be accounted for to the plaintiff.79 Equitable damages may also be available in some instances.80 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.81

Statutory unconscionability 18.18 Statutory unconscionability is now covered by the Australian Consumer Law (ACL). The ACL is housed within Sch 2 the Competition and Consumer Act 2010 (Cth) (CCA) and operates nationally via incorporation into the various Sale of Goods Acts in the states and territories. The CCA replaces the Trade Practices Act 1974 (Cth) (TPA). Under the TPA, unconscionable conduct was regulated under ss 51AA, 51AB and 51AC. Section 51AA concerned unconscionable conduct under the unwritten law.82 Section 51AB dealt with unconscionable conduct as applied to a corporation providing goods or services to

consumers.83 Section 51AC applied to unconscionable conduct in relation to a corporation receiving goods or services from an individual or small business. When the CCA was first enacted, ss 51AA, 51AB and 51AC of the TPA were replaced by, respectively, ss 20, 21 and 22 of the ACL, which in effect almost perfectly replicated the statutory language of ss 51AA, 51AB and 51AC. Shortly after the commencement of the ACL, parliament amended ss 21 and 22 of the ACL through the Competition and Consumer Legislation Amendment Act 2011 (Cth) (CCLAA). Consequently, s 21 denotes one cause of action for unconscionable conduct pertaining to the supply or receiving of goods and services, whereas s 22 sets out a set of statutory factors to be considered in evaluating s 21. Section 20 of the ACL provides: (1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time. (2) This section does not apply to conduct that is prohibited by section 21.

Section 20 of the ACL is tied to the concept of unconscionable conduct as developed by the courts of equity and the common law. In contrast, s 21 has a broader field of application due to the enumerated factors [page 588] in s 22.84 Given the relative infancy of the ACL, the relevant case law for assessing s 20 must be those cases that were decided under s 51AA of the TPA. 18.19 The following extract from Paciocco v Australia and New Zealand Banking Group Ltd85 demonstrates the considerations that a court must take into account in evaluating the notion of statutory unconscionable conduct.

Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584 Federal Court of Australia, Full Court Allsop CJ: Unconscionable conduct — the approach to an evaluative statutory standard [259] Notwithstanding the lack of controversy at the trial about the applicable principles, it is appropriate to say something about the standards involved, in particular unconscionability. This is so in order to explain why the conclusions reached by her Honour in her application of the principles were not shown to be wrong. I will focus, initially, upon the word ‘unconscionability’ in the ASIC Act. [260] It is also necessary to say something as to the relative standards or norms of unconscionability, unfairness and unjustness and the care needed in the use of other language to explicate those standards. In particular, the phrase ‘moral obloquy’ and a ‘high level of moral obloquy’ has been used to identify a feature of unconscionability: see Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; 15 BPR 29,699 at [291] where I referred to what Spigelman CJ said in Attorney-General (NSW) v World Best Holdings Ltd [2005] NSWCA 261; 63 NSWLR 557 at 583 [121] about the concept of unconscionability in s 62B of the Retail Leases Act 1994 (NSW). There are other cases in which this shorthand has been employed. It is unnecessary to discuss them. [261] It is important to recognise that Spigelman CJ in World Best was using the phrase in a way to differentiate the moral or normative standard in unconscionability as higher than in unfairness or unjustness. At [121] of World Best, the Chief Justice said: The Ministerial Second Reading speech, quoted above, indicates a similar concern to distinguish what is unconscionable from what is merely unfair or unjust. Even if the concept of unconscionability in s 62B of the Retail

[page 589] Leases Act is not confined by equitable doctrine, as the decisions under s 51AC of the Trade Practices Act suggest, restraint in decision-making remains appropriate. Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what was ‘fair or just, it could transform commercial relationships in a manner which the Minister expressly stated was not the intention of the legislation. The principle of unconscionability would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises. [262] That a degree of morality lies within the word ‘unconscionable’ is clear. ‘Unconscionability’ is a value-laden concept. ‘Obloquy’ is ‘the condition of being spoken against; bad repute; reproach; disgrace; a cause of detraction or reproach,’; ‘obliquity’ is ‘a deviation from moral rectitude, sound thinking or right practice; a delinquency; a fault or error.’: The Shorter Oxford English Dictionary on Historical Principles (3rd Ed, Oxford, 1969) Vol 2 p 1428. That unconscionability contains an element of deviation from rectitude or right practice or of delinquency can be readily accepted, as long as the phrase ‘moral obloquy’ is not taken to import into unconscionability a necessary conception of dishonesty. The statutory language is ‘unconscionable’: that is, against conscience. A sense of moral obloquy or moral obliquity can be accommodated within the meaning or conception of unconscientious or unconscionable conduct. That said, an understanding of the meaning conveyed by the word ‘unconscionable’ in the statute is not simply restated by substituting other words for those chosen by Parliament; danger easily lurks in the use of other words to capture the meaning of the statutory language. The task involved is not the choice of synonyms; rather, it is to identify and apply the values and norms that Parliament must be taken to have considered relevant to the assessment of

unconscionability: being the values and norms from the text and structure of the Act, and from the context of the provision …. 18.20 It is noticeable that under the TPA and the ACL, unconscionable conduct has only been found in those cases where the impugned conduct could be regarded as attracting a high degree of moral opprobrium. Driving a hard bargain, as in Berbatis, does not amount to unconscionable conduct. In Australian Competition and Consumer Commission v Samton Holdings Pty Ltd,86 a landlord required a payment of $70,000 from a tenant after the latter failed to renew a lease in time. The renewal of the lease was made contingent upon the payment of the $70,000. The Full Court of the Federal Court found that the [page 590] weak bargaining position of the tenant did not amount to a special disadvantage. The court noted: Characterisation of disadvantage as ‘special’ involves the recognition that it would be unconscionable knowingly to deal with the person so affected without regard to his or her disability, be it constitutional, in the sense of inherent, or situational, in the sense of arising from a particular set of circumstances. In effect this may require some special conduct or care which is not necessary in the absence of such disadvantage. If, for example, the disability relates to language, illiteracy or lack of education, conscientious dealing may ensure the bargaining deficit is compensated for by the provision of special assistance such as independent advice which will either enable a proper understanding of the transaction or overcome the disadvantage arising from want of a proper understanding. In this case it is difficult to see how the respondents might have catered for the disadvantage suffered by the Ranaldis and Executive Bloodstock other than by granting them a new lease on the same terms as would have applied had the option been exercised in accordance with the first lease. Yet it was accepted on all sides that the respondents were not obliged to offer the lessee a further term. The Ranaldis’ situation could not be characterised as one of special disadvantage only because the respondents failed to make an offer that they had no obligation to make. It cannot be the case that any tenant whose careless failure to exercise an option to renew a lease results in economic disadvantage would be entitled to a renewal of the term. A fortiori it cannot be the case that a tenant in that situation and absent other circumstances, is in a situation of special disadvantage ….87

The decisions in Berbatis and Samton Holdings suggest a contraction in the scope of the doctrine of unconscionable conduct in contrast to the broader approach that was arguably at play in Louth and Bridgewater. Under the more restricted approach, only clearly venal behaviour or outright victimisation amounts to unconscionable conduct. For example, in Australian Competition and Consumer Commission v Zanok Technologies Pty Ltd,88 a company accepted a fee from a number of migrant jobseekers for IT training, with the promise that it would employ them afterwards. No such employment was forthcoming after the training had been completed. In turn this jeopardised the ability of the jobseekers to remain in Australia due to their visa conditions. In the Federal Court, Edmonds J stated: Unconscionability is a concept which requires a high level of moral obloquy. It is not necessary for the party who has benefited from a transaction challenged as unconscionable to itself have created the special advantage which forms the basis of the unconscionability claim. It is sufficient if that party knows, or ought to have known, of the other party’s situation of special disadvantage and takes unfair advantage of the opportunity presented. …

[page 591] In the present circumstances, the unconscionable conduct on the part of Zanok was the promise that, in return for a fee, the applicant would receive training and thereafter guaranteed skilled employment in circumstances where Zanok knew or ought to have known that many of the applicants were temporary residents and anxious to find skilled employment to assist with their applications for permanent resident status. This conduct constituted more than simply taking advantage of a superior bargaining position but involved an unconscientious exploitation of another’s inability or diminished ability to conserve his or her own interests. Dangling the ‘employment carrot’ in return for a fee in circumstances in which the applicant faces having to leave Australia, constitutes a high level of moral obloquy especially where the promised employment does not exist.89

In Australian Competition and Consumer Commission v Lux Pty Ltd,90 the sale of a vacuum cleaner to a woman who was clearly mentally handicapped was found to be unconscionable as the door-to-door salesman who procured the transaction ought

reasonably to have been aware that the woman was intimidated and bothered by his presence, and only agreed to the sale so that he would leave. Likewise, in Australian Competition and Consumer Commission v Keshow91 the sale of books to illiterate and disadvantaged Indigenous women in the Northern Territory via a direct debit payments was found to be unconscionable. In Keshow, the salesman was aware that the women would have little immediate use for the books and the direct debits continued even after some of the women had fully paid for them. In Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd,92 the capricious actions of a franchisor in selectively denying advertising and supplies to franchisees was found to be unconscionable.

Key Points for Revision The doctrine of unconscionable conduct is well established in Australian law. There are three main elements of unconscionability: – one party must be at a special disadvantage; –

the other party must know that the special disadvantage exists; and

–

the other party must have taken an unconscientious advantage of the party with the special disability.

_________________ 1

Blomley v Ryan (1956) 99 CLR 362.

2

See Competition and Consumer Protection Act 2010 (Cth) ss 20, 21, 22.

3

See 18.4.

4

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153.

5

See Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402; Louth v Diprose (1992) 175 CLR 621; 110 ALR 1; Bridgewater v Leahy (1998) 194 CLR 457; 158 ALR 66.

6

(1983) 151 CLR 447; 46 ALR 402.

7

See Earl of Chesterfield v Janssen (1751) 28 ER 32.

8

Earl of Potmore v Taylor (1831) 4 Sim 182.

9

(1873) LR 8 Ch App 484 at 491 (CA).

10

J Dawson, ‘Economic Duress’ (1947) 45 Michigan Law Review 253 at 268.

11

(1864) 55 ER 430.

12

See Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402; Louth v Diprose (1992) 175 CLR 621; 110 ALR 1; Bridgewater v Leahy (1998) 194 CLR 457; 158 ALR 66. See also Aboody v Ryan (2012) 17 BPR 32,359; Nemeth (by her tutor) v Australian Litigation Funders Pty Ltd [2013] NSWSC 529; Gel Custodians Pty Ltd v Dewar [2014] WASC 177.

13

See Garcia v National Australia Bank Ltd (1998) 194 CLR 395; 155 ALR 614; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402; Louth v Diprose (1992) 175 CLR 621; 110 ALR 1.

14

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402; Louth v Diprose (1992) 175 CLR 621; 110 ALR 1; Bridgewater v Leahy (1998) 194 CLR 457; 158 ALR 66.

15

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474; 46 ALR 402.

16

(1956) 99 CLR 362.

17

(1956) 99 CLR 362 at 425–7.

18

(1956) 99 CLR 362 at 425–7.

19

(1956) 99 CLR 362 at 405.

20

For a discussion of gender inequality, see D Otto, ‘A Barren Future? Equity’s Conscience and Women’s Inequality’ (1992) 18 Melbourne University Law Review 808.

21

[2010] WASC 10 at [234]. See also Australia & New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305.

22

S Corones, The Australian Consumer Law, 2nd ed, LawBook Co, Sydney, p 182.

23

Luong v Du [2013] VSC 723.

24

[2013] VSC 723.

25

[2013] VSC 723 at [126].

26

(2003) 214 CLR 51; 197 ALR 153.

27

(1992) 175 CLR 621; 110 ALR 1.

28

(1983) 151 CLR 447; 46 ALR 402.

29

(2000) ATPR 41-778; [2000] FCA 1376 at [128].

30

(2003) 214 CLR 51; 197 ALR 153.

31

Johnson v Smith [2010] NSWCA 306.

32

[2010] NSWCA 306 at [5].

33

(1992) 175 CLR 621, 637; 110 ALR 1.

34

Permanent Mortgages Pty Ltd v Vandenbergh [2010] WASC 10.

35

(1983) 151 CLR 447; 46 ALR 402.

36

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 467; 46 ALR 402.

37

[2009] NSWCA 165.

38

[2011] NSWSC 107.

39

[2011] NSWSC 107 at [33]. This must now be qualified in light of the High Court’s decision in Kakavas.

40

(2013) 250 CLR 392; 298 ALR 35.

41

See also Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234 at [224] per Heenan J; Ellimark Pty Ltd v Calvo [2015] NSWSC 1240 at [146] per Bergin CJ.

42

(2013) 250 CLR 392; 298 ALR 35 at [156].

43

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402; Permanent Mortgages Pty Ltd v Vandenbergh [2010] WASC 10.

44

Lee v Ah Gee [1920] VLR 278; (1920) 26 ALR 179.

45

[2010] WASC 10 at [221].

46

Australian Competition and Consumer Commission v Radio Rentals Ltd (2005) 146 FCR 292.

47

[2015] WASC 234 at [224]. See also Bodapati v Westpac Banking Corp [2015] QCA 7 at [75] per Lyons J.

48

[2015] WASC 234 at [225].

49

(1983) 151 CLR 447; 46 ALR 402.

50

(1992) 175 CLR 621; 110 ALR 1.

51

Louth v Diprose (1992) 175 CLR 621; 110 ALR 1.

52

(1983) 151 CLR 447; 46 ALR 402.

53

(1983) 151 CLR 447, 474; 46 ALR 402.

54

(1992) 175 CLR 621; 110 ALR 1.

55

Though it is not remarked upon in the High Court judgments, the transcript of the trial discloses that Diprose even presented Louth with a contract, which stipulated that they would live together as husband and wife. See trial transcript, p 95, cited in L Sarmas, ‘Storytelling and the Law: A Case Study of Louth v Diprose’ (1994) 19 Melbourne University Law Review 701 at 715.

56

While this might have been evidence of calculation, it could also have easily been explained away as part of an untidy household.

57

Diprose v Louth (No 1) (1990) 54 SASR 438 at 448.

58

(1992) 175 CLR 621 at 638; 110 ALR 1.

59

Sarmas, above n 55, pp 716–17.

60

Sarmas, above n 55.

61

In this sense, the fact that Louth rejected offers from Diprose that fell short of ownership might well need to be viewed within the context of the relationship.

62

For a detailed discussion of Louth v Diprose, see S Hepburn, ‘Equity and Infatuation’ (1993) 18 Alternative Law Journal 208. See also P Heerey, ‘Truth, Lies and Stereotype: Stories of Mary and Louis’ (1996) 1(3) Newcastle Law Review 1.

63

[2005] VSC 346.

64

[2005] NSWSC 569.

65

(2013) 37 VR 301.

66

(2013) 37 VR 301.

67

[2005] VSC 346.

68

(2013) 250 CLR 392; 298 ALR 35.

69

(2013) 250 CLR 392; 298 ALR 35 at [21].

70

(2013) 250 CLR 392; 298 ALR 35 at [25]–[26].

71

R Bigwood, ‘Kakavas v Crown Melbourne Ltd — Still Curbing Unconscionability: Kakavas in the High Court of Australia’ (2013) 37(2) Melbourne University Law Review 463.

72

(2003) 214 CLR 51; 197 ALR 153.

73

(1998) 194 CLR 457; 158 ALR 66.

74

N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed, Butterworths LexisNexis, Sydney, 2008, p 752.

75

(1992) 175 CLR 621; 110 ALR 1.

76

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474; 46 ALR 402.

77

Louth v Diprose (1992) 175 CLR 621; 110 ALR 1.

78

Louth v Diprose (1992) 175 CLR 621; 110 ALR 1; Asia Pacific International Pty Ltd v Dalrymple [2000] 2 Qd R 229.

79

O’Brien v ANZ Bank Ltd (1971) 5 SASR 347.

80

Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810.

81

Dowsett v Reid (1912) 15 CLR 695; 19 ALR 15.

82

See Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153.

83

See Alievski v Cross Country Realty Victoria Pty Ltd [2010] VSC 316.

84

A Bruce, Consumer Protection in Australia, LexisNexis Butterworths, Sydney, 2014, p 151. See also Australian Competition and Consumer Commission v Radio Rentals Ltd (2005) 146 FCR 292.

85

(2015) 321 ALR 584.

86

(2002) 189 ALR 76.

87

(2002) 189 ALR 76 at [65]–[66].

88

[2009] FCA 1124.

89

[2009] FCA 1124 at [16]–[17].

90

[2004] FCA 926. See also Australian Competition and Consumer Commission v Lux Distributors Pty Ltd (2013) ATPR 42-429.

91

(2005) ATPR (Digest) 46-265; [2005] FCA 558.

92

(2000) 104 FCR 253; 178 ALR 304. See also Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143.

[page 593]

CHAPTER 19 Undue Influence CHAPTER OVERVIEW 19.1 19.2

Introduction Categories of undue influence 19.4 Actual undue influence 19.7 Presumed undue influence 19.9 Specific relationships of influence 19.9 Parent and child 19.13 Guardian and ward 19.14 Religious adviser and disciple 19.17 Rebutting the presumption 19.17 Independent advice 19.19 Free will 19.20 The principle in Yerkey v Jones 19.22 Remedies

Introduction 19.1

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 [page 594] 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 unconscionability 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 Skinner6 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: the importance of the relationship between the affected party and the party seeking the gift or contract; that undue influence can be found regardless of whether or not unfair pressure has been exerted, as taking advantage is sufficient in and of itself;7 and [page 595] that the party seeking to procure the contract or gift does not necessarily need to be seeking a personal benefit.

Categories of undue influence 19.2

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.

In Allcard v Skinner,9 Lindley LJ described the purpose of undue

influence as follows: [T]o 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.

19.3

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.10 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.11 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 this category, the existence of the relationship itself raises the presumption. Within Class 2 there are in fact two different subcategories: 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. [page 596]

Actual undue influence 19.4

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.12 In such cases, the plaintiff must demonstrate that the antecedent relationship has been characterised by a high degree of trust and confidence between the parties.13 Once the plaintiff has established that the

relationship was one of a high degree of trust and confidence, the evidentiary onus will then shift to the other party.14 In Farmers Co-operative Executors & Trustees Ltd v Perks,15 a transfer of property from a wife to a husband was found to be procured through actual undue influence. The relationship between the husband and wife was marked by a long history of violence from the husband to the wife. The husband eventually murdered the wife. Duggan J found that a relationship of influence existed and, as finding of the exercise of actual undue influence could not be rebutted, the transfer was set aside.16 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. The plaintiff must demonstrate that the antecedent relationship has been characterised by a high degree of trust and confidence between the parties. 19.5

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 Diprose,17 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,18 the gift of money and the provision of an interest-free loan from an alcoholic was found to be the result of undue influence. [page 597] In other cases of actual undue influence, a threat has been present. In Williams v Bayley,19 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. 19.6

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,20 where Starke J characterised the matter as one of actual undue influence, while Dixon J viewed the case as a relationship of influence which triggered the presumption.21

Presumed undue influence 19.7

As mentioned above, presumed undue influence refers to those categories of relationships that automatically raise the presumption of undue influence.22 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).23 Where this is a relationship of influence, once the plaintiff has established that the relationship exists, then the

presumption arises. [page 598]

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). The types of relationships that automatically give rise to the presumption (Class 2A) are: parent and child;24 guardian and ward;25 doctor and patient;26 solicitor and client;27 trustee and beneficiary;28 and religious adviser and disciple.29 The categories of relationships that might give rise to the presumption are not closed.30 Though the courts have over time identified the types of relationships listed above as giving rise to the presumption, it is possible that new relationships might also attract the operation of the presumption of undue influence. 19.8

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 depend highly upon Mary Johnson. Buttress was 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. [page 599]

Johnson v Buttress (1936) 56 CLR 113; [1936] ALR 390 High Court of Australia Latham CJ at 119–23: 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, wellunderstood 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 [page 600] 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 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 134–8: 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 wellknown relations as soon as it appears that the relation existed and that he has obtained a substantial [page 601] 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 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 [page 602] 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 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 daughterin-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 [page 603] 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 cross-examination 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 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 someone 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.

[page 604] The key facts in Johnson v Buttress that led to a finding of undue influence were: (1) the degree of inequality between the donor and the recipient of the gift; and (2) 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 the gift was made, the evidence suggests that Buttress himself proposed making it in favour of Johnson. But this alone did not prove that the gift was made as a free exercise of Buttress’s will. In order to prove a free exercise of will, the donee would need

to show that the donor had sought independent advice. This would be particularly important where the gift in question was a valuable one. Johnson did not advise Buttress to seek independent advice. Accordingly, once the relationship of trust and confidence between the parties was established by the plaintiff, she was unable to rebut the presumption of undue influence. The key facts in Johnson v Buttress that led to a finding of undue influence were: (1) the degree of inequality between the donor and the recipient of the gift; and (2) the failure of Johnson to persuade Buttress to seek independent advice.

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?

Specific relationships of influence32 Parent and child 19.9

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 [page 605]

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. 19.10 In Grace v Grace,34 the plaintiff had received 2001 shares in a company from his father’s estate. At the age of 19, for no consideration (despite being recorded as $1 per share), he transferred 667 shares to both his mother and sister, effectively losing voting control over the company, which held a large real estate portfolio. The court set aside the transfer on the basis that the transfer was procured by undue influence and was not an independent and well-understood act of the plaintiff exercising his own free judgment.

Grace v Grace [2012] NSWSC 976 Supreme Court of New South Wales Brereton J: [86] Equity avoids dispositions of property procured by the improper

or unconscientious use of the influence of one person over another, that cannot be explained on the grounds of friendship, charity or other ordinary motives on which people ordinarily act [National Westminster Bank plc v Morgan [1985] UKHL 2; [1985] AC 686 at 708; Bank of New South Wales v Rogers [1941] HCA 9; (1941) 65 CLR 42 at 54]. Undue influence may be established by proof that the disponor’s assent was in fact procured by undue influence (‘actual undue influence’), or by an unrebutted presumption arising from the existence of a relationship of influence between the parties where the quantum or improvidence of the transaction is such that it cannot be explained on grounds of friendship, relationship, charity, or [page 606] other ordinary motives (‘presumed undue influence’) [Whereat v Duff [1972] 2 NSWLR 147 at 168; Quek v Beggs (1990) 5 BPR 11,761; Allcard v Skinner (1887) 36 Ch D 145 at 185; Goldsworthy v Brickell [1987] Ch 378 at 400–1]. Some relationships — such as parent and child, guardian and ward, solicitor and client, doctor and patient, (probably) spiritual adviser and follower, and (arguably) fiancé and fiancée — are presumed to be relationships of influence. [87] At the time of the transaction, David was in a presumed relationship of influence with his mother Julienne. The suggestion, advanced by the defendants, that he had become emancipated from such influence by the time of the share transfers in January 1995 is untenable: he was but 19 years of age; he was still living at home; his affairs were still being managed by Julienne, who selected and retained accountants and lawyers for him; and Julienne continued to manage his personal assets, at least to some extent, then and for some years thereafter. He was, unsurprisingly, not subservient in every way to his mother: he disobeyed her requests not to use cannabis, and he questioned her decision to terminate his father’s life support in hospital. But that, perhaps like many teenagers, he engaged in occasional acts of defiance and rebellion does not mean that he was emancipated. His employment as a teller at Westpac was not at such a level as to demonstrate any

commercial sophistication. The simple will he made on 31 August 1995 in favour of Deborah with a gift over to Julienne, he says at the request of Julienne, is in no way inconsistent with undue influence so as to tell in favour of rebuttal of the presumption. That he signed cheques, drawn by others, does not establish emancipation. Even now, he does not present as a very forceful or dominant personality. [88] The defendants submit that there was no undue influence, which I take to be a submission to the effect that it was not established that the quantum or improvidence of the transaction was such that it could not be explained on grounds of friendship, relationship, charity, or other ordinary motives. In favour of that proposition are the circumstances that there was evidence from Mr Lonergan that the economic value of the CUMP shares was only about 97 cents each; that through Grace Securities, Deborah and Julienne would have an equitable interest in Nevilda Holdings and a legitimate interest in its management; and that there was a familial relationship between the three. In those circumstances, it might be said that a wish to share voting control was a rational explanation. [89] On the other hand, while the CUMP shares may have had slight economic value, their significance was that they conferred voting control of the Nevilda companies, which held extensive and valuable real property assets. While David did not by any means divest the whole of his property, he gave away effective control of the properties and assets that underlie the Nevilda companies — which his father had always had, and intended that David should have. Critically, he had limited knowledge of the companies and of his father’s estate, and he did not know that he was entitled to voting control of the companies under his father’s will, nor that the effect of the transaction was that he was surrendering [page 607] that control. In the context of the control that ownership of all the voting shares conferred, the stated consideration of $1 per share, even if paid, would not have dispelled the appearance that this transaction

was seriously disadvantageous to David, and prima facie improvident. In my judgment, in its context, this transaction by David was of such apparent improvidence as not to be explicable by ordinary motives. The defendants also invoked events that took place subsequently — including contributions made by Julienne to the management of the Nevilda companies, and benefits derived as a result — in support of the proposition that the transaction was not an improvident one from David’s perspective. But that judgment must be made at the time of the transaction, not by reference to later events. The circumstances of this case are such that the presumption rightly casts on Julienne the onus of rebutting it. … [91] David’s lack of knowledge that his father’s will gave him an entitlement to hold all the voting shares, and that he was surrendering that control, are also relevant to any suggestion that the presumption has been rebutted. The defendants contended that the transfers were made pursuant to an oral agreement whereby David agreed to transfer the CUMP shares, so as to enable them to share control between them, in circumstances where Julienne was unwilling to remain responsible for the management of the Nevilda companies with no voting rights. Deborah and Julienne say that this agreement was struck in a discussion between them and David in early January, in which they agreed that they should share equally between the three of them the voting shares in Nevilda Holdings. There is no contemporaneous evidence of any such agreement, beyond the share transfers themselves. The conversation could not have happened at the time the defendants allege, as David was in Byron Bay. For those reasons in addition to my general credit conclusions, I do not accept that any such agreement was made. But even if (which David, whose evidence I prefer, denies), there had been such an agreement, it would itself be vitiated by presumed undue influence. This is even more the case if Julienne said, or implied — as her evidence and that of Deborah suggests — that she was only prepared to continue to manage the companies and provide the personal guarantees that she claimed were required if she had some voting power; such a statement would accentuate rather than dissipate the pressure on David to accede to the transfers. With no

consideration being actually provided for the transfers, and in the absence of any independent advice, I am entirely unpersuaded that the presumption of undue influence is rebutted. My conclusion would not differ had the nominal consideration of $1 per share been paid, because it does not reflect the practical value of these shares to David, at least if he held all of them. [92] I am, therefore, quite unsatisfied that the transfers were the independent and well-understood act of David exercising his own free judgment. Subject to the defence of laches, considered below, the share transfers are voidable for undue influence.

[page 608] 19.11 Note that although a parent might be presumed to be in a position of undue influence over a child, there is no presumption that a child has influenced the parent.35 In Brown v NSW Trustee and Guardian,36 Brereton J observed: The relationship of parent and child is a presumed relationship of influence, but in the context that the parent is presumed to exercise influence over the child; there is no presumption in the opposite direction. There could only be a relationship of influence, such as could give rise to presumed undue influence, in this case if a special relationship of influence were proven. To establish such a relationship, more than mere confidence and reciprocal influence is required. For a relationship to be brought within the doctrine, it must go beyond one of mere confidence and influence to one involving dominion or ascendancy by one over the will of the other and, correlatively, dependence and subjection on the part of the other. It is not necessary to establish a relationship of actual dominion by one party over another, and it is enough to show that the party in whom trust and confidence is reposed is in a position to exert influence over the party who reposes it. But more is required than the influence that any person might have on another by making a recommendation or giving advice; as a minimum, it is necessary that one have some element of authority or superiority — which may be moral or practical, as distinct from legal — over the other.

As there is no presumption of undue influence (Class 2A), a party seeking to have a contract declared void by reason of the undue influence of a child over a parent must first establish that there was a special relationship of influence (Class 2B),

which is illustrated in the following case in which the plaintiff claimed that his adopted brother, the defendant, was in a special relationship of influence with their elderly and frail adoptive mother, which led her to transfer a property to the defendant, and sought to set aside the transfer. [page 609]

Mace v Mace [2015] NSWSC 1659 Supreme Court of New South Wales Robb J: [105] There was no issue between the parties concerning the legal principles that the court is required to apply in deciding whether the transfer of the Property was brought about by undue influence exercised by Glenn Mace over his mother. Those principles have conveniently been collected in a number of recent decisions of this court. It would not be helpful for me unnecessarily to multiply the number of different statements of principle in this area of law, and I will respectfully adopt the following passages from the judgment of Ball J in Courtney v Powell [2012] NSWSC 460: … [38] Although the relationship between parent and child is one which is well-accepted as giving rise to a presumption of undue influence, that is only true insofar as a parent is presumed to exercise influence over his or her child. There is no presumption in the opposite direction: Brown v New South Wales Trustee & Guardian [2011] NSWSC 1203 at [46] per Brereton J. Consequently, in order to establish a presumption that a child has exercised undue influence over his or her parent, it is necessary to prove that there was a ‘special

relationship’ of influence between the parties. In Quek v Beggs (1990) 5 BPR 11,761 at 11,764, McClelland J stated that two circumstances must be proved if a presumption of undue influence is to arise. They are: (a) that at the time the gift was made there existed a relationship between the donor and the donee of such a nature as to involve reliance, dependence or trust on the part of the donor resulting in an ascendancy on the part of the donee; and (b) that the gift is so substantial, or so improvident, as not to be reasonably accounted for on the grounds of friendship, relationship, charity or other ordinary motives on which ordinary persons act … … [40] It is not necessary to show that the relationship is one of domination by the donee of the donor. A position of dependence or trust enabling the donee to influence the donor is enough: Stivactas v Michelatos (No 2) (1993) NSW ConvR 55-683 at 59,908 per Sheller JA. [41] In order to rebut the presumption, it must be proved that ‘the gift was the independent and well-understood act of a man [or woman] [page 610] in a position to exercise a free judgment based on information as full as that of the donee’: Johnson v Buttress (1936) 56 CLR 113 at 134 per Dixon J. Relevant to that question is whether the intention to make the gift originated with the donor: Watkins v Combes (1922) 30 CLR 180 at 196 per Isaacs J. But that is by no means conclusive: Spong v Spong (1918) 18 CLR 544 at 549 per Griffiths CJ. The real question is how the

intention was produced: Hewitt v Gardner [2009] NSWSC 1107 at [73] per Ward J. [42] Whether or not the donor received independent advice on the transaction will be important in proving an independent and well-understood act of free will. … [106] In the present case, Brett Mace does not claim that the transfer of the Property occurred as a result of actual undue influence exercised by his brother. The question is whether a relationship of influence in fact existed between Glenn Mace and Mrs Mace, and whether the presumption arising from the existence of that relationship has not been rebutted by Glenn Mace. [107] There is no presumption of the exercise of influence by Glenn Mace over his adoptive mother, so it will be necessary for Brett Mace to prove that there was a ‘special relationship’ of influence. [108] The first matter to be proved is whether, at the time Mrs Mace transferred the Property to Glenn Mace, there was a relationship between the two that involved reliance, dependence or trust on the part of Mrs Mace resulting in an ascendancy on the part of Glenn Mace. [109] A feature of this case is that, while Brett Mace claims that Glenn Mace had the required ascendancy over Mrs Mace, Brett Mace does not say that his brother was the only one in this position of ascendancy. Brett Mace accepts that, by reason of Mrs Mace’s circumstances, and the relationship that he and his wife had with Mrs Mace, and her dependence upon them, as well as his brother and her wife, he was also in a position of ascendancy. Brett Mace’s case is that it is not necessary for him to establish that his brother was the sole person in a position of ascendancy over Mrs Mace; it did not matter how many persons had that relationship of ascendancy; the real question was whether one person in the ascendancy had unduly taken advantage of that relationship with Mrs Mace to gain an advantage for themselves. [110] If Brett Mace establishes that in fact Glenn Mace had a relationship of ascendancy over Mrs Mace, the question will be whether the transfer of the Property was a gift that was so substantial, or so improvident, as not to be reasonably accounted for on the grounds of

friendship, relationship, charity or other ordinary motives on which ordinary persons act. [111] In the present case, there is no evidence that would justify the court finding that the intention to make the gift originated with anyone other than Mrs Mace. While it may be an open question as to whether Glenn Mace unduly [page 611] influenced Mrs Mace, I accept the evidence given by Ms Soszyn, and that evidence supports a finding that the decision to transfer the Property was made by Mrs Mace. It will finally be necessary to consider the effect of the advice given by Ms Soszyn to Mrs Mace in relation to the transfer of the Property and the execution of her final will. In Mace v Mace,37 the court ultimately rejected the plaintiff’s argument that the adoptive mother transferred the title to the property because of undue influence exercised by the defendant, and did not accept that the transfer of the property was so substantial or improvident as not to be reasonably accountable for on the grounds of the caring relationship between the defendant and his adoptive mother, even though it represented practically all of her property. 19.12 As is evidenced by Mace v Mace, the absence of a presumption that a child has influenced a parent is not altogether unproblematic where the circumstances are such that the child is an adult and the parent is quite elderly. It is more troublesome yet where there are a number of adult children and one of them appears to have used his or her closeness to the parent to induce a gift of assets through inter vivos transactions.38 In Langford v Reddy [2012] NSWSC 289, the plaintiff, an elderly woman, claimed that her daughter and son-

in-law subjected her to undue influence and induced her to execute the transfer of her property to them in the presence of a solicitor under the guise of seeking her assistance to obtain a first home owners grant. The plaintiff sought an order that the property be held on trust for her and that the transfer be declared null and void as she had not received independent legal advice and that the transfer was registered without her knowledge or her consent. The defendants contended that the plaintiff transferred the property to them in exchange for them paying to build a granny flat at the back of the property for the plaintiff and undertaking to care for and maintain both the main house and the plaintiff. The court rejected the plaintiff’s case of fraudulent concealment and did not find undue influence; however, it did make orders for a constructive trust of a life estate in favour of the plaintiff. In Daunt v Daunt,39 the plaintiff claimed that his brother, the defendant, exercised undue influence over their parents by convincing their [page 612] mother, who co-owned the family property with the father, to transfer her share of the property to the defendant to ensure her continued eligibility for Centrelink payments. The father passed away and the defendant succeeded to sole proprietorship of the property by right of survivorship. The Court of Appeal40 upheld the trial judge’s decision that by reason of the facts and circumstances between the defendant and his parents, there was an antecedent relationship between the defendant and his parents such as to raise the presumption of undue influence, but that the defendant had discharged this onus by rebutting the presumption.

Guardian and ward 19.13 In Powell v Powell,41 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 21 years of age, 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 High Court of England and Wales, Chancery Division Lord Farwell at 245–8: 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 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

[page 613] 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 someone 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 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, [page 614] 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 to 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.

Religious adviser and disciple 19.14 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,42 Nottidge v Prince,43 Lyon v Home44 and Morley v Loughnan.45 More recent examples of courts finding undue influence in matters pertaining to religious orders and spiritual advisers include Quek v Beggs,46 Hartigan v International Society for Krishna Consciousness Inc,47 Khan v Khan48 and McCulloch v Fern.49 [page 615]

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. 19.15 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 anyone in the

Krishna Consciousness Movement to get the better of the plaintiff’,50 a finding of undue influence was still made.

Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810 Supreme Court of New South Wales Bryson J: [27] 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 undue 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. [28] 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 [page 616]

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. … [30] 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 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. … [32] 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.’ [33] 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 [page 617] 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. [34] 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.’ 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). … [36] 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 [page 618] 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. [37] 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 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 [page 619] 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 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 demonstrates the proposition that undue influence can be procured by a third party who derives no direct benefit from the impugned transaction. 19.16 The case of Khan v Khan,51 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 latter refused to sell the house to the former. Eventually, after much dispute over the price, a meeting was held at Mrs Sadiq’s house. Shikandar and Farisha brought along Mufti Naiem, a religious adviser, to assist with the negotiations. The Mufti advised Mrs Sadiq that if she sold her house to Shikandar and Farisha for $495,000 (which was significantly less than the house was worth) she would be blessed. Mrs Sadiq’s sons also advised her to sell. At this meeting, Mrs Sadiq signed the contract of sale. She later recanted, and when Shikandar and Farisha sued for specific performance, she [page 620] 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 community.

Khan v Khan (2004) 62 NSWLR 229 Supreme Court of New South Wales Barrett J at 234–42: 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 … 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. 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. [page 621] 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 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. 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 [page 622] 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. 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. 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 demonstrates 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.

Rebutting the presumption Independent advice 19.17 The procurement of independent advice is important in rebutting the presumption of undue influence. The stronger party bears the burden of [page 623] proof to demonstrate to the court that the affected party has in fact made an independent and fully informed decision.52 This is a positive burden of proof, and the mere absence of proof as to undue influence does not discharge the burden. Where the presumption of undue influence has arisen, it is clear that the existence of independent advice is fundamental to rebutting it. There is some disagreement, though, as to whether that independent advice actually has to be followed. The procurement of independent advice is important in rebutting the presumption of undue influence. The stronger party bears the burden of proof to demonstrate to the court that the affected party has in fact made an independent and fully informed decision. 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 Ltd53 pointed out that ‘there is no rule of law absolutely requiring independent advice’. Similarly, Latham CJ in Johnson v Buttress54 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 Omar55 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 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 Singh56 that a transaction might stand where it can be shown that independent advice would have been disregarded. [page 624] 19.18 The judgment in Edith White v Judith Liane Wills57 provides a useful overview of these concepts.

Edith White v Judith Liane Wills [2014] NSWSC 1160 Supreme Court of New South Wales Sackar J at [86]–[102]: Rebutting the presumption [86] A defendant may rebut the presumption of undue influence if it is

shown that the transaction was, per Eldon LC in Huguenin v Baseley: ‘the pure, voluntary, well-understood act of the mind,’ of the plaintiff: Johnson v Buttress at 119 per Latham CJ. [87] Courts of equity impose the presumption of undue influence as a matter of public policy, in order to prevent an abuse of the relations which existed between the parties and to protect persons from the exercise of influence in circumstances where its proof may be impossible (Allcard v Skinner (1887) 36 Ch D 145, 183 per Lindley LJ). [88] The difficulty of discharging the prescribed onus of proof is of course variable. In Westmelton (Vic) Pty Ltd v Archer [1982] VicRp 29; [1982] VR 305, the Full Court of the Supreme Court of Victoria observed: The extent and weight of the burden cast upon the person in whom the confidence was reposed, and the matters (where the presumption applies) of which the court will require to be satisfied before it will regard the presumption as having been negatived, must vary enormously with all the circumstances of the case, and it is pointless as well as unjustified in law to attempt to lay down any particular requirements for all cases, or indeed any classes of case, because the circumstances and the requirements will vary infinitely with the infinite variety of human affairs. The burden of proof may be discharged, for example, by showing a gift proceeded from some laudable motive, that there was a long-held intention to make the gift, or that the donor decided to go ahead with the transaction following advice from an unbiased friend. [89] The burden of proof may be discharged, for example, by showing a gift proceeded from some laudable motive, that there was a long-held intention to make the gift, or that the donor decided to go ahead with the transaction following advice from an unbiased friend.

[page 625] [90] In Johnson v Buttress Latham CJ noted at 120: 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. [91] Latham CJ also observed at 123: 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. [92] And Dixon J noted further at 134 that beneficial title obtained by reason of undue influence will only be set aside where the donee: … satisfies the court that he took no advantage of the donor and 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. [93] Dixon J continued: 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 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. [page 626] [94] It may not be enough for the defendant to establish the donor in fact intended to give the gift (Huguenin v Baseley (1807) 14 Ves 273, at 299–300). Nor may it be sufficient to show that the proposal came from the donor: see Spong v Spong [1914] HCA 52; (1914) 18 CLR 544 at 549; Whereat v Duff [1972] 2 NSWLR 147 at 169 per Asprey JA. [95] The defendant is required to establish that the disponor acted independently of the influence of the dominant party and that she both knew and understood what she was doing (Watkins v Combes [1922] HCA 3; (1922) 30 CLR 180). The burden is therefore a high one (Allcard v Skinner (1887) 36 Ch D 145, at 182-183 per Lindley LJ) … The presence of independent advice [97] The presence of independent advice may go towards establishing

the existence of a fully informed, free and independent will on the part of the plaintiff (although it is not essential to prove that independent advice was obtained in order to rebut the presumption). Latham CJ in Johnson v Buttress observed at 119-120: It may not be necessary in all cases to show that the donor received competent independent advice (Inche Noriah v Shaik Allie Bin Omar and Haskew v Equity Trustees, Executors and Agency Co Ltd); the law as to this matter is still a subject of discussion (Lancashire Loans, Ltd v Black). 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. [98] However in that case, independent advice was not relied upon. Indeed the transfer under scrutiny was prepared by the managing clerk of the defendant’s solicitor, the defendant accompanied the deceased to the office and was present at the interview with the managing clerk: at 121 per Latham CJ. [99] Although no hard and fast rule has been laid to establish the requisite content, scope and effect of the independent advice necessary to rebut the presumption, in Jenyns v Public Curator Qld [1953] HCA 2; (1953) 90 CLR 113 at 131 the High Court noted that independent advice ‘must be that of some independent person who is not connected with the donee in business or in any other confidential way and he has a knowledge of all the material facts and he, in fact, advises the donor on all matters which might affect her consideration in determining whether to make a gift’. [page 627]

[100] In Inche Noriah v Shaik Alle Bin Omar [1929] AC 127 the Privy Council noted that to satisfy the requisite quality of independent advice, the advice must originate from someone acting solely in the interests of the donor, at 135–136: Nor are their Lordships prepared to lay down what advice must be received in order to satisfy the rule in cases where independent legal advice is relied upon, further than to say that it must be given with a knowledge of all relevant circumstances and must be such as a competent and honest adviser would give if acting solely in the interests of the donor. [101] In Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 at 36, Street J made the following observations on the topic of independent legal advice: The need to provide meaningful advice in order to enable an independent choice to be made by a person in the position of the plaintiff is of great importance. The purpose of obtaining advice is to enable the making of an independent choice. It may be that to an informed and intelligent listener advice confined to explaining will enable an intelligent choice to be made to the effect that the document being explained is acceptable to the party being asked to execute it. But the mere fact that a document is explained, and that no questions are asked nor criticism made of it by the party to whom it is being explained, does not tend strongly in favour of the conclusion that this party made a deliberate and intelligent choice to adopt each and every one of the provisions contained in the document. [102] It must however be acknowledged that the absence of legal advice will not in itself substantiate a lack of a fully informed understanding of the transaction. Those facts may emerge in and of themselves.

Free will 19.19 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 AttorneyGeneral for England and Wales v R,58 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 [page 628] 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.

The principle in Yerkey v Jones 19.20 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.59 The basic principle in Yerkey v Jones60 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. 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. 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 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’.61 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 National Australia Bank Ltd v Garcia,62 but the High Court followed Dixon J’s approach.63 [page 629] 19.21 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 Court64 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.65 The decision in Garcia excited some public controversy and academic commentary.66 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.67 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; 155 ALR 614 High Court of Australia Gaudron, McHugh, Gummow and Hayne JJ at 403–7: The Court of Appeal held that it was not bound to follow Yerkey v Jones. Sheller JA [page 630]

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.’ 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 [page 631] 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 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 [page 632]

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 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 [page 633] 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.

Remedies 19.22 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. Rescission is discussed in detail in Chapter 22.

Key Points for Revision 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. 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. The presumption of undue influence may 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.

_________________ 1

(1939) 63 CLR 649; [1939] ALR 62.

2

National Westminster Bank v Morgan [1985] 1 AC 686; Johnson v Buttress (1936) 56 CLR 113; [1936] ALR 390; Royal Bank of Scotland Plc v Etridge (No 2) [2002] 2 AC 773.

3

Johnson v Buttress (1936) 56 CLR 113 at 135; [1936] ALR 390.

4

See 19.7.

5

Allcard v Skinner (1887) 36 Ch D 145; Goldsworthy v Brickell [1987] 1 All ER 853; [1987] 2 WLR 133.

6

(1887) 36 Ch D 145.

7

Coercion is not a requirement.

8

(1936) 56 CLR 113 at 135; [1936] ALR 390.

9

(1887) 36 Ch D 145 at 183.

10

See Farmers Co-operative Executors & Trustees Ltd v Perks (1989) 52 SASR 399; In re Craig (dec’d) [1971] Ch 95.

11

See Barclays Bank plc v O’Brien [1994] 1 AC 180. For a discussion of the categories of undue influence, see R Bigwood, ‘Undue Influence in the House of Lords: Principles and Proof’ (2002) 65 Modern Law Review 435.

12

Johnson v Buttress (1936) 56 CLR 113; [1936] ALR 390; Calvo v Sweeney [2009] NSWSC 719.

13

Johnson v Buttress (1936) 56 CLR 113; [1936] ALR 390; Farmers Co-operative Executors & Trustees Ltd v Perks (1989) 52 SASR 399.

14

In re Craig (dec’d) [1971] Ch 95.

15

(1989) 52 SASR 399.

16

(1989) 52 SASR 399 at 405–6, 416–17.

17

(1992) 175 CLR 621; 110 ALR 1.

18

[1984] WAR 61.

19

(1866) LR 1 HL 200.

20

(1936) 56 CLR 113; [1936] ALR 390, discussed at 19.8.

21

(1936) 56 CLR 113; [1936] ALR 390 at CLR 126 per Starke J, 138 per Dixon J.

22

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.

23

Proven relationships of influence, leading to the presumption of undue influence, have been described by Brereton J as ‘special relationships of influence’: Tulloch (dec’d) v Braybon (No 2) [2010] NSWSC 650.

24

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.

25

Powell v Powell [1900] 1 Ch 243.

26

Williams v Johnson [1937] 4 All ER 34.

27

Westmelton (Vic) Pty Ltd v Archer and Schulman [1982] VR 305.

28

Jenyns v Public Curator (Qld) (1953) 90 CLR 113; Whereat v Duff [1972] 2 NSWLR 147.

29

Allcard v Skinner (1887) 36 Ch D 145.

30

Johnson v Buttress (1936) 56 CLR 113 at 119; [1936] ALR 390 per Latham CJ.

31

(1936) 56 CLR 113; [1936] ALR 390. Johnson v Buttress may be defined as a Class 2B case.

32

Note that the other recognised relationships of influence — doctor and patient, solicitor and client, and trustee and beneficiary — are regulated by specific statutory schemes.

33

[1934] 1 KB 380.

34

[2012] NSWSC 976.

35

Note, however, that cases have acknowledged the influence that children may have over their parents. In Avon Finance Co Ltd [1985] 2 All ER 281, the defendant’s son utilised his relationship of influence to procure his parents’ signature on loan documents. The son misleadingly advised his parents that the documents were documents that they ought to have signed before in

connection with the first, agreed upon mortgage when in fact the documents were for a loan to the son secured by an additional mortgage over their house. The court dismissed an appeal by the finance company against an earlier decision that the finance company could not enforce the legal charge against the parents, with Brandon LJ stating at 288: ‘It seems to me that, while the relationship between husband and wife may be one in which it is more obvious that the husband will have influence over the wife, the relationship between a son in the prime of life and parents in the evening of life is equally a relationship in which it should be appreciated that the possibility of influence exists.’ 36

[2011] NSWSC 1203 at [46].

37

[2015] NSWSC 1659.

38

Note that this is different from when undue influence is alleged to have effected a transfer that is to occur under a testamentary disposition (a gift under a will).

39

[2013] VSC 706.

40

Daunt v Daunt [2015] VSCA 58.

41

[1900] 1 Ch 243.

42

(1887) 36 Ch D 145.

43

(1860) 66 ER 103.

44

(1868) LR 6 Eq 655.

45

[1893] 1 Ch 736.

46

(1990) 5 BPR 11,761.

47

[2002] NSWSC 810.

48

(2004) 62 NSWLR 229.

49

[2001] NSWSC 406.

50

[2002] NSWSC 810 at [37].

51

[2004] 62 NSWLR 229.

52

Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573; Westmelton (Vic) Pty Ltd v Archer and Schulman [1982] VR 305.

53

(1919) 27 CLR 231 at 234–5; 25 ALR 350.

54

(1936) 56 CLR 113 at 119; [1936] ALR 390.

55

[1929] AC 127 at 135.

56

(1913) 30 TLR 138.

57

[2014] NSWSC 1160.

58

[2004] 2 NZLR 577.

59

Bank of Victoria Ltd v Mueller [1925] VLR 642; Yerkey v Jones (1939) 63 CLR 649; [1939] ALR 62.

60

(1939) 63 CLR 649; [1939] ALR 62.

61

(1939) 63 CLR 649 at 675; [1939] ALR 62.

62

(1996) 39 NSWLR 577 at 598; 21 ACSR 309.

63

Garcia v National Australia Bank Ltd (1998) 194 CLR 395; 155 ALR 614.

64

Garcia v National Australia Bank Ltd (1998) 194 CLR 395; 155 ALR 614.

65

Garcia is primarily a case of unconscionability; however, it is extracted in this chapter in relation to the court’s discussion of undue influence.

66

See A Lyons, ‘Garcia v NAB: Who is Within its Scope and What Must They Be Told?’ (2004) 78 ALJ 379.

67

Note the Supreme Court of Queensland’s decision in Schultz v Bank of Queensland Ltd [2015] QCA 208, which illustrates that Yerkey v Jones is still good law in Australia. Although the guarantor wife’s claim failed in this case, the court held the view that the onus would switch to the lender to demonstrate that adequate explanation was provided if a surety was first able to show a material misunderstanding regarding the transaction. See also Agripay Pty Ltd v Byrne [2011] 2 Qd R 501, where a ‘well-educated, intelligent medical practitioner’ was protected from being held to a guarantee she had signed on her husband’s behalf after the court applied the rule laid down in Yerkey and confirmed in Garcia.

[page 635]

CHAPTER 20 Duress CHAPTER OVERVIEW 20.1 20.2 20.3

Introduction Elements of duress Legal boundaries of duress 20.3 Duress, undue influence and unconscionability 20.5 Duress and consideration 20.6 Contracts made under duress are voidable 20.7 Categories of duress 20.7 Duress to the person 20.7 Threats of violence 20.8 Other threats 20.9 Duress of goods 20.10 Economic duress 20.18 The overborne will and the nature of the threat 20.19 The overborne will 20.20 The nature of the threat 20.24 Causation 20.25 Remedies

Introduction 20.1

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 that the law of contract [page 636] 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.

Elements of duress 20.2

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: illegitimate pressure — physical, psychological or economic — was used to bring about a transaction; the pressure procured the transaction (causation); and 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. In response to these claims the defendant can make out certain ‘quasi’ defences by proving that the pressure did not cause [page 637] the contract or that the plaintiff had reasonable alternatives. Ordinarily, the illegitimate pressure is applied directly by the defendant. However, in Barton v Armstrong,9 Jacobs JA suggested that threats amounting to duress could be made by the defendant ‘or by someone acting with his knowledge and with his advantage.’ 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.

Legal boundaries of duress Duress, undue influence and unconscionability 20.3

The legal boundaries of duress are not sacrosanct. Duress as a doctrine is related to both undue influence and unconscionability. As with the latter two doctrines, duress has its roots within equity and is concerned with whether a bargain, procured under circumstances that the law deems to be questionable, can in fact be allowed to stand.

As with undue influence and unconscionability, duress has its roots within equity and is concerned with whether a bargain, procured under circumstances that the law deems to be questionable, can in fact be allowed to stand. The fundamental difference between duress and undue influence is that when duress arises, the contract has been procured by pressure such that the free will of one of the contracting parties 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. 20.4

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 [page 638] point is that statutory unconscionability, as it stands presently housed within the Australian Consumer Law,10 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.

Duress and consideration 20.5

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.11 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,12 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 that pointed to duress allowed for the contract to be enforceable.13 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.14 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 [page 639] fundamentally opposing doctrines such as duress and

consideration to the cleverness of a contracting party.15 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’’.16

Contracts made under duress are voidable 20.6

Where duress is made out, the contract will not be void ab initio;17 it will instead be voidable.18 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.19 However, the courts have consistently held, mainly on grounds of policy, that the affected party should have the right to decide whether or not they wish to remain in the contract.20 As duress now covers economic pressure, in the form of the doctrine of 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. [page 640]

Where duress is made out, the contract will not be void ab initio; it will instead be voidable. In Universe Tankships Inc of Monrovia v International Transport

Workers’ Federation (‘The Universe Sentinel’)21 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.

Categories of duress Duress to the person Threats of violence 20.7

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, 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 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 (1) the

other party was aware that the threats were being made or had some connection to the threats; or (2) the person [page 641] 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 20.8

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 Campion,27 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 son, both of whom were directors in a family company, were pressured into a contract by the implied threat of prosecution of another [page 642] 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.

Duress of goods 20.9

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. [page 643]

REVIEW QUESTIONS 1.

What is duress?

2.

Under what circumstances will claims of duress arise?

Economic duress 20.10 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.36 In McKay v National Australia Bank Ltd,37 Tadgell JA noted that the forms of illegitimate pressure giving rise to economic duress are ‘various and indefinite and the categories are not closed … the validity in law of pressure exerted by one party on another … will obviously be determined by the circumstances and the relationship, if any, between the parties.’38 What seems to be clear is that economic duress will normally entail a demand for payment that has no basis in the existing contractual relations between the parties and for which no new consideration is given.39 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.40 20.11 Both the Australian and United Kingdom courts were actively involved in developing the doctrine of economic duress. The Australian courts in TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd,41 Smith [page 644] v William Charlick Ltd42 and White Rose Flour Milling Co Pty Ltd v Australian Wheat Board43 effectively developed the concept of economic duress; and the United Kingdom courts in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd44 and Universe Tankships Inc of Monrovia v International Transport

Workers’ Federation (‘The Universe Sentinel’)45 also recognised the existence of the doctrine. In more recent cases, however, the Australian courts have been reluctant to find economic duress, as this doctrine might encroach upon legitimate but still unsavoury commercial practices; and it is clear that large businesses in particular may struggle to successfully make out a claim of economic duress.46 In Commonwealth Bank of Australia v Doggett,47 Hargrave J stated: Mere commercial pressure to act is not sufficient to establish the second element of duress. In the commercial arena, many acts are done under pressure, sometimes overwhelming pressure, so that it can be said that the party had no choice but to act. To constitute duress, however, the commercial pressure must be of a kind that is regarded by the law as illegitimate. As Tadgell JA said in McKay, ‘a threat by the creditor to institute legal proceedings or to pursue another legal remedy in order to recover the debt could seldom be wrong in itself’.

20.12 Though the two doctrines are distinct, the concept of economic duress draws upon the base concept of unconscionability. In turn, the idea that a bargain between two parties is unconscionable is less than compelling where the parties are large, savvy and well-resourced commercial entities. Harsh dealings in a commercial sphere are likely to be regarded by the courts as legitimate pressure.48 An argument of economic duress is on a surer footing where there is some clear inequality between the parties. For example, such an inequality of bargaining power surely exists between an employer and an employee. Economic duress will normally entail a demand for payment that has no basis in the existing contractual relations between the parties and for which no new consideration is given. 20.13 The cases of Smith v William Charlick Ltd49 and TA Sundell & Sons Pty v Emm Yannoulatos (Overseas) Pty Ltd50 illustrate the basic fact paradigm of

[page 645] 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: [T]he 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.51

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. 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.52 In TA 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 TA 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. [page 646] 20.14 In North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd,53 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 9 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 9 months after the ship had been completed, it thereby impliedly consented to the variation of the contract. 20.15 In Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’),54 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 Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’) [1983] 1 AC 366 House of Lords, United Kingdom Lord Scarman at 400–1: 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 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 [page 647] 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. 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 [page 648] 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, 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. 20.16 In the case of Crescendo Management Pty Ltd v Westpac Banking Corp,55 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 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 an oft-quoted statement, McHugh JA noted:

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.56

20.17 In Australia and New Zealand Banking Group Ltd v Karam,57 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. [page 649] 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 Ltd v Karam

(2005) 64 NSWLR 149 New South Wales Court of Appeal Beazley, Ipp and Basten JJA at 162–5: 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. … 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 [page 650]

effect is ‘compulsion or the absence of choice’: see generally, Mason and Carter, Restitution Law in Australia (1995) p 161. 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. 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. 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 duress58 should be rejected. A person who is the subject of duress usually knows only [page 651] too well what he is doing. 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. 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. 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. 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. 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:

[page 652] 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. 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’. 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. 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. [page 653] 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 …

The overborne will and the nature of the threat 20.18 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 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,59 that contracts made under duress are merely voidable, rather than void ab initio.

The overborne will 20.19 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/S Avanti (‘The Siboen’ and ‘The Sibotre’).60 This theory drew much criticism, notably from Professor Atiyah, for effectively reducing the affected party to a state of ‘automatism’.61 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 Corp,62 McHugh JA stated that the overbearing of the will approach to duress should be rejected: 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 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.

[page 654] 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 Wales Supreme Court in Equiticorp Financial Services Ltd (NSW) v Equiticorp Financial Services Ltd (NZ)63 and by the Victorian Supreme Court in Deemcope Pty Ltd v Cantown Pty Ltd64 and Belgravia Investments Pty Ltd v Evans.65 Similarly, in Dimskal Shipping Co SA v International Transport Workers Federation (The Evia Luck No 2),66 Lord Goff endorsed McHugh JA’s statement. Accordingly, the true test for duress is ‘whether any applied pressure induced the victim to enter into the contract’.67 However, in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd, various judges of the High Court noted that the question of whether the plaintiff’s will has been overborne is a relevant consideration in determining common law duress.68 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 nature of the threat 20.20 A degree of controversy exists in relation to the question whether or not duress must be unlawful. Unlawful and illegal acts can clearly constitute duress. It is less clear as to whether lawful conduct can constitute duress.69 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 [page 655] compromising information unless the victim enters into a particular contract.70 In Kaufman v Gerson,71 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 Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’),72 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 (UK)]. 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.73

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. [page 656] 20.21 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 Ltd v Karam,74 where the court argued that economic duress should be confined to unlawful acts.75 The court was of the view that lawful act duress cases should be regarded as cases of unconscionable dealing or undue influence.76 The Supreme Court’s decision in Karam has attracted some academic criticism,77 and in Mitchell v Pacific Dawn Pty Ltd,78 the Queensland Court of Appeal was at pains to point out that duress and unconscionable conduct are different doctrines ‘with different bases and incidents’.79 Similarly, in Electricity Generation Corp t/as Verve Energy v Woodside Energy Ltd,80 McLure P, with whom Newness JA agreed, noted that if ‘the pressure is lawful, it may be illegitimate if there is no reasonable or justifiable connection between the pressure being applied and the demand which that pressure supports.’ 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 Leahy81 has been removed. Suffice to say, that case has been advanced as potentially broadening the scope of unconscionable conduct.82

If duress is seen as a species of unconscionability, which it unquestionably is, then this enlivens the question of whether lawful [page 657] 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 that offend the conscience of equity.83

Australia and New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149 New South Wales Court of Appeal Beazley, Ipp and Basten JJA at 166–8: 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; 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’. 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: [page 658] 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 Practces 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. 20.22 While the Queensland Court of Appeal in Mitchell v Pacific Dawn Pty Ltd84 expressed some concern at the prospect that the terms ‘illegitimate pressure’ and ‘unconscionable conduct’ might be conflated, Chesterman J [page 659] in the Queensland Supreme Court expressed a degree of support for the position in Karam. In Mitchell v Pacific Dawn Pty Ltd,85 Chesterman J stated: In the passage I quoted the court did not (as I read it) recommend abandoning ‘economic duress’ as a doctrine or concept, but sought to confine it. The court was critical of the use of the term ‘illegitimate pressure’. I respectfully agree that the

term ‘illegitimate pressure’ should be abandoned. It has always begged more questions than it pretended to answer and its use by McHugh JA in Crescendo Management Pty Ltd v Westpac Banking Corporation has always been unhelpful.

In A v N,86 Ward J suggested that duress in Australia might be limited to unlawful conduct. However, given the later statements of the West Australian Court of Appeal in Woodside, this is clearly incorrect.87 In A v N, an adult daughter claimed that her step-mother had used duress to force her to enter into a deed pertaining to three family properties. At the time that the alleged acts took place the daughter was suing her father and step-mother with regard to the properties. The daughter contended that the step-mother had made threats, including indicating her unwillingness to comply with an apprehended violence order, and that she subsequently felt pressured to sign the deed. The daughter also suggested that the step-mother had threatened to deny her access to her father. The daughter claimed that the denial of access to her father at a time when he was quite unwell was unfair pressure. Ward J noted that there was insufficient evidence to support the allegation that there were threats of violence, though had they been proven, then duress would clearly have existed. In relation to the alleged threat to deny the daughter access to her father, presumably by not admitting her to the house in which the step-mother and father lived, Ward J stated that she was ‘not satisfied that this is an unlawful act of the kind considered to be necessary in Karam.’88 It is, of course, a lawful act to refuse another person entry into your home, though had the threat to deny access to the father been proven, it would surely have been considered in the broader context of the ongoing family litigation and the deed. Therein lies the weakness in the position established in Karam. A lawful act considered in isolation might under Karam be sufficient to avoid a claim of economic duress; however, a lawful act done for an improper purpose and with full knowledge of the distress it would cause the other party, such that they would enter into an agreement that they would never have willingly joined otherwise, must surely be set aside.

Indeed, such an act would likely fall within the parameters of duress that McLure P set out in Woodside. [page 660] 20.23 There have been some suggestions that a lawful act within a commercial context might still constitute economic duress. In Beerens v Bluescope Distribution Pty Ltd,89 the Victorian Court of Appeal held that a request for a further guarantee and indemnity coupled with a threat to join a winding-up proceeding was not duress. Bluescope made the demands to Beerens at a time that a third party had commenced windingup proceedings against the latter. At the time that Bluescope made its request it was unaware that the third party had an improper purpose in bringing its proceedings. Moreover, Bluescope had a contractual right against Beerens to initiate winding-up proceedings. Tate JA, with whom Redlich JA agreed, determined the matter on the basis of unconscionable conduct, and held that Bluescope had not acted improperly. Tate JA stated: The threat by BlueScope to exercise its rights under the Credit Agreement in the face of those circumstances did not amount to illegitimate pressure. In my opinion, in the circumstances, the threat to engage in a lawful act in a commercial context in pursuit of a bona fide claim, in the exercise of contractual rights, did not amount to unconscionable conduct.90

Nonetheless, Nettle JA, with whom Redlich JA agreed, stated that had Bluescope been aware that the proceedings were baseless, then the demand would have been improper. Nettle JA stated: If a creditor makes a threat to bring a proceeding which the creditor knows to be groundless or for an improper purpose, the threat is improper and may impose improper pressure sufficient to vitiate a transaction or payment of which it is a substantial cause. Similarly, if a creditor makes a threat to do something unlawful, even though the creditor believes he is lawfully entitled to do it, there are circumstances in which the law will regard the threat as amounting to improper pressure and relieve against its consequences. But in a commercial context, the

circumstances in which that is so are likely to be rare. It is, moreover, not unlawful to support an application to wind up a company and there is nothing in authority or principle to support the view that it would be improper pressure to do so where all that is known of the validity of the application is that it is disputed by the debtor.91

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?

[page 661]

Causation 20.24 The illegitimate threat must have caused the execution of the contract in some manner; that is, the threat must have acted on the mind of the victim. It follows then that one of the key issues in duress is determining whether the threat operated on the mind of the victim. In most duress cases, this will be fairly obvious. The victim of the alleged duress will protest in some manner and make their displeasure known in a tangible way. However, in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd,92 the failure of the victim of duress to seek redress was held to be an undue delay and a bar to a remedy. The illegitimate threat must have caused the execution of the contract in some manner; that is, the threat must have acted on the mind of the victim. In Crescendo Management Pty Ltd v Westpac Banking Corp,93 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 Armstrong94 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.95

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’.96 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 [page 662] contract’.97 This test, which is arguably more inclusive than a ‘but for’ test,98 might be preferable given the need to craft rules for duress that support three different species of the doctrine.

Remedies 20.25 The remedy that is of most fundamental importance in the area of duress is rescission;99 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.100

However, where rescission is not available — as, for example, in the facts of North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd101 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.102 Duress might be an actionable tort and, as such, damages may be payable in such cases. The notion of duress as a tort was considered by Lord Diplock in Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’),103 though his Lordship declined to express a view either confirming or rejecting the proposition.

Key Points for Revision 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: illegitimate pressure; causation; and 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.

_________________ 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 Corp v Skibs A/S Avanti (‘The Siboen’ and ‘The Sibotre’) [1976] 1 Lloyd’s Rep 293; Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’) [1983] 1 AC 366.

5

[1983] 1 AC 366.

6

(2004) 2 NZCCLR 187 at [98] (CA).

7

As Professor Bigwood has noted, this seems to be too many elements: see R Bigwood, ‘When Exegesis Becomes Excess: The Newborn Problematics of Contractual Duress Law in New Zealand’ (2005) 21 Journal of Contract Law 208.

8

See Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’) [1983] 1 AC 366.

9

[1973] 2 NSWLR 598 at 611; (1973) 3 ALR 355. See also Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24 at [58] per McColl JA (Ward JA agreeing).

10

ss 20, 21, 22.

11

For a discussion of duress and consideration, see R 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.

12

[1991] 1 QB 1.

13

[1991] 1 QB 1 at 13–16.

14

N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th ed, LexisNexis Butterworths, Sydney, 2008, p 711.

15

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.

16

D W Greig and J L R Davis, The Law of Contract, Law Book Co, Sydney, 1987, p 950.

17

Barton v Armstrong [1976] AC 104.

18

Barton v Armstrong [1976] AC 104; Lynch v DPP for Northern Ireland [1975] AC 653; Barton v Armstrong [1973] 2 NSWLR 598 at 614 per Jacobs JA, 617 per Mason JA, 621 per Taylor AJA. See also Electricity Generation Corp t/as Verve Energy v Woodside Energy Ltd [2013] WASCA 36 at [31] per McLure P (Newness JA agreeing), [201] per Murphy JA; Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24 at [58] per McColl JA (Ward JA agreeing).

19

This is the compulsion of the will test expounded in Pao On v Lau Yiu Long [1980] AC 614 at 635–6, where the court held that a ‘coercion of the will so as to vitiate consent’ would support this proposition. Similarly, in Occidental Worldwide Investment Corp 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 United Kingdom and Australia have moved away from this notion: see Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 at 45–6 per McHugh JA; Dimskal Shipping Co SA v International Transport Workers Federation (‘The Evia Luck’ (No 2)) [1992] 2 AC 152 per Lord Goff.

20

North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All ER 1170; [1979] 3 WLR 419; Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’) [1983] 1 AC 366.

21

[1983] 1 AC 366 at 400.

22

Barton v Armstrong [1976] AC 104 (PC).

23

Barton v Armstrong [1976] AC 104 (PC).

24

Barton v Armstrong [1973] 2 NSWLR 598.

25

Barton v Armstrong [1976] AC 104 at 120.

26

McLarnon v McLarnon (1968) 112 Sol Jo 419.

27

(1984) 56 ACTR 39; 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.

30

Maskell v Horner [1915] 3 KB 106; see also Occidental Worldwide Investment Corp v Skibs A/S Avanti (‘The Siboen’ and ‘The Sibotre’) [1976] 1 Lloyd’s Rep 293 at 336 per Kerr J; J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539; 61 FLR 108.

31

Skeate v Beale (1840) 113 ER 688.

32

Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298.

33

(1991) 22 NSWLR 298.

34

Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (‘The Universe Sentinel’) [1983] 1 AC 366; Pao On v Lau Yiu Long [1980] AC 614; TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1956) SR (NSW) 323; Smith v William Charlick Ltd (1924) 34 CLR 38; 30 ALR 246; White Rose Flour Milling Co Pty Ltd v Australian Wheat Board (1944) 18 ALJR 324.

35

See A Phang, ‘Economic Duress — Uncertainty Confirmed’ (1992) Journal of Contract Law 147.

36

Commonwealth Bank of Australia v Doggett [2014] VSC 423 at [199] per Hargrave J.

37

[1998] 4 VR 677.

38

[1998] 4 VR 677 at 689. The absence of illegitimate pressure will defeat a claim for economic duress. See Diploma Construction (WA) Pty Ltd v Best Bar Pty Ltd [No 2] [2015] WASC 230.

39

North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705.

40

News Ltd v Australian Rugby League Football Ltd (1996) 64 FCR 410; 139 ALR 193; Deemcope Pty Ltd v Cantown Pty Ltd [1995] 2 VR 44. The arguments for economic duress in Deemcope and News Ltd both failed. The learned commentators Seddon and Ellinghaus argue that this is merely evidence that claims of economic duress made by large commercial entities will fail. See Seddon and Ellinghaus, above n 14, p 710.

41

(1956) SR (NSW) 323.

42

(1924) 34 CLR 38; 30 ALR 246.

43

(1944) 18 ALJR 324.

44

[1979] QB 705.

45

[1983] 1 AC 366.

46

CTN Cash and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714; Ford Motor Co of Australia Ltd v Arrowcrest Group Pty Ltd (2003) 134 FCR 522.

47

[2014] VSC 423 at [200].

48

See Maritime Union of Australia v Geraldton Port Authority (1999) 93 FCR 34; 165 ALR 67.

49

(1924) 34 CLR 38; 30 ALR 246.

50

(1956) SR (NSW) 323.

51

(1924) 34 CLR 38 at 70; 30 ALR 246.

52

J W Carter, E Peden and G J Tolhurst, Contract Law in Australia, LexisNexis Butterworths, Sydney, 2008, p 489.

53

[1979] 1 QB 705.

54

[1983] 1 AC 366.

55

(1988) 19 NSWLR 40.

56

(1988) 19 NSWLR 40 at 46. See also Probert v Ericson [2014] QSC 4 at [40] per Henry J. The approach outlined by McHugh J in Crescendo has also been interpreted as requiring a two-step approach to economic duress consisting of (1) consideration of whether the defendant applied pressure that resulted in the plaintiff entering into a contract; and (2) an examination of whether that pressure is illegitimate. See Sturesteps v Khoury [2015] NSWSC 1041 at [151] per Slattery J.

57

(2005) 64 NSWLR 149.

58

See 20.19.

59

See 20.6.

60

[1976] 1 Lloyd’s Rep 293.

61

See P S Atiyah, ‘Economic Duress and the Overborne Will’ (1982) 98 Law Quarterly Review 197; see also A Phang, ‘Whither Economic Duress? Reflections on Two Recent Cases’ (1990) 53 Modern Law Review 107 at 109.

62

(1988) 19 NSWLR 40 at 45–6. See also Bustfree Pty Ltd v Llewellyn [2013] QCA 103 at [21] per Gotterson JA (Philippides and Lyons JJ agreeing); A v N [2012] NSWSC 354 at [505] per Ward J.

63

(1992) 29 NSWLR 260; 9 ACSR 199.

64

[1995] 2 VR 44.

65

SC Vic, Smith J, 13 March 1998, unreported.

66

[1992] 2 AC 152 at 165–6.

67

Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 at 45G.

68

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153 at [79] per Kirby J; [18] per Gleeson CJ; [36] per Gummon and Hayne JJ.

69

See J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539; 61 FLR 108.

70

See Public Service Credit Union Co-operative Ltd v Campion (1984) 56 ACTR 39; 75 FLR 131; Kaufman v Gerson [1904] 1 KB 591.

71

[1904] 1 KB 591.

72

[1983] 1 AC 366.

73

[1983] 1 AC 366 at 401.

74

(2005) 64 NSWLR 149.

75

See also Maher v Honeysett and Maher Electrical Contractors Pty Ltd (2007) Aust Contract R 90249; [2007] NSWSC 12 at [199] per Barrett J; Little Co Ltd v Peters [2007] NSWSC 833; Westpac Banking Corp v Billgate Pty Ltd [2013] NSWSC 1304; May v Brahmbhatt [2013] NSWCA 309.

76

See Seddon and Ellinghaus, above n 14, p 707.

77

See R Bigwood, ‘Throwing the Baby out with the Bathwater? Four Questions on the Demise of Lawful Act Duress in New South Wales’ (2008) 27(2) University of Queensland Law Journal 41.

78

[2007] QCA 74 at [7] (Keane JA, de Jersey CJ and Mullins J agreeing). Keane JA stated at [7]: ‘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”.’

79

[2007] QCA 74 at [7]. See also Commercial Base Pty Ltd v Watson [2013] VSC 334 at [35], where Almond J noted Karam and stated: ‘This approach effectively renders the concept of economic duress redundant and limits the circumstances in which a court would intervene in equity to set aside contracts and other transactions procured by lawful economic pressure to the established equitable doctrines of undue influence and unconscionable dealing of the type set out in Commercial Bank of Australia v Amadio.’

80

[2013] WASCA 36 at [25].

81

(1998) 194 CLR 457; 158 ALR 66.

82

As discussed at 18.15, 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.

83

While the author notes the comments of the Queensland Court of Appeal in Mitchell v Pacific Dawn Pty Ltd [2007] QCA 74 at [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.

84

[2006] QSC 198.

85

[2006] QSC 198 at [21]–[22].

86

[2012] NSWSC 354 at [509].

87

[2013] WASCA 36 at [25] per McLure P.

88

[2012] NSWSC 354 at [520].

89

(2012) 39 VR 1.

90

(2012) 39 VR 1 at [153].

91

(2012) 39 VR 1 at [46].

92

[1979] QB 705.

93

(1988) 19 NSWLR 40.

94

[1976] AC 104.

95

[1976] AC 104 at 118.

96

Seddon and Ellinghaus, above n 14, p 716.

97

(1988) 19 NSWLR 40 at 45G.

98

See, for example, Kolmar Group AG v Traxpo Enterprises Pty Ltd [2010] 2 Lloyd’s Rep 653.

99

North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705.

100 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705. 101 [1979] QB 705. 102 Dimskal Shipping Co SA v International Transport Workers Federation (‘The Evia Luck’ (No 2)) [1992] AC 152. 103 [1983] 1 AC 366.

[page 663]

CHAPTER 21 Unfair Contract Terms CHAPTER OVERVIEW 21.1 21.2 21.3 21.6

Introduction The Australian Consumer Law Rationale behind the Unfair Contract Terms regime Application and operation 21.7 A consumer contract 21.8 A standard form contract 21.9 An unfair term 21.11 Examples of unfair terms in the Australian Consumer Law 21.12 Remedies

Introduction 21.1

The advent of the Australian Consumer Law (ACL) as a law having uniform application throughout Australia has had a significant impact upon some areas of contract law.1 Most notably, the ACL impacts 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 the Unfair Contract Terms regime. It is the last topic that is the focus of this chapter: the Unfair Contract Terms regime of the ACL. This regime is provided for in ss 23–28 of the ACL and enables consumers to argue that certain kinds of terms in standard form consumer contracts are unfair.

The Australian Consumer Law 21.2

The ACL is housed in Sch 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 [page 664] 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). The TPA regulated corporate conduct in relation to consumers, prohibiting a variety of unfair conduct. Most notably, the TPA contained significant legislative provisions prohibiting statutory unconscionability, misleading or deceptive conduct, and implying terms in consumer contracts for goods and services.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 is to have a single, unified consumer and competition law. 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 certain provisions in the former TPA and state and territory legislation, 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 was necessary for the states and territories to apply the ACL through their Fair Trading Acts. This process was conceived and agreed to through the Council of Australian Governments

(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. In effect, each state and territory picked up the text of the ACL in the CCA and then dropped it into their Fair Trading Acts so that it forms part of the Fair Trading Acts. 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 Div 1, which recognises that businesses may at times contract as consumers but might at other times contract for business purposes. The misleading or deceptive conduct (Ch 2, Pt 2.1) and statutory unconscionability [page 665] (Ch 2, Pt 2.2) provisions in particular set out a general understanding that while businesses are able to be selfinterested and do not need to contract in the best interests of others, they must not engage in conduct that is unconscionable and dishonest.

Rationale behind the Unfair Contract Terms regime

21.3

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 preprepared 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. Unlike the market conditions in earlier centuries, consumers today will easily encounter standard form contracts when they engage in such activities as signing up for a gym membership, a mobile phone contract, car rentals, the purchase of airline tickets, or the purchase of computer software through a click-wrap licence. 21.4

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 2 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 [page 666] 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 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 Ltd6 and Interfoto Picture Library Ltd v Stiletto 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 Ltd8 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 Australian Competition and Consumer Commission v Lux Pty Ltd9 and Australian Competition and Consumer Commission 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 [page 667] 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. 21.5

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 targets the regulatory gap in the former TPA and provides a mostly workable solution to attempts by businesses to impose unfair and harsh terms on consumers. The ACL Unfair Contract Terms regime would offer a seemingly preferable solution in that it offers relatively clear rules on unfairness in contracts. In this sense, the regime targets the regulatory gap in the former TPA and provides a mostly

workable solution to attempts by businesses to impose unfair and harsh terms on consumers. The need for the Unfair Contract Terms regime is aptly demonstrated by the fact that during the interim between the enactment of the Unfair Contract Terms regime and the commencement of the CCA and the ACL, both Victoria and New South Wales enacted their own Unfair Contract Terms legislation. The ACL now supersedes both the Fair Trading Amendment (Unfair Contract Terms) Act 2010 (Vic) and 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 ACL Unfair Contract Terms regime?

[page 668]

Application and operation 21.6

The Unfair Contract Terms regime is found in Ch 2, Pt 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 Australian Competition and Consumer Commission (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: the contract in question must be a consumer contract;13 the contract must be a standard form contract;14 and the term in question must be unfair.15 With regard to the above requirements: Section 23(3) deals with the requirement of a consumer contract. 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. Section 27(2) then provides a number of factors to which the court must have regard in determining whether a contract is a standard form contract; 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 of terms that might be considered to be unfair.

A consumer contract 21.7

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 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), offers an arguably narrower definition, and it is important, in the context of the Unfair Contract Terms regime, to remember that the two definitions [page 669] are conceptually and legally separate. The Unfair Contract

Terms regime contained in Ch 2, Pt 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 This means that a person may be a ‘consumer’ for the purposes of most of the provisions of the ACL, but not a consumer for the purposes of the Unfair Contract Terms Regime of the ACL.

A standard form contract 21.8

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 ACCC has stated in its Unfair Contract Terms: A Guide for Businesses and Legal Practitioners:18 [I]n 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.

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 [page 670] 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. (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 terms of the contract. It seems highly likely that where a consumer has been able to negotiate the terms of a contract, it will not be found to be a standard form contract. In Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd (Civil Claims),19 decided under the then Victorian Unfair Contract Terms legislation, Judge Harbison stated: [T]erms 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 …20

[page 671]

It seems highly likely that where a consumer has been able to negotiate the terms of a contract, it will not be found to be a standard form contract.

An unfair term 21.9

Whether a term in a standard form consumer contract will be held to be unfair will depend upon the application of s 24 of the ACL. In effect, there are four requirements under s 24 that must be satisfied before a term can be held to be unfair: the court must take into account whether the term is transparent; the term must cause a significant imbalance in the parties’ rights under the contract; the term must not be reasonably necessary to protect the

interests of the party that benefits from the term; and 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 expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term. If a term is unintelligible or very difficult to understand, then it may add weight to the argument that the term causes a significant imbalance in the rights of the parties under the contract. 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)21 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 United Kingdom case of Director General of Fair Trading v First National Bank plc,22 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

[page 672] a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty.23

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 Unfair Contract Terms Guide,24 the ACCC states: Such evidence might include relevant material relating to a business’s costs and structure, the need to mitigate risks, or particular industry practices.

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. 21.10 In Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd),25 the Federal Court applied the Unfair Contract Terms scheme. The following extract from the judgment of North J demonstrates the reasoning process that the courts are likely to apply in administering the scheme.

Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 Federal Court of Australia North J: [945] A term of a consumer contract is void if two characteristics are established, namely, that the term is unfair and the contract is a standard form contract (s 23(1) of the ACL). [946] It is presumed that the NRM contract is a standard form contract unless NRM proves otherwise (s 27(1)). In determining whether a

contract is a standard form contact, the Court is required to take into account the factors referred to in s 27(2) of the ACL. The onus was on NRM to show that those circumstances did not exist. The circumstances were whether NRM had all or most of the bargaining power relating to the transaction, whether the contract [page 673] was prepared by NRM before any discussion relating to the transaction occurred with a patient, whether the patients were in effect required to accept or reject the terms of the contract, other than the term concerning the cost of treatment, in the form in which they were presented, whether the patient was given an effective opportunity to negotiate the terms of the contract other than the term concerning the cost of treatment, and whether the terms of the contract took into account the particular characteristics of the patient or of the particular transaction. [947] NRM failed to show that these circumstances did not exist. In fact, the evidence positively established that NRM had a dominant bargaining position obtained by using high-pressure selling techniques. The pressure applied to the patients denied them the power to resist entering into the agreement. This was manifested in the NRM patients who said they felt pressured and in the case of some who tried to cancel their contracts immediately following the phone call. Patients did not have the chance to negotiate the terms of the contract apart from price. The terms were set by the parameters of the business model of NRM. The terms were set out in the instruction booklet sent to patients, often after they had entered into the contract, and were in the same form irrespective of the individual circumstances of the patient. [948] The next question is whether the refund term was unfair within the meaning of s 24(1) of the ACL. The section requires the Court to examine three factors. [949] One factor is whether the term was reasonably necessary in order to protect the legitimate interests of NRM (s 24(1)(b)). It is

presumed that the term was not reasonably necessary to protect the legitimate interests of NRM unless NRM proved otherwise (s 24(4)). NRM did not so prove. [950] Then, the term is unfair if it would cause a significant imbalance in the parties’ rights and obligations arising under the contract (s 24(1)(a)), and would cause detriment, whether financial or otherwise, to the patient if it were to be applied or relied upon (s 24(1)(c)). These two factors may be considered together and in the light of one of the examples of an unfair term provided by s 25(1)(c). That section provides that a term which has the effect of penalising one party and not the other for terminating the contract may be unfair. As to the nature of a significant imbalance in rights, in Director General of Fair Trading v First National Bank plc [2001] UKHL 52; [2002] 1 AC 481 at 494; [2001] UKHL 52, Lord Bingham said at [17] of a regulation in similar terms: 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. [page 674] [951] The NRM refund term required the patient to pay a 15 per cent administration fee, a pro-rata fee for the expired portion of the treatment, a pro-rata fee for the 30-day notice period, and the cost of medication supplied or prepared for the patient. The term operated whether the reason for the termination was a change of mind very soon after the phone consultation, a severe adverse side effect, or where the medication proved ineffective. The term thus caused detriment to the patient, if relied upon, within the meaning of s 24(1)(c). It also caused a significant imbalance in the parties’ rights and obligations because it had the effect of binding patients to continue treatment in disadvantageous circumstances, or alternatively suffer a financial penalty.

[952] In determining whether a term of consumer contract is unfair, the Court must take into account the extent to which the term is transparent and also take into account the contract as a whole (s 24(2)). A term is transparent if it is expressed in reasonably plain language, is legible, is presented clearly, and is readily available to any party affected by the term (s 24(3)). [953] The NRM refund term lacked transparency to a significant extent. The basis on which the administration fee was calculated was not disclosed to the patient at all. The method of calculation of the cost of the medication was not disclosed to the patient at all. At the time that the agreement was made, the patient was told about the NRM refund term in a recorded message which suffered from the deficiencies outlined at [858] of these reasons for judgment. The patient was not provided with a written copy of the refund term until after the contract was entered into, save in the case of patients who attended clinics. [954] When regard is had to the contract as a whole, the unfairness of the term becomes incontrovertible. The contract provided for the supply of medications which were not regarded by the medical profession as the usual forms of treatment and there was no cogent evidence that they were effective to treat ED or PE. In those circumstances it was unfair to hold the patient to the agreement on penalty of payment of fees, the method of calculation of which was unknown, imposed in order to cancel the treatment.

Examples of unfair terms in the Australian Consumer Law 21.11 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. [page 675]

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; (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.

Remedies 21.12 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. [page 676]

Key Points for Revision 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 ACL Unfair Contract Terms regime: (1) establishing that the contract is a consumer contract; (2) establishing that the contract is a standard form contract; and (3) 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. 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: (1) whether the term is transparent; (2) whether the term causes a significant imbalance in the parties’ rights under a contract; (3) whether the term is reasonably necessary to protect the legitimate interests of the business; and (4) 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.

_________________

1

For a more detailed study of the ACL, see A Bruce, Consumer Protection Law in Australia, LexisNexis Butterworths, Sydney, 2011.

2

For an overview of these schemes within the TPA, see S Fisher, P Ali and G Pearson, Commercial Law, Lawbook Co, Sydney, 2010.

3

Second Reading Speech, Trade Practices Bill 1974 (Cth), Hansard, 30 July 1974, pp 540–1.

4

This example is actually based on a spate of claims for damages by the operators of several car parks against consumers. A practice had emerged of certain car park operators advertising ‘free parking for 2 hours’ and then attempting to claim either $66 or $88 in damages from customers if they either overstayed or failed 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 was stated that the commencement of the Australian Consumer Law would effectively end this practice.

5

The ‘red hand rule’ states that the more unreasonable a clause is, the greater the notice that must be given of it.

6

[1971] 2 QB 163; see also Spurling v Bradshaw Ltd [1956] 2 All ER 121; [1956] 1 WLR 461.

7

(1988) 1 All ER 348.

8

(2009) 253 ALR 417.

9

[2004] FCA 926.

10

(2005) ATPR (Digest) 46-265.

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 Pt 2B of the Fair Trading Act 1999 (Vic): see Director of Consumer Affairs Victoria v Craig Langley Pty Ltd 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 21.9.

17

Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth), [5.15].

18

ACCC, Unfair Contract Terms: A Guide for Businesses and Legal Practitioners, Commonwealth of Australia, Canberra, March 2016, p 8.

19

[2008] VCAT 1332.

20

[2008] VCAT 1332 at [66].

21

[2008] VCAT 1332.

22

[2002] 1 AC 481.

23

[2002] 1 AC 481 at 499.

24

ACCC, above n 18, p 11.

25

[2015] FCA 368. See also Ferme v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384.

[page 677]

CHAPTER 22 Mistake CHAPTER OVERVIEW 22.1 22.2

Introduction Unilateral mistake 22.3 Unilateral mistake as to identity 22.4 When the parties have contracted at a distance 22.5 When the parties have contracted face to face 22.6 The effect of an executed document 22.7 Unilateral mistake as to terms 22.8 ‘Snapping up’ an offer 22.9 Common and mutual mistake 22.10 Common mistake and the subject matter of the contract 22.10 Identifying the subject matter 22.11 Failure of consideration 22.12 Absence of subject matter 22.14 Partial absence of subject matter 22.15 Mistake as to quality of subject matter 22.16 Other categories of mistake 22.17 Remedies 22.18 Rescission 22.24 Unjust enrichment 22.25 Specific performance 22.26 Rectification 22.28 For common mistake 22.31 For unilateral mistake [page 678]

Introduction 22.1

The common law doctrine of mistake, and the application of that doctrine, are inseparable from the common law 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 or declaratory 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 that 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. 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 it to a contract for A. 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 [page 679] have a well-grounded position on the vitiation of consent or intention as compared to civil 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 Ltd8 was that: [I]t 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.

The reassertion of Bell v Lever Bros as the classic policy position9 followed a historical interlude in which relief was more broadly available on the basis of the courts’ equitable jurisdiction, stemming from Denning LJ’s decision in Solle v Butcher.10 At present, however, the scope of the doctrine of mistake is extremely narrow and operates only if both contracting parties, acting innocently, have entered the contract on the basis of a shared mistaken assumption that, if removed, would render performance of the contract impossible. At present, the scope of the doctrine of mistake is

extremely narrow and operates only if both contracting parties, acting innocently, have entered the contract on the basis of a shared mistaken assumption that, if removed, would render performance of the 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 commonwealth law that will be dealt with in this chapter is unilateral, common and mutual mistake. [page 680] 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.11

Unilateral mistake 22.2

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.

Unilateral mistake as to identity 22.3

Mistake as to identity may arise in a restricted number of circumstances; for example, in cases of fraudulent misrepresentation of agency.12 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.13 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. In addition, no contract arises and specific performance cannot be ordered where the offeror deals with a person acting on behalf of another with whom the offeror does not wish to deal, such as where one person enlists another to purchase on their behalf property that [page 681] the vendor would exclude them from purchasing.14 However, specific performance will be ordered where there is no misrepresentation15 and the purchaser’s identity is not material

to the transaction qua transaction, notwithstanding that the vendors would not have entered the contract had they known the purchaser’s identity.16 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 Jones,17 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 stated: ‘It is a rule of law, that if a person intends to contract with A, B cannot give himself any right under it.’18 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.19

When the parties have contracted at a distance 22.4

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 Lindsay20 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 that their contract with Blenkarn was void such that Cundy did not obtain ownership of the goods, and brought a claim in conversion

[page 682] 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’.21 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.22

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.23 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,24 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 was never paid. Wallis sold the metal to a third party. The plaintiffs sued the defendant third party, alleging the metal supplies remained the plaintiff’s 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. [page 683]

When the parties have contracted face to face 22.5

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.25 The presumption in face-to-face transactions is that parties intend to deal with the person actually present. The leading authority is Lewis v Averay.26 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 that Lewis tried to deposit bounced. Lewis sued Averay for conversion. The United Kingdom 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.27 In Lewis v Averay, Lord Denning MR criticised distinctions made in the case of Ingram v Little28 between mistakes as to identity and mistakes as to qualities and character, and between fraudulent misrepresentations that induce the making of the contract and those made after contract that induce the seller to part with possession. He stated: 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

[page 684] 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.29

The effect of an executed document 22.6

Does the existence of a written executed contract affect the approach to unilateral mistake? In Shogun Finance Ltd v Hudson,30 the majority applied Cundy v Lindsay31 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.32

[page 685] However, Millett LJ (dissenting) provided some basis for believing that mistake may indeed operate in these circumstances, even if in 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.33

Unilateral mistake as to terms 22.7

Where only one of the parties is mistaken as to the terms of the contract — that is, the mistake is unilateral — the mistaken party is not relieved of the effect of the contract on the grounds of mistake alone. 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. Indeed, the presumption is that the party is bound by the objectively, and not subjectively, determined terms of the contract. The objective principle binds the party in spite of their mistake. In Smith v Hughes34 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 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.

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. The objective presumption is motivated by the court’s recognition of the importance of treating a formal contract as the final and full expression of the agreement between the parties, and the particular importance of so recognising contracts in a commercial context.35 Parties are thereby bound to a contract even where they have been careless in signing an unread contract.36 [page 686]

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: 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.

‘Snapping up’ an offer 22.8

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 & Shields,38 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: [page 687] 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.

Common and mutual mistake 22.9

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 that sailed in December, contending that they had understood the contract to refer to the Peerless sailing in October. The seller, who believed that the contract referred to the Peerless that sailed in December, 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 that sailed in December, the buyer would have been bound by that interpretation of the contract regardless [page 688] 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.

Common mistake and the subject matter of the contract Identifying the subject matter 22.10 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 that 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.

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 [page 689] destroy the identity of the subject matter as it was in the original state of facts?’47 The facts in Bell v Lever Bros Ltd were that Bell and Snelling were Chairman and Vice-Chairman 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’.48 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 turns out that the agreement had already been broken and could have been terminated otherwise’.49 The view in Australia is that Lord Atkin’s test states the law, but is rarely satisfied.50 The test, however, has been applied in a number of English cases.51

Failure of consideration 22.11 As applied by Lord Atkin in Bell v Lever Bros Ltd,52 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 [page 690] of thing that it is; and suggests that contracts will only be void if 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 Prentice,53 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 that fails totally may be recovered on the basis of unjust enrichment as in Strickland v Turner,54 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 that had totally failed.

Absence of subject matter 22.12 Section 11 of the Goods Act 1958 (Vic) and its equivalent in the other states and territories55 provide that a contract will be void for common mistake where specific goods have perished at the time the contract was made.56 However, while perished goods may void a contract, goods that never existed do not. In Couturier v Hastie,57 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 United Kingdom. However, prior to the contract being made, the corn in question had been sold in Tunisia by the ship’s master because much of 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. [page 691]

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).58 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 that there was an existing something to be sold and bought, and if sold and bought, then the benefit of insurance should go with it.59

The decision may have been made on the basis of a total failure of consideration destroying the underlying basis of the contract. 22.13 The contract in the case of McRae v Commonwealth Disposals Commission60 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 (1856) 5 HL Cas 673, but this decision was reversed by the High Court on appeal.

The High Court analysed the contract in Couturier 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 [page 692] 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. It 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 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 22.14 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 McNamara61 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,62 and the vendor is not liable in damages for the purchaser’s loss.63 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, and the vendor is not liable in damages for the purchaser’s loss.

Mistake as to quality of subject matter 22.15 Where a contract is for a thing of a particular kind but something different is delivered,64 there may be a total failure of consideration [page 693] or the contract may be avoided.65 The difference must be sufficient to make the contract different from what was originally agreed to,66 and the fact underlying the agreement must be a condition precedent to the existence of the contract.67

Other categories of mistake 22.16 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,68 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.69 Furthermore, parties may agree about the subject matter and terminology of a contract but dispute the legal effect of the agreed language.70 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 Quinn,71 the purchaser purchased land at the price of £1.10.0 per acre ‘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 [page 694] and law.72 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.73 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.74

Remedies 22.17 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 Coulson:75 ‘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.’ 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. The basis for equity’s intervention is its established role in offering relief against fraud in its broadest sense, including unconscionable dealing.76 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,77 or making adjustments or allowances to ensure restitutio in integrum. [page 695]

While the remedies of rescission and rectification are not remedies in the alternative both are manifestations of ‘the ordinary jurisdiction of equity to deal with any instrument or other transaction “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”.’78 Therefore, similar considerations inform the court’s provision of both remedies. The defendant’s enforcement of their legal rights must be unconscientious in the circumstances and the mere existence of a unilateral mistake, no matter how serious, will not make the party’s insistence on performance of an agreed contract unconscionable unless the party who has not made the mistake in relation to the contract is implicated in the mistake. As Russell LJ said in Riverlate Properties Ltd v Paul:79 If reference be made to principles of equity, it operates on conscience. If conscience is clear at the time of the transaction, why should equity disrupt the transaction? If a man may be said to have been fortunate in obtaining a property at a bargain price, or on terms that made it a good bargain, because the other party unknown to him has made a miscalculation or other mistake, some high-minded men might consider it appropriate that he should agree to a fresh bargain to cure the miscalculation or mistake, abandoning his good fortune. But if equity were to enforce the view of those high-minded men, we have no doubt that it would run counter to the attitudes of much the greater part of ordinary mankind (not the least the world of commerce) and would be venturing upon the field of moral philosophy in which it would soon be in difficulties.

Rescission 22.18 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 unilateral80 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 Phibbs,81 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. [page 696] 22.19 Special circumstances must ordinarily be shown to exist before the unconscionabilty necessary to attract equitable intervention can be established. In Taylor v Johnson, the plaintiffs brought an action for specific performance of the sale of 10 acres of land for $15,000, when the defendant believed she had executed a contract for the sale of the land at $15,000 per acre, the defendant commenced proceedings for rectification or in the alternative rescission of the contract. The court at first instance found for the purchasers and ordered specific performance, reasoning that while Johnson was mistaken, Taylor had no knowledge of the mistake. The Court of Appeal set aside the contract on the basis that Taylor probably knew that Johnson was mistaken as to the price of the land. The High Court upheld the Court of Appeal’s decision. The majority (Mason ACJ, Murphy and Deane JJ) held that the Court of Appeal was able to arrive at a different conclusion from the trial judge as to the fact of Taylor’s knowledge of Johnson’s mistake in relation to the price to be paid for the land.82 In this case, said the majority, the party not making the mistake had set out to ensure the mistaken party remained unaware of the mistake regarding the price of the land in the contract. Mason ACJ, Murphy and Deane JJ stated: The particular proposition of law which we see as appropriate and adequate for disposing of the present appeal may be narrowly stated. It is that a party who has entered into a written contract under a serious mistake about its content in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.’

Having reviewed Torrance v Bolton,83 Solle v Butcher84 and Riverlate Properties Ltd v Paul,85 the majority concluded: What we have said is sufficient to demonstrate the broad basis of support which the authorities provide for that proposition. Moreover, and perhaps more importantly, it is a principle which is best calculated to do justice between the parties to a contract in the situation which it contemplates. In such a situation it is unfair that the mistaken party should be held to the written contract by the other party whose lack of precise knowledge of the first party’s actual mistake proceeds from wilful ignorance because, knowing or having reason to know that there is some mistake or misapprehension, he engages deliberately in a course of conduct which is designed to inhibit discovery of it.86

[page 697] The Court therefore examines conduct that is directly related to the mistake made by the mistaken party preceding the formation of the contract. Relief on the basis of mistake cannot simply be pleaded on the basis of a party having misconstrued the contract.87 The other party must have caused, or at least contributed to, the mistake.88 The majority saw sharp practice in Taylor’s conduct (although Dawson J, in dissent, did not). A mistake regarding a statement of fact that 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 that never existed, the guarantor may be in breach and be exposed to a damages claim,89 because the guarantee is an acceptance of the risk of the statement being untrue and a promise to pay compensation if it is false. Whether actual knowledge of the mistake is required, the majority in Taylor v Johnson endorsed the objective test for determining the unmistaken party’s knowledge of the mistaken party’s mistake. The majority held on the basis that the unmistaken party ‘deliberately set out to ensure that the first

party does not become aware of the … mistake or misapprehension’. This behaviour is only consistent with subjective knowledge of the mistake, or strong suspicion of the mistake together with a deliberate lack of inquiry.90 Young J in Misiaris v Saydels,91 reviewing English authorities and texts,92 found it sufficient if the other party ‘strongly suspects’ that the mistaken party is making the mistake about the fundamental nature of the contract, or ‘must have known’ from the surrounding circumstances that the plaintiff was making a mistake.93 The circumstances in which a contract can be rescinded for unilateral mistake are limited to those in which it is unconscionable for the other party to enforce the contract. As Mason ACJ, Murphy and Deane JJ explained in Taylor and Johnston:94 [page 698] A party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.

Similarly, in the Canadian case of Anderson v Brouwer Claims Canada & Co Ltd,95 Chamberlist J explained: Equity and fair dealing in modern commercial transactions require that this form of relief be available in situations where one party may not actually have known of the other’s mistake but the mistake was of such a character and accompanied by such circumstances that the party had good reason to know of it and to know what was intended.

However, rescission for mistake is not available where the defendant neither shares nor knows of the plaintiff’s mistake, and the mistake was not attributable to anything said or done by the defendant.96

22.20 Solle v Butcher97 is a case relating to the notorious Rent Restrictions Acts 1920–1923 (UK).98 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 the defendant, a rent of £250 for flat no 1 postrenovation 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 Acts, the appropriate rent for the flat would have been £140 per year. The plaintiff took out a lease of 7 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, which held that the structural alteration to the building had not destroyed the identity of the flat. It also held that the parties had made [page 699] 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.99 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

avail himself of the legal advantage which he had obtained’.100 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.101

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.102 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 read103 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.104 22.21 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 material105 or go to the root of the contract.106 A party, in pursuing the performance of the bargain, must have acted unconscionably. A party may therefore rescind a contract if: (1) they [page 700] and the other party laboured under a common mistake; (2) upholding the contract would be unconscionable under the circumstances; and (3) the party seeking to have the contract set aside is not at fault.107 ‘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.108

22.22 Today, the common law is ruled by Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd.109 The decision in that case reasserted Lord Atkin’s policy statement from Bell v Lever Bros Ltd,110 promoting certainty in contracting, and rejected Denning LJ’s efforts to develop an equitable doctrine of common mistake in Solle v Butcher.

Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407 England and Wales Court of Appeal, Civil Division Lord Phillips MR at 161–2: 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

[page 701] 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. 22.23 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’.111 In Svanosio v McNamara,112 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.113 The element of fraud was not present in Svanosio v McNamara, so the parties had to adhere to the terms of the contract.114 As clarified by the High Court in Taylor v Johnson,115 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.

Unjust enrichment 22.24 Where a mistake has prevented the formation of a contract, parties may seek relief under the doctrine of unjust enrichment.116 Parties are not, however, able to recover payments obligated under the contract if the contract is not void or voidable117 unless one party has paid and the other received more than the contracted amount.118

Specific performance

22.25

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.119 [page 702] Specific performance may be refused at the court’s discretion if the contract is not void and rescission is not claimed.120

Rectification 22.26 A common or unilateral mistake may be remedied by rectification of the contract.121 Rectification is available as a discretionary remedy where there has been a mistake not in the making but in the recording of a contract, so that the document accords with the parties’ intention.122 The parties’ common intention as to what the instrument shall say is not the same as their common belief or understanding as to the effect it is intended to produce.123 The aim of rectification is to eliminate the mistake in a document, and the remedy is applicable to common and mutual 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.124 The most common situation in which rectification is granted is where the terms of a document fail to correspond with the terms agreed to by the parties. The document to be rectified does not need to be proceeded by a binding contract; it is, however, not a sufficient basis for rectification that the parties conduct discussions on the point for which rectification is sought.125 It would not be equitable to force an unmistaken party to enter an agreement they had not made. So, rectification is denied where the unmistaken party’s conduct did not cause

the mistaken party to enter the contract on the mistaken basis, but only where the unmistaken party’s conduct is clearly involved in the mistake made by the mistaken party.126 [page 703] In Thomas Bates and Son Ltd v Wyndham’s (Lingerie) Ltd,127 Buckley LJ said that rectification was available where the conduct of the defendant was: … such as to make it inequitable that he should be allowed to object to the rectification of the document. If this necessarily implies some measure of sharp practice, so be it, but for my part I think that the doctrine is one which depends more upon the equity of the position. The graver the character of the conduct involved, no doubt the heavier the burden of proof may be, but, in my view, the conduct must be such as to affect the conscience of the party who has suppressed the fact that he has recognised the presence of a mistake.

In Snell on Equity128 the learned author states: By what appears to be a species of equitable estoppel, if one party to a transaction knows that the instrument contains a mistake in his favour but does nothing to correct it, he (and those claiming under him) will be precluded from resisting rectification on the ground that the mistake is unilateral and not common.

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. 22.27 The defendant’s silence in circumstances where they knew or ought to have known that the plaintiff was entering into the contract on the basis of fundamental misapprehension as to its terms and effects entitles the plaintiff to a quantum meruit,129 or, alternatively, a mistake known to the defendant who kept silent about it in circumstances where the mistake conferred an advantage upon the defendant entitles the plaintiff to seek that the court rectifies the agreement.130 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.131 In the United Kingdom case of Joscelyne v Nissen,132 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 [page 704] 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 with her father, the daughter stopped these payments. The United Kingdom Court of Appeal decided that the father was entitled to rectify the contract document. In Swainland Builders Ltd v Freehold Properties Ltd133 the court held: 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 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.

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.134

For common mistake 22.28 Common mistake can attract rectification in circumstances where the parties have imperfectly recorded their agreement (mistranscription), or where the parties have deliberately used

certain words to which they have ascribed the wrong meaning.135 Although there need not be a concluded antecedent contract, there must be an intention common to both parties at the time of the contract to include in their bargain a term which by mutual mistake is omitted from it, or to omit something which by mutual mistake is included in it. Further, a plaintiff must advance convincing proof that the written contract does not embody the final intention of the parties. Moreover, the omitted ingredient must be capable of proof in clear and concise terms, so that the court must not assume for itself the task of making the contract for the parties.136 Rectification was therefore not available in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd137 because the contract reflected the parties’ common intention to trade ‘horsebeans’, even though they [page 705] wrongly mutually assumed that this was another word for ‘feveroles’. The mistake was not made in the process of the parties recording their agreement.138 22.29 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,139 and also show clearly what rectification is required to be made.140 This first requirement relates to the heavy burden141 of ‘convincing proof’142 — of proof in clear and precise terms143 — 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.144 However, the plaintiff’s evidentiary burden may require such a manifestation in order to be discharged. 22.30 The mistake that 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 discussions), 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 were in complete agreement on the terms of their contract, but by an error wrote them down wrongly’.145 In Pukallus v Cameron,146 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 [page 706] 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.147 In Winks v W H Heck & Sons Pty Ltd,148 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.

In Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd149 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 22.31 Unilateral mistake was not treated as a case for rectification until much later than common mistake. In fact, unilateral 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. The defendant must at least have knowledge of the plaintiff’s mistake and have remained silent about the mistake in such a manner and to such an extent that the silence amounts to sharp practice on the defendant’s part.150 Sharp practice may fall short of actual fraud to suffice: ‘In Australia [page 707] a contract may be avoided not only where the mistake was induced by the person in the part of the present plaintiff, but also where he has deliberately cloaked the mistake or has otherwise behaved unconscionably.’151 In A Roberts & Co Ltd v Leicestershire County Council,152 a construction company tendered to a council for a contract, specifying a completion date for the works to be done. The time for completion of the works was indexed to the price. The

council communicated both its acceptance of the tender to the company and that the company undertake the work in accordance with the tender. However, the council prepared a formal contract, inserting a different completion date without notifying the company, who unwittingly executed it, knowing the company believed it to be in the same terms on which it tendered for the work. Pennycuick J held that the council’s knowledge that the instrument contained a mistake in their favour about which they did nothing to correct prevented it resisting rectification on the basis that the mistake was unilateral and not common.153 Pennycuick J stated that ‘a party is entitled to rectification of a contract upon proof that he believed a particular term to be included in the contract, and that the other party concluded the contract with the omission or variation of that term in the knowledge that the first party believed the term to be included.’154 22.32 The doctrine of rectification for unilateral mistake was formulated in Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd:155 For this doctrine — that is to say the doctrine of A Roberts & Co Ltd v Leicestershire County Council [1961] 1 Ch 555 — 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 a 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 resist 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 mistake.

[page 708] 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,156 or may wilfully or recklessly fail to attend to the truth,157 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 dishonesty158 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. 22.33 In Commission for the New Towns v Cooper (Great Britain) Ltd,159 Stuart-Smith LJ qualified the proposition from A Roberts & Co Ltd v Leicestershire County Council to align it with the doctrine espoused in Taylor v Johnson. In Commission for the New Towns v Cooper (Great Britain) Ltd the plaintiff assigned leases to company E along with a ‘put option’ binding the plaintiff to take assignment of the lease from company E if it gave appropriate notice. The put option was expressed under the lease as being personal to company E and to have expired if it assigned leases to another party or was no longer in possession of the premises. When company E sold its business on the premises to the defendant the latter acquired the unexpired portion of the lease. After some time, the defendant considered closing the failing business and devised a scheme whereby it gave the plaintiff the impression that it was in fact intending to expand its business by seeking to acquire all the rights of company E, which included a side option to lease adjacent premises, but were silent with respect to the put option which alone they desired to exercise. When the plaintiff accepted the defendant’s terms the defendant exercised the put option. The plaintiff sought rectification to prevent the defendant surrendering the lease. Micklem J at first instance held that the defendant lacked actual knowledge of the plaintiff’s mistake and denied the plaintiff rectification consistent with the objective agreement, but found the correspondence insufficient to constitute a binding contract,

and that the agreement therefore was unenforceable. The defendant appealed the finding that there was no contract between the parties and the plaintiff cross-appealed seeking rectification. The Court of Appeal allowed the cross-appeal. Stuart-Smith LJ, who wrote the leading judgment, based the court’s [page 709] decision on the defendant’s unconscionable conduct, and dismissed the proposition that the unmistaken party’s actual knowledge of the mistaken party’s mistake was an essential element in the granting of rectification. Instead, the knowledge the unmistaken party was required to have was required to be consistent with the hypothetical situation: … where A intends B to be mistaken as to the construction of the agreement, so conducts himself that he diverts B’s attention from discovering the mistake by making false and misleading statements; and B in fact makes the very mistake that A intends, then notwithstanding that A does not actually know, but merely suspects, that B is mistaken, and it cannot be shown that the mistake was induced by any misrepresentation, rectification may be granted.160

The decision in Commission for the New Towns v Cooper (Great Britain) Ltd therefore frees the remedy of rectification from the strict requirement of actual knowledge.161 In Leibler v Air New Zealand Ltd (No 2),162 the Victorian Court of Appeal upheld an order for rectification on the ground of a unilateral mistake where the mistaken party’s solicitor had erroneously deleted from an agreement a clause that should only have been amended, not deleted, and the other party, knowing that a mistake had been made, concluded the agreement without drawing attention to the mistake. Winnecke P and Phillips JA said: His Honour found … that, when the parties executed the shareholders’ agreement not long afterwards, the one was continuing to labour under the mistake that cl, 10.9 had not been deleted but merely amended and the other remained aware that the

former was labouring under that mistake. His Honour found further that although cl. 10.9 had been solely for the benefit of the respondent and had been deleted by the respondents’ own solicitors (albeit by mistake), the appellants ought to have drawn the mistake to their attention and, not having done so, had acted unconscionably. In short, his Honour made all the findings of fact necessary to sustain an order for rectification.163

Kenny JA summarised the principles involved in the following terms: The principles which govern an application for rectification of a contract on the ground of unilateral mistake can briefly be stated. If (1) one party, A, makes an agreement under a misapprehension that the agreement contains a particular provision which the agreement does not in fact contain, and (2) the other party, B, knows of the omission and that it is due to a mistake on A’s part, and (3) lets A remain under the misapprehension and concludes the agreement on the mistaken basis in circumstances where equity would require B to take some step or steps, depending on those circumstances, to bring the mistake to A’s attention, then (4) B will be precluded from relying upon A’s execution of

[page 710] the agreement to resist A’s claim for rectification to give effect to A’s intention. Whether or not the mistake must be one which operates in favour of B or merely to the detriment of A is not entirely clear.164

Rectification on the basis of unilateral mistake is a step not taken lightly165 by the courts because it imposes an obligation on the parties in the absence of any prior agreement,166 and it is probably as unfair to impose an agreement on the mistaken party167 as it is to impose the mistaken party’s terms on the non-mistaken party.168 22.34 In the case of unilateral mistake, only those mistakes that relate to the documented terms attract the remedy. In Connolly Ltd v Bellway Homes Ltd,169 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 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 stated: 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

[page 711] 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.170

22.35 From the decided cases it is not clear whether, although actual knowledge is not required,171 the mistake must prejudice the party making the mistake or benefit the party not having made the mistake.172 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.173 In Riverlate Properties Ltd v Paul,174 the lessee had not contributed

at all to the lessor’s mistake. The United Kingdom 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.175 In the case of unilateral mistake, the court considered that the defendant must have engaged in sharp practice,176 or intended the plaintiff to make the mistake or otherwise to deceive them.177 22.36 Rectification and rescission may be pursued as alternative remedies in the same proceeding.178 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.179 Rectification may be barred by methods including laches, where a third party has acquired rights under the original contract for value and without notice,180 and because the contract can no longer be performed.181 [page 712]

Key Points for Revision A unilateral mistake involves one person making a mistake, but the contract that arises will nevertheless be enforceable unless the other party knew of or contributed to the mistake. 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 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. A contract may be avoided 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 must 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. 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. 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. 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.

_________________ 1

See 2.2.

2

See J Gordley, The Philosophical Origins of Contract Law, Clarendon Press, UK, 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 585–7, 619–20 (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.

7

Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450 (CA); see also Prenn v Simmonds [1971] 3 All ER 237; [1971] 1 WLR 1381 (HL) at 1383–5 per Lord Wilberforce.

8

[1932] AC 161 at 224 per Lord Atkin.

9

Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 All ER 902; [1989] 1 WLR 255, where Steyn J applied Atkin LJ’s test in determining whether the contract had been rendered void for mistake.

10

[1950] 1 KB 671, discussed at 22.20.

11

See, for example, M A Eisenberg, ‘Mistake in Contract Law’ (2003) 91 California Law Review 1575.

12

Higgons v Burton (1857) 26 LJ Ex 342; Lake v Simmons [1927] AC 487.

13

Lewis v Averay [1972] 1 QB 198 at 207 per Lord Denning; see also Westpac Banking Corp v Dawson (1990) 19 NSWLR 614; 2 ACSR 316 (mistake as to the identity of a party to a mortgage did not void the mortgage).

14

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).

15

Dyster v Randall & Sons [1926] 1 Ch 932.

16

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).

17

(1857) 2 H & N 564.

18

(1857) 2 H & N 564 at 565.

19

(1857) 2 H & N 564 at 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.

20

(1878) 3 App Cas 459.

21

(1878) 3 App Cas 459 at 465.

22

(1878) 3 App Cas 459 at 465.

23

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 at 960 per Lord Millett.

24

(1897) 14 TLR 98.

25

Ingram v Little [1961] 1 QB 31 per Pearce and Sellers LJJ.

26

[1972] 1 QB 198.

27

Compare Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525.

28

[1961] 1 QB 31.

29

[1972] 1 QB 198 at 207.

30

[2002] QB 834. Shogun is now the leading case in the United Kingdom 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.

31

(1878) 3 App Cas 459.

32

[2002] QB 834 at 978.

33

[2002] QB 834 at 953.

34

(1871) LR 6 QB 597 at 607.

35

Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507 at 517 per Dixon CJ, Fullagar and Taylor JJ; Leif Investments Pty Ltd v ConAgra International Fertiliser Co (NSW CA, Sheller JA, 16 July 1998, unreported) at 10.

36

L’Estrange v F Graucob Ltd [1934] 2 KB 394.

37

(1871) LR 6 QB 597 at 605.

38

[1939] 3 All ER 566.

39

[1939] 3 All ER 566 at 568.

40

Solle v Butcher [1950] 1 KB 671; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] ALR 771.

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 Thomson (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.

45

Lever Brothers Ltd v Bell [1931] 1 KB 557 at 563 per Wright J.

46

[1932] AC 161 at 235–6.

47

[1932] AC 161 at 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’.

48

[1932] AC 161 at 236.

49

[1932] AC 161 at 223–4.

50

See McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] ALR 771.

51

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 [1988] 3 All ER 902; [1989] 1 WLR 255.

52

[1932] AC 161.

53

(1815) 3 M & S 344.

54

(1852) 7 Ex ch 208.

55

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.

56

See Couturier v Hastie (1856) 5 HL Cas 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 7 days prior to the execution of the contract without the knowledge of the buyer or seller).

57

(1856) 5 HL Cas 673.

58

G H Treitel, The Law of Contract, 9th ed, Sweet & Maxwell, 1995, p 272.

59

[1843–60] All ER 280 at 284.

60

(1951) 84 CLR 377; [1951] ALR 771.

61

(1956) 96 CLR 186; [1956] ALR 961.

62

Bligh v Martin [1968] 1 All ER 1157; [1968] 1 WLR 804.

63

See William Sindall plc v Cambridgeshire County Council [1994] 3 All ER 932; [1994] 1 WLR 1016.

64

See Gompertz v Bartlett (1853) 2 E & B 849.

65

See Galloway v Galloway (1914) 30 TLR 531.

66

See Bell v Lever Brothers Ltd [1932] AC 161 and the examples provided by Lord Atkin at 224; see also Robert A Munro & Co Ltd v Meyer [1930] 2 KB 312; Psaltis v Schultz (1948) 76 CLR 547; [1948] 2 ALR 502; Leaf v International Galleries [1950] 2 KB 86.

67

See McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] ALR 771.

68

[1934] SASR 214.

69

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); Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450 (a mistaken belief that ‘horsebeans’ meant ‘feveroles’).

70

Life Insurance Co of Australia Ltd v Philips (1925) 36 CLR 60; 31 ALR 206.

71

(1910) 10 CLR 674; 17 ALR 42.

72

See Avon County Council v Howlett [1983] 1 All ER 1073; [1983] 1 WLR 605 at 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.

73

See Cooper v Phibbs (1867) LR 2 HL 149.

74

Falck v Williams [1900] AC 176; Sharp v Thomson (1915) 20 CLR 137; R W Cameron & Co v L Slutzkin Pty Ltd (1923) 32 CLR 81; 29 ALR 261.

75

(1869) LR 8 Eq 368 at 375.

76

See Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265.

77

See Allen v Richardson (1879) 13 Ch D 524 (order made for a conveyance of property and payment of price).

78

Torrance v Bolton (1872) LR 8 Ch App 118 at 124 per James LJ (Mellish LJ agreeing), explaining the basis on which contract was set aside in a case of unilateral mistake; compare Taylor v Johnson (1983) 151 CLR 422 at 431; 45 ALR 265; Commonwealth of Australia v VL Investments (Vic SC, Marks J, 18 December 1987, unreported); Misiaris v Saydels Pty Ltd (1989) NSW ConvR 55-474 per Young J.

79

[1975] Ch 133.

80

There is no case in which relief has been granted for mutual mistake.

81

(1867) LR 2 HL 149.

82

Dawson J dissenting vigorously.

83

(1872) LR 8 Ch App 118 at 124.

84

[1950] 1 KB 671 at 692.

85

[1975] Ch 133 at 145.

86

(1983) 151 CLR 422 at 432–3; 45 ALR 265.

87

Powell v Smith (1872) LR 14 Eq 85; Dowsett v Reid (1912) 15 CLR 695; 19 ALR 15.

88

Wilding v Sanderson [1897] 2 Ch 534; Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374.

89

See McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] ALR 771.

90

See N Seddon (1983) Australian Law Journal 296 at 298.

91

(1989) NSW ConvR 55-474.

92

Young J reviewed Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1980] EWCA Civ 3; [1981] 1 WLR 505; Riverlate Properties Ltd v Paul [1975] Ch 133.

93

Brereton J in International Advisor Systems Pty Ltd v XYYX Pty Ltd [2008] NSWSC 2 at [22], [29]– [30] (the claim for rectification failing because the defendant was not shown to have actually known, constructively known, or strongly suspected, that the plaintiff believed the contract was conditional upon a new lease being granted, and had therefore not acted unconscionably) followed the decision of Young J.

94

Taylor v Johnson (1983) 151 CLR 422 at 432; 45 ALR 265 per Mason ACJ, Murphy and Deane JJ. See also Solle v Butcher [1950] 1 KB 671 at 691 per Lord Denning MR; Svanosio v McNamara (1956) 96 CLR 186 at 196; [1956] ALR 961 per Dixon CJ and Fullagar J.

95

[2002] BCSC 1043 at [72].

96

Riverlate Properties Ltd v Paul [1975] Ch 133 at 140–1.

97

[1950] 1 KB 671.

98

Comprising the Increase of Rent and Mortgage Interest (Restrictions) Act 1920 (UK), as amended by the Rent Restrictions (Notices of Increase) Act 1923 (UK) and the Rent and Mortgage Interest Restrictions Act 1923 (UK). This legislation discouraged the improvement of properties and led to appalling habitation conditions in London.

99

[1950] 1 KB 671 at 690–1 per Lord Denning.

100 [1950] 1 KB 671 at 692. 101 [1950] 1 KB 671 at 693. 102 C Macmillan, Mistakes in Contract Law, Hart Publishing, 2010, pp 44–5. 103 See McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] ALR 771; Svanosio v McNamara (1956) 96 CLR 186; [1956] ALR 961; Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265. In Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679, a United Kingdom court refused to apply Solle v Butcher since it contradicted the decision in Bell v Lever Bros Ltd [1932] AC 161. 104 The case has been applied widely but the law is not settled, and, indeed, Solle v Butcher and the cases that 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; 11 BPR 20,573. In the United Kingdom, however, in the case of Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679, the court declined to apply Solle v Butcher. 105 Bettyes v Maynard (1882) 46 LT 766. 106 Earl of Beauchamp v Winn (1873) LR 6 HL 223. 107 See Solle v Butcher [1950] 1 KB 671 at 693 per Lord Denning. 108 See Earl of Beauchamp v Winn (1873) LR 6 HL 223 at 234; Grist v Bailey [1967] Ch 532; but compare Laurence v Lexcourt Holdings Ltd [1978] 2 All ER 810; [1978] 1 WLR 1128 at 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. 109 [2002] EWCA Civ 1407.

110 [1932] AC 161. 111 Svanosio v McNamara (1956) 96 CLR 186 at 198; [1956] ALR 961 per Dixon and Fullagar JJ. 112 (1956) 96 CLR 186; [1956] ALR 961. 113 Compare Lukacs v Wood (1978) 19 SASR 520. 114 (1956) 96 CLR 186 at 196; [1956] ALR 961 per Dixon and Fullagar JJ. 115 (1983) 151 CLR 422 at 431; 45 ALR 265. 116 Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 273. 117 Bell v Lever Bros Ltd [1932] AC 161. 118 National Mutual Life Association of Australasia Ltd v Walsh (1987) 8 NSWLR 585. 119 Goldsbrough Mort & Co Ltd v Quinn (1910) 10 CLR 674; 17 ALR 42. 120 Swaisland v Dearsley (1861) 29 Beav 430. 121 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. See also Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265, a case in which the mistaken party sought rescission but the court considered that the same principles (at 432–3) applied in cases of rectification. The court cited as authorities Riverlate Properties Ltd v Paul [1975] Ch 133 at 145, where the English Court of Appeal considered rectification to be the appropriate remedy); and Thomas Bates and Son Ltd v Wyndham’s (Lingerie) Ltd [1980] EWCA Civ 3; [1981] 1 WLR 505 at 514–16, wherein Buckley LJ (Brightman LJ agreeing) referred to an earlier judgment placing reliance on R E Megarry and R V Baker (eds), Snell on Equity, 25th ed, Sweet and Maxwell, London, 1960, p 569. 122 Treitel, The Law of Contract, 7th ed, p 245. See Mackenzie v Coulson (1869) LR 8 Eq 369 at 375 per James VC; see also The Olympic Pride [1980] 2 Lloyd’s Rep 67. 123 Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450; Pukallus v Cameron (1982) 180 CLR 447; 43 ALR 243. 124 See Malmesbury (Earl) v Malmesbury (Countess) (1862) 31 Beav 407 at 418. 125 Treitel, above n 122, p 248. 126 Therefore, in Agip SpA v Navigazione Alta Italia SpA [1984] 1 Lloyd’s Rep 353, rectification was denied where the plaintiff’s mistake in reading the charter carelessly caused the mistake to be made, and not the conduct of the defendants who did not know of the mistake. 127 [1980] EWCA Civ 3; [1981] 1 WLR 505 at 514–16 128 Megarry and Baker, above n 121, p 569. 129 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; 69 ALR 577. 130 Johnston v Arnaboldi [1990] 2 Qd R 138. 131 Slee v Warke (1949) 86 CLR 271 at 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 HegemanHarris Co Inc [1939] 1 All ER 662 at 664. 132 [1970] 2 QB 86. 133 [2002] EWCA Civ 560 at [33] per Peter Gibson LJ. 134 Thomas Bates & Son Ltd v Wyndham’s (Lingeries) Ltd [1981] 1 All ER 1077; [1981] 1 WLR 505 at

515 (CA). 135 Re Butlins Settlement Trusts [1976] Ch 251 at 260–3; Cooperative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 (CA). 136 Pukallus v Cameron (1982) 180 CLR 447 at 452; 43 ALR 243; International Advisor Systems Pty Ltd v XYYX Pty Ltd [2008] NSWSC 2 at [21]; Harris v Smith (2008) 14 BPR 26,223 at [26]. 137 [1953] 2 QB 450. 138 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. 139 See Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; 1 ALR 169; see also RACV Investment Co Pty Ltd v Silbury Pty Ltd (1986) 13 ACLR 555. 140 See Energy World Corp Ltd v Maurice Hayes and Associates Pty Ltd (2007) 239 ALR 457 at 460. 141 See Fowler v Fowler (1859) 4 De G & J 250 at 264–5. 142 See Joscelyne v Nissen [1970] 2 QB 86 at 98. 143 See Pukallus v Cameron (1982) 180 CLR 447 at 452; 43 ALR 243. 144 See NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 at 753; Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 at 406; see also Bishopsgate Insurance Australia Ltd v Commonwealth Engineering (NSW) Pty Ltd [1981] 1 NSWLR 429; Pukallus v Cameron (1982) 180 CLR 447 at 452; 43 ALR 243; but contrast Etablissments Georges et Paul Levy v Adderley Navigation Co Panama SA (‘The Olympic Pride’) [1980] 2 Lloyd’s Rep 67 at 72; see also contrary views expressed in other cases: for example, Joscelyne v Nissen [1970] 2 QB 86 at 98; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 350; 1 ALR 169. 145 [1953] 2 QB 450 at 463. 146 (1982) 180 CLR 447; 43 ALR 243. 147 See NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 at 748 per Mahoney JA (CA). 148 [1986] 1 Qd R 226 at 237. 149 (1995) 41 NSWLR 329 at 332; 7 BPR 15,083. 150 A Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555; Taylor v Johnson (1983) 151 CLR 422 at 431; 45 ALR 265; Riverlate Properties Ltd v Paul [1975] Ch 133 at 140; Easyfind (NSW) Pty Ltd v Paterson (1987) 11 NSWLR 98; International Adviser Systems Pty Ltd v XYYX Pty Ltd [2008] NSWSC 2; Harris v Smith (2008) 14 BPR 26,223 at [27]. 151 Easyfind (NSW) Pty Ltd v Paterson (1987) 11 NSWLR 98 at 107–8 per Young J (a compromise of litigation was not voidable for unilateral mistake where a legal adviser, knowing of the other party’s mistake, neither induced nor deliberately cloaked it). 152 [1961] Ch 555. 153 Compare Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] 1 Lloyd’s Rep 547 at 561 per Gloster J, where the shipowner’s mistake was not known to the insurers. 154 Adopted by the English Court of Appeal in Riverlate Properties Ltd v Paul [1975] Ch 133 at 140; Thomas Bates and Son Ltd v Wyndham’s (Lingerie) Ltd [1980] EWCA Civ 3; [1981] 1 WLR 505 at 514–15. 155 [1981] 1 All ER 1077 at 1086; [1981] 1 WLR 505 per Buckley LJ.

156 Agip SpA v Navigazione Alta Italia SpA (‘The Nai Genova’ and ‘The Nai Superba’) [1984] 1 Lloyd’s Rep 353 at 359 (CA). 157 Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 277–81, 292 (CA). 158 George Wimpey (UK) Ltd v VI Construction Ltd [2005] EWCA Civ 77 at [79]; KPMG v Network Rail Infrastructure Ltd [2006] EWHC 67 (Ch); [2006] 2 P & CR 7 at [192]. 159 [1995] Ch 259. 160 Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 280. 161 This is said to be the correct principle and a more secure foundation: D Mossop, ‘Rectification for Unilateral Mistake’ (1996) 10 Journal of Contract Law 259. 162 [1999] 1 VR 1. 163 [1999] 1 VR 1 at 4. 164 [1999] 1 VR 1 at 14. In Canada, the availability of rectification is governed by similar principles: see Anderson v Brouwer Claims Canada & Co Ltd [2002] BCSC 1043 at [72] per Chamberlist J; Downtown King West Development Corp v Massey Ferguson Industries Ltd 28 OR (3d) at 327. 165 Rowallan Group Ltd v Edgehill Portfolio No 1 Ltd [2007] EWHC 32 at [15] (Ch): ‘[T]he 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’. 166 Littman v Aspen Oil (Broking) Ltd [2005] EWHCA Civ 1579 at [20]. 167 Smith v Hughes (1870–71) LR 6 QB 597; Hartog v Colin & Shields [1939] 3 All ER 566. 168 See E Peel, Treitel: The Law of Contract, 12th ed, Sweet and Maxwell, UK, 2007, paras [8-044]–[8051], commenting on Smith v Hughes (1870–71) LR 6 QB 597. 169 [2007] EWHC 895 (Ch). 170 [2007] EWHC 895 (Ch) at [109] 171 See Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259; Thor Navigation Inc v Ingosstrakh Insurance Co Ltd [2005] 1 Lloyd’s Rep 547 at 561. In Budget Stationery Supplies Pty Ltd v National Australia Bank Ltd (SC NSW, Santow J, 25 September 1996, No 4303/93, unreported), affirmed 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. 172 See Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1 at 14 per Kenny JA. 173 Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 280. 174 [1975] Ch 133. 175 [1975] Ch 133 at 141. 176 [1975] Ch 133 at 140. 177 See Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 280, 281, 282 per Stuart-Smith J, referring to diverting the party’s attention from the contract, false and misleading statements, misrepresentations and smokescreens. 178 See Riverlate Properties Ltd v Paul [1975] Ch 133. 179 See Garrard v Frankel (1862) 30 Beav 445. For a criticism of this approach, see Riverlate Properties Ltd v Paul [1975] Ch 133 at 140–1 per Russell LJ. 180 Garrard v Frankel (1862) 30 Beav 445.

181 Borrowman v Rossel (1864) 16 CBNS 58.

[page 713]

CHAPTER 23 Termination and Discharge CHAPTER OVERVIEW 23.1 23.2 23.3 23.5

Introduction A right to terminate Subsequent agreements and abandonment Contingent conditions

Introduction 23.1

A contract can be terminated through the mutual agreement or conduct of both parties.1 Similarly, a contract may be discharged through the effective performance of contractual duties by the parties, with the effect that the contract is brought to an end through the operation of its own terms. It is also possible that the parties may terminate a contract through abandonment.2 This chapter outlines some of the issues around termination and breach. Chapter 24 deals with termination for breach.

A right to terminate 23.2

Repudiatory fixed-term contracts clearly set out the span of their duration. When the agreed time period passes, the contract ceases to bind the parties. Where the contract has no fixed term and is open-ended, the parties may include an express right to terminate. Such clauses may stipulate that a particular process should be followed in order to effectively terminate the contract.3 Strict compliance with the processes set out by termination clauses may not be necessary as they will be

construed in a commercial manner and not in an unduly restrictive fashion. In Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd,4 Kirby J stated: [page 714] In my view, such documents should be construed practically, so as to give effect to their presumed commercial purposes and so as not to defeat the achievement of such purposes by an excessively narrow and artificially restricted construction. The law facilitates and upholds commercial contractual obligations and the expectations that derive from them. Statute and equity may sometimes come to the aid of parties where various forms of unfairness or inequality can be shown. None was invoked in this appeal. But as between a commercial enterprise and a finance provider, such as a bank, the law should be the upholder of agreements. It should eschew artificialities and excessive technicalities for these will not be imputed to the ordinary businessperson. Business is entitled to look to the law to keep people to their commercial promises. In a world of global finances and transborder capital markets, those jurisdictions flourish which do so. Those jurisdictions which do not soon become known. They pay a price in terms of the availability and costs of capital necessary as a consequence of the uncertainties of the enforcement of agreements in their courts.

In the absence of an express right to terminate, it is likely that such a right can be implied from the terms of the contract.5 The courts will ordinarily require that reasonable notice is given to the other party.6 The specific facts of the relevant contractual relationship will guide the court in determining the extent of the reasonable notice period.

Subsequent agreements and abandonment 23.3

The parties to an original contract may subsequently agree to a new contract which effectively displaces and renders otiose the former agreement.7 If the parties are silent about their desire to supplant the earlier contract, the relevant intention can be discerned from their conduct.8 That intention must be evaluated with respect to the surrounding commercial

circumstances. For example, in Concut Pty Ltd v Worrell9 the High Court found that an earlier oral agreement had not been displaced by a later written agreement. As Kirby J noted: ‘[O]rdinary practical and commercial considerations militate strongly against a conclusion that the Service Agreement wholly discharged the former oral agreement and excused every later discovered instance of misconduct that had occurred during the currency of the employment, however serious.’10 23.4

It is open to parties to abandon their rights under a contract. The abandonment of a contract can be inferred from the circumstances. [page 715] In DTR Nominees Pty Ltd v Mona Homes Pty Ltd,11 both parties believed that the other had repudiated the contract and subsequently conducted themselves on the basis that the agreement no longer operated. The High Court found that this belief was mistaken, but that the conduct of the parties amounted to abandonment of the contract.12 In Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd,13 the Victorian Court of Appeal stated; ‘[I]t is to be inferred that the abandonment of a contract operates prospectively without prejudice to accrued entitlements.’

Contingent conditions 23.5

The formation of a contract may be subject to a condition precedent.14 Accordingly, where the contingent condition does not eventuate, the contract may not be formed at all. For example, parties A and B may agree that if it rains on Tuesday, then A will be bound in contract to provide an umbrella to B.

Unless it actually does rain on Tuesday there is no contract between A and B. The parties may also agree to a condition subsequent that may determine whether contractual performance occurs.15 In this situation there is a contract between the parties, but performance entirely depends upon some event happening. Here, A and B are under a contract wherein A will provide an umbrella to B if it rains on Tuesday. As is self-evident, the distinction between a condition precedent and a condition subsequent is not always easy to identify and may in fact be unhelpful.16 In Perri v Coolangatta Investments Pty Ltd,17 Gibbs CJ stated: It has sometimes proved difficult to decide whether a particular condition of a contract should be classified as a condition precedent or a condition subsequent, and as Profession Stoljar has pointed out in ‘The Contractual Concept of Condition’, Law Quarterly Review, vol 69 (1953) 485, at p 506, if the words ‘precedent’ and ‘subsequent’ are to make sense they must be connected with a definite point of reference; since they express a relationship in time, the question which must be asked is ‘Precedent to what? Subsequent to what?’ However, provided the effect of a condition is clearly understood, its classification may be merely a matter of words.

The most obvious example of a contingent condition is a ‘subject to finance’ clause in a contract. In Perri, the contract itself was ‘subject to [page 716] completion’. It follows that if the specified event does not occur, then the parties may be discharged from any further obligation. Nevertheless, a duty to cooperate will apply and the fulfilment or otherwise of a ‘subject to finance’ or ‘subject to completion’ clause may rest upon the promisor taking reasonable steps to attain finance or to achieve completion.18 Where the contingent condition applies to the whole contract, then it will be a matter of construction to determine whether any further obligations remain. Where the contingent condition

applies to only a specific obligation or set of obligations, then the remainder of the contract may remain binding.19

Key Points for Revision A contract can be terminated through the mutual agreement or conduct of both parties. A contract may be discharged through performance. The parties to an original contract may subsequently agree to a new contract which effectively displaces and renders otiose the former agreement. The parties may also abandon a contract. The formation of a contract may be subject to a condition precedent. The performance of a contract may be subject to a condition subsequent.

_________________ 1

Wallace-Smith v Theiss Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; 23 ACLC 630.

2

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223.

3

Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579; 74 ALJR 791.

4

(2000) 170 ALR 579; 74 ALJR 791 at [24].

5

Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438.

6

Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438.

7

Wallace-Smith v Theiss Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; 23 ACLC 630; Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93; 64 ALR (CN) 1198b.

8

Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93; 64 ALR (CN) 1198b.

9

(2000) 176 ALR 693; 75 ALJR 312.

10

(2000) 176 ALR 693; 75 ALJR 312 at [56].

11

(1978) 138 CLR 423; 19 ALR 223.

12

(1978) 138 CLR 423 at 434; 19 ALR 223.

13

(2014) 45 VR 79 at [19].

14

See Meehan v Jones (1982) 149 CLR 571; 42 ALR 463; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; 41 ALR 441.

15

See Maynard v Goode (1926) 37 CLR 529; Suttor v Gundowda Pty Ltd (1950) 81 CLR 418.

16

Meehan v Jones (1982) 149 CLR 571 at 592; 42 ALR 463.

17

(1982) 149 CLR 537 at 541; 41 ALR 441.

18

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234.

19

Suttor v Gundowda Pty Ltd (1950) 81 CLR 418.

[page 717]

CHAPTER 24 Termination for Breach CHAPTER OVERVIEW 24.1 24.2 24.3 24.6 24.7 24.14 24.15 24.17 24.18 24.20

Introduction The classification of terms Conditions Intermediate terms Repudiation Anticipatory breach Termination for delay Notice Election Restrictions on the right to terminate

Introduction 24.1

In some instances a breach of contract may give rise to a right in the aggrieved party to terminate the contract. The right to terminate the contract may arise in a number of ways. First, the contract itself may stipulate that the breach of certain conditions gives rise to a right to terminate. Second, the common law rules on termination may apply and if a term is found to be a condition, then termination may be possible. Third, a breach of an intermediate term may also give rise to a right to terminate if the breach is serious enough. Fourth, the conduct of one party may be sufficient to amount to a repudiation of his or her obligations under the contract. Accordingly, once the other party has become aware that the repudiating party is unwilling to perform the contract, they may elect to terminate rather than wait for the breach to

manifest itself. Fifth, a delay in performance may be sufficient to give rise to a right to terminate if time is of the essence. Sixth, an aggrieved party may choose to terminate through a notice process. There are some restrictions that apply to a right to terminate a contract and termination may not be possible where an estoppel has arisen or where the terminating party’s conduct might be viewed as unconscionable. This chapter examines the issues around termination. [page 718]

The classification of terms 24.2

While there has been some debate about the matter, it is now largely settled that there is a tripartite classification of contractual terms1 that distinguishes between conditions, intermediate terms and warranties. Where a term can properly be described as a condition, a breach of that term automatically gives rise to a right to terminate a contract for the injured party. In contrast, a breach of warranty merely results in a right to damages accruing to the injured party. In Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd,2 Lord Diplock developed the notion of intermediate terms as those terms that fall between conditions and warranties.

Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd [1962] 2 QB 26 England and Wales Court of Appeal, Civil Division Lord Diplock at 69–72: Once it is appreciated that it is the event and not the fact that the event is a result of a breach of contract which relieves the party not in default of further performance of his obligations

two consequences follow. (1) The test whether the event relied upon has this consequence is the same whether the event is the result of the other party’s breach of contract or not, as Mr Justice Devlin pointed out in Universal Cargo Carriers Corporation v Citati (1957 2 Queen’s Bench page 401, at page 434). (2) The question whether an event which is the result of the other party’s breach of contract has this consequence cannot be answered by treating all contractual undertakings as falling into one of two separate categories: ‘conditions’ the breach of which gives rise to an event which relieves the party not in default of further performance of his obligations, and ‘warranties’ the breach of which does not give rise to such an event. … No doubt there are many simple contractual undertakings, sometimes express but more often because of their very simplicity (‘It goes without saying’) to be implied, of which it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract. And such a stipulation, unless the parties have agreed that breach of it shall not entitle the non-defaulting party to treat the contract as repudiated, is a ‘condition’. So too there may be other simple contractual undertakings of which it can be predicated that no breach can give rise to an event which will deprive the party not in default of substantially the whole benefit which it was [page 719] intended that he should obtain from the contract; and such a stipulation, unless the parties have agreed that breach of it shall entitle the nondefaulting party to treat the contract as repudiated, is a ‘warranty’. There are, however, many contractual undertakings of a more complex character which cannot be categorised as being ‘conditions’ or ‘warranties’ … Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will

deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a ‘condition’ or a ‘warranty’. … As my ‘brethren have already pointed out, the shipowner’s undertaking to tender a seaworthy ship has, as a result of numerous decisions as to what can amount to ‘unseaworthiness’, become one of the most complex of contractual undertakings. It embraces obligations with respect to every part of the hull and machinery, stores and equipment and the crew itself. It can be broken by the presence of trivial defects easily and rapidly remediable as well as by defects which must inevitably result in a total loss of the vessel. Consequently the problem in this case is, in my view, neither solved nor soluble by debating whether the shipowner’s express or implied undertaking to tender a seaworthy ship is a ‘condition’ or a ‘warranty’. It is like so many other contractual terms an undertaking one breach of which may give rise to an event which relieves the charterer of further performance of his undertakings if he so elects and another breach of which may not give rise to such an event but entitle him only to monetary compensation in the form of damages. It is, with all deference to Mr. Ashton Roskill’s skilful argument, by no means surprising that among the many hundreds of previous cases about the shipowner’s undertaking to deliver a seaworthy ship there is none where it was found profitable to discuss in the judgments the question whether that undertaking is a ‘condition’ or a ‘warranty’; for the true answer, as I have already indicated, is that it is neither, but one of that large class of contractual undertakings one breach of which may have the same effect as that ascribed to a breach of ‘condition’ under the Sale of Goods Act and a different breach of which may have only the same effect as that ascribed to a breach of ‘warranty’ under that Act. The cases referred to by Lord Justice Sellers illustrate this and I would only add that in the dictum which he cites from Kish v Taylor (1912 Appeal Cases page 604, at page 617) it seems to me from the sentence which immediately follows it as from the actual decision in the case and the whole tenor of

Lord Atkinson’s speech itself that the word ‘will’ was intended to be ‘may’.

[page 720] The development in Hong Kong Fir Shipping of the concept of intermediate terms allows for a degree of flexibility in the management of contractual relations. It is almost intuitive that a contractual term can be breached in a number of different ways with consequences of varying degrees of importance. The High Court was rather slow to explicitly accept intermediate terms, but in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd,3 the court brought the common law of Australia in line with that of the United Kingdom on this point.

Conditions 24.3

Where a term is a condition, either because it satisfies the common law test for being a condition or because it has been expressly and knowingly designated as such by the parties under the contract, there will be a right to terminate the contract for any breach of the term no matter how slight the breach may be.4 In Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale,5 Lord Upjohn stated: A fundamental term of a contract is a stipulation which the parties have agreed either expressly or by necessary implication or which the general law regards as a condition which goes to the root of the contract so that any breach of that term may at once and without further reference to the facts and circumstances be regarded by the innocent party as a fundamental breach.

While the parties to a contract may designate a term as a condition, the courts will examine whether they intended to use the term ‘condition’ in a manner that is consistent with its meaning under the common law.6 It is quite possible that the

parties to a contract may have unwittingly used the term ‘condition’ to describe a particular clause in their contract. Accordingly, to enforce the clause as an actual condition would be unfair to the party in breach and would represent a windfall gain of sorts to the innocent party. There are numerous situations in which contracting parties might use the term ‘conditions’ in a colloquial sense with no intention of proffering a right to terminate to the non-breaching party should any breach of that term occur. Where there is an express right to terminate for breach of a condition the court will treat the matter as a question of construction so as to determine the true intention of the parties.7 In the absence of any express designation, the common law test for determining whether a term is a condition is that which was stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd:8 [page 721] 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.

24.4

Once it is established that a term is a condition, then any breach of that term, whether it be a slight infraction or an egregious breach, will give rise to a right to terminate.9 In Associated Newspapers Ltd v Bancks,10 the author of the Ginger Meggs comic argued that his employer, Associated Newspapers, had breached a condition of their contract. Under the contract the newspaper company had agreed to prominently display Bancks’ comics on the front page of the comic section of its newspaper. During the term of the contract the newspaper in fact failed to display the author’s work on the front page of the

comic section.

REVIEW QUESTIONS 1.

What is a condition?

2.

What is the test of essentiality and how does it apply?

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 High Court of Australia Dixon, Williams, Webb, Fullagar and Kitto JJ: [7] 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 Bettini v Gye (1876) 1 QBD, at p 186 [page 722] Blackburn J (as he then was) said that to determine this question the court must ascertain the intention of the parties to be collected from the instrument and the circumstances legally admissible with reference to which it is to be construed. Later in the same case his Lordship said that in the absence of any express declaration by the parties, as in the present case, ‘we think that we are to look at the whole contract and applying the rule stated by Parke B to be acknowledged in Graves v Legg

[1854] EngR 497; (1854) 9 Ex 709, at p 716 [1854] EngR 497; (156 ER 304); 23 LJ (Ex) 228, see whether the particular stipulation goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff a thing different in substance from what the defendant has stipulated for; or whether it merely partially affects it and may be compensated for in damages’ (1876) 1 QBD, at p 188. 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 CB 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.’ As he says, this form is ‘expressly supported by such cases at law as Flight v Booth [1834] EngR 1087; (1834) 1 Bing (NC) 370 (131 ER 1160), and Bannerman v White [1861] EngR 713; (1861) 10 CB (NS) 844 (142 ER 685) and, implicitly, by such cases as Hoare v Rennie [1859] EngR 983; (1859) 5 H & N 19 (157 ER 1083) and Bowes v Shand (1877) 2 App Cas 455. 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] HCA 66; (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 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: Flight v Booth (1834) 1 Bing (NC), at p 377 (131 ER, at pp 1162, 1163); Bettini v Gye (1876) 1 QBD, at p 188; Bentsen v Taylor, Sons & Co (No 2) (1893) 2 QB 274, at p 281; Fullers’ Theatres Ltd v Musgrove [1923] HCA 12; (1923) 31 CLR 524, at pp 537, 538; Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159; Clifton v Coffey [1924] HCA 35; (1924) 34 CLR 434, at pp 438, 440. 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.’ [8] 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 [page 723] 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. It is not sufficient if the employer pays his salary. He must find work for him to do in the sort of part, principal or subsidiary, for which he is employed.

The High Court’s decision in Associated Newspapers demonstrates that the test of essentiality requires a holistic and pragmatic appraisal of the contractual relationship between the parties. In effect, if the term relates to the heart of the bargain between the parties, then it is more likely than not to be a condition. 24.5

There are a range of factors that a court may consider in determining whether a clause is a condition. First, courts may have regard to previous decisions that dealt with similar contractual terms. Second, a court will consider the language that the parties have used in framing the obligations. Some terms may have been phrased so as to indicate that compliance with their requirements is mandatory. Other terms might on closer inspection appear to be somewhat equivocal. Third, the court may look at the contract as a whole, which would involve comparing the disputed terms to other terms, in order to determine whether the term in question is a condition. This examination of the term within the context of the entire contract should indicate how the parties intended for their contractual relationship to operate. In turn, this should shed light on whether a term is a condition. Fourth, the court may also need to consider the variety of ways in which a particular term could be breached. If a term can be breach in a number of ways, some of which are undeniably trivial, then it is less likely that [page 724] the parties intended that term to be a condition, with the result that any breach of that term would set the basis for severing the contractual relationship. Fifth, the courts may consider whether the breach of the term can effectively be remedied by damages.

Intermediate terms 24.6

In Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd,11 the United Kingdom Court of Appeal accepted that there existed some terms, properly classified as intermediate terms, that lay midway between conditions and warranties, where a breach might in some situations be so severe as to justify termination and in other situations where damages would suffice. In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd,12 Gleeson CJ, Gummow, Heydon and Crennan JJ stated: … at the time a contract is entered into, it may not be possible to say that any breach of a particular term will entitle the other party to terminate, but that some breaches of the term may be serious enough to have that consequence, … Breaches of this kind are sometimes described as ‘going to the root of the contract’, a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party.

In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd, Koompahtoo and Sanpine signed a joint venture agreement with the express purpose of facilitating a commercial property development. Under the agreement, Koompahtoo was to make the land available for the development project and in turn Sanpine was to manage the project. Koompahtoo provided the land, but Sanpine failed to keep adequate financial records. Koompahtoo subsequently went into administration. Koompahtoo’s administrator sought to terminate the joint venture agreement on the basis that Sanpine had breached cl 16 of the agreement, under which Sanpine was required to keep financial accounts of the joint venture. The High Court found that cl 16(5) was an intermediate term and that ‘the breaches of Sanpine were in a number of respects gross, and their consequences were serious.’13 As such, the administrator was justified in seeking to terminate the contract. The following extract from the lead judgment in Koompahtoo explores the notion of intermediate terms and the tripartite classification of contractual terms.

[page 725]

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; 241 ALR 88 High Court of Australia Gleeson CJ, Gummow, Heydon and Crennan JJ: [46] Termination of a contract in response to breach, where permitted, may alter substantially the allocation of risk accepted by the parties. The consequences of termination for the parties may be affected by external circumstances such as market fluctuations. At the same time, there are cases in which damages are not an adequate remedy, and it would be irrational and unjust to bind one party to an ongoing contractual relationship notwithstanding the other’s default. The appellants say that binding Koompahtoo to a long-term joint venture with Sanpine is such a case. This, however, is not a suit for the dissolution of a partnership, and it is the law of contract that is to be applied. [47] For present purposes, there are two relevant circumstances in which a breach of contract by one party may entitle the other to terminate. The first is where the obligation with which there has been failure to comply has been agreed by the contracting parties to be essential. Such an obligation is sometimes described as a condition. In Australian law, a well-known exposition was that of Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd who, in comparing conditions and warranties, employed language reflected in many statutory provisions. The widespread statutory adoption of the distinction between conditions and warranties, or essential and inessential terms, is an established part of the background against which the common law has developed. The Chief Justice of New South Wales said (references omitted): In considering the legal consequences flowing from a breach of contract, it is necessary to remember that (i) the breach may extend to all or to some only of the promises of the defaulting

party, (ii) the promises broken may be important or unimportant, (iii) the breach of any particular promise may be substantial or trivial, (iv) the breach may occur or be discovered (a) when the innocent party has not yet performed any or some of the promises on his part, or after he has performed them all, and (b) when the innocent party has received no performance from the defaulting party, or has received performance in whole or in part; and to remember also that the resultant rights of the innocent party and the nature of the remedies available to him may depend upon some or all of these matters. The nature of the promise broken is one of the most important of the matters. If it is a condition that is broken, ie, an essential promise, the innocent party, when he becomes aware of the breach, has ordinarily the right at his option either to treat himself as discharged from the [page 726] contract and to recover damages for loss of the contract, or else to keep the contract on foot and recover damages for the particular breach. If it is a warranty that is broken, ie, a nonessential promise, only the latter alternative is available to the innocent party: in that case he cannot of course obtain damages for loss of the contract. The question whether a term in a contract is a condition or a warranty, ie, an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. 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. If he contracted in reliance upon a substantial performance of the promise, any substantial breach will ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg, by a stipulation that it is the basis or of the essence of the contract; but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained. In general, Courts of common law have been more ready than Courts of Equity to regard promises as essential. This is in part due to the fact that Courts of common law are in the main concerned with ordinary commercial contracts in which it is common to find provisions which are intended to be strictly and literally performed. It is now provided by s 13 of the Conveyancing Act, 1919 (taken from the Judicature Act, 1873, 36 and 37 Victoria, Chap 66, s 25(7)) that stipulations in contracts, as to time or otherwise, which would not before the commencement of the Act have been deemed to be or to have become of the essence of such contracts in a Court of Equity shall receive in all Courts the same construction and effect as they would have heretofore received in such Court. This serves to make equitable liberality of construction supersede common law strictness, so far as is consistent with apparent intention, in fields where equity and common law overlap; but it does not affect the principle that effect must be given to the apparent intention of the parties as disclosed in the contract. [48] What Jordan CJ said as to substantial performance, and substantial breach, is now to be read in the light of later developments in the law. What is of immediate significance is his reference to the question he was addressing as one of construction of the contract. It is the common intention of the parties, expressed in the language of their contract, understood in the context of the

[page 727] relationship established by that contract and (in a case such as the present) the commercial purpose it served, that determines whether a term is ‘essential’, so that any breach will justify termination. [49] The second relevant circumstance is where there has been a sufficiently serious breach of a non-essential term. In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, the English Court of Appeal was concerned with a stipulation as to seaworthiness in a charterparty. Breaches of such a stipulation could vary widely in importance. They could be trivial or serious. The Court of Appeal held that to the accepted distinction between ‘conditions’ and ‘warranties’, that is, between stipulations that were in their nature essential and others, there must be added a distinction, operative within the class of nonessential obligations, between breaches that are significantly serious to justify termination and other breaches. This was a recognition that, although as a matter of construction of a contract it may not be the case that any breach of a given term will entitle the other party to terminate, some breaches of such a term may do so. Diplock LJ said that the question whether a breach by one party relieves the other of further performance of his obligations cannot always be answered by treating a contractual undertaking as either a ‘condition’ or a ‘warranty’. Of some stipulations ‘all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise’. [50] In this way Diplock LJ set the policy of the law favouring certainty of outcome through the classification of terms as conditions against that which encourages contractual performance and favours restriction of the right to terminate to cases where breach occasions serious prejudice. As it is put in the eleventh edition of Treitel: [T]he policy of leaning in favour of classifying stipulations as intermediate terms can be said to promote the interests of

justice by preventing the injured party from rescinding on grounds that are technical or unmeritorious. Perhaps the adoption of other taxonomies for contractual stipulations might achieve similar outcomes. However, Hongkong Fir was decided in 1961 and has long since passed into the mainstream law of contract as understood and practised in Australia. [51] It may be true that this Court has yet to accept Hongkong Fir as an essential element in the grounds for decision in any particular case. However, in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd, Mason ACJ, Wilson, Brennan and Dawson JJ referred to Hongkong Fir with evident approval and said that the [page 728] concept of the intermediate and innominate term brings a greater flexibility to the law of contract. With that in mind, it was entirely appropriate for Campbell J to proceed with an analysis of the facts in which Hongkong Fir was applied. [52] The practical utility of a classification which includes intermediate terms, and the consequent greater flexibility of which the Court spoke in Ankar, appears from several consequences. First, the interests of justice are promoted by limiting rights to rescind to instances of serious and substantial breaches of contract. Secondly, a just outcome is facilitated in cases where the breach is of a term which is inessential. [53] As will appear later in these reasons, we rest our decision in the appeal not upon the ground of breach of an essential obligation, but upon application of the doctrine respecting intermediate terms. [54] We add that recognition that, at the time a contract is entered into, it may not be possible to say that any breach of a particular term will entitle the other party to terminate, but that some breaches of the term may be serious enough to have that consequence, was taken up in Ankar. Breaches of this kind are sometimes described as ‘going to the

root of the contract’, a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party. Since the corollary of a conclusion that there is no right of termination is likely to be that the party not in default is left to rely upon a right to damages, the adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract. [55] A judgment that a breach of a term goes to the root of a contract, being, to use the language of Buckley LJ in Decro-Wall International SA v Practitioners in Marketing Ltd, ‘such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract’, rests primarily upon a construction of the contract. Buckley LJ attached importance to the consequences of the breach and the fairness of holding an injured party to the contract and leaving him to his remedy in damages. These, however, are matters to be considered after construing the agreement the parties have made. A judgment as to the seriousness of the breach, and the adequacy of damages as a remedy, is made after considering the benefit to which the injured party is entitled under the contract. [56] A question as to contractual intention, considered in the light of the language of the contract, the circumstances in which the parties have contracted and their common contemplation as to future performance, is different from a question as to the intention evinced by one of the parties at the time of breach, such as arises in cases of alleged renunciation. That difference is exemplified by the way in which the majority in the Court of Appeal dealt with the decision of the primary judge in this case.

[page 729]

REVIEW QUESTIONS 1.

What is an intermediate term?

2.

In Koompahtoo, did the High Court accept the United Kingdom approach to intermediate terms?

Repudiation 24.7

Repudiation of a contract occurs where one party to the contract demonstrates through statements, conduct or omissions that they will not be able to perform their contractual obligations. In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd,14 Deane and Dawson JJ stated: An issue of repudiation turns upon objective acts and omissions and not upon uncommunicated intention. The question is what effect the lessor’s conduct ‘would be reasonably calculated to have upon a reasonable person’. … It suffices that, viewed objectively, the conduct of the relevant party has been such as to convey to a reasonable person, in the situation of the other party, repudiation or disavowal either of the contract as a whole or of a fundamental obligation under it.

In Koompahtoo, the High Court used the term ‘renunciation’ to describe the concept of repudiation. The terms ‘renunciation’ and ‘repudiation’ appear to have substantively the same meaning.15 In Galafassi v Kelly,16 Gleeson JA stated: For the conduct of a party to constitute a renunciation of its contractual obligations it must be shown that the party is either unwilling or unable to perform its contractual obligations, that is, it has evinced an intention to no longer be bound by the contract or stated that it intends to fulfil the contract only in a manner substantially inconsistent with its obligations and in no other way.

24.8

In assessing a repudiation, the courts look at the conduct and attitude of the party in default, to see whether they are behaving in a manner that demonstrates that they no longer consider themselves bound by the contract.17 A finding of repudiation can be drawn from one particular act or a series of actions evincing an intent not to be bound by the contract.18 Nonetheless, in some manner, whether by words or [page 730]

otherwise, the repudiation must be clearly communicated.19 In Galafassi v Kelly,20 Gleeson JA stated: Where inability to perform is declared the conduct amounts to a refusal to perform and the innocent party need not prove that the other party was actually unable to perform as a matter of fact. … A renunciation can be made either by words or conduct, provided it is clearly made …. The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.

In Earney v Australian Property Investment Strategic Pty Ltd,21 Hargrave J summarised the basic principles of repudiation: (1) The term repudiation is used in a number of senses. Relevantly, the High Court has recently stated that repudiation: may refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations. It be may termed renunciation. The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it. (2) It is not necessary to prove a subjective intention to repudiate. The test is an objective one. (3) Whether there has been repudiation is a question of fact. (4) Repudiation is not to be inferred lightly. It is a serious matter. (5) Repudiation may be evidenced by a single act or by an accumulation of conduct in circumstances where no individual act on its own constitutes a repudiation. (6) Repudiation does not bring an end to a contract. It is necessary for the innocent party to elect to accept the repudiation. (7) Repudiatory conduct may be ‘cured’ by the party in breach, but only prior to the acceptance of the repudiation. Accordingly, once the innocent party has elected to terminate the contract for breach, it cannot thereafter be cured. (8) In the context of employment contracts, a significant diminution in remuneration, status or responsibility may constitute a repudiation. Whether or not this is so is a question of fact in each case.

24.9

The repudiatory conduct may relate to the contract in its entirety or to a fundamental obligation.22 Moreover,

repudiation is not necessarily [page 731] distinct from the other grounds for termination;23 that is, conduct that amounts to a repudiation may also be said to amount to a breach of a condition or an egregious breach of an intermediate term.

Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305 High Court of Australia Gibbs CJ: … [4] The primary submission made on behalf of the respondent was that since the breaches of contract committed by the lessee entitled the respondent to terminate the contract, it followed that when the respondent exercised its right to do so it became entitled to damages for loss of the benefits which performance of the contract would have conferred upon it. This submission treated the breaches of the covenant to pay rent as a breach of an essential term of the contract. In the alternative it was submitted that the conduct of the lessee revealed such an unwillingness or inability to perform the contract as to amount to a repudiation of it. [5] This argument proceeded on the basis that the general principles of the law of contract, so far as they are relevant to the questions that arise in this case, are equally applicable to leases. A contrary view was expressed in Total Oil v Thompson Garages (1972) 1 QB 318, at p 324, where Lord Denning MR said that repudiation which is accepted does not come to an end like an ordinary contract on repudiation and acceptance, and drew an analogy with the case of frustration. The

learned authors of Brooking and Chernov: Tenancy Law and Practice in Victoria, 2nd ed (1980), at p 197, dispute this view and cite a number of cases, from New Zealand and Canada as well as from Australia, which in their opinion support the conclusion that a lease may be determined by an acceptance of a repudiation. I need not enter upon this controversy. I am content to assume that the ordinary principles of contract law are applicable. [6] As Lord Wright pointed out in Heyman v Darwins Ltd (1942) AC 356, at p 378, repudiation is an ambiguous word and is used in various senses. We are of course concerned only with a case in which it is admitted that there was a valid and binding contract. Such a contract may be repudiated if one party renounces his liabilities under it — if he evinces an intention no longer to be bound by the contract (Freeth v Burr (1874) LR 9 CP 208, at p 213) or shows that he intends to fufil the contract only in a manner substantially inconsistent with his obligations and not in any other way (Ross T Smyth & Co Ltd v T D Bailey, Son & Co [page 732] (1940) 3 All ER 60, at p 72; Carr v J A Berriman Pty Ltd [1953] HCA 31; (1953) 89 CLR 327, at p 351). In such a case the innocent party is entitled to accept the repudiation, thereby discharging himself from further performance, and sue for damages: Heyman v Darwins Ltd (1942) AC, at p 399. It is convenient to say that the injured party in these circumstances rescinds the contract, although there is, of course, no rescission ab initio: Johnson v Agnew (1980) AC 367, at pp 392–393. The present case was not one of this kind. There is nothing to suggest that the lessee had any intention other than to fulfil the contract, according to its terms, to the best of its ability. However, if one party, although wishing to perform the contract, proves himself unable to do so, his default in performance will give the other party a right to rescind the contract, if the breach goes ‘so much to the root of the contract that it makes further commercial performance of the contract impossible’: Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7; (1962) 2 QB 26, at p 64. There is high authority for treating such

cases as a form of repudiation of the contract: Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale (1967) 1 AC 361, at pp 421–422; Federal Commerce v Molena Alpha (1979) AC 757, at pp 778–779. In Honner v Ashton (1979) 1 BPR 9478, at p 9490, Mahoney JA said that he thought that the right to terminate for fundamental breach should be seen as, in principle, distinct from the right to terminate for repudiation. For present purposes, it is immaterial whether repudiation and fundamental breach are treated as separate categories, for in either case the innocent party can rescind the contract and recover damages to compensate him for the failure to perform the contractual obligations. Counsel for the respondent, in their alternative argument, sought to bring the case within this principle. A third situation in which a right to rescission arises is where there has been a breach of a fundamental or essential term of the contract. … 24.10 In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd,24 Laurinda Pty Ltd sought to lease premises from Capalaba. Under the agreement, Capalaba was to construct the premises and the register the lease. Capalaba failed to register the lease and Laurinda eventually stopped paying rent, on the basis that the former had repudiated the lease. The High Court found that Capalaba had repudiated their obligations. Deane and Dawson JJ stated: … the alleged repudiation by the lessor was of the fundamental obligation to produce a lease of the subject premises in registrable form. Clearly, there was unreasonable delay on the part of the lessor in the performance of that obligation. That delay was deliberate and was for the lessor’s own commercial purposes. Its significance, from the viewpoint of a reasonable person in the position of the lessee, was heightened by an absence of explanation in the face of the lessee’s requests and complaints and by the dishonouring of assurances given as to future conduct.25

[page 733] As Deane and Dawson JJ noted in Laurinda, the existence of repudiation can be determined by the application of a reasonable person test.26 Indeed, in Laurinda, Brennan J stated:

The question whether an inference of repudiation should be drawn merely from continued failure to perform requires an evaluation of the delay from the standpoint of the innocent party. Would a reasonable person in the shoes of the innocent party clearly infer that the other party would not be bound by the contract or would fulfil it only in a manner substantially inconsistent with that party’s obligations and in no other way? Different minds may easily arrive at different answers.27

24.11 A finding of repudiation is not lightly made.28 In Carr v JA Berriman Pty Ltd,29 a builder entered into a contract with a landowner to build a factory on a property owned by the former. Under the contract, the landowner was obliged to complete excavation work by a certain date. Instead, the landowner left heavy machinery on the site and failed to excavate the site by the required date. The builder then subcontracted the bulk of his assigned work under the existing contract to a subcontractor. The builder then suggested that the failure of the landowner to excavate and to provide steel for the construction amounted to a repudiation of the contract. The High Court agreed and found in favour of the builder.

Carr v JA Berriman Pty Ltd (1953) 89 CLR 327 High Court of Australia Fullagar J: [16] … I am of opinion that the company’s solicitor was fully justified in asserting, as he did in his letter of 31st July, that two breaches of contract had been committed by Carr. He had not given possession of the building site, duly excavated or at all, on the date required by the contract or thereafter. And he had repudiated his obligation to deliver the structural steel for fabrication. As soon as this position is realized, the case becomes, in my opinion, a reasonably clear one. [17] Both Owen J and the Full Court appear, as I have said, to have approached the matter on the assumption that the only breach committed by Carr before

[page 734] 31st July lay in his failure to excavate and deliver the site. It was held by Owen J and the majority of the Full Court that that breach did justify rescission. But there are difficulties about this view, and there is much force in the answer made to it by counsel for Carr. 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. 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 noncompliance with that notice: see, eg, Taylor v Brown [1839] EngR 1058; (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. [18] 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 29th May. For the company after 29th 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 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] HCA 37; (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. [19] 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 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 [page 735] 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 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 3rd and 29th 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. And, as Mr Barwick rightly said, while the state of the weather is quite irrelevant on the question whether a breach of contract has been committed, it is very relevant on the question of the intention of the building owner with reference to the performance of the particular promise in question. [20] 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 21st 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 19th July, which had announced that the amount allowed for the fabrication would simply be deducted from the contract price. [page 736]

[21] 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. Mr Barwick cited the case of James Shaffer Ltd v Findlay Durham & Brodie (1953) 1 WLR 106, but that case seems to present a marked contrast with this case. In that case the defendants were desirous of doing, and were in fact doing, their very utmost to perform their contract. It is possible that Carr believed that the architect had power under the conditions of the contract to ‘omit’ therefrom the fabrication of the steel and so leave him at liberty to make other arrangements for the doing of that work. But he had, in the words of Latham CJ in Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR, at p 304 ‘given’ Berriman ‘the right to believe that the contract would not be performed according to its true construction’. Moreover, the step was taken without inviting the exercise of any discretion on the part of the architect. Mr Oser seems simply to have been presented with a fait accompli and to have tried to make the best he could of it. [22] 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 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. [23] From this conclusion two things follow. On the one hand, the builder’s solicitor’s letter of 31st 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 [page 737] 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. [24] The builder’s damages were assessed by Owen J under three heads. In the first place, he awarded £1,824 for loss of profit on the contract. No question seems to arise as to this. In the next place, he allowed a sum of £300 as an approximate estimate of expenditure incurred and wasted in ‘keeping a team of men together in anticipation of being able to start work on the job.’ Expenditure so incurred and wasted would be recoverable by way of damages, and the amount awarded under this head was not challenged. In the third place, his Honour awarded a sum of £868 as representing damages recoverable by Hurll & Douglas from the builder. How this sum was arrived at is by no means clear. The notice of appeal asserted, as one of the grounds of appeal, that no sum should have been awarded under this head. This ground of appeal, however, was not argued, and no attack was made on the amount awarded. It would appear to have been right to allow a

substantial amount under this head, and, the amount actually awarded not being challenged, it seems to me that it should be allowed to stand. [25] Both appeals should be dismissed with costs. 24.12 A repudiation can also emerge from the erroneous assertion of rights under a contract.30 For example, if one party wrongly believes that the other party has breached the contract, and subsequently refuses to perform their obligations, the refusal may amount to a repudiation.31 Nonetheless, the conduct may not amount to repudiation if there are other grounds upon which the first party could reasonably rely upon to justify terminating the contract.32 In Shepherd v Felt & Textiles of Australia Ltd,33 Dixon J stated: It is well established, however, that a servant’s dismissal may be justified upon grounds on which his master did not act and of which he was unaware when he discharged him … It is true that the agreement between the appellant and the respondent does not amount to a contract of service. But the rule is of general application in the discharge of contract by breach, and enables a party to any simple contract who fails or refuses further to observe its stipulations to rely upon a breach of conditions, committed before he so failed or so refused, by the opposite party to the contract as operating to absolve him from the

[page 738] contract as from the time of such breach of condition whether he was aware of it or not when he himself failed or refused to perform the stipulations of the contract. ‘It is a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of a justification which in fact existed, whether he was aware of it or not’ …

24.13 Similarly, a court may take into account the good faith behaviour of a party who asserts a breach of contract. A party who honestly insists that a breach has occurred may not be repudiating the contract, notwithstanding the fact that their position is incorrect.34 It may well be that once the true position is properly explained to the party in question, they will accept

that their former view was wrong and perform their obligations under the contract.35 The following extract from Sopov v Kane Constructions Pty Ltd,36 sets out the relevant principles in this area of the law.

Sopov v Kane Constructions Pty Ltd (2007) 20 VR 127 Victorian Supreme Court, Court of Appeal Maxwell P and Kellam JA: Adopting an incorrect interpretation of the contract [7] An issue which arose at trial, and again on the appeal, concerned the significance of the adoption by the alleged repudiator of an incorrect interpretation of the contract. Of what significance is it if the repudiatory party acts in accordance with a bona fide belief as to the correctness of its interpretation? [8] This is an important topic. As a practical commercial matter, contracting parties need to know what will — and will not — count as repudiatory conduct. As this case illustrates, such judgments typically have to be made in circumstances of commercial and financial pressure. The applicable principles need, therefore, to be stated as simply and clearly as possible. [9] In our view, the objective test of repudiation, as stated by Brennan J in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (‘Laurinda’), leaves no room for consideration of whether the party in breach — the alleged repudiator — held the honest belief that its action was justified by the contract. Axiomatically, the repudiator’s state of mind is irrelevant. What matters is the character of the repudiator’s conduct. [page 739]

[10] In the present case, the appellants argued that their conduct in cashing the bank guarantees did not justify the drawing of an inference of repudiation: As the trial judge found, the Owners were purporting to assert contractual rights, but were relying on an incorrect interpretation of the contract. … In seeking recourse to the guarantees, the Owners were seeking to secure costs to which, on their interpretation of the contract, they were entitled. Viewed in the proper context, where the Owners were purporting to act pursuant to the contract, it cannot clearly be inferred they were repudiating their obligations pursuant to it. We reject this argument. As Whelan AJA says: Even if the Principal’s subjective view was, on the basis of legal advice perhaps, that it had some entitlement to call up the bank guarantees without notice, the issue is what message would that action have conveyed to Kane Constructions on 6 October 2000. [11] That the touchstone is conduct, not state of mind, emerges clearly from the authorities dealing with erroneous interpretation. In Federal Commerce & Navigation Co Limited v Molena Alpha Inc (The Nanfri) (‘Molena Alpha’), the House of Lords held that shipowners had repudiated a charter party. Lord Wilberforce said: If a party’s conduct is such as to amount to a threatened repudiatory breach, his subjective desire to maintain the contract cannot prevent the other party from drawing the consequences of his actions. The two cases relied on by the [buyers] … would only be relevant here if the owners’ action had been confined to asserting their own view — possibly erroneous — as to the effect of the contract. They went, in fact, far beyond this when they threatened a breach of the contract with serious consequences.

[12] One of the cases referred to in this passage was Sweet & Maxwell Ltd v Universal Services Ltd (‘Sweet & Maxwell’), in which the English Court of Appeal held that it was not repudiation for a party merely to assert an erroneous interpretation of the contract. Pearson LJ said: A party should not too readily be found to have refused to perform the agreement by contentious observations in the course of discussions or arguments as to the provisions to be inserted in the lease. In the letter … the defendants’ solicitors were stating their view as to the effect of the agreement, and said they were willing to perform it, and they were not refusing to perform it according to its true construction, whatever that might be. In my view, there was no repudiation. [13] In Woodar Investment Development Ltd v Wimpey Construction UK Ltd, the relevant conduct consisted of: on one side of the contract, express reliance on a particular term; [page 740] on the other side, an intention to seek judicial determination of the validity of a notice purportedly given under the contract; and ‘an assumption … that both sides would abide by the decision of the court.’ Consistently with what he had said in Molena Alpha, Lord Wilberforce said this was ‘quite insufficient to support the case for repudiation’. [14] In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (‘DTR Nominees’), the High Court said: No doubt there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he will not perform the contract according to its terms. But there are other cases in which a party, though asserting a wrong view of a contract because he believes it to be correct,

is willing to perform the contract according to its tenor. He may be willing to recognise his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. In either event an intention to repudiate the contract could not be attributed to him. [15] The Court cited the passage quoted above at [12] from the judgment of Pearson LJ in Sweet & Maxwell, and concluded as follows: In this case the appellant acted on its view of the contract without realising that the respondents were insisting upon a different view until such time as they purported to rescind. It was not a case in which any attempt was made to persuade the appellant of the error of its ways or indeed to give it any opportunity to reconsider its position in the light of an assertion of the correct interpretation. There is therefore no basis on which one can infer that the appellant was persisting in its interpretation willy nilly in the face of a clear enunciation of the true agreement. … … [O]n the evidence this Court would not be justified in finding that the appellant acted otherwise than in accordance with a bona fide belief as to the correctness of the interpretation which it sought to place upon the contract. Consequently it is a case of a bona fide dispute as to the true construction of a contract expressed in terms which are by no means clear (see Asprey JA in Satellite Estate Pty Ltd v Jaquet). In these circumstances the Court is not justified in drawing an inference that the appellant intended not to perform the contract according to its terms or that it repudiated the contract. What mattered was not the (bona fide) belief of the alleged repudiator but the character of its conduct: rather than ‘persisting willy nilly’, the repudiator was engaging in genuine disputation with the other parties

[page 741] about the true construction of the contract. The inference of repudiation could not reasonably be drawn. [16] In the same way, it is immaterial whether the alleged repudiator acts in accordance with legal advice. In Vaswani v Italian Motors (Sales and Service) Ltd, the Privy Council quoted with approval what had been said by Lord Denning MR in Molena Alpha, as follows: I have yet to learn that a party who breaks a contract can excuse himself by saying that he did it on the advice of his lawyers: or that he was under an honest misapprehension … I would go by the principle … that if the party’s [conduct] — objectively considered in its impact on the other party — is such as to evince an intention no longer to be bound by his contractual obligations, then it is open to the other party to accept his repudiation and treat the contract as discharged from that time onwards. [17] The distinctions drawn in the cases may be summarised as follows: 1.

For party A merely to assert, or argue for, a wrong interpretation of the contract will usually not be enough to justify party B drawing an inference of repudiation. The reason for this is that party A may be — willing to perform the contract according to its tenor. He may be willing to recognise his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. In either event an intention to repudiate the contract could not be attributed to him. Thus the inference of repudiation should not readily be drawn where, for example — (a) party A makes ‘contentious observations in the course of discussions or arguments’; or

(b) party A’s conduct amounts to engaging in ‘a bona fide dispute as to the true construction of a contract expressed in terms which are by no means clear’. 2.

The inference of repudiation can more readily be drawn when the interpretation relied on by party A is clearly or obviously untenable and party A — (a) acts (or threatens to act) unilaterally on the basis of the interpretation; or (b) persists in the interpretation in the face communications from party B pointing out the error.

of

REVIEW QUESTIONS 1.

What is repudiation?

2.

Why did repudiation occur in Carr v JA Berriman?

3.

How can repudiation occur through an erroneous interpretation of contractual rights? How might the courts react?

[page 742]

Anticipatory breach 24.14 Anticipatory breach is a species of repudiation. In effect, anticipatory breach occurs when one party renounces their obligations under a contract before they are due to be performed. In Foran v Wright,37 Mason CJ stated: … the breach was then anticipatory because it amounted to a refusal by the vendors to perform an essential term of the contract before the time for performance had arrived. The breach was a repudiation which entitled the purchasers at their election to treat the contract as at an end.

Under the doctrine of anticipatory breach, the innocent party is entitled to damages from the point of renunciation, rather than simply from the time that the obligation falls due and is not

honoured. In Fishlock v Campaign Palace Pty Ltd,38 Sackar J stated: At a theoretical level, the concept of repudiation includes the concept of anticipatory breach. Lord Diplock (with whom the other members of the House of Lords agreed) said in Afovos Shipping Co SA v Pagnan [1983] 1 WLR 195 (at 203): [T]he doctrine of anticipatory breach is but a species of the genus repudiation. This reflects the fact that a repudiation of obligation may occur before or after the arrival of the time for performance, whereas anticipatory breach can only occur before the time for performance has passed.

In Foran v Wright,39 prior to the completion of a sale of land contract the vendors intimated to the purchasers that they would not complete by the required date. The purchaser subsequently sought to terminate the contract and to recover their deposit. The vendors countered that there was no evidence that the purchasers would have been able to have completed by the set date. A majority of the High Court held that the purchasers could rely on anticipatory breach. Brennan J reasoned: When the appeal was argued in this Court, the vendors were not represented but written submissions on their behalf were received. The first question for determination is whether the contract was subsisting on 22 June despite the intimation by the vendors’ solicitor on 20 June that the vendors could not complete on 22 June. It is clear that the vendors’ solicitor did not wish the sale to go off; he sought no more than a postponement of the day for completion in order that he could procure the registration of the easement over the land before conveyance. The vendors did not offer to complete on 22 June; the vendors’ solicitor had intimated that they were unready to complete on

[page 743] the day fixed for completion. As the parties had made completion on the day fixed an essential term of the contract, the intimation that the vendors were not ready to complete on 22 June was capable of amounting to a repudiation which would confer on the purchasers a right to rescind. When a promise is an essential term of a contract, an announcement by the promisor before the time for performance arrives that he will not perform the promise is an anticipatory breach amounting to a repudiation of the contract conferring on the promisee a right to rescind the

contract: see Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 63 ALJR 372, at pp 380, 389–390; [1989] HCA 23; 85 ALR 183, at pp 195– 196, 212. It is unnecessary, in my opinion, that an anticipatory breach be classified as ‘fundamental’ in any other respect in order to amount to a repudiation: but cf per Lord Diplock in Afovos Shipping Co v Pagnan & Flli (1983) 1 WLR 195, at p 203; (1983) 1 All ER 449, at p 455. However, a repudiation by anticipatory breach does not affect the subsistence of a contract unless the promisee elects to rescind: Frost v Knight (1872) LR 7 Exch 111, at p 112; Heyman v Darwins, Ltd (1942) AC 356, at p 361. Absent an election by the promisee to rescind, both parties remain bound by the contract, and the promisor may take advantage of any supervening circumstance which justifies him in refusing to perform when the time for performance arrives: Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159, at pp 169, 192, 197–198; Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235, at pp 250, 261; and see, for example, Avery v Bowden [1856] EngR 889; (1856) 6 El & Bl 953 (119 ER 1119); Arcos, Ltd v E A Ronaasen & Son [1933] UKHL 1; (1933) AC 470. The purchasers did not elect to rescind for repudiation by anticipatory breach and the contract was subsisting on 22 June, the day fixed for completion. The purchasers elected to rescind for an actual breach by the vendors in failing to complete on 22 June. The question is whether the failure by the vendors to complete on that day was a breach of contract. The effect of an intimation of non-performance on mutually dependent obligations under a subsisting contract The obligation of a vendor to deliver a conveyance and the obligation of a purchaser to pay the price on completion are mutually dependent and concurrent obligations in the absence of any contrary stipulation; each obligation is to be performed in exchange for the other: Palmer v Lark (1945) Ch 182, at pp 184–185. Where the respective obligations of parties to a contract are mutually dependent and concurrent, the primary rule is that neither party who fails to perform his obligation when the time for performance arrives can rescind for the other party’s failure at that time to perform his obligation. Each party’s obligation is conditional on performance by the other; neither can complain of non-performance by the other when the condition governing the other’s obligation goes unfulfilled. But if one party intimates to the other that it is useless for the other to fulfil his obligation and the other acts on the intimation, the party to whom the intimation is given is dispensed from a nugatory tender of performance.40

[page 744] In Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd,41 the issue was whether termination for anticipatory breach following the delivery of one sub-standard batch of product was valid. The court found that the termination was not justified, taking into account both the fact that the delivery was

but one of many scheduled and the degree of probability or improbability that such a breach would be repeated.

Termination for delay 24.15 A party that fails to perform its obligations under a contract in a timely manner may create in the other party a right to terminate the contract. The parties may have specified that time is of the essence in the contract, and where they have done so the failure by a party to perform in a timely manner may give the other party the right to terminate the contract. Where no stipulation has been made, the parties must perform their obligations within a reasonable time. If time is not of the essence, a party may still terminate a contract for delay via the notice procedure. The relevant principles are set out in the judgment of Gibbs CJ in Louinder v Leis.42

Louinder v Leis (1982) 149 CLR 509; 41 ALR 187 High Court of Australia Gibbs CJ: [2] The contract for the sale of the land in question from the appellant to the respondent did not fix any date for completion, and did not contain any stipulation that time should be of the essence of the contract. However, by cl 4, it was provided that within twenty-eight days from the delivery of the vendor’s statement of title the purchaser should at his own expense tender to the vendor for execution the appropriate assurance of the property. The statement of title was delivered on 2 November 1979, but, on 8 February 1980, when the appellant gave to the respondent a notice to complete the contract, the respondent had not tendered a transfer for execution. However, at the hearing at first instance no reliance was placed on the failure of the

respondent to tender a transfer. Before the Court of Appeal, the appellant sought to argue that the failure of the respondent to tender a transfer within the time allowed by the contract was a breach of contract which provided [page 745] sufficient justification for the giving of the notice to complete. Since the facts concerning the failure to comply with cl 4 were not examined at first instance, and since evidence could possibly have been given that the appellant had waived the non-compliance (as indeed the evidence suggests), thus preventing the appellant’s argument from succeeding, the Court of Appeal was correct in holding that it was not open to the appellant to take this point for the first time on appeal. [3] It is common ground that if it was not open to the appellant to rely on a breach by the respondent of cl 4, the appellant was not entitled to give the notice requiring completion of the contract unless the respondent had been guilty of unreasonable delay. In the circumstances of the case, which Mason J has set out, it is impossible to conclude that the delay on the part of the respondent was unreasonable. [4] What I have said is enough to dispose of the case, but the parties have directed argument to the question whether, if the appellant had been able to establish that the respondent was in breach of cl 4, it would have been open to the appellant to give a notice to complete, and since that question appears to be an important one from a practical point of view, it appears appropriate to deal with it. There is no doubt that where a contract contains a promise to do a particular thing on or before a specified day, and time is not of the essence of the promise, the promisee can, generally speaking, only rescind for non-performance on that day if he has given a notice requiring performance within a specified reasonable time and there has been a failure to comply with that notice: Carr v J A Berriman Pty Ltd [1953] HCA 31; (1953) 89 CLR 327, at pp 348–349; Balog v Crestani [1975] HCA 16; (1975) 132 CLR 289, at p 296. The question which arises is whether it is enough to enable the party not in default to give a notice that the other party is in breach of the

contract or whether, as some text writers suggest, the notice can only be given to a party who has been guilty of unreasonable delay. The authorities which support the latter view are mainly based on the decision of Harman J in Smith v Hamilton (1951) Ch 174. In that case the day for completion of the contract was 4 April, and it was held that the vendor could not, on 5 April, serve a notice on the purchaser ‘on the footing that there has been such impropriety on the part of the purchaser as entitles him, as it were, to engraft time on the contract’: (1951) Ch, at p 181. Harman J particularly relied on Green v Sevin (1879) 13 ChD 589, at p 599, where Fry J said: What right then had one party to limit a particular time within which an act was to be done by the other? It appears to me that he had no right so to do, unless there had been such delay on the part of the other contracting party as to render it fair that, if steps were not immediately taken to complete, the person giving the notice should be relieved from his contract. [page 746] Fry J was there dealing with a case in which no time had been fixed by the contract for completion of the contract, as he himself pointed out immediately before the passage which Harman J cited. It appears from the examination of the authorities by Wootten J in Winchcombe Carson Trustee Co v Ball-Rand (1974) 1 NSWLR 477 that the cases before Smith v Hamilton were cases in which no time for completion had been fixed by the contract, or in which a time originally fixed had been waived. Further, the judgment of Harman J contains what has since been demonstrated to be an error of principle. His Lordship said, after referring to the condition that the purchase should be completed on 4 April (1951) Ch, at p 183: But it is agreed that that date, except in special circumstances, is not an essential part of the contract, and therefore the condition is, I think … that the purchase shall be completed on April 4 or within a reasonable time thereafter.

Both before and after Smith v Hamilton it was said in a number of cases that a clause providing for completion on a fixed date should, when time was not of the essence of the contract, be construed as meaning that completion could take place within a reasonable period after the date fixed. It has been convincingly shown by the House of Lords in Raineri v Miles (1981) AC 1050 that this view was erroneous. It was there held that the breach of a contractual provision as to time which was not of the essence of the contract was a breach of the contract and entitled the injured party to damages, notwithstanding that the rules of equity would relieve the party in breach to the extent of allowing him to obtain specific performance. Once one rejects the notion that a clause providing for completion on a specified day means that completion may take place within a reasonable time thereafter, it is apparent that a party who fails to complete on the specified day is guilty of delay, within the meaning of the contract, whether or not the delay would, in the absence of the provision fixing the time, be regarded as unreasonable. In principle, it seems to me that such delay entitles the innocent party to treat the contract as at an end provided that, if time is not of the essence of the contract, he first gives a reasonable notice which is not complied with. I therefore respectfully agree with the statement in Neeta (Epping) Pty Ltd v Phillips [1974] HCA 18; (1974) 131 CLR 286, at p 299 that where a contract of sale of land contains a stipulation as to time which is not of the essence of the contract, and one party is in breach or guilty of unreasonable delay, the party not in default may give a notice fixing a reasonable time for completion and making that time the essence of the contract. In my opinion this case laid down no new principle, in spite of the body of opinion to the contrary. The judgment of Fullagar J in Carr v J A Berriman Pty Ltd is in my opinion consistent with this view. In his clear statement of principle, Fullagar J (1953) 89 CLR, at pp 348–349 did not suggest that, where there was a failure to perform on a specified day, it was necessary that there should in addition have been unreasonable delay before the party not in default became entitled to give a notice. [page 747]

[5] Assuming that the appellant had not waived cl 4, he would have been entitled to give the respondent a notice requiring him to tender a transfer within a reasonable time, and notifying him that the contract would be treated as at an end if the notice was not complied with. However, he would not have been entitled to give a notice requiring the respondent to complete the contract. Default in compliance with a covenant which fixes a time for performance of that covenant, when time is not of the essence, entitles the innocent party to make time of the essence and fix a reasonable time for performance of that covenant. If such a notice is not complied with, the party who gave the notice may rescind. However, mere breach of one contractual provision does not enable the injured party to re-write another. Of course, the circumstances of the breach might be such as to show that there was unreasonable delay in completion, and that would justify giving a notice to complete. In the present case, where there was no unreasonable delay, the breach of cl 4 would have entitled the applicant to make time of the essence and limit a time for tender of the transfer, but it would not have entitled him to give a notice to complete. Even if this point had been open, the appellant would have failed. 24.16 In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd,43 Brennan J considered the interaction between repudiation and termination for delay.

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; 85 ALR 183 High Court of Australia Brennan J at 641–5: … A right in one party to rescind a contract will arise when the other party repudiates a contract generally, but it may also arise when the other party repudiates a term of the contract. A right to rescind

depends on the importance of the term repudiated. Here, the subject of the agreement was the granting of a legal lease for a term of six years. The implied promise by Capalaba to procure registration of an appropriate instrument was thus at the heart of the agreement. It was a promise of such importance to the promisee that it would not have entered into the contract unless it had been assured of substantial performance and this ought to have been apparent to the promisor. It answered the criterion of an essential promise in the sense that an outright repudiation of the promise would have entitled Laurinda to rescind. The criterion of an essential [page 748] promise which I have stated in terms relevant to the present case is derived from the criterion expressed by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 (at pp 641–642) and frequently adopted in this Court, most recently in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, at p 556, but I have modified it by using the term ‘substantial performance’ rather than the usual formula of ‘a strict or a substantial performance’. The modification is necessary when, no day for performance being stipulated and the subject matter of the promise not being such as to require strictly timeous performance, time is not of the essence of the promise either in law or in equity: Canning v Temby [1905] HCA 45; (1905) 3 CLR 419, at p 425; Louinder v Leis, at p 533. When time is not of the essence, the promisee must have been willing to enter into the contract without an assurance that the promise would be performed strictly, albeit with an assurance that the promise would be performed substantially. Thus, Laurinda would not have been entitled either at law or in equity to rescind the contract as soon as a reasonable time for procuring registration had elapsed. As Griffith CJ said in Canning v Temby, at p 426: In one sense, of course, time is always of the essence of a contract to be performed within a reasonable time. But that is not the sense in which the term ‘of the essence’ is used.

Where an essential term – in the sense defined – is to be performed within a reasonable time, there being no stipulated day for performance, and that time passes without performance, the innocent party does not acquire a right to rescind unless the defaulting party repudiates or has repudiated his obligation to perform. Barwick CJ and Jacobs J observed in Neeta (Epping) Pty Ltd v Phillips [1974] HCA 18; (1974) 131 CLR 286, at p 306: Contracts for the sale of land, creating as they do equitable interests in the land, do not easily go off except pursuant to an express condition of the contract or pursuant to an express repudiation or a repudiation clearly to be inferred. The same observation may be applied to agreements for lease. More than a mere failure in timeous performance is necessary to warrant an inference of repudiation, but delay may be so serious as to amount to a refusal to perform and in such a case an innocent party has a right to rescind: see De Soysa v De Pless Pol (1912) AC 194, at pp 202–203; Holland v Wiltshire [1954] HCA 42; (1954) 90 CLR 409, at p 420. The difference between a contract which contains a stipulated day for performance of an essential term and a contract which, expressly or impliedly, requires performance within a reasonable time is important when the question is whether, on failure to perform within the time limited by the contract, the innocent party is entitled to rescind. In the former case, a right to rescind arises at law when the stipulated day passes; in the latter, that right does not necessarily [page 749] arise when the reasonable time expires but only when repudiation is clearly to be inferred from the circumstances in which the delay occurs. Delay will amount to repudiation if the defaulting party ‘evinces an intention no longer to be bound by the contract … or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way’: Shevill v Builders Licensing

Board [1982] HCA 47; (1982) 149 CLR 620, at pp 625–626; Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, at pp 33, 40. If the inference to be drawn from the circumstances is that the defaulting party intends to perform an essential promise after some minor delay, repudiation cannot be inferred; but if the inference is that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise, repudiation can be inferred. The inference is not lightly drawn: Progressive Mailing House Pty Ltd v Tabali Pty Ltd, at p 32. However, a reservation on the part of the promisor that he may perform the promise if it suits his convenience to do so is not inconsistent with repudiation of the contract or promise. Thus Fullagar J was able to say in Carr v JA Berriman Pty Ltd [1953] HCA 31; (1953) 89 CLR 327, at p 349: it is correct … to say … 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’. When delay in performance is prolonged, the point at which repudiation might be inferred is necessarily uncertain. The promisor and promisee are likely to regard the circumstances differently. To provide a firm foundation for the inference of repudiation, it is prudent for the promisee to give a notice to complete. In Louinder v Leis, Mason J said (at p 526): Unreasonable delay in complying with the stipulation in substance amounting to a repudiation is essential to justify rescission. It is to this end that, following breach, the innocent party gives notice fixing a reasonable time for performance of the relevant contractual obligation. The result of noncompliance with the notice is that the party in default is guilty

of unreasonable delay in complying with a non-essential time stipulation. The unreasonable delay amounts to a repudiation and this justifies rescission. That was said in reference to delay beyond a stipulated date. It does not follow that delay beyond the stipulated reasonable time necessarily amounts to repudiation. But if, the stipulated reasonable time having elapsed, a notice to complete allowing a further reasonable time is given, a failure to comply provides a firm foundation for an inference of repudiation. [page 750] A right to rescind is one thing; fairness in the exercise of that right is another. In some circumstances, equity asserts a jurisdiction to restrain the exercise of a right to rescind. As I attempted to explain in Louinder v Leis (at pp 532–536), a notice to complete does not make time of the essence of the contract when the contract itself does not do so, but it is a step towards lifting an equitable restraint on the exercise of a right to rescind which arises aliunde. Therefore, when a contract requires performance of an essential promise within a reasonable time and a valid notice to complete on or before a specified day is given by the innocent party, the significance of the notice is twofold: primarily, it fixes a day when, if the default is not remedied, the party in default will be held to have repudiated the promise; and, secondarily, it will show that, for equity’s purposes, it is fair for the innocent party to exercise that right: see per Fry J in Green v Sevin (1879) 13 ChD 589, at p 599, and per Isaacs J in Maynard v Goode [1926] HCA 4; (1926) 37 CLR 529, at p 538. Where a contract contains a promise to be performed within a reasonable time, a notice to complete does not insert the time it prescribes into the contract and make that time of the essence, but the notice is evidence which may support the inference of repudiation, from which the innocent party’s right to rescind arises and it clears the way for the exercise of that right. When a reasonable time is prescribed for performance of an essential

term of a contract, a notice to complete requiring performance of that term by a specified day can be given only if the party to whom it is given is already in breach of his contractual obligation: Neeta (Epping) Pty Ltd v Phillips, at p 299. But it would be futile to give a notice if, in the event of the default complained of persisting beyond the time limited by the notice, repudiation were not to be inferred from the circumstances then existing. Therefore, in considering whether the time limited by a notice is reasonable in such a case, it is necessary to consider whether an inference of repudiation would be drawn from non-performance if that were to persist beyond that time.

REVIEW QUESTION What is the difference between a breach of a condition that time is of the essence and an act of repudiation?

Notice 24.17 The High Court also addressed the issue of notice in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd. The notice procedure provides an avenue for the termination of a contract in the absence of repudiation, a major breach of an intermediate term or a stipulation that time is of [page 751] the essence. A notice procedure may be used where there is a delay in performance that amounts to a contractual breach.44 The notice must set out a time in which performance should occur. That time should be reasonable and the notice should also suggest that termination may possibly follow if performance does not occur.45 In Laurinda, Mason CJ stated: … it is not necessary that the notice should state that the party will treat the

contract as at an end in the event of non-compliance with the requirement stated in the notice and that it is sufficient if the notice indicates that the party giving it may choose to rely on his rights in that event. However, the notice must convey a definite and specific intent to require strict compliance with the terms of the contract within a reasonable time, so that the recipient will be made aware that the party giving the notice may elect to treat the contract as at an end at the conclusion of such reasonable time unless compliance is forthcoming.46

Election 24.18 A party who is faced with a breach by the other party that would justify termination must elect to affirm or terminate the contract. In Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd,47 French J stated: A party to a contract whose counterparty has acted in such a way as to give rise at common law to a right to terminate the contract may have to choose between exercising the right of termination and affirming the contract. This is a choice between inconsistent rights said to constitute an ‘election’ to proceed one way or the other. Importantly, a party who elects to exercise one right inconsistent with another cannot, in the ordinary course, resile from that election and choose to exercise the other right.

The innocent party should be allowed a reasonable time to decide to affirm or reject the contract.48 Where the innocent party wishes to terminate the contract, on the basis of the repudiation or fundamental breach by the other, he or she must take affirmative steps to communicate the termination.49 The election must be unequivocal.50 In Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW),51 Deane, Toohey, Gaudron and McHugh JJ stated: The consequences of election may well be serious for the party electing; in particular, election involves the abandoning of a right that is available. A party can

[page 752] only be held to have elected ‘if he has so communicated his election to the other party in clear and unequivocal terms’.

If, after receiving the other party’s repudiation, the innocent party then fails to perform his or her contractual obligations, this will amount to an election to terminate. In Vitol SA v Norelf Ltd,52 Lord Steyn stated: ‘I am satisfied that a failure to perform may sometimes signify to a repudiating party an election by the aggrieved party to treat the contract as at an end.’ Likewise, subsequent acts by the innocent party that make performance impossible will amount to an election to terminate.53 There is a conceptual overlap between election and estoppel;54 that is, the election to continue or to reject the contract is a clear representation to the other party, and that party may be harmed if the representor is allowed to resile from his or her position. Many of the key principles of the doctrine of election are set out in the following extract from the judgment of Stephen J in Sargent v ASL Developments Ltd.55

Sargent v ASL Developments Ltd (1974) 131 CLR 634; 4 ALR 257 High Court of Australia Stephen J: … [16] The doctrine of election as between two inconsistent legal rights is well established but certain of is features are not without their obscurities. The doctrine only applies if the rights are inconsistent the one with the other and it is this concurrent existence of inconsistent sets of rights which explains the doctrine; because they are inconsistent neither one may be enjoyed without the extinction of the other and that extinction confers upon the elector the benefit of enjoying the other, a benefit denied to him so long as both remained in existence. As Williston points out (Contracts, 3rd ed, vol 5, par 683) the doctrine is not out of harmony with the general rule that a binding surrender of a right requires a sealed release or consideration; by surrendering one

right the elector thereby, gains an advantage not previously enjoyed, the ability to exercise to the full the other, inconsistent right. [17] In many instances what may pass for an application of the doctrine is in truth but the inevitable consequence of the party’s conduct, a consequence that [page 753] would follow even if no such doctrine existed. Thus in the common case of avoidance of a contract for breach it is not any doctrine of election that prevents the avoiding party subsequently from enforcing the contract but rather the fact that the contract has, by his act of avoidance, ceased to exist; such a situation is revealed by the facts discussed by Lindley J in Evans v Wyatt (1880) 43 LT 176. On the other hand, if he chooses instead to keep the contract on foot and sue for damages rather than rescind for breach, recourse must be had by the other party either to election or, if the facts will support it, to an estoppel if that breach should later be sought to be relied upon so as to avoid the contract. All this is made clear in the judgment of Jordan CJ in O’Connor v S P Bray Ltd [1936] NSWStRp 14; (1936) 36 SR (NSW) 248, at pp 258–261. In the present appeals the doctrine of election is directly in question since the issue is not whether following rescission the vendors may enforce the contracts but rather whether acts on their part consistent with the continued existence of the contracts prevent their subsequent purported rescission from being effective. [18] For the doctrine to operate there must be both an element of knowledge on the part of the elector and words or conduct sufficient to amount to the making of an election as between the two inconsistent rights which he possesses (Craine v Colonial Mutual Fire Insurance Co Ltd [1920] HCA 64; (1920) 28 CLR 305, at p 326; United Australia Ltd v Barclays Bank Ltd (1941) AC 1, at p 30). [19] The nature of the knowledge which an elector must possess is a matter upon which the authorities are somewhat at variance. An elector must at least know of the facts which give rise to those legal rights, as

between which an election must be made; without that knowledge the doctrine of election will not be available to make irrevocable his choice of one particular right, although in appropriate circumstances an estoppel may still arise which produces that very consequence and this without any such requirement of knowledge on the part of the party who is estopped. The extent of knowledge of relevant facts necessary for the doctrine of election to apply has been described as ‘full knowledge of the material facts’ (Bennett v L & W Whitehead Ltd (1926) 2 KB 380, at p 410). In Elder’s Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd [1941] HCA 31; (1941) 65 CLR 603 a knowledge of circumstances such as will provide information from which the decisive fact giving rise to the legal right is ‘a clear if not a necessary inference’ was held to be sufficient (1941) 65 CLR, at p 617. [20] The extent of knowledge will no doubt usually give rise to little difficulty; it is when the nature of the requisite knowledge is in issue, whether knowledge of the facts giving rise to the legal rights suffices or whether, on the contrary, there must also be knowledge of the right of election as between two available, inconsistent legal rights, that contrariety exists. Some authorities, such as Scarf v Jardine (1882) 7 AC 345, omit all discussion of the nature of the requisite knowledge; others speak simply of knowledge of the facts from which the legal rights arise (Matthews v Smallwood (1910) 1 Ch 777); some expressly deny the need for knowledge of legal rights, knowledge of the facts alone sufficing (Jordan [page 754] CJ in O’Connor v S P Bray Ltd (1936) 36 SR (NSW), at pp 263–264); others again, especially in the field of election of remedies by an injured worker, require actual knowledge of the right to elect (Young v Bristol Aeroplane Co Ltd (1946) AC 163, at p 186, but see also (1946) AC, at p 191; Dey v Victorian Railways Commissioners [1949] HCA 1; (1949) 78 CLR 6). [21] In Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd (1971) AC 850, where the right of a lessor to rely upon a defect in his

lessee’s statutory application for the grant of a new tenancy was in question, Lord Reid and Lord Pearson formed a minority on the issue whether the lessor had, by its conduct, waived that defect but their treatment of the knowledge requisite to establish such a ‘waiver’ did not differ in substance from the views of Lord Diplock, one of the majority. Lord Pearson, in whose views Lord Reid concurred, concluded (1971) AC, at p 878 that the only knowledge which must be shown so as to bind the lessor to its act of waiver was knowledge of the relevant facts, it being unnecessary to show that there was also knowledge of ‘the legal position resulting from the relevant facts’. Lord Pearson and Lord Reid each spoke in terms of ‘waiver’ but their observations were, I think, directed to the doctrine of election. Of the members of the majority on this issue Viscount Dilhorne, who spoke of the question as one of election (1971) AC, at p 873, appears to have regarded knowledge of the legal position as necessary before a binding election could have arisen (1971) AC, at pp 872–873; Lord Diplock on the other hand spoke of the making of an election between inconsistent rights in distinguishing that from the case in hand and regarded it as enough that an elector should there know ‘of the facts which give rise in law to these alternative rights’ (1971) AC, at p 883. [22] In this Court, in the Elder’s Trustee Case [1941] HCA 31; (1941) 65 CLR 603, their Honours dealt with this question in some detail and after referring to the judgment of Jordan CJ in O’Connor v SP Bray Ltd [1936] NSWStRp 14; (1936) 36 SR (NSW) 248 and to Mr J S Ewart’s book on the subject, both of which sources deny the need for more than knowledge of the facts giving rise to the legal right, expressed a clear preference for this view in those cases in which the conduct of the elector is unequivocal; as where, despite knowledge of a breach going to the root of the contract, he exercises rights by virtue of the contract which rights would not exist unless that contract remained in force. Only where the conduct is not so unequivocal, amounting to no more than some evidence of election to affirm, will knowledge of the right of election be relevant and then only because, viewed in its light, his conduct may, as a matter of ‘natural inference’, be regarded as constituting an affirmation of the contract (1941) 65 CLR, at p 618. [23] In Coastal Estates Pty Ltd v Melevende [1965] VicRp 60; (1965) VR

433 the members of the Full Court of the Supreme Court of Victoria, conscious of the apparent conflict of authority, each undertook an analysis of the cases and concluded that where the right of rescission for misrepresentation was in question an election to treat the contract as remaining on foot rather than to rescind could only arise if there was knowledge both of the relevant facts and [page 755] of the inconsistent legal rights from which a choice was to be made. Both Sholl J (1965) VR, at p 443 and Adam J (1965) VR, at p 453 regarded the presence of some detriment to the other party, a form of estoppel, as necessary before acts of affirmation of the contract could, in the absence of any knowledge of the alternative legal right to rescind, destroy the right of rescission. … [25] The present appeals are concerned only with the vendor’s choice between rescission of the contracts under cl 16 and affirmation of the contracts. The right of rescission here in issue is, therefore, quite different from that under consideration in the Coastal Estates Case [1965] VicRp 60; (1965) VR 433, a distinction made by Herring CJ who refers to the view of Mr Ewart concerning an express right of rescission conferred by the contract and concludes that in such a case ‘the parties to a contract are to be deemed aware of the elections that the terms of their contract give them or at any rate are to be precluded from denying knowledge of them’ (1965) VR, at p 435. [26] Not only is this distinction, with respect, well founded but it provides a measure of reconciliation of conflicting authority as well as resolving the matter so far as concerns the present appeals. Where election is in question between contracting parties and, as in these appeals, the contract itself confers the inconsistent rights there can be no question whether a party had knowledge of his choice of rights. He is deemed to know the terms of his own contract and the rights it confers, at all events he cannot take advantage of his own ignorance.

24.19 An election to affirm a contract after a particular breach does not necessarily bind the innocent party in relation to future breaches;56 that is, the fact that a contract has been affirmed once in relation to a given breach does not bind the innocent party when similar breaches occur in the future.57 It does not seem altogether illogical to suggest that repeated affirmations of the contract in response to repeated instances of a specific type of breach could give rise to an overall representation that future occurrences of the same kind of breach will not be treated as giving rise to a right to terminate the contract. Nevertheless, in Galafassi v Kelly,58 repeated affirmations of a contract, in the face of the appellant’s repudiatory conduct, did not preclude the respondents from terminating the contract. The following extract from Tropical Traders Ltd v Goonan59 explores some of the issues around the doctrine of election. [page 756]

Tropical Traders Ltd v Goonan (1964) 111 CLR 41; [1964] ALR 585 High Court of Australia Kitto J: [1] This is an appeal from a judgment of the Supreme Court of Western Australia declaration that a certain agreement for sale made between it and the respondents on 6th January 1958 had been lawfully rescinded by it, and upholding a counterclaim by the respondents for specific performance of that agreement. [2] The agreement provided for the sale by the appellant and the purchase by the respondents of two lots of land in Perth of which the appellant is the registered proprietor. The agreed price was £47,500, payable by a deposit of £10,000 (£500 before the signing of the

agreement and £9,500 on 6th January 1958), four sums of £5,000 each payable at twelve monthly intervals from the date of the agreement, and the balance, £17,500, sixty months from that date. The agreement provided for the payment by the respondents of interest at five and a half per annum on the balance of purchase price outstanding, the interest to be payable on the same days as the annual instalments of purchase price. It is clear, I think, that the annual instalments here referred to include the final payment of £17,500. Of the remaining stipulations of the agreement four only need be mentioned. Clause 5 provided that possession should be given and taken on the date of the agreement, and that the sale should be deemed to have taken place as from that date. By cl 11 it was agreed (inter alia) that if the purchasers should fail to pay the deposit or the balance of the purchase money or any other moneys payable at the respective times appointed all moneys paid by them should be absolutely forfeited to the vendor and it should be lawful for the vendor to rescind the contract without notice. By cl 12 it was agreed that time should be of the essence of the contract in all respects. Clause 14 provided that upon payment in full of the balance of purchase money and all other moneys payable under the contract the appellant at the cost and expense of the respondents should execute a proper registrable transfer of the land and do all that was necessary on its part to secure the registration thereof. [3] Notwithstanding the stipulation that time should be of the essence, the provisions of the agreement as to times for the making of the payments were not precisely adhered to from the beginning. The £9,500 balance of deposit was paid and accepted on 7th January 1958 although payable one day earlier. The first three instalments were paid three, thirteen and five days late respectively. The fourth instalment was paid a few days early. Apparently interest to the due date of each of these instalments was paid with the instalment. [page 757] The last day for making the final payment, 6th January 1963, was a Sunday. That fact did not give the respondents an extra day: Halsbury’s

Laws of England, 3rd ed vol 37, p 97, par 172. The payment was not made on or before that day, and the appellant became entitled according to the terms of the agreement to rescind the contract as soon as 6th January had passed. However, it did not at once purport to do so. On Monday, 7th January 1963, the respondents’ secretary and accountant, a man named Rogers, interviewed the appellant’s secretary, one Emery. Rogers gave Emery a cheque for £962 10s 0d, being the amount of interest under the contract for the twelve months ended 6th January, and told him that the respondents, being unable to pay immediately the £17,500 that had fallen due on that day, requested an extension of time for three months. Emery accepted the interest and said that the request would be considered by the appellant’s board of directors that day. Next morning, the appellant’s solicitor gave Rogers the answer by telephone. He pointed out, evidently to the surprise of Rogers, that because of the respondents’ default the appellant was entitled to rescind the contract; but he said that in order to give the respondents a further opportunity of finding and paying the money the appellant would not exercise its power to rescind the contract until Monday, 14th January 1963. He added that the respondents (sc if a payment before 14th January were to prevent rescission) would have to ‘pay something for the additional accommodation’ — they would have to pay an extra £50 to cover additional interest, costs and expenses. On the following day, 9th January, the appellant’s solicitor by letter substantially repeated to the respondents what he had said by telephone. The portion of the letter which is important for present purposes was in these terms: ‘In order to give you an opportunity of finding the money, and subject to the payment of an additional £50 to cover further interest and the Company’s costs and expenses, the Company will not take action under the contract until Monday, 14th January, but this must be regarded as an act of grace on the part of the Company, and without prejudice to and in no way varying the Company’s right to the strict enforcement of the contract’. [4] The respondents did not reply, and they allowed 14th January to go by without making any payment. On 15th January the appellant’s solicitor, pursuant to a resolution of the board, gave them notice in writing that the appellant had exercised ‘the powers under the agreement dated 6th January 1958’, had forfeited all moneys paid, and

had rescinded the agreement ‘in so far as it imposes any obligation on the vendor’. Notwithstanding the words last quoted, it is clear that the letter constituted an election to rescind the contract. [5] The question for decision is whether this purported rescission was effectual. The respondents say that it was not, for reasons which may be summarized under four heads: (1) by accepting late payments in the years 1959, 1960 and 1961, or alternatively by accepting those late payments and then granting the extension of time for payment of the £17,500, the appellant either made the stipulation that time should be of the essence no longer applicable in respect of the £17,500 or created a promissory estoppel against insisting that the stipulation was still [page 758] applicable in respect of the balance; (2) by accepting on 7th January the payment of £962 10s 0d for interest, or alternatively by granting the extension of time to 13th January, the appellant bound itself by an election not to rescind for non-payment of the £17,500 on 6th January; (3) time never became of the essence in respect of 13th January; and (4) the appellant was precluded by s 3 of the Landlord and Tenant Act, 1912 (WA) from rescinding the contract without first giving a notice in accordance with that section. [6] The learned judge of first instance held that by voluntarily accepting late payments in the years 1959, 1960 and 1961 the appellant indicated to the respondents and induced them to believe that the clause of the contract as to time being of the essence would not be enforced against them, and thus either ‘waived’ the clause or created an equitable estoppel against relying upon it. As his Honour acknowledged, however, no evidence was called in regard to the late payments, and consequently the case must be decided without any information as to the circumstances in which any of them was accepted. In particular we do not know whether anything was said between the parties in respect of any of them. His Honour said he assumed that the payments were accepted by the appellant without complaint or protest. Perhaps they were; but from the bare fact of the acceptance of late payments of three

out of four annual instalments of £5,000 each it does not follow that in respect of the final payment of £17,500 the appellant was giving the respondents to understand that they might safely rely upon its treating cl 12 of the contract as no longer in force. I can see no justification for such a conclusion. Each acceptance of a late payment operated, of course, as an election by the appellant not to rescind the contract for non-payment of the relevant amount on its due date; but to read into the acceptances, considered either separately or as a whole, something promissory or some inducement to a belief in relation to future payments is, I think, to take an unwarranted step. It may be that repeated acquiescence by one party to a contract in non-observances by the other of stipulations as to time may amount, when considered in the light of particular circumstances, to an assent to time being treated for the future as not of the essence, notwithstanding a provision in the contract that it is of the essence; and in such a case it may not matter whether the result is described as a promissory estoppel or a waiver or a variation of the contract by mutual, though tacit, consent. But it is not a valid general proposition that wherever some instalments are accepted late without demur the party accepting them is precluded in respect of later instalments from insisting upon the agreement that time shall be of the essence: see Bird v Hildage (1948) 1 KB 91, at pp 94–96. In the present case there is nothing to support the conclusion unless that general proposition be correct. The learned judge mentioned a statement made by one of the respondents in evidence, referring to the fact that none of the payments had been made on the exact date, that they ‘took it to mean that a day here and there didn’t matter as that had always been our dealings with this company’. His Honour accepted this evidence and thought that the respondent’s belief was both honest and reasonable in view of [page 759] what had occurred in the past. Honest it may well have been, but reasonable I think with respect it was not, assuming as we must that ‘our dealings with this company’ meant only the acceptance of the unpunctual instalments. It is a strong thing to place upon a few days’

indulgence in respect of instalments payable during the course of a contract a construction which means that in relation to the time for completion of the payment of purchase price a stipulation that time shall be of the essence may be regarded as abandoned. I do not think that such a construction can properly be placed upon the appellant’s conduct in accepting the late instalments in the present case. … [8] The real questions which arise in relation to the granting of the extension are first whether it amounted to a binding election not to rescind for non-payment of the £17,500 on 6th January, and secondly, if it did amount to such an election, whether it was ineffectual to fix 13th January as a date in respect of which time was of the essence. In Kilmer v British Columbia Orchard Lands Ltd (1913) AC 319, the Privy Council proceeded on the footing that the vendor in that case could not insist that time was of the essence after having given an extension of time for payment of an instalment. The case is clear authority for the proposition that a stipulation making time of the essence may be rendered no longer applicable by the granting of an extension of time in particular circumstances; but it is not authority for the more general proposition that every grant of an extension of time deprives such a stipulation of effect for the future. Counsel had cited to their Lordships the case of Barclay v Messenger (1874) 43 LJ Ch 449, in which Jessel MR dealt with the effect of an extension of time under a contract making time of the essence and held that ‘a mere extension of time, and nothing more, is only a waiver to the extent of substituting the extended time for the original time, and not an utter destruction of the essential character of the time’ (1874) 43 LJ Ch, at p 456. This was a pronouncement upon a point which had been one of difference between Lord Romilly and Lord Cranworth in Parkin v Thorold (1852) 16 Beav 59 (51 ER 698), Sir George Jessel accepting the opinion of the latter in accordance with the view of Lord St Leonards: Sugden on Vendors and Purchasers 14th ed (1862), p 270. It is hardly to be supposed that Lord Moulton, who delivered the judgment in Kilmer’s Case (1913) AC 319, would have intended to overrule without even mentioning it a case which for forty years had stood as settling a point formerly disputed at so high a level. Evidently the time clause was disregarded because of something special

in the facts. That is the explanation of the case which was adopted in later cases in the Privy Council: Steedman v Drinkle (1916) 1 AC 275, at pp 279, 280; Brickles v Snell (1916) 2 AC 599, at p 604: ‘The stipulation as to time being of the essence of the contract did not apply as the facts stood’. The authorized report does not reveal what the material facts were, but the report in the Law Journal (1913) 8 LJPC 77 is more informative. Three days before an instalment became payable the purchaser requested the vendors to draw upon him for the amount of the instalment and interest at five days after sight. This was done and the purchasers accepted the bill. Thirteen days [page 760] after the contract date for payment of the instalment the purchaser requested the vendors to hold the bill for ten days, and they agreed to do so. The purchaser, believing that this gave him three days’ grace after the end of the ten days, made no arrangements to meet the bill; and on the day after the expiration of the ten days he wrote to the vendors that the bill would be paid on a day four days later still. The vendors then called the deal off. But by that time (as appears from the report of the counsel’s argument) the bill was outstanding in the hands of the vendors’ bankers; and the cases of Davis v Reilly (1898) 1 QB 1 and In re a Debtor; Ex parte the Debtor (1908) 1 KB 344 were cited to the Privy Council, presumably as showing that at the time of the purported determination of the contract there was subsisting and binding upon the vendors an agreement, implied from the making and acceptance of the bill, that the debt should not be enforced while the bill was in the hands of a third party. It is hardly surprising that Lord Moulton treated the provision that time should be of the essence as irrelevant to the determination of the appeal, and considered only the equitable jurisdiction to relieve against forfeiture of the purchase moneys paid and (though he did not discuss this separately) to decree specific performance notwithstanding a rescission which was valid according to the terms of the contract. …

[10] The granting of the extension of time, therefore, far from constituting an election by the appellant to affirm the contract, was the announcement of an intention to refrain from electing either way until either the £17,500 should have been paid or 14th January should have arrived. Not that election is a matter of intention. It is an effect which the law annexes to conduct which would be justifiable only if an election had been made one way or the other: Scarf v Jardine (1882) 7 App Cas 345, at p 361; Craine v Colonial Mutual Fire Insurance Co Ltd [1920] HCA 64; (1920) 28 CLR 305, at p 325. But the solicitor’s telephone message of 8th January and his letter of the 9th were not of such a nature as to be justified only on the footing of an election made, and it cannot be said that there were any negotiations between the parties of such a kind as to imply that the contract was not to be rescinded and accordingly was proceeding to completion: cf Petrie v Dwyer [1954] HCA 75; (1954) 91 CLR 99, at p 105.

REVIEW QUESTIONS 1.

What is an election to affirm?

2.

How was an election to affirm made in Tropical Traders v Goonan?

Restrictions on the right to terminate 24.20 If a right to terminate has arisen, but the innocent party has led the other party to believe that the contract will continue to operate, the [page 761] innocent party may find themselves estopped from asserting a right of termination. If, after the termination of the contract, the innocent party behaves as if the contract is still operating, an estoppel by convention may arise.60 In Waterman v Gerling

Australia Insurance Company Pty Ltd,61 the prompt and timely payment of instalments on an insurance contract was a condition of maintaining cover under the policy. However, the insurance company accepted late payments and sent out reminder notices to the insured, thereby creating an estoppel by convention which restrained the operation of the condition. The following extract from the judgment of Brereton J demonstrates how the estoppel by convention was developed.

Waterman v Gerling Australia Insurance Company Pty Ltd (2005) 65 NSWLR 300 Supreme Court of New South Wales Brereton J: [75] Various species of estoppel have not infrequently avoided the results which might otherwise flow from non-payment of premium [see, for example, Roberts v Security Company Ltd [1897] 1 QB 111; Ellery v Beck and The Royal Insurance Fire and General (NZ) Ltd (1990) 6 ANZ Ins Cas 61-045; Farmers Mutual Insurance Ltd v Slavich (1995) 9 ANZ Ins Cas 61-295]. Mr Weber founded his case on that species of common law estoppel known as ‘conventional estoppel’. [76] In Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406, Mason and Deane JJ identified three general classes of estoppel: estoppel of record, estoppel of writing, and estoppel in pais, which they described in the following terms [at 430]: Estoppel in pais includes both the common law estoppel which precludes a person from denying an assumption which formed the conventional basis of a relationship between himself and another or which he has adopted against another by the assertion of a right based on it and estoppel by representation which was of later development with origins in Chancery. It is commonly regarded as also including the overlapping equitable

doctrines of proprietary estoppel and estoppel by acquiescece or encouragement. [77] In Commonwealth v Verwayen, Deane J said of the doctrine of estoppel by conduct that its central principle was to prevent an unconscientious departure [page 762] by one party from an assumption adopted by the other as the basis of a relationship to the other’s detriment [at 444]: The law will not permit an unconscionable (or more accurately, unconscientious) departure by one party from the subject matter of an assumption which has been adopted by the other party as the basis of some relationship, course of conduct, act or omission which would operate to that other party’s detriment if the assumption be not adhered to for the purposes of the litigation. [78] An estoppel by convention depends upon an assumption adopted by the parties as the conventional basis of their relationship. In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Limited [1986] HCA 14; (1986) 160 CLR 226, Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ emphasised the need for the conduct of relations on the basis of an agreed or assumed state of facts [at 244]: Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted upon by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying. … [82] … The purpose of the rule enunciated by McLelland J in Johnson

Matthey was that where, as a result of negotiations, parties have entered into a formal written contract, short of a claim for rectification (so as to suggest that the true agreement was other than as recorded in the writing) it should not be open to them to contend that they had in fact agreed informally on something other than what was recorded in the document. Entirely different considerations apply in respect of postcontractual conduct. After a formal contract is made, parties may so conduct themselves as to treat provisions of the contract as no longer relevant or varied in some way or suspended in operation. A representation made post-contractually that a contractual right will not be enforced is the classic territory of promissory estoppel. As Lord Cairns LC said in Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 (emphasis added): If parties who have entered into definite and distinct terms involving legal results — certain penalties or legal forfeiture — afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties. [page 763] [83] Although this was said in the field of equitable (promissory) estoppel, there is a substantial overlap between many of the species of estoppel [as to which see Commonwealth v Verwayen, 410–411 (Mason CJ), 431–2 (Deane J)] and application of this approach in the field of conventional estoppel is apt [cf MK & JA Roche v Metro Edgley, [72]]. This is particularly so, given that, notwithstanding that Mr Weber eschewed reliance on equitable estoppel, and while accepting that there remains a separate doctrine of common law conventional estoppel [MK & JA Roche v Metro Edgley, [71], the analogies between conventional estoppel and

equitable (promissory) estoppel in the present context are considerable and close. Thus, in promissory estoppel, it is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of a legal relationship with the defendant; (2) that the defendant has induced or acquiesced in the plaintiff’s adoption of that assumption; (3) that the plaintiff has acted in reliance on its assumption; (4) that the defendant knew or intended that the plaintiff so act; and (5) that it will occasion detriment to the first party if the assumption is not fulfilled [Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387, 428– 429 (Brennan J)]. In conventional estoppel, it is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of its legal relationship with the defendant; (2) that the defendant has adopted the same assumption; (3) that both parties have conducted their relationship on the basis of that mutual assumption. It is inherent in the idea of a mutually agreed or assumed convention that each party knew or intended that the other act on that basis. And it seems that a conventional estoppel will not arise unless departure from the assumption will occasion detriment to the plaintiff [MK & JA Roche v Metro Edgley, [72], and see the discussion below]. [84] There is in my judgment no reason why a mutual assumption as to a state of affairs made by two contracting parties arising from their conduct after the contract is made should in this respect be in any different a position from a unilateral assumption made by one party but known to and encouraged or acquiesced in by the other. The policy considerations which informed McLelland J’s decision – that the stability of commercial relationships and dealings would be threatened if, after deliberately recording their agreement in permanent written form, they were subject to the risk of having it yield to the inherently less reliable evidence of oral statements made during the course of negotiations — do not have the same force when it comes to post-contractual conduct, because in the latter context what is set up is not an argument that the terms of the parties’ arrangements when made are to be found in the oral negotiations and not the written agreement, but rather that since the contract was made, the parties have acted on an assumed state of affairs which is inconsistent with the contractual position and has arisen as a result of conduct after the contract was made.

[85] Mr Weber ultimately accepted — in my opinion correctly — that to succeed on the estoppel argument, Mr Waterman had to establish that there was a common assumption of the parties that so much of the deferred premiums endorsement as automatically ceased cover upon non-payment of an instalment [page 764] did not operate, so that no failure to pay a premium instalment on time would automatically lead to cessation of cover, except where the Insurers gave notice under clause B(8). This is because, in the context of this case, it would be insufficient to establish a convention that the insurance contract remained on foot, or had not been automatically terminated, as at any particular date prior to 6 December 1998: whatever was the position prior to that date, a further default occurred on that date, and a common assumption that cover had not ceased, for example on 6 September 1998, would not avail Mr Waterman. In this respect the case is to be distinguished from MK & JA Roche v Metro Edgley, in which it sufficed to establish a common assumption that the contract was not automatically terminated in accordance with its terms on a particular date. As there is no evidence of any conduct or communication between the parties after 6 December 1998 and before the loss, Mr Waterman has to establish a convention, in place before 6 December 1998, not only that despite prior defaults cover remained in force and had not automatically ceased, but also that cover would not automatically cease if there were non-payment of an instalment in the future. This can, I think, best be described as a convention that, regardless of the express provision in the endorsement, punctual payment of premium was not essential to the continuation of cover under the policy. [86] Mr Weber submits that such a convention is established by the following matters: In respect of the 1997/1998 policy, the first premium due on 6 July 1997 was paid on 16 July 1997, some ten days late, yet AAIG

in writing to Mr Waterman on 18 July attaching the debit note said ‘We thank you for the prompt payment’. When the second premium was not paid punctually on 6 September 1997, despite an invoice issued on 18 August 1997, AAIG on 10 October 1997 simply wrote ‘To date we do not appear to have received the moneys and request payment within seven days’. When the third premium had not been paid when due on 6 December 1997 despite an invoice dated 19 November 1997, AAIG wrote ‘I know from previously that mail is a problem with you but can now offer you credit card facilities. Just sign and fill in the bottom portion of the invoice attached and fax back to this office’. By the renewal notice dated 13 May 1998, AAIG invited Mr Waterman to renew on the basis of the expiring terms and conditions. In respect of the 1998/1999 policy, the first premium due on 6 June 1998 was not paid until 21 July 1998. When the second premium was not paid punctually on 6 September 1998, despite an invoice issued on 11 August 1998, AAIG on 11 November 1998, presumably intending to refer to the second premium, wrote: ‘As this is obviously an oversight a copy of the invoice/mail order authority is attached. Your cheque or authority would be appreciated at your earliest’. [page 765] [87] There is no conventional estoppel unless the parties have in fact adopted the alleged assumption as the conventional basis of their relationship [Dabbs v Seaman [1925] HCA 26; (1925) 36 CLR 538, 549; Con-Stan Industries, 244–5]. [88] It is true that there is no explicit evidence, in precise terms, that either party assumed that punctual payment of instalments was not essential to continuation of cover. However, there is evidence from Mr

Waterman, which was not the subject of challenge, that, as at January 1999, he believed that his aircraft was insured in accordance with the policy and that AAIG would get in contact with him regarding any further amount outstanding, as it had the previous year; and that evidences an assumption by him to the effect, though not in precise terms, that punctual payment in accordance with the schedule was not essential to the maintenance of cover. [89] While the mere absence of an overt assertion on the part of AAIG, when payments were late, that cover had ceased, would not establish that AAIG was necessarily acting on the basis that punctual payment in accordance with the schedule was not essential to the maintenance of cover, and while the acceptance of late payment (with reinstatement of cover) is not necessarily inconsistent with cover having ceased in the interim when the payment was not punctually made, the tenor of the correspondence to which reference has been made, when analysed and viewed as a whole, warrants the conclusion that the Insurers were not treating punctual payment of instalments as essential to the continuation of cover. Thus: Although it is unclear when Mr Waterman was first notified that the first premium instalment in respect of the 1997/1998 policy, paid some ten days late on 16 July 1997, yet accepted by AAIG as ‘prompt payment’, was in fact due on 6 July, it was sufficiently shortly before 16 July that receipt on that date could be described as ‘prompt’; on the probabilities, this was after 6 July, the day on which it was due. More importantly, the response was in terms which conveyed that the Insurers accepted the payment as regular, and ‘prompt’. The revised policy schedule showed the date due (6 July) and the date paid (16 July); as Mr Waterman was charged premium for 365 days of the 1997/98 insurance policy, it should be concluded that the Insurers treated him as covered for the period between 6 and 16 July 1997. Thus, upon the inception of the policy, the Insurers did not treat punctual payment in accordance with the endorsement as essential to the maintenance of cover. AAIG’s reminder of 10 October 1997, when the second premium instalment was not paid punctually on 6 September 1997, by

simply requesting ‘payment within seven days’, suggested that it would be acceptable if payment were made within seven days. It does not suggest that Mr Waterman would be without cover in the interim, and that prospect would be so potentially catastrophic that one would expect [page 766] reference to it in those circumstances. Its terms suggest, at least implicitly, that the insurers had not ceased to cover the risk. The letter is therefore against punctual payment being treated by the Insurers as essential for maintenance of cover. Similarly, AAIG’s reminder, when the third premium instalment had not been paid when due on 6 December 1997, despite an invoice dated 19 November 1997, by offering credit card facilities and requesting signature and return of an authority for that purpose, and not suggesting that cover had ceased in the interim, also suggests, at least implicitly, that the insurers had not ceased to cover the risk, and is against punctual payment being treated by the Insurers as essential for maintenance of cover. Most significantly, the new policy schedule in respect of the 1998/1999 policy, which included the deferred premium endorsement in the same terms as the previous year’s policy except that the first instalment payment was $865.20 due 6 June 1998, does not appear even to have been issued until 19 June 1998, by which time payment was already ‘overdue’. Payment was made, without apparent comment, on 21 July 1998. The issue of the policy on 19 June, in the context of its being a renewal of the previous policy, when according to its terms the first instalment was already overdue, cannot be reconciled with treating punctual payment of instalments in accordance with the endorsement as essential to the continuation of cover. Finally, AAIG’s reminder of 11 November 1998, when the second premium was not paid punctually on 6 September 1998, despite an invoice issued on 11 August 1998, suggesting that it was an

oversight and requesting ‘Your cheque or authority … at your earliest’, again suggests, at least implicitly, that the insurers had not ceased to cover the risk, and is against punctual payment being treated as essential for maintenance of cover. [90] Mr Oslington has submitted that the matters relied on by Mr Waterman do not warrant the conclusion that either Mr Waterman or the Insurers conducted their affairs on the footing that cover would continue, even if after rendering an invoice and a follow-up letter not only was the overdue instalment not paid, but the next instalment also became overdue: at the highest, he submits, those matters might establish that if an instalment of premium was not paid on a due date, but payment was made shortly after a reminder, then the Insurers would treat cover as continuing in force. Thus, so the submission goes, there might have been a convention that Mr Waterman would be held covered if he paid promptly after a reminder, notwithstanding that he had not paid punctually on time, but the matters relied on establish nothing about the situation if premium was not paid in response to a reminder, let alone if a further instalment became concurrently overdue; any convention could have extended only to the situation [page 767] where payment was made promptly after a reminder, when only one instalment was overdue. [91] I do not overlook the requirement that a representation or assumption founding an estoppel be ‘clear and unequivocal’: though this has usually been recognised in the fields of equitable promissory or proprietary estoppel [see Legione v Hateley, 436–437 (Mason and Deane JJ); Woodhouse A C Israel Cocoa Limited SA v Nigerian Produce Manufacturing Co Limited [1971] 2 QB 23, 60 (Lord Denning MR); Low v Bouverie [1891] 3 Ch 82, 106 (Bowen LJ), 113 (Kay LJ)] it is plain that the requirement that a representation be clear and unequivocal applies generally to an estoppel in pais [Legione v Hateley, 435 (Mason and Deane JJ); Western Australian Insurance Company Limited v Dayton [1924]

HCA 58; (1924) 35 CLR 355, 375 (Isaacs ACJ)], and estoppel by convention is a species of estoppel in pais. But as Mason and Deane JJ explained in Legione v Hateley, the requirement that a representation — or assumption — must be clear if it is to found an estoppel in pais or a promissory estoppel, does not mean that it must be express, and a sufficiently clear representation — or assumption — may properly be implied from words, conduct or even silence, and it is not necessary that a representation — or assumption — be clear in its entirety, it sufficing that so much of it as is necessary to found the propounded estoppel satisfies the requirement. Their Honours illustrated this by the example that 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, so that 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 [Legione v Hateley, 438–439]. And a promise may be definite, in the sense that there is a clear promise to do something —even though exactly what is promised is not precisely defined [Flinn v Flinn [1999] VSCA 109; [1999] 3 VR 712, 738 (Brooking JA, Charles and Batt JJA concurring); see also Australian Crime Commission v Gray [2003] NSWCA 318, [184]–[200] (Ipp JA; Mason P and Tobias JA agreeing on this point)]. As Tobias JA has observed, even if a representation is insufficiently precise to give rise to a contract, that does not necessarily disqualify the representation from founding a promissory estoppel, much depending upon the circumstances in which the representation is made and the context against which it is to be considered, so that a representation will be sufficiently clear and unambiguous if it is reasonable for the representee to have interpreted it in a particular way, which it is clearly capable of bearing and upon which it is reasonable for the representee to rely, and in those circumstances it would be unconscionable for the representor to deny responsibility for the detriment that arises because of that reliance. On the other hand, if it is not reasonable for the representee to rely on the meaning he attributes to the representation, then it cannot be

unconscionable for the representor to deny responsibility for the detriment [page 768] that the representee sustains because of that unreasonable reliance [Galaxidis v Galaxidis [2004] NSWCA 111, [93]–[94]]. Thus, the requirement that a party should not be estopped on an ambiguity does not mean that the precise terms of the assumption or representation which founds the claimed estoppel must be entirely and unequivocally clear: an estoppel can arise even though the precise terms of the assumption or representation may be difficult to ascertain, so long as it is clear that there was an assumption, and the scope of the assumption, though its full extent may be uncertain, is at least sufficient that it can be said that the defendant’s conduct would involve a departure from it. [92] Nor is it necessary that the parties, in adopting their assumption, have adverted to the express terms of the contract. As Lord Denning MR said in Amalgamated Property Co v Texas Bank [at 121]: There is no need to inquire whether their particular interpretation is correct or not — or whether they were mistaken or not — or whether they had in mind the original terms or not. Suffice it that they have, by their course of dealing, put their own interpretation on their contract, and cannot be allowed to go back on it. [93] Here, the probable explanation of the matters to which reference has been made (and more probable than all others combined), when they are taken as a whole, is that at all times up to at least 11 November 1998, both parties were proceeding on the assumption that punctual payment of premium instalments was not essential to the continuation of cover, whatever might be the formal terms of the policy. While the terms and tone of the reminder letters contribute to this conclusion, the conduct of the Insurers at the time of inception of the policy, and upon renewal, by issuing policies specifying due dates for

instalments after the first instalment was already overdue, is the strongest evidence, and takes the case beyond one in which, in the absence of that conduct, the reminder letters might have been explained merely as indulgences, or waivers of prior defaults, but not amount to evidence of an assumption that punctual payment was not essential. Together, the effect of these matters is to show that the Insurers and Mr Waterman were dealing with each other on the conventional basis that punctual payment of premiums was not essential to the continuation of cover, and once such a convention is established it matters not if the terms of the deferred premiums endorsement provide otherwise, nor whether or not the parties adverted to those terms. [94] Once such a convention is established, so that the requirement for punctual payment loses the essential character which it otherwise had under the endorsement, then the practical effect is that, at least without notice, neither party can insist on the strict legal position under the endorsement. Neither the duration nor the number of defaults in punctual payment can make any difference to this, because something more than continued or repeated default is required to restore essentiality to a provision which has lost it. [page 769] Thus it matters not that circumstances equivalent to those which prevailed by 2 January 1999 — when, so far as the evidence establishes, there remained outstanding not only the second instalment (due 6 September 1998) but also the third instalment (due 6 December 1998) — had not previously arisen: because it was conventional that punctual payment was treated as not essential to the continuation of cover, that applied as much to a second default in punctual payment as to the first. [95] Mr Waterman’s unchallenged evidence is to the effect that he continued to act on this assumption until the loss on 2 January 1999. Mr Oslington submits that it is strong evidence against the continuation of any such assumption on the part of the Insurers, at least by early December 1998, that AAIG did not issue any invoice for the December

1998 instalment, nor any reminder letter in respect of it. However, while these matters might suggest that, whatever the position until then, by December 1998 AAIG was no longer acting on the basis that punctual payment was not essential to maintenance of cover or even that cover was still in force, adoption of such a position by or on behalf of the Insurers would involve a departure by them from the position which the parties had adopted to that point, and if the Insurers wished to revert to requiring strict compliance with the contractual terms, they were required to give notice of their intention so to do [cf Commonwealth v Verwayen, 442 (Deane J); Ajayi v R T Briscoe (Nigeria) Ltd [1964] 3 All ER 556, 559]. [96] It has been submitted on behalf of the Insurers that in conventional estoppel, as in equitable estoppel, it remains necessary to establish detriment from a departure from the assumption. The Court of Appeal has so held in MK & JA Roche v Metro Edgley, [72] (Hodgson JA, Beazley and Ipp JJA concurring), and while noting the formal submission on behalf of Mr Waterman to the contrary — that this was a misapplication to conventional estoppel of dicta of Sir Owen Dixon in Grundt in respect of what is said to be the related but distinct field of estoppel in pais — I should and do take the law to be as stated by Hodgson JA: first, because conventional estoppel is not distinct from, but a sub-species of, estoppel in pais, and was encompassed by the statements of principle in Grundt from which Mr Waterman’s counsel seek to distinguish it [Legione v Hateley, 430; Grundt, 657 (Latham CJ), 675–676 (Dixon J); Thompson v Palmer [1933] HCA 61; (1933) 49 CLR 507, 547]; secondly, because it is fundamental to the imposition of an estoppel that it would be unjust or inequitable to permit departure from the relevant assumption [Grundt, 657 (Latham CJ), 675 (Dixon J); Thompson v Palmer, 547; Amalgamated Property Co v Texas Bank, 121 (Lord Denning MR, citing Crabb v Arun District Council [1976] Ch 179, 187, a proprietary estoppel case in which detriment was unquestionably required)], and it would not be unjust or inequitable to permit such a departure if to do so would occasion no detriment; and thirdly, because were it not so, then mutual agreement or assumption with neither consideration nor detriment would be elevated to a status equivalent to contract.

[page 770] [97] However, the detriment here is plain: Mr Waterman has lost the opportunity, which notice of intended departure from the assumption would have afforded him, of reinstating cover by paying the outstanding instalment, or arranging cover with an alternative insurer, before the loss was suffered. [98] Thus, in my opinion, the evidence establishes that, at least until November 1998, Mr Waterman and the Insurers conducted their affairs on the agreed or mutually assumed basis, inconsistent with the express terms of the policy, that punctual payment of premium instalments was not essential to the maintenance of cover under the policy. If either party wished to depart from that common assumption, notice was required. Although there is some evidence that the Insurers were no longer proceeding on that assumption by December 1998, there is no evidence that they gave any notice of any such change in position, nor that they would thenceforth insist upon punctual payment. Even though the facts by January 1999 were more extreme than those which established the convention — in that whereas previously payment was made promptly after a reminder letter, but by 2 January 1999, Mr Waterman’s default extended to two instalments, and did not involve payment even after the November 1998 reminder — they remained within the scope of the common assumption that strict compliance with the timetable for payments of instalments was not essential to the maintenance of cover. [99] Accordingly, in my opinion, Mr Waterman has made out a case of estoppel such as to preclude the Insurers from relying, in the events which have happened, on the provisions of the deferred premiums endorsement. 24.21 Apart from estoppel, there are other doctrinal rules that may preclude the exercise of a right of termination. These include relief against forfeiture, which arises primarily in relation to property rights.62 Similarly, the doctrine of waiver may apply in the sense that a breach may be ‘waived’.63 It is notable that

the terms ‘waiver’ and ‘election’ are at times used interchangeably by the courts.64 It is also possible that an exercise of the right to terminate may be unconscientious and that the broader doctrine of unconscionable conduct might apply generally to termination.65 [page 771]

Key Points for Revision The tripartite classification distinguishes between conditions, intermediate terms and warranties. The contract itself may stipulate that the breach of certain conditions gives rise to a right to terminate. The common law rules on termination may apply, and if a term is found to be a condition, then termination may be possible. A breach of an intermediate term may also give rise to a right to terminate if the breach is serious enough. The conduct of one party may be sufficient to amount to a repudiation of his or her obligations under the contract. Once the other party has become aware that the repudiating party is unwilling to perform the contract, they may elect to terminate rather than wait for the breach to manifest itself. A delay in performance may be sufficient to give rise to a right to terminate if time is of the essence. An aggrieved party may choose to terminate through a notice process. There are some restrictions that apply to a right to terminate a contract, and termination may not be possible where an estoppel has arisen or where the terminating party’s conduct might be unconscionable.

_________________ 1

See Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; 241 ALR 88.

2

[1962] 2 QB 26.

3

(2007) 233 CLR 115; 241 ALR 88.

4

Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305.

5

(1967) 1 AC 361 at 422. See also Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305.

6

Amman Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527; 92 ALR 601.

7

Shevill v Builders Licensing Board (1982) 149 CLR 620 at 627; 42 ALR 305.

8

(1938) 38 SR (NSW) 632 at 641–2.

9

Arcos Ltd v EA Ronaasen & Son [1933] AC 470.

10

(1951) 83 CLR 322.

11

[1962] 2 QB 26.

12

(2007) 233 CLR 115 at 140; 241 ALR 88.

13

(2007) 233 CLR 115 at 147; 241 ALR 88.

14

(1989) 166 CLR 623 at 658; 85 ALR 183.

15

Galafassi v Kelly (2014) 87 NSWLR 119 at [61] per Gleeson JA.

16

(2014) 87 NSWLR 119 at [62].

17

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; 85 ALR 183.

18

Progressive Mailing House v Tabali Pty Ltd (1985) 157 CLR 17; 57 ALR 609; Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 KB 148.

19

Hoad v Swan (1920) 28 CLR 258.

20

(2014) 87 NSWLR 119 at [62].

21

[2010] VSC 621 at [77]. See also Whittaker v Unisys Australia Pty Ltd (2010) 26 VR 668.

22

Shevill v Builders Licensing Board (1982) 149 CLR 620; Progressive Mailing House v Tabali Pty Ltd (1985) 157 CLR 17.

23

Shevill v Builders Licensing Board (1982) 149 CLR 620.

24

(1989) 166 CLR 623; 85 ALR 183.

25

(1989) 166 CLR 623 at 658; 85 ALR 183.

26

See also Versus (Aus) Pty Ltd v ANH Nominees Pty Ltd [2015] VSC 515 at [122]–[126] per Croft J. See also Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd (2013) 29 BCL 329 at [180] per Bathurst CJ; Commonwealth Bank of Australia v Shannon [2013] NSWSC 1076 at [119] per Sackar J.

27

(1989) 166 CLR 623, 648; 85 ALR 183.

28

Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 32; 57 ALR 609.

29

(1953) 89 CLR 327.

30

Sopov v Kane Constructions Pty Ltd (2007) 20 VR 127; DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223; Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; Vaswani v Italian Motors (Sales and Services) Ltd [1996] 1 WLR 270.

31

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223; Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.

32

Rawson v Hobbs (1961) 107 CLR 466; Concut Pty Ltd v Worrell (2000) 176 ALR 693; 75 ALJR 312.

33

(1931) 45 CLR 359 at 373; [1931] ALR 194.

34

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432; 19 ALR 223.

35

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432; 19 ALR 223.

36

(2007) 20 VR 127.

37

(1989) 168 CLR 385 at 394; 88 ALR 413.

38

[2013] NSWSC 531 at [118]–[119].

39

(1989) 168 CLR 385; 88 ALR 413.

40

(1989) 168 CLR 385; 88 ALR 413 at [6]–[8].

41

[1934] 1 KB 148.

42

(1982) 149 CLR 509; 41 ALR 187.

43

(1989) 166 CLR 623; 85 ALR 183.

44

Carr v JA Berriman Pty Ltd (1953) 89 CLR 327.

45

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; 85 ALR 183.

46

(1989) 166 CLR 623 at 640; 85 ALR 183.

47

(2005) 218 ALR 1; 23 ACLC 630 at [85].

48

Stocznia Gdanska SA v Latvian Shpping Company (No 3) [2002] 2 Lloyd’s Rep 436.

49

Vitol SA v Norelf Ltd [1996] AC 800.

50

Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; 112 ALR 609.

51

(1993) 182 CLR 26 at 39; 112 ALR 609. See also Motor Oil Hellas (Corinth) Refineries v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 at 398 per Lord Goff.

52

[1996] AC 800 at 811. See also Holland v Wiltshire (1954) 90 CLR 409; [1954] ALR 822.

53

Holland v Wiltshire (1954) 90 CLR 409; [1954] ALR 822.

54

Motor Oil Hellas (Corinth) Refineries v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 at 397–9 per Lord Goff.

55

(1974) 131 CLR 634; 4 ALR 257.

56

Tropical Traders Ltd v Goonan (1964) 111 CLR 41; [1964] ALR 585.

57

Larking v Great Western (Nepean) Gravel Ltd (in liq) (1940) 64 CLR 221.

58

(2014) 87 NSWLR 119.

59

(1964) 111 CLR 41; [1964] ALR 585.

60

W & R Pty Ltd v Birdseye (2008) 102 SASR 477.

61

(2005) 65 NSWLR 300.

62

Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315.

63

Agricultural and Rural Finances Pty Ltd v Gardiner (2008) 238 CLR 570.

64

See Commonwealth v Verwayen (1990) 170 CLR 394, 481 (McHugh J).

65

Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCAFC 4.

[page 773]

CHAPTER 25 Remedies for Breach of Contract CHAPTER OVERVIEW 25.1 25.2 25.3 25.5 25.9 25.13

Introduction The compensation principle Expectation damages Reliance damages Rectification Limitations on damages 25.14 Causation 25.16 Remoteness 25.20 Mitigation 25.21 Disappointment and distress 25.22 Liquidated damages and the rule against penalties

Introduction 25.1

Where a contract has been breached by another party, the innocent party will be entitled to some form of remedy. Ordinarily, the remedy supplied to the innocent party will take the form of damages. These damages may be for reliance, the expectation interest or for a loss of chance. In some instances, rectification will be required in order to properly compensate the innocent party. There are some limitations that apply to damages. These limitations are concerned with issues of causation, remoteness and mitigation. Furthermore, while liquidated damages may be valid under the common law, contractual penalties are routinely set aside by the courts where they are excessive. This chapter addresses the issues outlined above.

[page 774]

The compensation principle 25.2

The courts have approached the question of damages on the basis that the innocent party should be placed in the same position that he or she would have been in had the contract been performed. In Robinson v Harman,1 Parke B stated the general principle: [W]here 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 situation, with respect to damages, as if the contract had been performed.

However, damages should not place the injured party in a position that is superior to that which they might otherwise have enjoyed. In Haines v Bendall,2 Mason CJ, Dawson, Toohey and Gaudron JJ stated: The settled principle governing the assessment of compensatory damages, whether in actions of tort or contract, is that the injured party should receive compensation in a sum which, so far as money can do, will put that party in the same position as he or she would have been in if the contract had been performed or the tort had not been committed … Compensation is the cardinal concept. It is the ‘one principle that is absolutely firm, and which must control all else’ … Cognate with this concept is the rule … that a plaintiff cannot recover more than he or she has lost.

Accordingly, the concept of loss is particularly important. There are at least three different types of loss. The first pertains to the loss experienced when an anticipated benefit does not materialise. The second relates to the loss suffered where the injured party has incurred costs in preparation for the defaulting party’s contractual performance. The third pertains to the unjust enrichment of the defaulting party. These types of loss were set out, albeit in a different order, by Hayne J in Clark v Macourt:3 Three different forms of ‘loss’ might be identified. First, there might be a loss constituted by the amount by which the promisee is worse off because the promisor did not perform the contract. That amount would include the value of whatever the promisee outlaid in reliance on the promise being fulfilled. Second, the loss might be

assessed by looking not at the promisee’s position but at what the defaulting promisor gained by making the promise but not performing it. Third, there is the loss of the value of what the promisee would have received if the promise had been performed.

Expectation damages 25.3

Expectation damages reflect the benefit that has been lost by the innocent party as a result of the contractual promise not being performed. In Clark v Macourt,4 Gageler J stated: [page 775] The ‘expectation interest’ sometimes identified as protected by an award of damages for breach of contract at common law is a reflection of that ruling principle and of its corollary. The expectation interest is no less, but no more, than the interest protected by seeking ‘to give [a] promisee the value of the expectancy which the promise created’. In other words, it is the interest of the injured party ‘in having the benefit of [the contractual] bargain by being put in as good a position as he [or she] would have been in had the contract been performed’. The common law does not compensate an injured party for the non-fulfilment of an expectation which could not reasonably be supposed to have been within the contemplation of other parties when they made the contract as the probable result of breach.

25.4

In Clark v Macourt, the parties entered into an agreement under which Clark agreed to purchase the assets of an artificial reproductive technology business, including straws of frozen sperm, from the vendor company controlled by Macourt (‘vendor’). The vendor warranted that at completion it would give Clark records for the frozen sperm that complied with various guidelines. Of the sperm straws delivered by the vendor at completion, 1996 straws that Clark would reasonably have expected to be able to use were not as warranted and were unusable. Clark acquired usable frozen sperm from an alternative supplier in the United States at an approximate price of over $1 million and subsequently charged her patients a fee to cover the costs of that acquisition.

The issue before the High Court was how to assess damages owed to Clark for the vendor’s breach of warranty. The primary judge had assessed damages at the date of completion. His Honour therefore assessed the damages by reference to the amount that Clark would have had to pay at the date of completion to acquire 1996 replacement straws from the United States supplier. Clark was awarded over $1.2 million in damages.5 The primary judge made the award of damages despite the fact that the purchase price of the assets of the business that the plaintiff was acquiring, which included the straws of sperm, were worth less than $400,000. The Court of Appeal assessed the damages at the date of the trial. Accordingly, Clark had not suffered any loss because the cost of acquiring sperm from the alternative supplier had been recovered via charges to patients.6 The High Court held, by a 4:1 majority, that the primary judge had been correct. There were two competing approaches to measuring damages: (1) focusing on the loss to the purchaser of the value of warrantycompliant sperm straws that Clark could reasonably have expected to be able to use at the date of completion; and [page 776] (2) focusing on the expense incurred by the purchaser to acquire substitute stock in the ongoing conduct of her business. The court held that the former approach was correct. Therefore, Clark was entitled to recover the amount it would have cost (at the date of the breach of warranty) to acquire 1996 straws of sperm from the United States supplier.7 Gageler J dissented, holding that the damages should be assessed as so much of the cost to Clark of sourcing sperm from the alternative supplier for the treatment of her patients, as

Clark was, and would be, unable to recoup from those patients.8

Clark v Macourt (2013) 253 CLR 1; 304 ALR 220 High Court of Australia Keane J: [106] The principle according to which damages for breach of contract are awarded is that the damages should put the promisee in the same situation with respect to damages, so far as money can do it, as it would have been in had the broken promise been performed. The appellant was entitled to claim this measure, rather than a measure based, either on the difference between what she paid for the sperm straws and what they were worth, or on the expense ‘of undoing the harm which [her] reliance on the defendant’s promise has caused [her].’ This Court said in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd: The ‘ruling principle’, confirmed in this Court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman: ‘The rule of the common law is, that 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 situation, with respect to damages, as if the contract had been performed.’ [107] In Bellgrove v Eldridge, Dixon CJ, Webb and Taylor JJ explained that the practical operation of the ruling principle may vary depending on the commercial context; but that the principle is always applied with a view to assuring to the purchaser the monetary value of faithful performance by the vendor of the bargain. The decision in Bellgrove v Eldridge confirms that the circumstance that a case does not involve the transfer of marketable commodities does not displace the application of

the ruling principle. To the same effect, in Tabcorp the Court went on to say: [page 777] Oliver J was correct to say in Radford v De Froberville that the words ‘the same situation, with respect to damages, as if the contract had been performed’ do not mean ‘as good a financial position as if the contract had been performed’ (emphasis added [by their Honours]). In some circumstances putting the innocent party into ‘the same situation … as if the contract had been performed’ will coincide with placing the party into the same financial situation. Thus, in the case of the supply of defective goods, the prima facie measure of damages is the difference in value between the contract goods and the goods supplied. But as Staughton LJ explained in Ruxley Electronics Ltd v Forsyth such a measure of damages seeks only to reflect the financial consequences of a notional transaction whereby the buyer sells the defective goods on the market and purchases the contract goods. The buyer is thus placed in the ‘same situation … as if the contract had been performed’, with the loss being the difference in market value. However, in cases where the contract is not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract is not possible. In such cases, diminution in value damages will not restore the innocent party to the ‘same situation … as if the contract had been performed’. [108] The ruling principle governs the assessment of damages, not only in the case of a failure to supply goods in accordance with the requirements of a contract for the sale of goods, but also in a case where, as here, the goods are supplied as an aspect of performance under a contract for the sale of assets of a business. The application of the ruling principle does not depend on characterising the Deed as a contract for the sale of goods. The rule in s 54(3) of the Sale of Goods

Act 1923 (NSW), whereby a purchaser is ‘prima facie’ entitled to recover ‘the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty’, is a statutory expression of the ruling principle, but it does not exhaust its operation. [109] The value to be paid in accordance with the ruling principle is assessed at the date of breach of contract, not as a matter of discretion, but as an integral aspect of the principle, which is concerned to give the purchaser the economic value of the performance of the contract at the time that performance was promised. In this way, the measure of damages captures for the purchaser the benefit of the bargain and so compensates the purchaser for the loss of that benefit. [110] The application of the ruling principle to measure value lost at the date of breach of contract serves the important end of bringing finality and certainty to commercial dealings. It ensures that whatever might befall the purchaser after the date of breach, for good or ill, and whether by reason of the purchaser’s acumen, or lack of it, in dealing with other persons who were not party to the contract, and whatever movements may occur in the market, these developments have no bearing on the entitlement of the purchaser and the liability of the seller.

[page 778]

REVIEW QUESTIONS 1.

What is the compensation principle?

2.

What are expectation damages?

Reliance damages 25.5

Where the parties have agreed to a given contract, one or both parties may incur substantial costs in preparation for the

performance of that contract. The costs represent a reliance interest and when the contract is breached, resulting in nonperformance, the award for damages should take these costs into account. A plaintiff cannot be doubly compensated for the expectation and reliance interests. Nonetheless, reliance costs form a useful basis for damages in cases where the expectation interest cannot be meaningfully addressed. The issue of reliance damages is particularly complicated in loss-making contracts. 25.6

In McRae v Commonwealth Disposals Commission,9 the High Court held that ‘mere difficulty in estimating damages did not relieve a tribunal from the responsibility of assessing them as best it could’, except where it is impossible to say that any assessable loss resulted from a contractual breach. The commission accepted a tender by the plaintiffs for the purchase of a wrecked oil tanker specified to be ‘lying on Jourmaund Reef’ adjacent to New Guinea. In fact, there was not at any material time any oil tanker there. The plaintiffs claimed damages for breach of a contract to sell a tanker lying at a particular place. Having found that the only proper construction of the contract was that it included a promise by the commission that there was a tanker in the position specified,10 the court proceeded to assess the damages to which the plaintiffs were entitled for breach. It was impossible to place a value on the non-existent tanker. There was no market in these tankers and the contract did not describe the tanker as being, for example, of a particular size, in any particular condition or holding particular cargo. The plaintiffs merely acquired a chance of making a profit — wrecked tankers off the coast of New Guinea following World War II might be sold at a profit after expending large sums of money salvaging the wreck or materials from it. The court held that, were there nothing more than a promise to deliver a stranded

[page 779] tanker and a failure to deliver it, it might be a case where no assessable loss had resulted from the breach of contract. In such a case, the plaintiff’s damages would be a return of the money paid for the tanker under the contract and a nominal sum for breach.11 There was more here, however: in reliance on the commission’s promise that there was a tanker at a specific place, the plaintiffs had, as was reasonable, spent money trying to locate and salvage it; and there was no tanker at, or anywhere near, the specified place, the only basis for the commission’s belief to the contrary being ‘mere gossip’.12 The High Court assessed the damages as the expenditure reasonably incurred and wasted in reliance on the commission’s promise that there was a tanker at the specified place.13

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] ALR 771 High Court of Australia Dixon and Fullagar JJ at CLR 411–15: … The contract was a contract for the sale of goods, and the measure of damages for nondelivery of goods by a seller is defined in very general terms by s 55(2) of the Goods Act 1928 as being ‘the estimated loss directly and naturally resulting in the ordinary course of events from the seller’s breach of contract’. This states, in substance, the general prima-facie rule of the common law as to the measure of damages for breach of contract. But, if we approach this case as an ordinary case of wrongful non-delivery of goods sold, and attempt to apply the ordinary rules for arriving at the sum to be awarded as damages, we seem to find ourselves at once in insuperable difficulties. There was obviously no market into which the buyers could go to mitigate their loss, and the rule normally applied

would require us to arrive at the value of the goods to the buyer at the place where they ought to have been delivered and at the time when they ought to have been delivered. But it is quite impossible to place any value on what the Commission purported to sell. The plaintiffs indeed, on one basis of claim which is asserted in their statement of claim, assessed their damages on the basis of an ‘average-sized tanker, 8,000– 10,000 ton oil tanker, valued at 1,000,000 pounds, allowing for the said tanker lying on Jourmaund Reef, valued at 250,000 pounds’, and, for good measure, they added their ‘estimated value of cargo of oil” at the figure of 50,000 pounds. But this, as a basis of damages, seems manifestly absurd. The Commission simply did not contract to deliver a tanker of any particular size or of any particular value or in any particular condition, nor did it contract to deliver any oil. [page 780] It was strongly argued for the plaintiffs that mere difficulty in estimating damages did not relieve a tribunal from the responsibility of assessing them as best it could. This is undoubtedly true. In the well-known case of Chaplin v Hicks (1911) 2 KB 786, at p 792 Vaughan Williams LJ said:‘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’. That passage, and others from the same case, are quoted by Street CJ in Howe v Teefy [1927] NSWStRp 41; (1927) 27 SR (NSW) 301, at pp 305–306; 44 WN 102, at pp 103, 104, but the learned Chief Justice (1927) 27 SR (NSW), at p 306; 44 WN, at p 104 himself states the position more fully. He says:- ‘The question in every case is: has there been any assessable 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 a 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’. The present case seems to be more like Sapwell v Bass (1910) 2 KB 486 than Chaplin v Hicks (1911) 2 KB 786. And see Fink v Fink

[1946] HCA 54; (1946) 74 CLR 127, at p 143, per Dixon and McTiernan JJ. It does not seem possible to say that ‘any assessable loss has resulted from’ non-delivery as such. In Chaplin v Hicks (1911) 2 KB 786, if the contract had been performed, the plaintiff would have had a real chance of winning the prize, and it seems proper enough to say that that chance was worth something. It is only in another and quite different sense that it could be said here that, if the contract had been performed, the plaintiffs would have had a chance of making a profit. The broken promise itself in Chaplin v Hicks (1911) 2 KB 786 was, in effect, ‘to give the plaintiff a chance’: here the element of chance lay in the nature of the thing contracted for itself. Here we seem to have something which cannot be assessed. If there were nothing more in this case than a promise to deliver a stranded tanker and a failure to deliver a stranded tanker, the plaintiffs would, of course, be entitled to recover the price paid by them, but beyond that, in our opinion, only nominal damages. There is, however, more in this case than that, and the truth is that to regard this case as a simple case of breach of contract by non-delivery of goods would be to take an unreal and misleading view of it. The practical substance of the case lies in these three factors — (1) the Commission promised that there was a tanker at or near to the specified place; (2) in reliance on that promise the plaintiffs expended considerable sums of money; (3) there was in fact no tanker at or anywhere near to the specified place. In the waste of their considerable expenditure seems to lie the real and understandable grievance of the plaintiffs, and the ultimate question in the case (apart from any question of quantum) is whether the plaintiffs can recover the amount of this wasted expenditure or any part of it as damages for breach of the Commission’s contract that there was a tanker in existence. In the opinion of Webb J, it would have been reasonable, and within the proper contemplation of the Commission, that the plaintiffs should [page 781] take steps, but should do no more than take steps, to see whether there was a tanker in the locality given, and, if so, whether any and what

things should be done to turn her to account. And his Honour estimated the reasonable cost of taking such steps at the sum of 500 pounds. This view, however, seems to assume that the plaintiffs would be, or ought to be, in doubt as to whether they really had succeeded in buying a tanker. But they were clearly entitled to assume that there was a tanker in the locality given. The Commission had not, of course, contracted that she or her cargo was capable of being salved, but it does not follow that the plaintiffs’ conduct in making preparations for salvage operations was unreasonable, or that the Commission ought not to have contemplated that the course in fact adopted would be adopted in reliance on their promise. It would be wrong, we think, to say that the course which the plaintiffs took was unreasonable, and it seems to us to be the very course which the Commission would naturally expect them to take. There was evidence that salvage operations at the locality given would not have presented formidable difficulties in fair weather. The plaintiffs were, of course, taking a risk, but it might very naturally seem to them, as business men, that the probability of successful salvage was such as to make the substantial expense of a preliminary inspection unwarranted. It was a matter of business, of weighing one consideration with another, a matter of which business men are likely to be the best judges. So far as the purpose of the expenditure is concerned, the case seems to fall within what is known as the second rule in Hadley v Baxendale (1854) 9 Ex 341 (156 ER 145). … There is, however, still another question. … Suppose there had been a tanker at the place indicated. Non constat that the expenditure incurred by the plaintiffs would not have been equally wasted. If the promise that there was a tanker in situ had been performed, she might still have been found worthless or not susceptible of profitable salvage operations or of any salvage operations at all. How, then, he asked, can the plaintiffs say that their expenditure was wasted because there was no tanker in existence? The argument is far from being negligible. But it is really, we think, fallacious. If we regard the case as a simple and normal case of breach by non-delivery, the plaintiffs have no starting-point. The burden of proof is on them, and they cannot establish that they have suffered any damage unless they can show that a tanker delivered in performance of the

contract would have had some value, and this they cannot show. But when the contract alleged is a contract that there was a tanker in a particular place, and the breach assigned is that there was no tanker there, and the damages claimed are measured by expenditure incurred on the faith of the promise that there was a tanker in that place, the plaintiffs are in a very different position. They have now a starting-point. They can say: (1) this expense was incurred; (2) it was incurred because you promised us that there was a tanker; (3) the fact that there was no tanker made it certain that this expense would be wasted. The plaintiffs have in this way a starting-point. They make a prima-fcie case. The fact that the expense was wasted flowed prima facie from the fact that there was no tanker; and the first fact is damage, and the second fact is breach [page 782] of contract. The burden is now thrown on the Commission of establishing that, if there had been a tanker, the expense incurred would equally have been wasted. This, of course, the Commission cannot establish. The fact is that the impossibility of assessing damages on the basis of a comparison between what was promised and what was delivered arises not because what was promised was valueless but because it is impossible to value a non-existent thing. It is the breach of contract itself which makes it impossible even to undertake an assessment on that basis. It is not impossible, however, to undertake an assessment on another basis, and, in so far as the Commission’s breach of contract itself reduces the possibility of an accurate assessment, it is not for the Commission to complain. For these reasons we are of opinion that the plaintiffs were entitled to recover damages in this case for breach of contract, and that their damages are to be measured by reference to expenditure incurred and wasted in reliance on the Commission’s promise that a tanker existed at the place specified. 25.7

In Commonwealth v Amann Aviation Pty Ltd,14 Amann Aviation Pty Ltd entered into a contract with the Commonwealth to

conduct aerial coastal surveillance for 3 years as part of the Commonwealth’s policies with respect to quarantine from Karratha, Western Australia to Cairns, Queensland. Amann spent a substantial amount of money acquiring aircraft that were specially equipped for the surveillance that it was to perform under the contract. When surveillance commenced, Amann breached the contract in various ways, including by not having enough aircraft available to carry out the required level of surveillance. The Commonwealth exercised an express power to terminate under the contract. That power required the Commonwealth to serve a notice on Amann. In the event, the notice the Commonwealth served was invalid. Amann treated service of the notice as a repudiation of the contract by the Commonwealth, terminated the contract and claimed damages for breach. Amann contended that it was entitled to damages on a ‘reliance’ basis because it had incurred heavy expenditure preparing to perform the contract, which had been wasted because of the Commonwealth’s repudiation. The primary judge rejected the claim for ‘reliance’ damages. His Honour held that ‘expectation’ damages were appropriate. His Honour calculated damages by reasoning that, had the contract continued to term, the company would have made a profit of $820,000; however, damages should be reduced by 50 per cent, to $410,000, because there was a 50 per cent chance that the Commonwealth would have validly terminated the contract in any event due to Amann’s breach.15 [page 783] On appeal, the Full Court of the Federal Court held that Amann was entitled to a substantially higher award of damages assessed on a ‘reliance’ basis.16 The High Court, by majority, affirmed the Full Court’s decision. The majority held

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. In doing so, the High Court confirmed that contractual damages are ordinarily assessed on an ‘expectation’ basis, such that damages will be commensurate with the plaintiff’s expectation, objectively determined, of what he or she would obtain if the contract were performed. Where it is impossible to predict the plaintiff’s position had the contract been fully performed, it is just to allow a plaintiff to recover damages assessed on a ‘reliance’ basis — such expenditure as is reasonably incurred in reliance on the defendant’s promise. The latter is justified by assuming that the plaintiff would expect to at least recoup such expenditure were the contract performed.17 When assessing damages on a ‘reliance’ basis, the onus of proof is reversed: it is no longer for the plaintiff to show the loss for which it is entitled to damages; rather, the defendant must prove that the reliance expenditure would have been wasted even if the contract had been performed.18 In Amann, it was not impossible to establish what Amann’s likely profits would have been absent the Commonwealth’s repudiation. However, the majority of the High Court held that this was an appropriate case for assessing damages on a ‘reliance’ basis because of the uncertainties caused by the chance that the Commonwealth would have validly terminated the contract in any event and of Amann securing a renewal of the contract. In addition, the fact was that wasted expenditure constituted the substantial part of Amann’s loss flowing from the Commonwealth’s breach. It was then for the Commonwealth to establish that Amann’s expenditure would have been wasted even if the contract had been performed. This, the Commonwealth could not do.19 It is worth noting that Deane J held that Amann’s damages,

even though assessed on a ‘reliance’ basis, should be reduced by 20 per cent because it was necessary to take into account that Amann was itself in breach [page 784] of the contract. There was, therefore, only an 80 per cent chance that Amann would have recouped its wasted expenditure in any event.20 Toohey J similarly found that the trial judge was correct in taking into account the chance that various factors would have resulted in the contract being terminated even in the absence of repudiation by the Commonwealth.21 McHugh J dissented from the majority, holding that damages should be awarded on an ‘expectation’ basis because the value of the Commonwealth’s promise could be ascertained.22 His Honour held that those damages should then be discounted by 20 per cent to account for the possibility of the contract being terminated in any case because of Amann’s breaches.23 Whether assessing damages on an ‘expectation’ or ‘reliance’ basis, a majority of their Honours emphasised that the measure of damages is governed by Robinson v Harman — the purpose is to place the plaintiff, so far as money can, in the same situation as if the contract had been performed.24 As Mason CJ and Dawson J stated: ‘[E]xpectation 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.25

The following extract from Commonwealth v Amann Aviation Pty Ltd sets out many of the issues addressed in the case.

Commonwealth v Amann Aviation Pty Ltd

(1991) 174 CLR 64 High Court of Australia Mason CJ and Dawson J: The award of damages for breach of contract [23] The general rule at common law, as stated by Parke B in Robinson v Harman (1848) 1 Ex 850 at p 855; 154 ER 363 at p 365, is: [page 785] that 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 situation, with respect to damages, as if the contract had been performed. … [24] 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. [25] 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. [26] 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. … [page 786] [28] 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. In L Albert and Son v Armstrong Rubber Co (1949) 178 F 2d 182, Learned Hand CJ said (at p 189):

(O)n those occasions in which the performance would not have covered the promisee’s outlay, such a result imposes the risk of the promisee’s contract upon the promisor. We cannot agree that the promisor’s default in performance should under this guise make him an insurer of the promisee’s venture. Learned Hand CJ went on (at p 191) to approve the statement made by Fuller and Perdue in their celebrated article, ‘The Reliance Interest in Contract Damages’, (1936) 46 Yale Law Journal 52, at p 79: ‘We will not in a suit for reimbursement for losses incurred in reliance on a contract knowingly put the plaintiff in a better position than he would have occupied had the contract been fully performed.’ … [33] Thus, if a plaintiff’s expenditure would not have been fully recouped had the contract been performed, then full compensation for the wasted expenditure would not be awarded. A plaintiff is only entitled to damages for an amount equivalent to that which would have been earned had the contract been fully performed. In this way, the award of damages assessed by reference to a plaintiff’s expenditure is in complete conformity with the principle that an award of damages for breach of contract should place a plaintiff in the same position as if the contract had been performed. [34] In Anglia Television Ltd v Reed (1972) 1 QB 60 Lord Denning MR considered that a plaintiff could claim expenditure thrown away when he has not suffered any loss of profits or if he cannot prove what his profits would have been. His Lordship observed (at pp 63–64): It seems to me that a plaintiff in such a case as this has an election: he can either claim for loss of profits; or for his wasted expenditure. But he must elect between them. He cannot claim both. If he has not suffered any loss of profits — or if he cannot prove what his profits would have been — he can claim in the alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach. … …

[35] We do not regard the language of election or the notion that alternative ways are open to a plaintiff in which to frame a claim for relief as appropriate in a discussion of the measure of damages for breach of contract. In truth, as has been seen, damages for loss of profits and damages for expenditure reasonably incurred are simply two manifestations of the general principle enunciated in Robinson v Harman. … [page 787] [36] Naturally, the categories of case in which a plaintiff is likely to make a claim for the recovery of expenditure incurred are those in which the plaintiff has not suffered a loss of profits and those in which it is impossible to assess what would have been the outcome had the contract been performed or those in which that outcome is otherwise uncertain. So much is acknowledged by Lord Denning in the passage from Anglia Television already cited. The manner in which a plaintiff frames his or her claim for damages will be dictated not so much by a choice of alternatives giving rise to an election but simply according to whether the contract, if fully performed, would have been and could be shown to have been profitable (even if the actual amount of profit is not readily ascertainable). If this can be demonstrated, a plaintiff’s expectation of a profit, objectively made out, will be protected by the award of damages. Otherwise, subject to it being demonstrated that a plaintiff would not even have recovered any or all of his or her reasonable expenses, a plaintiff’s objectively determined expectation of recoupment of expenses incurred will be protected by the award of damages. [37] An award of damages for expenditure reasonably incurred under a contract in which no net profit would have been realized, while placing the plaintiff in the position he or she would have been in had the contract been fully performed, also restores the plaintiff to the position he or she would have been in had the contract not been entered into. In this particular situation it will be noted that there is a coincidence, but

no more than a coincidence, between the measure of damages recoverable both in contract and in tort. [38] It should be observed that, in a case where it is not possible to predict what position a plaintiff would have been in had the contract been fully performed, as was the case in both McRae and Anglia Television, it is not possible as a matter of strict logic to assess damages in accordance with the principle in Robinson v Harman. But the law considers the just result in such a case is to allow a plaintiff to recover such expenditure as is reasonably incurred in reliance on the defendant’s promise. In this case, the law assumes that a plaintiff would at least have recovered his or her expenditure had the contract been fully performed. … Onus of proof … [40] In other jurisdictions there is strong authority to the effect that, where a plaintiff claims damages for expenditure reasonably incurred, it is prima facie sufficient for that plaintiff to prove his or her expenditure and that it was reasonably incurred. The onus then shifts to the party in breach of contract to establish that such expenditure would not have been recouped even if the contract had been fully performed. If this onus is not discharged, a plaintiff’s entitlement to reliance damages remains intact. … … [page 788] [45] … McRae illustrates the proposition that a plaintiff has a prima facie case for recovery of wasted expenditure once it is established that the expense was incurred in reliance on the promise of the party in breach, there being a failure of performance by that party. By reason of its facts, the reasoning in McRae does not depend upon the presumption that an innocent party would not have entered into the contract unless it would at least have recovered its reliance expenditure under the

contract had it been performed. But the reasoning is not inconsistent with the application, in appropriate cases, of that presumption which, in our view, has much to commend it. Indeed, it is just and fair that the repudiating party should bear the onus of showing that the party not in breach would have made a loss on the contract. [46] The present case differs from McRae in that it was not impossible, as a matter of theory, for Amann to establish what its profits (if any) would have been had the Commonwealth not repudiated the contract. Indeed, the trial judge’s assessment of damages proceeded on that footing although, significantly, he did not take into account the value to Amann of the prospects of renewal of the contract. But the difficulties attending that undertaking were legion, as appears from the judgments in the Full Court. Not the least of those difficulties were the problems of assessing what were the prospects of early termination of the contract by the Commonwealth had the contract proceeded and, more importantly, the prospects of Amann securing a renewal of the contract. Add to those uncertainties the fact that, on any view, the most substantial part of Amann’s damages flowing from the Commonwealth’s breach of the original contract was represented by the wasted expenditure. [47] In this respect it is significant that the contract was of such a kind that the parties clearly contemplated that the contractor would be in an advantageous and preferred position to secure a renewal of the contract had it run its expected course. In that event Amann would, subject to any variations in the Commonwealth’s requirements, have had the necessary equipment (written down in value), facilities and personnel in place at the relevant time. The prospect of renewal was an important commercial benefit which would then have accrued to the contractor. Amann was looking to that commercial benefit as well as revenue receipts arising under the original contract as the reward which it would obtain under that contract. In other words, it was a contract which enabled the contractor to recoup part, if not all, of its expenditure during the currency of the original contract and placed the contractor in a favourable position to secure a renewal of the contract and earn substantial profits under any renewed contract. On this score alone it was a case in which, it being natural and appropriate for Amann to sue

to recover its wasted expenditure by way of reliance damages, the onus rested on the Commonwealth of establishing that the reliance expenditure would have been wasted even if the contract had been performed. [page 789] The prospect of renewal of the contract and discharge of the onus [48] In seeking to discharge this onus, the Commonwealth submits that it is irrelevant, when considering the position Amann would have been in had the contract been fully performed, to have regard to the value of Amann’s prospects of renewal of the contract. This is because, so the argument runs, the Commonwealth was under no legal obligation to renew the contract. According to the argument, a defendant is not liable for that which he or she has not promised to do; a plaintiff is not entitled to recover compensation for the non-realization of his or her expectation that the defendant would provide him or her with a benefit when the defendant has not assumed a legal obligation to do so. A variation of this argument is that to take into account loss arising from deprivation of the prospects of renewal is to take into account a loss arising from non-performance of an act which the Commonwealth was under no legal obligation to perform. … … [51] However, the rule that the defendant is not liable in damages for not doing that which he or she has not promised to do is necessarily subject to the rule in Hadley v Baxendale. According to Alderson B’s renowned formulation, the plaintiff is 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 at the time they made the contract as the probable result of the breach: at p 354 (p 151 of ER). It is now accepted that this is the statement of a single principle and that its application may

depend on the degree of relevant knowledge possessed by the defendant in the particular case … [52] However, in the present case, the application of the rule in Hadley v Baxendale turns not on the degree of knowledge possessed by the defendant but on what may reasonably be supposed to have been in the contemplation of the parties as the probable result of the breach. If it be right to suppose that the loss of the prospect of securing a renewal of the contract was within the contemplation of the parties as a probable result of the breach, then, notwithstanding the principle established by Abrahams and Lavarack, Amann is entitled to compensation which takes into account the value of the loss of the prospect of securing a renewal of the contract. [53] 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 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. [page 790] [54] The Commonwealth also submits that the Full Court of the Federal Court was wrong in taking into account the prospect of renewal of the contract because to do so infringed the rule that, where there are two or more ways in which a defendant might perform the contract, the court, in assessing damages, adopts the mode of performance which is most beneficial to the defendant. That rule, which is a manifestation of the principle that damages will not be awarded for not doing that which

there is no legal obligation to do, is well supported by authority: Cockburn v Alexander [1848] EngR 1009; (1848) 6 CB 791, per Maule J at p 814 [1848] EngR 1009; (136 ER 1459, at pp 1468–1469); Withers v General Theatre Corporation (1933) 2 KB 536, per Scrutton LJ at p 551; TCN Channel 9 v Hayden Enterprises (1989) 16 NSWLR 130, per Hope JA at pp 150–156. … [56] Where compensation is sought in respect of the deprivation of a possible benefit which is dependent upon the unrestricted volition of another it may be impossible to say that any assessable loss results from the breach. … However, this statement must be understood in the light of the principle that the mere existence of a contractual right in a party to terminate does not operate automatically to restrict the damages that can be awarded. The court does not reach a conclusion by reference to an improbable factual hypothesis. The court must have regard to the facts and evaluate the possible exercise of the right in all the relevant circumstances of the case … Moreover, in determining what is or would be beneficial for the defendant, the court does not confine its attention to the relationship between the plaintiff and the defendant; it would be wrong to reduce the defendant’s legal obligations to the plaintiff on the footing that he or she would incur greater loss in other respects. 25.8

The issue of reliance damages and loss-making contracts is particularly complicated. In Commonwealth v Amann Aviation Pty Ltd, a majority of the judges of the High Court addressed and rejected the Commonwealth’s argument that Amann was not entitled to reliance damages because it was not required to renew Amann’s contract. The following extract from the judgment of Deane J sets out the issues at hand. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 104 ALR 1

High Court of Australia Deane J: [11] … In a case where a plaintiff has incurred expenditure either in procuring the contract or in its performance but it is impossible or difficult to establish the value of any benefits which the plaintiff would have derived from performance [page 791] by the defendant, considerations of justice dictate that the plaintiff may rely on a presumption that the value of those benefits would have been at least equal to the total detriment which has been or would have been sustained by the plaintiff in doing whatever was reasonably necessary to procure and perform the contract (see, e.g., McRae, at p 414; Holt v United Security Life Ins and Trust Co (1909) 72 Atlantic Reporter 301, at pp 305–306; L Albert and Son v Armstrong Rubber Co (1949) 178 F 2d 182, at pp 188–189). In my view, the rational basis of that presumption is that that total detriment represents what would reasonably have been in the contemplation of the parties themselves as the cost to the plaintiff of full performance by the defendant and constitutes some evidence, in proceedings between them, of the value of the total benefits which would have been derived by the plaintiff from such performance. It follows from it that, at least in a case where proof of value is impossible or difficult, it is presumed in the plaintiff’s favour that the future net benefits (i.e. excess of future benefit over future detriment) which would have been derived from performance of the contract would have been of a value sufficient to recoup the past net expenditure reasonably incurred in procuring or performing it. Where that presumption is operative, it enables the recovery by a plaintiff of what are commonly referred to as ‘reliance damages’, that is to say, damages equivalent to the wasted expenditure which has been reasonably incurred in reliance upon the assumption that the contractual promises of the defendant would be honoured. The presumption will be rebutted if it be selfevident or established that the plaintiff would have derived no financial

or other benefit from performance of the contract or that any financial or other benefit which would have been derived from future performance would not have been sufficient in value to counterbalance the past expenditure. The presumption will not, however, be displaced merely by the circumstance that the benefits which the plaintiff would have obtained from performance by the defendant included the chance of some more remote benefit and it is a matter of speculation whether that ultimate benefit would have in fact been obtained or by the circumstance that the perceived ‘benefit’ which the plaintiff sought and for which she incurred the past expenditure is something which is of value only to the plaintiff or which, for some other reason, is not capable of being objectively valued in monetary terms (see, e.g., McRae, at p 414; Fink v Fink, at pp 134–135, 143). If it be established that the plaintiff would not, in any event, have derived the ‘benefit’ which she sought from performance by the defendant or that any ‘benefit’ which would have been derived is capable of being valued in monetary terms and would, when so valued, have been inadequate to recoup the expenditure, the plaintiff’s recovery will be limited to the extent (if at all) to which it has not been established that that expenditure would not have been recouped (see, e.g., Bowlay Logging Ltd v Domtar Ltd (1978) 87 DLR (3d) 325, at pp 332–335; affd 135 DLR (3d) 179). Even in a case where it is established that the plaintiff would have incurred a loss if the contract had been fully performed, reliance damages can be recovered in respect of wasted expenditure to the extent (if at all) that the past net expenditure exceeds that [page 792] ultimate loss since, to that extent, the expenditure would have been recouped if there had been no breach (see, e.g., Sunshine Vacation Villas Ltd v The Bay (1984) 13 DLR (4th) 93, at pp 102–103). [12] It should be apparent from what has been said above that an award of reliance damages does not represent the direct recovery of the wasted net expenditure. The basis of an award of reliance damages is the ordinary one in an action for repudiation or breach, namely, that

the plaintiff is, so far as money can do it, to be placed in the same situation with respect to damages as if the repudiation or breach had not occurred. Such an award represents the recovery of the wasted net expenditure only in the indirect sense that, in the assessment of damages, the net benefits which would have been derived but for the repudiation or breach are quantified in monetary terms by reference to the presumption that their value would have at least equalled that wasted expenditure. In other words, the wasted expenditure represents ‘an alternative measure of gains prevented’ (see Corbin on Contracts, vol 5, (1964), p 192). [13] The general statements in the two preceding paragraphs may be susceptible of criticism on the grounds that they are dogmatic about some matters which still remain the subject of learned discussion and differences of opinion (see, e.g., Owen, op cit.; Slawson, ‘The Role of Reliance in Contract Damages’, Cornell Law Review (1990), vol 76, 197). They have been framed with the circumstances of the present case in mind and are not comprehensive in that they will be inadequate to deal with some particular problems which might arise in the assessment of damages in some of the circumstances to which they apply. Where, for example, the repudiation or breach of contract directly results in a detriment, such as an enforced expenditure of money, which would not otherwise have been sustained, the amount of that detriment will also be recoverable in a case where reliance damages are assessed on the presumption that the value of the benefits which the plaintiff would have derived from performance of the contract should be treated as at least equal in value to the total detriment which had been or would have been sustained by the plaintiff in doing whatever was reasonably necessary to procure and perform the contract. The reason why that is so is that when one compares the position which would have existed if the contract had been performed and the position which exists after its breach or repudiation, the comparison will disclose that, but for the breach or repudiation, net expenditure in procuring or performing the contract would (on the basis of the presumption) have been counterbalanced by the benefits resulting from performance, while expenditure consequent upon the repudiation or breach would not have been incurred at all.

The Appeal: Facts, Issues and Two Problems [14] The detailed facts of the present case, the relevant contractual provisions and the issues involved in the appeal are set out in the joint judgment of Mason CJ and Dawson J. Except to the extent necessary for the purposes of discussion, it is [page 793] unnecessary that I repeat them. It is now common ground between the parties that the conduct of the Commonwealth constituted a repudiation of the contract between itself and Amann Aviation Pty Limited (‘Amann’) and that Amann validly rescinded the contract on the ground of that repudiation. It would also seem to be common ground that the construction of cl 2.24 of the contract favoured by the Full Court should be accepted and that the power of the Secretary of the Commonwealth Department of Transport (‘the Secretary’) to cancel the contract in the event of breach by Amann was not conferred upon him merely as agent for the Commonwealth and could not be exercised capriciously or unfairly. Under the contract, Amann had agreed to provide aerial surveillance of the northern coastline of Australia for a period of three years. Prior to the repudiation, it had incurred substantial expenditure (including liability to an associated company) in equipping itself to provide surveillance services under the contract. The effect of the Commonwealth’s repudiation was that the benefit of that expenditure was largely wasted. The present appeal is by the Commonwealth from the decision of the majority of the Full Court of the Federal Court of Australia to the effect that Amann was entitled to recover from the Commonwealth reliance damages equal to the whole of the net detriment it sustained by reason of incurring wasted expenditure in reliance upon the assumption that the Commonwealth would honour its contractual promises. Ultimately, the critical questions on the appeal are whether the Full Court’s conclusion that Amann was entitled to recover reliance damages in the circumstances of the case was correct and whether, if it was, the Full Court was in error in

awarding damages equivalent to the whole of its assessment of the amount of Amann’s wasted net expenditure. [15] There are two major problems involved in the comparison of the position in which Amann would have been placed if the Commonwealth had not repudiated the contract and the position in which it was placed after it had rescinded the contract on the ground of the Commonwealth’s repudiation. The first problem is that, at the time of the Commonwealth’s repudiation, Amann was itself in breach of the contract. Like the majority of the Full Federal Court, I consider that that existing breach of contract on the part of Amann was sufficient to found a proper exercise of the power of cancellation conferred upon the Secretary by cl 2.24 and that there was a significant possibility that, if the contract had not been repudiated by the Commonwealth, it would have been validly ‘cancelled’ by the Secretary pursuant to that clause. If it had been so ‘cancelled’, Amann would not have been entitled to the performance of the contract by the Commonwealth or to claim damages for non-performance. The second problem also relates to the hypothetical situation which would have existed if the contract had not been repudiated. If the contract had turned out to represent a one-off involvement by Amann in aerial surveillance in this country and the aircraft acquired for performance of the contract could not, at the expiry of the contract, be sold locally at a value which reflected their special suitability for surveillance purposes, the contract would not have been [page 794] a profitable one from Amann’s point of view. In fact, however, Amann did not regard its involvement in aerial surveillance in this country as a one-off activity. To the contrary, a significant commercial advantage which Amann sought, and would have derived, from the contract if it had run its full course would have been the favourable position in which it would have been placed for obtaining a new contract with the Commonwealth for a further period of aerial surveillance of the

northern coast. There are obvious difficulties about placing a value in monetary terms upon that favourable position. Amann’s Claim for Reliance Damages [16] It is convenient, for the moment, to put to one side the first of the above-mentioned problems, that is, the significant possibility that the contract would, if it had not been repudiated by the Commonwealth, have been cancelled in any event by the Secretary. There are two aspects of the second problem which are of present significance. The first is that it is impossible to do more than speculate about what Amann’s approximate proportionate chance of obtaining a further contract after the expiry of the existing contract would have been if the contract had run its course. The most that can be said is that, at the end of the existing contract, Amann would have almost certainly enjoyed substantial advantages, in terms of experienced personnel and equipment held at depreciated values, over any potential new supplier of the relevant surveillance services and that, even if it had not itself won a further contract, there would have been a significant chance that it could sell its local undertaking or its aircraft to its successor for a price which reflected the special value of the aircraft (by reason of their equipment) to a supplier of coastal surveillance services. The second aspect is that one can also do no more than speculate about how advantageous to Amann any such future contract would have been if it had eventuated. The result is that it is impossible to do more than speculate about either the value to Amann of the chance of a further contract which would have existed at the end of the contract period or the price it would have obtained for its equipment if the contract had been fully performed by the Commonwealth. It follows from the earlier discussion of relevant principles that, in these circumstances, Amann is entitled to found its claim for damages upon the presumption that the value of the contractual benefits which it would have derived from full performance by the Commonwealth would have at least equalled the expenditure incurred in obtaining the contract and in performance of it on its part. Clearly enough, the difficulty of assessing the value of the chance of a further contract or the resale value of the equipment makes it impossible for the Commonwealth to demonstrate that the total monetary value of any benefits which would have been derived by

Amann from full performance would have been less than the total of its net expenditure. That being so, and subject to one important qualification, Amann is entitled to recover reliance damages equivalent to its wasted expenditure.

[page 795]

REVIEW QUESTIONS 1.

What are reliance damages?

2.

Why were reliance damages difficult to assess in Commonwealth v Amann Aviation?

Rectification 25.9

In some cases, actual damages may be an insufficient form of compensation. Accordingly, in cases concerning buildings or repairs where the performance has breached the contractual obligations, resulting in a defective build, an order may be given to rectify the defects.26 In these situations a sum of damages that represents the difference between the work that was actually completed and the work that was supposed to be completed would not put the innocent party in the position that they would have been in had the work been properly performed.27 In Bellgrove v Eldridge28 the High Court stated: In assessing damages in cases which are concerned with the sale of goods the measure, prima facie, to be applied where defective goods have been tendered and accepted, is the difference between the value of the goods at the time of delivery and the value they would have had if they had conformed to the contract. But in such cases the plaintiff sues for damages for a breach of warranty with respect to marketable commodities and this is in no real sense the position in cases such as the present. 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.

25.10 It must also be reasonable for a court to order an award of rectification. Whether the award is reasonable is a question of fact. In Bellgrove, the High Court stated: 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

[page 796] 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.29

Notably, in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd,30 the High Court cited the example given by the court in Bellgrove and stated that ‘[t]hat tends to indicate that the test of “unreasonableness” is only to be satisfied by fairly exceptional circumstances’.31 25.11 In Bellgrove v Eldridge the parties contracted for Bellgrove to build Eldridge a two-storey ‘brick house villa’, in accordance with certain plans and specifications, for the sum of £3500. The contract provided for progress payments such that by the time

of the dispute Eldridge had paid £3100 of the contract price. Bellgrove sued for the remainder of the contract price and other moneys allegedly owed for extras and adjustments under the contract. Eldridge successfully cross-claimed for damages in respect of a breach of contract arising out of substantial departures from the specifications as to the composition of the concrete used in the foundations of the building and the mortar used in its walls. The trial judge assessed Eldridge’s damages as £4950, representing the cost of demolishing and re-erecting the building in accordance with the plans and specifications, together with certain consequential losses, less the demolition value of the house and moneys unpaid under the contract.32 Bellgrove appealed to the High Court against the trial judge’s assessment of damages. The High Court affirmed the decision of the trial judge. In Bellgrove, demolition and rebuilding was necessary and ‘obviously reasonable’ because, as the trial judge had found and Bellgrove did not challenge on appeal, the fact that Bellgrove’s building departed from the specifications under the contract had made the building unstable. The High Court agreed with the trial judge that, in those circumstances, [page 797] demolition and rebuilding was the only practicable method of dealing with the situation.33 25.12 In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd,34 Tabcorp Holdings Ltd (‘tenant’) and Bowen Investments Pty Ltd (‘landlord’) entered into a lease in respect of an office building. The lease contained a covenant (cl 2.13) prohibiting alterations by the tenant without the landlord’s prior written approval. In ‘contumelious disregard’ for the landlord’s rights,35 the tenant began construction works to remodel the building’s foyer. The issue before the High Court was the measure of damages in relation to two breaches of cl 2.13 by the tenant: the destruction

of the old foyer and the construction of a new foyer. The trial judge in the Federal Court gave judgment for the landlord in the sum of $32,820, being, mostly, the difference between the value of the property with the old foyer and the value of the property with the new foyer as constructed by the tenant. On appeal by the landlord, a majority of the Full Court of the Federal Court increased the judgment sum to $1.38 million. That sum comprised the cost of restoring the foyer to its original condition and a sum representing the loss of rent during restoration works. The tenant appealed to the High Court, arguing that the trial judge’s figure should be restored.36 The High Court dismissed the tenant’s appeal. With reference to the court’s reasoning in Bellgrove v Eldridge,37 their Honours unanimously held that the landlord was entitled to damages as assessed by the Full Court — the loss sustained by the landlord from the tenant’s failure to perform its contractual obligation to preserve the premises without unapproved alterations. That loss was the cost of restoring the premises to the condition in which they would have been absent the tenant’s breach.38 The High Court noted that, had the tenant requested a discount of those damages to take into account the ‘betterment problem’, the court may have acceded to that request. The ‘betterment problem’ referred to the fact that, when it came time to retake possession of the foyer at the end of the lease, the landlord would be better off than it would have been if the tenant had not breached cl 2.13 because, absent the breach, the landlord would have retaken possession of a foyer that had been subject to 15–20 years of wear and tear, rather than the newer foyer.39 [page 798]

REVIEW QUESTIONS

1.

How have the Australian courts approached the issue of rectification?

2.

When might rectification damages be unavailable?

Limitations on damages 25.13 An innocent party is not entitled to be compensated for every form of loss that they have suffered. There are considerations that place limits upon damages. First, the conduct of the defendant must have caused the loss.40 This is referred to as the causation requirement.41 The loss suffered must not be too remote from the defendant’s breach. The remoteness requirement involves a detailed consideration of the rule in Hadley v Baxendale.42 The plaintiff must also, in assessing its claim for damages, account for any benefits it received after the breach that would tend to mitigate any loss. Further, while it is possible to receive compensation for loss or distress,43 this is not altogether common.

Causation 25.14 Causation is a factual question rather than a strictly legal inquiry. The causation requirement involves a consideration of how the breach resulted in the plaintiff’s loss. For example, in Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd,44 the defendants breached their contractual obligation to provide a burglar-proof door that was fit for purpose. When the plaintiff’s premises were subsequently burgled because the thieves easily broke in through the defective door, the defendants were liable for the subsequent loss. Causation encompasses more than the ‘but for’ test. In Chappel v Hart,45 McHugh J stated: Proof of a cause of action in negligence or contract requires the plaintiff to prove that the breach of duty by the defendant caused the particular damage that the plaintiff suffered. In civil cases, causation theory operates on the hypothesis that the defendant has breached a duty owed to the plaintiff and that the plaintiff has suffered

injury; but causation theory insists that the plaintiff prove that the injury is relevantly connected to the breach of duty. The existence of the relevant causal connection is determined according to common sense ideas and not according to philosophical or scientific theories of causation. The reason for this distinction was pointed out by Mason CJ in March v Stramare (E & MH) Pty Ltd:

[page 799] In philosophy and science, the concept of causation has been developed in the context of explaining phenomena by reference to the relationship between conditions and occurrences. In law, on the other hand, problems of causation arise in the context of ascertaining or apportioning legal responsibility for a given occurrence. In March this Court specifically rejected the ‘but for’ test as the exclusive test of factual causation. Instead the Court preferred the same common sense view of causation which it had expressed in its decision in Fitzgerald v Penn. There, the Court said that the question is to be determined by asking ‘whether a particular act or omission … can fairly and properly be considered a cause of the accident’. As a natural consequence of the rejection of the ‘but for’ test as the sole determinant of causation, the Court has refused to regard the concept of remoteness of damage as the appropriate mechanism for determining the extent to which policy considerations should limit the consequences of causation-in-fact. Consequently, value judgments and policy as well as our ‘experience of the “constant conjunction” or “regular sequence” of pairs of events in nature’ are regarded as central to the common law’s conception of causation. The rejection of the ‘but for’ test as the sole determinant of causation means that the plaintiff in this case cannot succeed merely because she would not have suffered injury but for the defendant’s failure to warn her of the risk of injury. However, his failure to warn her of the risk was one of the events that in combination with others led to the perforation of her oesophagus and damage to the right recurrent laryngeal nerve. Without that failure, the injury would not have occurred when it did and, statistically, the chance of it occurring during an operation on another occasion was very small. Moreover, that failure was the very breach of duty which the plaintiff alleges caused her injury. The defendant’s failure to warn, therefore, must be regarded as a cause of the plaintiff’s injury unless either common sense or legal policy requires the conclusion that, for the purposes of this action, the failure is not to be regarded as a cause of the plaintiff’s injury. Underlying the rejection of the ‘but for’ test as the determinant of legal causation is the instinctive belief that a person should not be liable for every wrongful act or omission which is a necessary condition of the occurrence of the injury that befell the plaintiff. As Mason CJ emphasised in March, causation for legal purposes is concerned with allocating responsibility for harm or damage that has occurred. So the mere fact that injury would not have occurred but for the defendant’s act or omission is often not enough to establish a causal connection for legal purposes.

25.15 If there are multiple causes of the plaintiff’s loss it is sufficient if the defendant’s breach is one of those causes. However, a common sense rule applies in cases where multiple causes of loss feature. For example, in Alexander v Cambridge Credit Corp Ltd,46 the failure of auditors to properly fulfil their contractual obligations, which allowed a [page 800] corporation to continue trading when it should not have, was found not to have caused the catastrophic losses that followed when the market experienced a significant downturn.

Remoteness 25.16 The loss suffered by the plaintiff should not be too remote from the defendant’s breach of contract. In Hadley v Baxendale,47 Alderson B stated: 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 arising naturally, i.e., 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. Now, if the special circumstances under which the contract was actually made where communicated by the plaintiffs to the defendants, 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. But, 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. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants. The Judge ought, therefore, to have told the jury, that, upon the facts then before them, they ought not to take the loss of profits into consideration at all in estimating the damages.

25.17 The rule in Hadley v Baxendale is best considered as one single rule with two limbs.48 In European Bank Ltd v Robb Evans of Robb Evans & Associates,49 the High Court stated that, ‘the two limbs of the rule in Hadley v Baxendale represent the statement of a single principle and that the application of that principle may depend on the degree of relevant knowledge possessed by the defendant in the particular case.’ Under the first limb are those damages that arise in ‘the usual course of things’ from the breach of contract. In the second limb are those damages that are recoverable solely due to the actual knowledge of the defendant; that is, where the defendant actually knew that a specific type of loss would [page 801] result from a certain breach. This second limb requires an acceptance of the risk. There has been a degree of confusion around the phrase ‘according to the usual course of things’. Different courts have attempted to reformulate this requirement under the first limb. Most famously, in C Czarnikow Ltd v Koufos (The Heron II),50 the various judges of the House of Lords differed in their preference for phrases such as ‘on the cards’, ‘not unlikely’, ‘liable to result’ and ‘serious possibility’. In C Czarnikow, Lord Reid stated: 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 such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.51

This statement has subsequently been supported by the High Court in Wenham v Ella52 and Burns v MAN Automotive (Aust) Pty Ltd.53 In C Czarnikow, a carrier failed to deliver sugar from Constanza to Basrah in the time stipulated under the contract

because it had deviated from the required route. The delay resulted in a loss for the plaintiffs as the price of sugar in Basrah dropped in the interim. The House of Lords held that the loss fell within the ‘usual course of things’ because the defendant was aware that the plaintiffs were in the business of selling sugar and that the market for sugar was in Basrah. 25.18 In Transfield Shipping Inc v Mercator Shipping Inc,54 a delay in returning a time-chartered vessel resulted in the shipowners suffering a loss of US $1.36 million when they were unable to make the vessel available for a subsequent time-charter contract. The defendants argued that the plaintiffs were only entitled to $158,000, a figure that reflected the normal market rate rather than the lucrative deal that the plaintiffs had struck for the second time-charter. An arbitral panel and the English Court of Appeal found for the plaintiffs. However, the House of Lords found that the smaller sum was the type of loss flowing from a breach of contract that was more likely to have been in the contemplation of the parties at the time of the first time-charter. The following extract from the judgment of Lord Hoffman in Transfield demonstrates some of the difficulties in this area, but also that applying the rule in Hadley v Baxendale is very much a question of contractual interpretation. [page 802]

Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61 House of Lords, United Kingdom Lord Hoffman at 66–71: … The owners claimed damages for the loss of the difference between the original rate and the reduced rate over the period of the fixture. At US$8,000 a day, that came to

US$1,364,584.37. The charterers said that the owners were not entitled to damages calculated by reference to their dealings with the new charterers and that they were entitled only to the difference between the market rate and the charter rate for the nine days during which they were deprived of the use of the ship. That came to $158,301.17. The arbitrators, by a majority, found for the owners. They said that the loss on the new fixture fell within the first rule in Hadley v Baxendale (1854) 9 Exch 341, 354 as arising ‘naturally, ie according to the usual course of things, from such breach of contract itself’. It fell within that rule because it was damage ‘of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract [by delay in redelivery]’: see Lord Reid in C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350, 382–383. The dissenting arbitrator did not deny that a charterer would have known that the owners would very likely enter into a following fixture during the course of the charter and that late delivery might cause them to lose it. But he said that a reasonable man in the position of the charterers would not have understood that he was assuming liability for the risk of the type of loss in question. The general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period and ‘any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable. … On appeal from the arbitrators, Christopher Clarke J [2007] 1 Lloyd’s Rep 19 and the Court of Appeal (Ward, Tuckey and Rix LJJ) [2007] 2 Lloyd’s Rep 555 upheld the majority decision. The case therefore raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable (‘not unlikely’) an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not

reasonably have been regarded as assuming responsibility for such losses? … [page 803] The question of principle has been extensively discussed in the literature. Recent articles by Adam Kramer (‘An Agreement-Centred Approach to Remoteness and Contract Damages’ in Comparative Remedies for Breach of Contract (2005), eds Cohen & McKendrick, pp 249–286), Andrew Tettenborn (‘Hadley v Baxendale Foreseeability: a Principle Beyond its Sell-by Date’ in (2007) 23 Journal of Contract Law 120–147) and Andrew Robertson (‘The Basis of the Remoteness Rule in Contract’ (2008) 28 Legal Studies 172–196) are particularly illuminating. They show that there is a good deal of support in the authorities and academic writings for the proposition that the extent of a party’s liability for damages is founded upon the interpretation of the particular contract; not upon the interpretation of any particular language in the contract, but (as in the case of an implied term) upon the interpretation of the contract as a whole, construed in its commercial setting. Professor Robertson considers this approach somewhat artificial, since there is seldom any helpful evidence about the extent of the risks the particular parties would have thought they were accepting. I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common. There is, I think, an analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City Council v Irwin [1977] AC 239, 257–258 between terms implied into all contracts of a certain type and the implication of a term into a particular contract. It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in

their particular market, would not reasonably be considered to have undertaken. The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing. And as Willes J said in British Columbia and Vancouver’s Island Spar, Lumber and Saw-Mill Co Ltd v Nettleship (1868) LR 3 CP 499, 508: ‘I am disposed to take the narrow view, that one of two contracting parties ought not to be allowed to obtain an advantage which he has not paid for.’ … In other words, one must first decide whether the loss for which compensation is sought is of a ‘kind’ or ‘type’ for which the contractbreaker ought fairly to be taken to have accepted responsibility. … [page 804] What is true of an implied contractual duty (to take reasonable care in the valuation) is equally true of an express contractual duty (to redeliver the ship on the appointed day). In both cases, the consequences for which the contracting party will be liable are those which ‘the law regards as best giving effect to the express obligations assumed’ and ‘[not] extending them so as to impose on the [contracting party] a liability greater than he could reasonably have thought he was undertaking’. … It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v Baxendale: see, for example, Staughton J in Transworld Oil Ltd v North Bay Shipping Corpn (The Rio Claro) [1987] 2 Lloyd’s Rep 173, 175 and Jackson v Royal Bank of Scotland plc

[2005] 1 WLR 377. That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But … it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility. What is the basis for deciding whether loss is of the same type or a different type? It is not a question of Platonist metaphysics. The distinction must rest upon some principle of the law of contract. In my opinion, the only rational basis for the distinction is that it reflects what would reasonably have been regarded by the contracting party as significant for the purposes of the risk he was undertaking. In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, where the plaintiffs claimed for loss of the profits from their laundry business because of late delivery of a boiler, the Court of Appeal did not regard ‘loss of profits from the laundry business’ as a single type of loss. They distinguished, at p 543, losses from ‘particularly lucrative dyeing contracts’ as a different type of loss which would only be recoverable if the defendant had sufficient knowledge of them to make it reasonable to attribute to him acceptance of liability for such losses. The vendor of the boilers would have regarded the profits on these contracts as a different and higher form of risk than the general risk of loss of profits by the laundry. If, therefore, one considers what these parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, I think it is clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be. If it was clear to the

[page 805] owners that the last voyage was bound to overrun and put the following fixture at risk, it was open to them to refuse to undertake it. What this shows is that the purpose of the provision for timely redelivery in the charterparty is to enable the ship to be at the full disposal of the owner from the redelivery date. If the charterer’s orders will defeat this right, the owner may reject them. If the orders are accepted and the last voyage overruns, the owner is entitled to be paid for the overrun at the market rate. All this will be known to both parties. It does not require any knowledge of the owner’s arrangements for the next charter. That is regarded by the market is being, as the saying goes, res inter alios acta. 25.19 The second limb of the rule in Hadley v Baxendale pertains to losses that fall outside the ‘usual course of things’, but which are in the actual knowledge and contemplation of the defendant. This involves an acceptance of the risk. In Robophone Facilities v Blank,55 Harman LJ stated: The basis of the defendant’s liability for the enhanced loss under the ‘second rule’ in Hadley v Baxendale is his implied undertaking to the plaintiff to bear it. His 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 that 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.

Mitigation 25.20 Where a breach of contract has occurred, and where the plaintiff has received new benefits as a result from being unexpectedly free to engage in other activities, these new benefits must be taken into account in assessing damages.56 Moreover, the innocent plaintiff is under a duty of sorts to mitigate their loss; that is, the plaintiff must seek to minimise

the loss that they have suffered. In Tasman Capital Pty Ltd v Sinclair,57 Giles JA stated in relation to an employment case: In assessing the damages of a wrongfully dismissed employee there must be brought to account the financial benefit which the employee received, or acting reasonably should have received, from the exercise of earning capacity freed up by the dismissal. Bagnall v National Tobacco Corporation of Australia Ltd and Lavarach v Woods of Colchester Ltd are amongst the many cases which could be cited. In the latter case the employee immediately took other employment and bought a half interest in the new employer. He had to bring to account his salary earned in

[page 806] the relevant period and a sum representing the discounted value of the increase from his endeavours in the value of the half interest in the employer. In Bagnall v National Tobacco Corporation of Australia Ltd Jordan CJ said at 429 that in the case of wrongful dismissal the measure of damages is the salary or wages the employee has been prevented from earning and the value of any other benefits under the contract of employment of which the employee has been deprived … with a deduction of the value to him of the time placed at his disposal by his dismissal — ie, what he has earned, or might have earned if he could by due diligence have obtained similar suitable employment elsewhere during the period …

In effect, the plaintiff cannot deliberately and unreasonably take steps to maximise their loss.58

Disappointment and distress 25.21 Damages for disappointment or distress are far from uncontroversial. In Baltic Shipping Co v Dillon,59 Baltic Shipping Co agreed in consideration of $2205 payable in advance (‘ticket price’) to carry Joan Dillon on the Mikhail Lermontov on a 14-day cruise in the South Pacific. On the tenth day of the cruise, the ship struck a rock and sank. Dillon suffered personal injury, among other things. She sued Baltic for breach of contract, claiming, relevantly, (1) a full refund of the ticket price because there had been a ‘total failure of consideration’; and (2) compensation for disappointment and distress.

The High Court explained that an ‘entire contract’ or ‘entire obligation’ is one in which ‘the consideration for the payment of money or for the rendering of some other counterperformance is entire and indivisible.’60 Their Honours held that there will not be a total failure of consideration if incomplete performance results in the innocent party receiving and retaining any substantial part of the benefit expected under the contract. Here, there was no total failure of consideration because Dillon received the benefit of the first 8 full days of the cruise.61 The High Court noted that full damages and complete restitution will not be given for the same breach because that would lead to double compensation for a single loss.62 The court went on to consider whether damages for disappointment and distress were an available remedy for a breach of contract. Their Honours held: [page 807] [I]t is preferable to adopt the rule that damages for disappointment and distress are not recoverable unless they proceed from physical inconvenience caused by the breach or unless the contract is one the object of which is to provide enjoyment, relaxation or freedom from molestation. In cases falling within the last-mentioned category, the damages flow directly from the breach of contract, the promise being to provide enjoyment, relaxation or freedom from molestation.63

As the contract between Dillon and Baltic could be characterised as a contract the object of which was to provide for enjoyment and relaxation, Dillon was entitled to an award of damages for ‘disappointment and distress and physical inconvenience flowing from [Baltic’s breach].’64 Although not material to the outcome of the case, their Honours differed as to the significance of the general rule that damages for disappointment and distress are unavailable in an action for contractual breach. Although agreeing that the

general rule is in line with authority, McHugh J criticised the general rule as being inconsistent with the object of an award of damages for breach of contract and the principles of causation and remoteness, which require the conclusion that damage for disappointment or distress, resulting from a breach, be compensable if it was within the reasonable contemplation of the parties at the time they contracted.65 Nevertheless, the general rule might not, as McHugh J (and Mason CJ) suggest, preclude damages for disappointment and distress where it can be shown that such damage being a likely result of such a breach was reasonably within the contemplation of the parties at the time they contracted.66 Notably, Brennan, Deane and Dawson JJ agreed with the correctness of the general rule. However, Brennan J suggested that the rule had no application when the disappointment is itself the ‘direct consequence of the breach of contract’, as opposed to merely a reaction to the breach and resultant damage.67 Deane and Dawson JJ saw the general rule as merely a ‘pragmatic and judicially imposed assumption’ for the purpose of applying the ‘second limb’ of the rule in Hadley v Baxendale.68 That is, it is to be assumed that disappointment and distress flowing from the breach of contract would not have been in the contemplation of the parties as a likely result of such a breach at the time those parties [page 808] contracted.69 Thus, Brennan, Deane and Dawson JJ drew the category of case in which damages for mental suffering will be available more broadly than Mason CJ and McHugh J, who confined the categories to where such damages proceed from ‘physical inconvenience caused by the breach’ or where the object of the contract is to provide enjoyment, relaxation or freedom from molestation.

REVIEW QUESTIONS 1.

Under what circumstances might a court place limitations on damages claims?

2.

Is the innocent party under a duty to mitigate its loss?

Liquidated damages and the rule against penalties 25.22 The common law permits liquidated damages clauses to operate on the basis that these are a valid estimate of damages in the likely event of a breach of contract. However, the courts have been unwilling to uphold penalty clauses on the basis that these are not genuine estimates of damage.70 In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd,71 Lord Dunedin stated: 1.

Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.

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 (Public Works Commissioner v Hills and Webster v Bosanquet).

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. (Illustration given by Lord Halsbury in Clydebank Case.

[page 809]

(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 (Kemble v Farren). This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A promised to pay B a sum of money on a certain day and did not do so, B could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable, — a subject which much exercised Jessel MR in Wallis v Smith — is probably more interesting than material. (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’ (Lord Watson in Lord Elphinstone v Monkland Iron and Coal Co). On the other hand: (d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.

25.23 In Ringrow Pty Ltd v BP Australia Pty Ltd,72 the High Court stated: The principles of law relating to penalties require only that the money stipulated to be paid on breach or the property stipulated to be transferred on breach will produce for the payee or transferee advantages significantly greater than the advantages which would flow from a genuine pre-estimate of damage. Among the different words which have been used to describe how extensive the difference must be before the transaction creates a penalty are the words employed by Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin — a ‘degree of disproportion’ sufficient to point to oppressiveness.

In Ringrow, the High Court considered the distinction between a ‘penalty’, which is void or unenforceable, and a ‘pre-estimate of liquidated damages’. Ringrow Pty Ltd entered into a contract with BP Australia Pty Ltd to buy a service station from it. The parties also entered into an option deed granting BP an option to purchase the premises at market price — exclusive of any goodwill attaching to any business conducted on the premises — in the event that another agreement between the parties, the BP Branded Privately Owned Sites Agreement

(‘POSA’), ‘is terminated’. Ringrow breached the POSA by purchasing fuel from another supplier and on-selling it to the public. BP terminated the POSA and exercised the option to buy back the premises from Ringrow. [page 810] Ringrow commenced proceedings, arguing, relevantly, that the option deed was void and unenforceable because it amounted to a ‘penalty’. Ringrow emphasised that the option was enforceable even for minor breaches of the POSA. The Federal Court and the Full Court declared that BP’s termination of the POSA and exercise of the option were valid. On appeal to the High Court, Ringrow was again unsuccessful. The High Court defined a ‘penalty’ as being ‘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’.73 The court accepted that the law of penalties applies not only to cases where money is payable upon breach but where money’s worth (including property) is transferrable on a particular event.74 The court then went on to explain where such an arrangement might amount to a penalty. The High Court held that whether an arrangement is a penalty involves asking whether the value of that which is transferable upon breach is ‘oppressive’ or ‘extravagant and unconscionable in comparison with the loss which flowed from [that] breach.’75 The something to be transferred on breach must ‘produce for the payee or transferee advantages significantly greater than the advantages which would flow from a genuine pre-estimate of damage.’76 Their Honours reiterated: ‘It is not enough that it should be lacking in proportion. It must be “out of all proportion”’.77

In Ringrow, the relevant comparison was between the price payable by BP to Ringrow upon re-transfer of the premises and the actual value of the property to be re-transferred.78 Although a ‘suspicion’ of a penalty arose because what was retransferred might be worth more than the price to be paid for it because the price to be paid for it excludes goodwill, that ‘suspicion’ was not enough to establish that the option was a penalty.79 The High Court also rejected the argument that the fact that the POSA could be terminated for minor breaches established that the option was a penalty. While Ringrow’s submission in this respect revealed the existence of a possible precondition to the penalty doctrine, it did not itself establish that it was a penalty.80 Nor was it [page 811] helpful for Ringrow to argue that the contract might have imposed an alternative arrangement that was less onerous than requiring Ringrow to sell the property back to BP upon breach of the POSA.81 25.24 In Andrews v Australia and New Zealand Banking Group Ltd,82 the High Court considered when the penalty doctrine will be engaged. Their Honours also clarified that the penalty doctrine is a rule of equity.83 About 38,000 customers brought a class action against ANZ alleging that certain provisions in contracts between ANZ and the customers were void or unenforceable as penalties and that group members were therefore entitled to repayment of fees charged to them under those provisions. The question for consideration was whether the doctrine of penalties applied in the absence of a breach of contract or an obligation on a party to a contract to avoid the occurrence of an event occasioning the imposition of fees. In the Federal Court, the primary judge found that only late

payment fees were payable upon breach of contract and were therefore capable of being characterised as a penalty. In respect of honour, dishonor, non-payment and over-limit fees, the primary judge held that these were not charged upon breach of contract by the customer, nor upon the occurrence of an event that the customer was obliged to avoid. Therefore, her Honour held that they did not amount to a penalty.84 The High Court concluded that the absence of contractual breach or such an obligation did not preclude the doctrine of penalties from applying.85 In reaching this decision, the High Court stated that ‘a penalty is in the nature of a punishment for non-observance of a contractual stipulation and consists, upon breach, of the imposition of an additional or different liability.’86 In obiter dicta, the High Court suggested that, in deciding whether the fees charged by the ANZ were penalties — a matter to be determined upon further trial in the Full Court of the Federal Court — the distinction between ‘a stipulation attracting the penalty doctrine and one giving rise consensually to an additional obligation’ may be relevant. Having decided that the penalties doctrine could apply, the court remitted the matter for determination of whether honour, dishonor, non-payment and over-limit fees did in fact amount to a penalty. [page 812] 25.25 Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd87 demonstrates how the analysis in Ringrow and Andrews come together. In Cedar Meats, the Victorian Court of Appeal had to consider whether the doctrine of penalties was engaged and then whether the clause impugned was in fact penal. Five Star Lamb Pty Ltd and Cedar Meats (Aust) Pty Ltd entered a contract under which Cedar Meats agreed to provide Five Star with manufacturing, processing and packaging services for

lamb products at the Cedar Meats abattoir. Clause 7 of the contract provided that Cedar Meats would process lamb in accordance with the ‘agreed daily volumes’ in a schedule to the contract. Clause 8(a) of the contract provided that where Five Star provided daily volumes to Cedar Meats that fell more than 25 per cent below the agreed daily volumes, Five Star would pay to Cedar Meats a minimum of 75 per cent of the agreed daily volume and price. Five Star fell short in providing Cedar Meats with the agreed daily volumes under the contract. When Cedar Meats pressed for payments of the amounts provided for in cl 8(a), Five Star contended that cl 8(a) was unenforceable because it was a penalty. The Victorian Court of Appeal upheld the trial judge’s finding that cl 8(a) was a penalty.88 In doing so, the court explained the High Court’s decision in Andrews as follows: Prior to Andrews, it was generally considered to be the law that a provision of the kind in question was incapable of being a penalty unless it secured the performance of a contractual obligation. Andrews re-established that such a provision may still be regarded as penal if it secures a primary stipulation even though the stipulation does not import a contractual promise. Accordingly, where it is sought to secure the performance of a condition and, instead of exacting a promise from the obligor to perform the condition, the obligee exacts a promise from the obligor to pay a sum of money (or perhaps to convey property) if the condition not be performed, the promise is properly to be viewed as a security for the satisfaction of the condition and so, therefore, if the sum of money (or conveyance) is excessive and unconscionable, may now be treated as penal.89

Applying Andrews, the Court of Appeal held that cl 8(a) was a promise by Five Star (the obligor) to Cedar Meats (the obligee) that, if the condition specified in cl 7 were not performed, Five Star would pay Cedar Meats the amount of money specified in cl 8; therefore, the doctrine of penalties could apply.90 The question was then whether [page 813] cl 8(a) was ‘extravagant and unconscionable’ in comparison

with the loss flowing from the relevant breach and thus a penalty.91 The trial judge’s findings on this point were not challenged on appeal.92 Those findings were that the estimated loss to Cedar Meats flowing from the breach was at most $8.54 per sheep not delivered. By contrast, cl 8(a) required at least 75 per cent of $21.50 ($16.13) to be paid, regardless of the extent of the shortfall. This was ‘clearly extravagant’.93 As a result, cl 8(a) was a penalty, which meant it was enforceable only to the extent of the compensation due to Cedar Meats for loss it suffered due to the breach. The matter was remitted to the primary judge for determination of compensation.94 As an aside, the Court of Appeal made the following point about the readiness of courts to find that a contractual clause amounts to a penalty: [W]hen and if a similar question arises in another case, it would be well to bear in mind the injunction of Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin [(1986) 162 CLR 170] against courts being too ready to find the requisite degree of disproportion ‘lest they impinge on the parties’ freedom to settle for themselves the rights and liabilities’ following the failure of a primary stipulation. In a case like this involving commercial organisations of apparently equal bargaining power, courts should be prepared to allow a substantially larger degree of latitude than would be appropriate in case of a contract of adhesion.95

[page 814]

Key Points for Revision The courts have approached the question of damages on the basis that the innocent party should be placed in the same position that he or she would have been in had the contract been performed. Expectation damages reflect the benefit that has been lost by the innocent party as a result of the contractual promise not being performed. Where the parties have agreed to a given contract, one or both parties may incur substantial costs in preparation for the performance of that contract. The costs represent a reliance interest and when the contract is breached, resulting in non-performance, the award for damages should take these costs into account. In some cases, actual damages may be an insufficient form of compensation.

Accordingly, in cases concerning buildings or repairs where the performance has breached the contractual obligations resulting in a defective build, an order may be given to rectify the defects There are considerations that place limits upon damages. First, the conduct of the defendant must have caused the loss. This is referred to as the causation requirement. The loss suffered must not be too remote from the defendant’s breach. The remoteness requirement involves a detailed consideration of the rule in Hadley v Baxendale. The plaintiff must also, in assessing its claim for damages, account for any benefits it received after the breach that would tend to mitigate any loss. Further, while it is possible to receive compensation for loss or distress, this is not altogether common. The common law permits liquidated damages clauses to operate on the basis that these are a valid estimate of damages in the likely event of a breach of contract. However, the courts have been unwilling to uphold penalty clauses on the basis that these are not genuine estimates of damage.

_________________ 1

(1848) 154 ER 363 at 365; (1848) 1 Ex 850 at 855.

2

(1991) 172 CLR 60; 99 ALR 385 at 386.

3

(2013) 253 CLR 1; 304 ALR 220 at [9].

4

(2013) 253 CLR 1; 304 ALR 220 at [61]–[62].

5

(2013) 253 CLR 1; 304 ALR 220 at [88]–[92] per Keane J.

6

(2013) 253 CLR 1; 304 ALR 220 at [96] per Keane J.

7

(2013) 253 CLR 1; 304 ALR 220 at [75] per Keane J; Hayne J agreeing at [23]; Crennan and Bell JJ agreeing at [24].

8

(2013) 253 CLR 1; 304 ALR 220 at [72].

9

(1951) 84 CLR 377 at 411–12; [1951] ALR 771 per Dixon and Fullagar JJ. McTiernan J agreed with the joint judgment: at 419.

10

(1951) 84 CLR 377 at 410; [1951] ALR 771 per Dixon and Fullagar JJ.

11

(1951) 84 CLR 377 at 412; [1951] ALR 771 per Dixon and Fullagar JJ.

12

(1951) 84 CLR 377 at 399, 412; [1951] ALR 771 per Dixon and Fullagar JJ.

13

(1951) 84 CLR 377 at 415; [1951] ALR 771 per Dixon and Fullagar JJ.

14

(1991) 174 CLR 64; 104 ALR 1.

15

(1991) 174 CLR 64 at 75; 104 ALR 1 per Mason CJ and Dawson J.

16

(1991) 174 CLR 64 at 78; 104 ALR 1 per Mason CJ and Dawson J.

17

(1991) 174 CLR 64 at 86; 104 ALR 1 per Mason CJ and Dawson J; 104–5 per Brennan J; 117, 126 per Deane J; 135, 137 per Toohey J; 153, 154 per Gaudron J; 161 per McHugh J; but see 165–6 per McHugh J.

18

(1991) 174 CLR 64 at 90, 94; 104 ALR 1 per Mason CJ and Dawson J; 106–8 per Brennan J; Toohey J dissented on this point: at 137, 142–3.

19

(1991) 174 CLR 64 at 89, 94; 104 ALR 1 per Mason CJ and Dawson J; 115 per Brennan J.

20

(1991) 174 CLR 64 at 131–3; 104 ALR 1 per Deane J.

21

(1991) 174 CLR 64 at 143–4, 148; 104 ALR 1.

22

(1991) 174 CLR 64 at 172–3; 104 ALR 1.

23

(1991) 174 CLR 64 at 176–7; 104 ALR 1.

24

(1991) 174 CLR 64 at 86, 94; 104 ALR 1 per Mason CJ and Dawson J; 107 per Brennan J; 127 per Deane J; 135 per Toohey J.

25

(1991) 174 CLR 64 at 82; 104 ALR 1.

26

Bellgrove v Eldridge (1954) 90 CLR 613; [1954] ALR 929.

27

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; 253 ALR 1.

28

(1954) 90 CLR 613 at 616–17; [1954] ALR 929.

29

(1954) 90 CLR 613 at 618; [1954] ALR 929.

30

(2009) 236 CLR 272; 253 ALR 1.

31

(2009) 236 CLR 272; 253 ALR 1 at [17].

32

(1954) 90 CLR 613 at 616; [1954] ALR 929.

33

(1954) 90 CLR 613 at 619; [1954] ALR 929.

34

(2009) 236 CLR 272; 253 ALR 1.

35

(2009) 236 CLR 272; 253 ALR 1 at [4].

36

(2009) 236 CLR 272; 253 ALR 1 at [5].

37

(2009) 236 CLR 272; 253 ALR 1 at [15], [17], [19].

38

(2009) 236 CLR 272; 253 ALR 1 at [15].

39

(2009) 236 CLR 272; 253 ALR 1 at [24]–[25].

40

Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310; 12 ACLR 202.

41

Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516.

42

(1854) 9 Exch 341; (1854) 156 ER 145.

43

Baltic Shipping Co v Dillon (1993) 176 CLR 344; 111 ALR 289.

44

(1968) 120 CLR 516.

45

(1998) 195 CLR 232; 156 ALR 517 at [23]–[26].

46

(1987) 9 NSWLR 310; 12 ACLR 202.

47

(1854) 9 Exch 341 at 354; (1854) 156 ER 145 at 151.

48

European Bank Ltd v Evans of Robb Evans & Associates (2010) 240 CLR 432; 264 ALR 1.

49

(2010) 240 CLR 432 at [13].

50

[1969] 1 AC 350.

51

[1969] 1 AC 350 at 369.

52

(1972) 127 CLR 454 at 471–2; [1972–73] ALR 353.

53

(1986) 161 CLR 653 at 667; 69 ALR 11.

54

[2009] 1 AC 61.

55

[1966] 3 All ER 128; [1966] 1 WLR 1428 at 1448.

56

Lucy v The Commonwealth (1923) 33 CLR 229.

57

(2008) 75 NSWLR 1 at 8.

58

Ardlethan Options Ltd v Easdown (1915) 20 CLR 285.

59

(1993) 176 CLR 344; 111 ALR 289.

60

(1993) 176 CLR 344 at 350; 111 ALR 289 per Mason CJ; see also 384–5 per Gaudron J.

61

(1993) 176 CLR 344 at 353; 111 ALR 289 per Mason CJ; 367 per Brennan J agreeing; 378 per Deane and Dawson JJ; 383 per Toohey J agreeing with Mason CJ; 386 per Gaudron J; 388, 392 per McHugh J.

62

(1993) 176 CLR 344 at 359; 111 ALR 289 per Mason CJ; 379 per Deane and Dawson JJ; 406 per McHugh J.

63

(1993) 176 CLR 344 at 365; 111 ALR 289 per Mason CJ; 380 per Deane and Dawson JJ; 394–5 per McHugh J.

64

(1993) 176 CLR 344 at 366; 111 ALR 289 per Mason CJ; 371–2 per Brennan J agreeing; 382 per Deane and Dawson JJ; 383 per Toohey J agreeing with Mason CJ; 387 per Gaudron J agreeing with Mason CJ; 394 per McHugh J.

65

(1993) 176 CLR 344 at 404; 111 ALR 289.

66

See, especially, Larner v George Weston Foods Ltd [2014] VSCA 62 at [197]–[198].

67

Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 369–70; 111 ALR 289.

68

(1854) 9 Exch 341.

69

Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 381; 111 ALR 289.

70

Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; 222 ALR 306.

71

[1915] AC 79 at 86–7.

72

(2005) 224 CLR 656; 222 ALR 306 at [27].

73

(2005) 224 CLR 656; 222 ALR 306 at [10].

74

(2005) 224 CLR 656; 222 ALR 306 at [21]. See also Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; 290 ALR 595 at [12].

75

(2005) 224 CLR 656; 222 ALR 306 at [21], [25].

76

(2005) 224 CLR 656; 222 ALR 306 at [27].

77

(2005) 224 CLR 656; 222 ALR 306 at [32].

78

(2005) 224 CLR 656; 222 ALR 306 at [21].

79

(2005) 224 CLR 656; 222 ALR 306 at [21].

80

(2005) 224 CLR 656; 222 ALR 306 at [35].

81

(2005) 224 CLR 656; 222 ALR 306 at [26].

82

(2012) 247 CLR 205; 290 ALR 595.

83

(2012) 247 CLR 205; 290 ALR 595 at [63].

84

(2012) 247 CLR 205; 290 ALR 595 at [22].

85

(2012) 247 CLR 205; 290 ALR 595 at [78].

86

(2012) 247 CLR 205; 290 ALR 595 at [9], citing Legione v Hateley (1983) 152 CLR 406 at 445; 46 ALR 1 per Mason and Deane JJ.

87

(2014) 45 VR 79.

88

(2014) 45 VR 79 at [39].

89

(2014) 45 VR 79 at [43], referring to Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; 290 ALR 595.

90

(2014) 45 VR 79 at [51].

91

(2014) 45 VR 79 at [48].

92

(2014) 45 VR 79 at [54].

93

(2014) 45 VR 79 at [53], quoting Cedar Meats Pty Ltd v Five Star Lamb Pty Ltd [2013] VSC 164 at [108] fn 36.

94

(2014) 45 VR 79 at [57]–[58].

95

(2014) 45 VR 79 at [54].

Index References are to paragraph numbers

A Ab initio …. 6.8 Abandonment of contract …. 23.4 Absolute contracts …. 15.32 Acceptance see also Offer ‘battle of the forms’ situation …. 4.6 actual intentions and understanding of parties …. 4.3 bilateral contract …. 4.11 communication of …. 4.10 by conduct …. 4.13 consciousness of offer …. 4.8, 4.9 counter-offers …. 4.4 distinguished from error in restating terms of offer …. 4.5 external manifestations of consent …. 4.3 instantaneous methods of communication governed by statutes …. 4.22 postal rule, comparison …. 4.21 making …. 4.1 mutual assent to terms …. 4.2 offer, relationship with …. 3.4

postal rule …. 4.15 concluded at moment of posting …. 4.18 confined to contract formation …. 4.19 impact of commercial dealings …. 4.16 negated expressly or by implication …. 4.17 prescribed mode …. 4.14 silence as consent …. 4.12 tenders …. 4.7 Actual consent …. 2.10 Actual undue influence onus lies with affected party …. 19.4 presence of coercion …. 19.6 specific facts determining …. 19.5 Advertising comparative …. 17.13 as warranty …. 7.9 Agents offer, communication of acceptance …. 4.10 Alienable rights …. 2.18 Ambiguity of contracts …. 2.5 language …. 2.6 correspondence theory …. 2.8 legal truth …. 2.9 public not private …. 2.7 Assumption

equitable estoppel …. 9.12 Auction as invitation to treat …. 3.16 Australian Consumer Law misleading or deceptive conduct …. 17.3, 17.4 establishing standard for commercial behaviour …. 17.2 unconscionable conduct …. 18.18 unfair terms …. 21.2 helping consumers …. 21.3 regime targets TPA regulatory gaps …. 21.5 TPA provisions …. 21.4 Automatic presumption …. 7.11

B Bankrupts capacity to contract …. 6.20 disclaiming onerous property …. 6.22 rights and responsibilities …. 6.23–6.25 vesting and transfer of property …. 6.21 Bargaining theory consent to contract …. 2.10, 2.12 Bilateral contract …. 3.14 offer, communication of acceptance …. 4.11 Breach of contract remedies see Remedies for breach termination see Termination for breach

C Capacity …. 3.1 Capacity to contract …. 6.1 bankrupts disclaiming onerous property …. 6.22 rights and responsibilities …. 6.23–6.25 vesting and transfer of property …. 6.21 corporations definition …. 6.10 legal capacity …. 6.11 Crown …. 6.18 liability for non-performance of commercial contracts …. 6.19 married women …. 6.26 mentally disabled and intoxicated persons …. 6.4 A v N case …. 6.6 not voided ab initio …. 6.8 other participant’s awareness of incapacity …. 6.7 reasonable recompense for goods and services …. 6.9 understanding nature, purpose and effect of agreement …. 6.5 minors common law, position under …. 6.2 common law, statutory amendments …. 6.3 preceeding incorporation not binding …. 6.12 ratification …. 6.13

unincorporated associations changing nature of membership …. 6.16 definition …. 6.14 employees …. 6.17 liability of committees …. 6.15 Case law analysis …. 1.6 Causation damages, remedies for breach …. 25.14, 25.15 duress …. 20.24 frustration …. 15.11 Certainty …. 3.1 clauses capable of more than one meaning …. 8.7, 8.8 discretion and ‘subject to finance’ clauses …. 8.9, 8.10 legal issue …. 8.1 need for courts to ascertain intentions …. 8.3 particular circumstances vary …. 8.2 severability of non-essential terms …. 8.4 external standards …. 8.5 intention of parties …. 8.6 Character merchandising …. 17.17 Coercion actual undue influence …. 19.6 Collateral contracts …. 7.10 pre-contractual statements …. 11.18 Commercial arrangements

intention to create legal relations …. 7.6 express exclusions …. 7.7, 7.8 mere representations and puffery …. 7.9, 7.10 from presumption to construction …. 7.11–7.15 preliminary estoppel …. 9.23 Common law minors, capacity to contract …. 6.2, 6.3 Common law damages privity of contract …. 14.8, 14.9, 14.12 non-breaching party …. 14.10 Common law estoppel …. 9.32 equitable, fundamental differences between …. 9.3 Common law method …. 1.5 Common mistake …. 22.9 rectification form and content …. 22.30 omission of terms …. 22.29 wrong meanings …. 22.28 subject matter of contract absence …. 22.12, 22.13 failure of consideration …. 22.11 identifying …. 22.10 mistake as to quality …. 22.15 partial absence …. 22.14 Comparative advertising …. 17.13

Completeness …. 3.1 legal issue …. 8.1 non-essential parts severed without voiding …. 8.12, 8.13 conflicts over essential terms …. 8.14 specific performance …. 8.15 particular circumstances vary …. 8.2 Compromise consideration …. 5.13 Consent …. 2.3 actual …. 2.10 hypothetical …. 2.10 standard form contracts …. 2.4 Consideration …. 2.2, 3.1 adequacy of past consideration not sufficient …. 5.10, 5.11 compromise …. 5.12, 5.13 deeds, not required …. 5.27 definition …. 5.2 bargain requirement …. 5.4, 5.5 benefit/detriment requirement …. 5.3 doctrine of …. 5.1 doctrine of privacy, and …. 14.8 duress, distinguished …. 20.5 existing duties …. 5.17 imposed by contract with bound promise …. 5.20–5.23

promise to perform to third party …. 5.19 public duty imposed by law …. 5.18 forbearance …. 5.12, 5.14 amount of time not relevant …. 5.15 mere act not sufficient …. 5.16 identifying legally enforceable promises …. 5.1 illusory …. 5.9 illusory promises …. 8.11 moved from promisee to promisor …. 5.6 privity …. 14.8 promises to pay lesser sums …. 5.24 displacement by deed, early repayment or other arrangements …. 5.25 good consideration …. 5.26 sufficiency …. 5.8 written evidence …. 10.8 Constitutional disadvantage unconscionable conduct …. 18.5 Construction of contract ambiguity gateway …. 12.3–12.8 Campbelltown City Council v WSN Environmental Solutions Pty Ltd [2015] …. 12.5 differences between High Court and Courts of Appeal …. 12.1 exclusion clauses …. 12.9 interpretation, meaning …. 12.2 McCourt v Cranston [2012] …. 12.3

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) …. 12.6 Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] …. 12.8 Consumer contract …. 21.7 Contra proferentum rule …. 12.9 Contract absolute …. 15.32 acceptance see Acceptance auction …. 3.16 bilateral …. 3.14 offer, communication of acceptance …. 4.11 certainty see Certainty completeness see Completeness consideration see Consideration consumer …. 21.7 definition …. 3.1 estoppel see Estoppel express terms see Express terms formation global approach …. 3.3 traditional rule …. 3.2 licences …. 3.19 mere puffery …. 3.13 no interpersonal interaction …. 3.2 offer …. 3.1

communicated to be effective …. 3.20 counter-offer …. 3.20, 4.4, 4.5 definition …. 3.5 determining existence …. 3.6, 3.7, 3.9 existence of definite promise …. 3.8 invitations to treat …. 3.10–3.12 setting out terms of bargain …. 3.4 termination …. 3.20 unilateral contract, revoking …. 3.21 parties unequal …. 3.2 shop sales …. 3.15 six essential elements …. 3.1 standard form …. 21.8 tender …. 3.17 ticket cases …. 3.18 unilateral …. 3.14 revocation …. 3.21 vitiating factors doctrine …. 3.2 Contract as bargain history …. 2.2 parties conduct …. 2.3 ambiguity …. 2.5–2.9 hypothetical and actual consent …. 2.10 standard form contracts …. 2.4 Contract as promise …. 2.13

enforcement …. 2.14 liability …. 2.16 moral responsibility …. 2.15 Contract as property inalienable right to transfer alienable rights …. 2.18 reliance theory of contract …. 2.19 remedial action …. 2.20 corrective justice principle …. 2.22 harm principle …. 2.21 transferring title to alienable good …. 2.17 Core legal skills …. 1.4 case law analysis …. 1.6 challenges …. 1.14 common law method …. 1.5 legal problem solving …. 1.7 legal writing …. 1.9 research …. 1.10 statutory interpretation …. 1.8 Corporations capacity to contract definition …. 6.10 legal capacity …. 6.11 Corrective justice principle …. 2.22 Correspondence theory …. 2.16 language …. 2.8

Counter-offer …. 3.20 distinguished from error in restating terms of offer …. 4.5 not acceptance of original offer …. 4.4 Crown capacity to contract …. 6.18 liability for non-performance of commercial contracts …. 6.19

D Damages common law …. 14.10–14.12 expectation …. 25.3, 25.4 limitations, remedies for breach …. 25.13 causation …. 25.14, 25.15 disappointment and distress …. 25.21 mitigation …. 25.20 remoteness …. 25.16–25.19 liquidated engagement of penalty doctrine …. 25.24, 25.25 penalty clauses not upheld …. 25.22 pre-estimate of liquidated damages and penalty, distinguished …. 25.23, 25.25 Death or incapacity frustration …. 15.21 Deeds consideration, not required …. 5.27 Definitions see Words and phrases

Deontological moral theories …. 2.13 Detriment equitable estoppel …. 9.14 forms …. 9.15–9.17 onus of proof …. 9.18 Disappointed expectations frustration …. 15.27 Disappointment restitution …. 25.21 Discharge see Termination Doctrine of consideration see Consideration Doctrine of frustration …. 15.1 absolute contracts …. 15.32 application …. 15.2 circumstances …. 15.3 contractual assumption and mistake, relationship with …. 15.10 frustrating event …. 15.9 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] …. 15.13 onus of proof …. 15.12, 15.13 radically altering performance …. 15.15, 15.16 Urusoglu v MSU Management Pty Ltd [2011] …. 15.13 without fault of either party …. 15.11 Austin v Sheldon [1974] …. 15.35 conceptual basis …. 15.4

effects automatic discharge of obligation …. 15.37–15.40 discharge in futuro; …. 15.41 frustrating events application …. 15.9 death or incapacity of promisor …. 15.21 delays …. 15.30, 15.31 disappointed expectations …. 15.27 external …. 15.17–15.20 illegality …. 15.28 increased burden of performance …. 15.22 non-occurrence of event …. 15.23 uncontemplated …. 15.24–15.26 war …. 15.28, 15.29 implied term theory …. 15.5, 15.6 land …. 15.33–15.36 requirements needing to be satisfied …. 15.7 Domestic arrangements intention to create legal relations presumption to construction …. 7.3–7.5 rebuttable presumptions …. 7.2 Duress …. 20.1 causation …. 20.24 consideration, distinguished …. 20.5 contracts made under voidable …. 20.6

economic …. 20.10 Australia and New Zealand Banking Group Ltd v Karam (2005) …. 20.17 Crescendo Management Pty Ltd v Westpac Banking Corp (1988) …. 20.16 development by Australian and United Kingdom courts …. 20.11 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] …. 20.14 payment that has no basis …. 20.12 Smith v William Charlick (1924) …. 20.13 TA Sundell & Sons Pty v Emm Yannoulatos (Overseas) Pty Ltd (1955) …. 20.13 Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (The Universe Sentinel) [1983] …. 20.15 elements …. 20.2 goods …. 20.9 legal boundaries unconscionable conduct, distinguished …. 20.4 undue influence, distinguished …. 20.3 nature of threat Australia and New Zealand Banking Group Ltd v Karam (2005) …. 20.21 lawful or unlawful conduct …. 20.20–20.23 overborne will …. 20.18, 20.19 person other threats …. 20.8 threats of violence …. 20.7

remedies …. 20.25 restitution …. 25.21 Duty of good faith …. 13.15 actual content …. 13.20 commercial contracts …. 13.17, 13.19 mutual self-interest …. 13.16 North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd [2016] …. 13.21 points of controversy …. 13.18

E Earnest and part payment, sale of goods …. 10.18 Economic duress …. 20.10 Australia and New Zealand Banking Group Ltd v Karam (2005) …. 20.17 Crescendo Management Pty Ltd v Westpac Banking Corp (1988) …. 20.16 development by Australian and United Kingdom courts …. 20.11 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] …. 20.14 payment that has no basis …. 20.12 Smith v William Charlick (1924) …. 20.13 Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (The Universe Sentinel) [1983] …. 20.15 Electronic communication offers, role in acceptance …. 4.22 Equitable estoppel assumption …. 9.12

common law, fundamental differences between …. 9.5 detriment …. 9.14 forms …. 9.15–9.17 onus of proof …. 9.18 family and commercial settings compared …. 9.23–9.25 inducement …. 9.13 knowledge …. 9.19 reasonableness …. 9.20 of action taken in reliance on assumption …. 9.22 of reliance on assumption …. 9.21 relief …. 9.29–9.31 representation …. 9.10, 9.11 unconscionability …. 9.26 Estoppel …. 3.2 common law …. 9.32 equitable, fundamental differences between …. 9.3, 9.5 concept …. 9.2 consideration, distinguished from …. 5.5 equitable …. 9.1 assumption …. 9.12 common law, fundamental differences between …. 9.3, 9.5 detrimental reliance …. 9.14, 9.18 family and commercial settings compared …. 9.23–9.25 forms of detriment …. 9.15–9.17 inducement …. 9.13

knowledge …. 9.19 reasonableness …. 9.20 reasonableness of action taken in reliance on assumption …. 9.22 reasonableness of reliance on assumption …. 9.21 relief …. 9.29–9.31 representation …. 9.10, 9.11 unconscionability …. 9.26, 9.27 no unified doctrine …. 9.1 promissory …. 9.6–9.9 proprietary …. 9.28 support for unified doctrine …. 9.4 termination for breach …. 24.20 Exclusion clauses …. 12.9 Expectation damages …. 25.3, 25.4 Express exclusions intention to create legal relations …. 7.8 Express terms identity unclear …. 11.1 incorporated through course of dealings …. 11.13 incorporation of written terms by notice …. 11.6 contractual effect …. 11.8 prior to contract formation …. 11.7 reasonable steps …. 11.9, 11.10 misrepresentation …. 11.4, 11.5 non est factum defence …. 11.4

parol evidence rule …. 11.14, 11.17 evidentiary function …. 11.16 non-application …. 11.15 pre-contractual statements context and meaning …. 11.19 puffs, warranties and mere representations …. 11.18 signature, effect of …. 11.2, 11.3 unusual terms …. 11.11, 11.12

F Family arrangements intent to create legal relations …. 7.2, 7.4 burdensome obligations …. 7.6 detailed examinations of facts …. 7.3 promissory estoppel …. 7.6 Fiduciary relationship misrepresentation …. 16.15 Forbearance …. 5.12, 5.14 amount of time not relevant …. 5.15 mere act not sufficient …. 5.16 Force majeure clauses …. 15.40 Formal contracts implied terms …. 13.3 business efficacy …. 13.5 obviousness …. 13.6 reasonable and equitable …. 13.4

Formalities …. 10.1 non-compliance, effect of …. 10.19 part performance Australia and New Zealand Banking Group Ltd v Widin (1990) …. 10.23 Maddison v Alderson (1883) …. 10.24 promissory estoppel, distinguished from …. 10.21 seeking relief of specific performance …. 10.20 Thomas Butcher v Stapely and Richard Butcher [1686] …. 10.22 sale of goods …. 10.16 acceptance …. 10.17 earnest and part payment …. 10.18 Statute of Frauds 1677 (Imp) joinder of documents …. 10.12–10.14 parol and oral evidence …. 10.15 pleading specifically …. 10.2 Popiw v Popiw [1959] …. 10.7 Powercell v Cuzeno [2003] …. 10.4 relevant provisions …. 10.3, 10.5, 10.6 signature …. 10.10, 10.11 written evidence …. 10.8, 10.9 Fraudulent misrepresentation …. 16.17 contract voided due to mistaken identity …. 22.5 Free will duress …. 20.19

undue influence …. 19.19 Frustrating events death or incapacity of promisor …. 15.21 delays …. 15.30, 15.31 disappointed expectations …. 15.27 external availability of subject matter …. 15.18 destruction of subject matter …. 15.17 extended to method …. 15.19 manner of performance impossible …. 15.20 illegality …. 15.28 increased burden of performance …. 15.22 non-occurrence of event …. 15.23 uncontemplated foreseeing …. 15.26 not foreseen by parties …. 15.24 occurrence …. 15.25 war …. 15.28, 15.29 Frustration see Doctrine of frustration

G Good faith see Duty of good faith Goods, duress of …. 20.9

H Harm principle …. 2.21

Hypothetical consent …. 2.10

I Illegal contracts …. 15.28 Illusory consideration …. 5.9 Illusory promises …. 8.11 Implied terms by custom Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) …. 13.11 in fact …. 13.2 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) …. 13.7 formal contracts …. 13.3–13.9 informal contracts …. 13.10 by law …. 13.12 applying to defined class …. 13.13 Commonwealth Bank of Australia v Barker (2014) …. 13.14 duty of good faith …. 13.15–13.21 duty to cooperate …. 13.22 North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd [2016] …. 13.21 Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) …. 13.22 Inalienable rights …. 2.18 Increased burden of performance frustration …. 15.22

Independent advice undue influence …. 19.17 Inducement equitable estoppel …. 9.13 Informal contracts …. 13.10 Innocent misrepresentation …. 16.20, 22.21 Intention to create legal relations …. 3.1, 7.1 commercial arrangements …. 7.6 Ermogenous v Greek Orthodox Community of SA Inc …. 7.13 Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976] …. 7.10 express exclusions …. 7.7, 7.8 mere representations and puffery …. 7.9, 7.10 from presumption to construction …. 7.11–7.15 domestic arrangements presumption to construction …. 7.3–7.5 rebuttable presumptions …. 7.2 particular situations government schemes and agreements …. 7.16 registered companies …. 7.18, 7.19 voluntary associations …. 7.17 preliminary agreements …. 7.20, 7.21 Invitation to treat auction …. 3.16 definition …. 3.10 licences …. 3.19 offer, distinguished from …. 3.11

framework to identify …. 3.12 shop sales …. 3.15 tender …. 3.17 ticket cases …. 3.18

J Joinder of documents incorporation by necessary implication …. 10.13 not necessarily contract …. 10.14 when able to be read together …. 10.12

K Knowledge equitable estoppel …. 9.19

L Language of contracts …. 2.6 correspondence theory …. 2.8 legal truth …. 2.9 public not private …. 2.7 Law main concerns …. 1.2 Legal personality …. 3.5 Legal problem solving …. 1.7 Legal relations see Intention to create legal relations Legal writing …. 1.9

Licences as invitation to treat …. 3.19 Liquidated damages engagement of penalty doctrine …. 25.24, 25.25 penalty clauses not upheld …. 25.22 pre-estimate of liquidated damages and penalty, distinguished …. 25.23, 25.25

M Manifestation of mutual assent …. 2.2 Married women capacity to contract …. 6.26 Matter of construction …. 7.12 Mentally disabled and intoxicated persons capacity to contract …. 6.4 A v N case …. 6.6 other participant’s awareness of incapacity …. 6.7 reasonable recompense for goods and services …. 6.9 understanding nature, purpose and effect of agreement …. 6.5 Mere puffery see Puffery Minors capacity to contract common law, position under …. 6.2 common law, statutory amendments …. 6.3 Misdescription offers and counter-offers …. 4.5

Misleading or deceptive conduct …. 17.1 Australian Consumer Law s 18 …. 17.3 establishing standard for commercial behaviour …. 17.2 fundamental concern …. 17.4 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) …. 17.7 conduct in trade or commerce …. 17.5–17.7 establishing …. 17.8 Campomar Sociedad Limitada v Nike International Ltd (2000) …. 17.11 ordinary and reasonable person …. 17.10 Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) …. 17.9 examples …. 17.12 character merchandising …. 17.17 comparative advertising …. 17.13 promises …. 17.16 puffery …. 17.15 silence where disclosure is expected …. 17.14 Misrepresentation …. 16.1 culpable fraudulent …. 16.17 L Shaddock & Associates v Council of the City of Parramatta (1981) …. 16.17 negligent …. 16.18, 16.19 express terms …. 11.4, 11.5 general rule elements of actionable misrepresentation …. 16.3

statement in question referring to existing or past fact …. 16.2 innocent …. 16.20 positive …. 16.4 Bissett v Wilkinson [1927] …. 16.7 mere puffery …. 16.5, 16.6 Mitchell v Valherie (2005) …. 16.5 Public Trustee v Taylor [1978] …. 16.11 silence, distorting …. 16.13 statements of intention …. 16.9 statements of law …. 16.10, 16.11 statements of opinion …. 16.7, 16.8 rescission …. 16.27 silence …. 16.12 distorting positive misrepresentation …. 16.13 Krakowski v Eurolynx Properties Ltd (1995) …. 16.13 parties are in a fiduciary relationship …. 16.15 statement becomes untrue …. 16.14 suing for …. 16.21 misrepresentation is not material …. 16.26 plaintiff does not act on representation …. 16.25 plaintiff knows representation is false …. 16.24 plaintiff unaware …. 16.23 statement is non-inducing …. 16.22 Mistake …. 22.1

common …. 22.9 rectification …. 22.28–22.30 subject matter of contract …. 22.10–22.15 identity …. 22.3 parties contracted at distance …. 22.4 parties contracted face to face …. 22.5 meaning of terms …. 22.16 mutual …. 22.9 own basis or motive for entering agreement …. 22.16 remedies …. 22.17 Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] …. 22.22 rectification …. 22.26, 22.27 rescission …. 22.18–22.23 specific performance …. 22.25 unjust enrichment …. 22.24 snapping up offer …. 22.8 subject matter of contract absence …. 22.12, 22.13 consideration, failure of …. 22.11 identifying …. 22.10 partial absence …. 22.14 quality …. 22.15 unilateral …. 22.2 executed document …. 22.6

rectification …. 22.31–22.35 terms …. 22.7 Mitigation damages …. 25.20 Moral obligation …. 7.1 Morality …. 2.15

N Natural rights theory of contracts …. 2.1 Negligent misrepresentation …. 16.18, 16.19 Negotiating in good faith agreements, enforceability …. 8.16, 8.20 ‘heads agreement.’ …. 8.18 court reluctance to apply …. 8.17 not enforceable …. 8.19 Non est factum express terms …. 11.4 Nudum pactum …. 2.17

O Offer see also Acceptance communicated to be effective …. 3.20 counter-offer …. 3.20, 4.4 distinguished from error in restating terms of offer …. 4.5 definition …. 3.5 determining existence …. 3.6, 3.7, 3.9

existence of definite promise …. 3.8 invitation to treat …. 3.10 auction …. 3.16 distinguished from …. 3.11 framework to identify …. 3.12 licences …. 3.19 shop sales …. 3.15 tender …. 3.17 ticket cases …. 3.18 setting out terms of bargain …. 3.4 termination …. 3.20 unilateral contract, revoking …. 3.21 Offeree conduct may amount to acceptance …. 4.13 consciousness of offer …. 4.8 counter-offer …. 3.20, 4.4 options of acceptance, rejecting or suggesting …. 4.1 paying to keep offer open by option …. 3.20 postal rule, acceptance …. 4.15–4.19 postal rule, negated by …. 4.17 prescribed mode of acceptance …. 4.14 silence does not create contract …. 4.12 unilateral contract definition …. 3.14 revoking …. 3.21

Offeree offeree silence does not create contract …. 4.12 Offeror acceptance effective when communicated to …. 4.10 acceptance of counter-offer …. 4.4 invitation to treat, intent …. 3.10 limiting acceptors …. 3.12 postal rule, negated by …. 4.17 prepared to be bound by terms …. 3.5 prescribing mode of acceptance …. 4.14 revocation not necessarily communicated …. 3.20 Onus of proof equitable estoppel …. 9.18 frustration …. 15.12 Overborne will see Free will

P Pacta sunt servanda …. 15.15 Parol and oral evidence …. 10.15 Parol evidence rule definition …. 12.8 express terms …. 11.14, 11.17 evidentiary function …. 11.16 non-application …. 11.15 Part performance Australia and New Zealand Banking Group Ltd v Widin (1990) …. 10.23

Maddison v Alderson (1883) …. 10.24 promissory estoppel, distinguished from …. 10.21 seeking relief of specific performance …. 10.20 Thomas Butcher v Stapely and Richard Butcher [1686] …. 10.22 Past consideration …. 5.10 Peppercorn principle …. 5.7 Personal duress other threats …. 20.8 threats of violence …. 20.7 Plagiarism …. 1.11 Positive misrepresentation …. 16.4 Bissett v Wilkinson [1927] …. 16.7 mere puffery …. 16.5 Public Trustee v Taylor [1978] …. 16.11 statements of intention …. 16.9 statements of law …. 16.10, 16.11 statements of opinion …. 16.7, 16.8 Postal rule offer, acceptance …. 4.15 concluded at moment of posting …. 4.18 confined to contract formation …. 4.19 impact of commercial dealings …. 4.16 negated expressly or by implication …. 4.17 Presumed undue influence …. 19.7 Privity of contract …. 14.1

Beswick v Beswick [1968] …. 14.13 cannot create obligations for third parties …. 14.6 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) …. 14.8, 14.10 Darlington Borough Council v Wiltshier Northern Ltd [1995] …. 14.14 development of rule …. 14.2 attempts to overrule …. 14.4 inconvenience of …. 14.3 doctrine of consideration and …. 14.8 effective in both law and equity …. 14.7 exceptions to rule …. 14.19 hypothetical example …. 14.5 Jackson v Horizon Holidays Ltd [1975] …. 14.11 remedies damages at common law …. 14.8–14.12 in equity …. 14.13, 14.14 trusts …. 14.15–14.19 third party beneficiaries and exclusion clauses …. 14.20 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) …. 14.15, 14.17 Promise see Contract as promise Promises misleading or deceptive conduct …. 17.16 Promissory estoppel …. 9.7–9.9 Proprietary estoppel …. 9.28 Puffery

commercial arrangements …. 7.9, 7.10 contract …. 3.13 definition …. 3.13 intention to create legal relations …. 7.10 misleading or deceptive conduct …. 17.15 misrepresentation …. 16.5, 16.6 pre-contractual statements …. 11.18

Q Quantum meruit …. 11.12, 22.27

R Rational bargaining consent to contract …. 2.11 Rational bargaining theory …. 2.4 hypothetical and actual consent …. 2.10 Reasonable expectation test misleading or deceptive conduct …. 17.14 Reasonableness equitable estoppel …. 9.20 of action taken in reliance on assumption …. 9.22 of reliance on assumption …. 9.21 Rectification breach of contract, remedies …. 25.10–25.12 common mistake …. 22.28–22.30 mistakes …. 22.26, 22.27

unilateral mistakes …. 22.31–22.35 Registered companies intention to create legal relations …. 7.18, 7.19 Reliance damages …. 25.5–25.8 Reliance theory of contract …. 2.19 Remedies duress …. 20.25 privity of contract damages at common law …. 14.8–14.12 in equity …. 14.13 trusts …. 14.15–14.19 unconscionable conduct …. 18.17 undue influence …. 19.22 unfair terms …. 21.12 Remedies for breach …. 25.1 compensation principle …. 25.2 expectation damages …. 25.3 Clark v Macourt (2013) …. 25.4 limitations on damages …. 25.13 causation …. 25.14, 25.15 disappointment and distress …. 25.21 mitigation …. 25.20 remoteness …. 25.16–25.19 Transfield Shipping Inc v Mercator Shipping Inc …. 25.18 liquidated damages

engagement of penalty doctrine …. 25.24, 25.25 penalty clauses not upheld …. 25.22 pre-estimate of liquidated damages and penalty, distinguished …. 25.23, 25.25 rectification award, reasonableness …. 25.10–25.12 order for …. 25.9 reliance damages …. 25.5 Commonwealth v Amann Aviation (1991) …. 25.7, 25.8 McRae v Commonwealth Disposals Commission (1951) …. 25.6 Remoteness damages …. 25.16–25.19 Representation equitable estoppel …. 9.10, 9.11 Repudiation of contract …. 24.7, 24.10 anticipatory breach …. 24.14 conduct and attitude of parties …. 24.8 erroneous assertion of rights …. 24.12 finding not lightly made …. 24.11 good faith behaviour of party …. 24.13 not distinct from other grounds for termination …. 24.9 Rescission bankruptcy …. 6.23 duress …. 20.25 innocent misrepresentation …. 16.20, 22.21

misrepresentation …. 16.27 mistake …. 22.18–22.23 unconscionable conduct …. 18.1 undue influence …. 19.22 Research skills …. 1.10 Restitutio in integrum …. 22.17 Restitution detriment …. 9.16 disappointment and duress …. 25.21 rescission …. 20.25

S Sale of goods …. 10.16 acceptance …. 10.17 earnest and part payment …. 10.18 Shop sales as invitation to treat …. 3.15 Signature binding parties to contents of agreement …. 11.2, 11.3 constituting …. 10.10, 10.11 Silence misleading or deceptive conduct …. 17.14 misrepresentation …. 16.12, 16.15 distorting positive misrepresentation …. 16.13 Krakowski v Eurolynx Properties Ltd (1995) …. 16.13

statement becomes untrue …. 16.14 Situational disadvantage unconscionable conduct …. 18.5 Special disadvantage unconscionable conduct …. 18.4, 18.7 Standard form contracts …. 2.4, 21.8 Statements of intention …. 16.9 Statements of law …. 16.10 Statements of opinion …. 16.7, 16.8 Statute of Frauds 1677 (Imp) joinder of documents …. 10.12–10.14 parol and oral evidence …. 10.15 pleading specifically …. 10.2 Popiw v Popiw [1959] …. 10.7 Powercell v Cuzeno [2003] …. 10.4 relevant provisions …. 10.3, 10.5, 10.6 signature …. 10.10 written evidence …. 10.8, 10.9 Statutory interpretation …. 1.8 Statutory unconscionability …. 18.18 Studying law core legal skills, practising …. 1.4 case law analysis …. 1.6 challenges …. 1.14 common law method …. 1.5

legal problem solving …. 1.7 legal writing …. 1.9 research …. 1.10 statutory interpretation …. 1.8 engaging with staff and students …. 1.12 protecting reputation of school …. 1.11 reading widely …. 1.13 understanding of …. 1.2 working effectively …. 1.3

T Tender as invitation to treat …. 3.17 Tenders acceptance, identifying …. 4.7 Termination …. 23.1 contingent conditions …. 23.5 express right …. 23.2 fixed-term contracts …. 23.2 parties abandoning rights …. 23.4 subsequent agreements supersede former agreement …. 23.3 Termination for breach …. 24.1 conditions …. 24.3 Associated Newspapers Ltd v Bancks (1951) …. 24.4 conditions …. 24.4 determining if clause is condition …. 24.5

intermediate terms …. 24.6 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) …. 24.6 conditions, intermediate terms and warranties, distinguished …. 24.2 election to affirm or terminate Sargent v ASL Developments Ltd (1974) …. 24.18 Tropical Traders Ltd v Goonan (1964) …. 24.19 failure to perform obligations in timely manner …. 24.15, 24.16 Laurinda Pty Ltd v Capalaba Park Shopping Centre (1989) …. 24.16 Louinder v Leis (1982) …. 24.15 Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd [1962] …. 24.2 notice …. 24.17 repudiation …. 24.7, 24.10 anticipatory breach …. 24.14 Carr v JA Berriman Pty Ltd (1953) …. 24.11 conduct and attitude of parties …. 24.8 erroneous assertion of rights …. 24.12 good faith behaviour of party …. 24.13 not distinct from other grounds for termination …. 24.9 repudiation finding not lightly made …. 24.11 Shevill v Builders Licensing Board (1982) …. 24.9 Sopov v Kane Constructions Pty Ltd (2007) …. 24.13 restrictions

estoppel …. 24.20 relief against forfeiture …. 24.21 waiver doctrine …. 24.21 Waterman v Gerling Australia Insurance Company Pty Ltd (2005) …. 24.20 Ticket cases as invitation to treat …. 3.18 Title-transfer model of contract law …. 2.17 Transfer of property bankruptcy …. 6.21 Trusts privity of contract …. 14.15–14.19

U Uberrimae fidei …. 16.16 Unconscionability dividing line between common law and equitable estoppel …. 9.3 equitable estoppel …. 9.26, 9.27 Unconscionable conduct …. 18.1 defences …. 18.16 duress, distinguished …. 20.4 elements …. 18.3 historical development …. 18.2 remedies …. 18.17 special disadvantage …. 18.4 constitutional or situational disadvantage …. 18.5

knowledge …. 18.7, 18.8 taking advantage …. 18.6 statutory attracting high degree of moral opprobrium …. 18.20 Australian Consumer Law …. 18.19 Paciocco v Australia and New Zealand Banking Group Ltd (2015) …. 18.19 taking advantage …. 18.9 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) …. 18.14 Bridgewater v Leahy (1998) …. 18.15 Commercial Bank of Australia Ltd v Amadio (1983) …. 18.10 Kakavas v Crown Melbourne Ltd (2013) …. 18.13 Louth v Diprose (1992) …. 18.11 Mackintosh v Johnson (2013) …. 18.12 Uncontemplated events frustration …. 15.24–15.27 Undue influence …. 19.1 categories …. 19.2, 19.3 actual …. 19.4–19.6 presumed …. 19.7 duress, distinguished …. 20.3 Garcia v National Australia Bank principle …. 19.21 guardian and ward Powell v Powell [1900] …. 19.13

Johnson v Buttress (1936) …. 19.8 parent and child …. 19.9 child adult and parent elderly …. 19.12 Grace v Grace [2012] …. 19.10 Mace v Mace [2015] …. 19.11 rebutting presumption Edith White v Judith Liane Wills [2014] …. 19.18 free will …. 19.19 independent advice …. 19.17 religious adviser and disciple …. 19.14 Hartigan v International Society for Krishna Consciousness Inc [2002] …. 19.15 Khan v Khan (2004) …. 19.16 remedies …. 19.22 Yerkey v Jones principle …. 19.20 Unfair terms …. 21.1 Australian Consumer Law …. 21.2 helping consumers …. 21.3 regime targets TPA regulatory gaps …. 21.5 TPA provisions …. 21.4 Australian Consumer Law regime application and operation …. 21.6 Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] …. 21.10 consumer contract …. 21.7

examples …. 21.11 requirements to be satisfied …. 21.9 standard form contract …. 21.8 regime rationale behind …. 21.3–21.5 remedies …. 21.12 Unilateral contract definition …. 3.14 revocation …. 3.21 Unincorporated associations capacity to contract changing nature of membership …. 6.16 definition …. 6.14 employees …. 6.17 liability of committees …. 6.15 Utilitarian theory of contracts …. 2.1

V Vesting of property bankruptcy …. 6.21 Vitiating factors doctrine …. 3.2 Voluntary associations intention to create legal relations …. 7.17

W War

frustration of contract …. 15.28, 15.29 Warranties …. 3.19 advertising language …. 7.9 conditions, distinguished …. 24.2, 24.4 contractual terms, as …. 7.12 definition …. 11.18 express terms …. 11.18 intermediate terms, distinguished …. 24.2 Will theory of contract …. 2.2 Words and phrases age of majority …. 6.3 battle of the forms …. 4.6 becomes a bankrupt …. 6.21 benefit …. 6.3 consideration …. 5.2 consumer …. 21.7 contract …. 3.1 corporations …. 6.10, 6.11 estoppel …. 9.2 in trade or commerce …. 17.5, 17.7 interpretation …. 12.2 invitation to treat …. 3.10 a meeting of minds …. 4.2 necessaries …. 6.2 offer …. 3.5

partisan fashion …. 13.4 puffery …. 3.13 reasonable expectation …. 17.14 signature …. 10.10 something in earnest …. 10.18 undue influence …. 19.2 unilateral contract …. 3.14 unincorporated associations …. 6.14 warranty …. 11.18 Writing consideration for guarantee …. 10.8 prescribed mode of acceptance …. 4.14 three main functions …. 10.2, 10.3